Summary
Highlights
After World War II, the income of the average European converged with that of the average American. However, this trend reversed after the 2008 financial crisis, with European income seemingly falling behind in dollar terms. Despite this, Americans often complain more about their economy, while Europeans generally exhibit higher quality of life statistics, including life expectancy at birth, where the US lags significantly.
The video uses the example of a haircut to illustrate 'non-tradable' goods and services—those with high transportation costs that prevent international trade from being economical. This concept is crucial because most of what people buy are non-tradable. Comparing economies simply using exchange rates for dollar-denominated GDP can be misleading due to these non-tradable sectors.
Economists often use Purchasing Power Parity (PPP) exchange rates to compare economies accurately, as PPP accounts for both prices and exchange rates. While US dollar GDP shows a widening gap, PPP GDP indicates that Europe is not falling significantly behind where it matters. Europeans work fewer hours than Americans and their PPP GDP has not stagnated like the US dollar GDP, suggesting a more stable economic reality for Europeans.
The difference between US dollar GDP and PPP GDP stems from how they handle prices and exchange rates. Post-2008, US prices rose faster than in Europe. Counterintuitively, the low-inflation Euro lost value against the high-inflation dollar. This means that while Europeans are poorer in dollar terms, they don't necessarily feel poorer because most of their consumption is of non-traded goods and services produced within Europe, insulating them from the dollar's strength.
Europeans maintain their quality of life because their local purchasing power, as measured by PPP, remains strong for essential non-tradable goods and services. For instance, tourists and those working for international companies might feel the dollar's strength, but the average European's daily life is less affected by the currency exchange rate. The video concludes that despite popular narratives of European impoverishment, they have not genuinely become poorer than Americans where it counts, emphasizing factors like happiness and well-being over solely monetary comparisons.