“The steady progress of physics requires for its theoretical formulation a mathematics that gets continually more advanced. This is only natural and to be expected. What, however, was not expected by the scientific workers of the last century was the particular form that the line of advancement of the mathematics would take, namely, it was expected that the mathematics would get more and more complicated, but would rest on a permanent basis of axioms and definitions, while actually the modem physical developments have required a mathematics that continually shifts its foundations and gets more abstract. Non-euclidean geometry and non-commutative algebra, which were at one time considered to be purely fictions of the mind and pastimes for logical thinkers, have now been found to be very necessary for the description of general facts of the physical world. It seems likely that this process of increasing abstraction will continue in the future and that advance in physics is to be associated with a continual modification and generalisation of the axioms at the base of the mathematics rather than with a logical development of any one mathematical scheme on a fixed foundation.”
“For some, prudence paid off, when [oil] prices came tumbling down. Indeed, there is no better example of the value to an oil producer of hedging its production forward than the sovereign nation of Mexico. Its government is very vulnerable to the price of oil, as about 35 percent of its total revenues are generated by Pemex, the state company. A sudden fall in the price of oil can create budgetary and social turmoil. For years, Mexico had been hedging part of its oil output. It was not cheap; the cost of this insurance was $1.5 billion. But when the price plummeted [during the Great Recession], Mexico made an $8 billion profit on its hedge, thus preserving $8 billion for its budget that, without the hedge, would have otherwise disappeared. It could only have done that huge trade over the counter. If it had tried to do it on the futures market itself, the scale would have set off a scramble by other market participants before Mexico could even begin to get its hedges in place.”
“[China’s] total exports have risen sharply as a share of GDP over time, and the headline ratio now stands at over 36%. [N]eedless to say, the most common conclusions we hear from clients are that (i) exports now ‘make up’ more than a third of the Chinese economy, and (ii) the trade contribution to overall growth is even higher, since the export share is rising over time. If this is the case, then China is clearly at risk of a sharp contraction when global demand for its products slows.
Unfortunately (or, in this case, fortunately), both of the above conclusions are demonstrably wrong.
Why? For starters, the headline export/GDP ratio is a very misleading, even meaningless statistic. In 2006 Malaysia reported total goods exports of 104% of GDP … but this obviously doesn’t mean that the export sector is larger than the economy itself. For Hong Kong and Singapore the situation is even worse, with ratios over 200%, also a seeming paradox for the uninitiated observer.
How can countries report numbers over 100%? Because the export/GDP ratio compares two incompatible concepts: exports are defined as total turnover while GDP is measured in value-added terms. To use a micro-level analogy for a single company, exports are similar to revenue, while GDP is similar to profit.
In order to arrive at the actual export share of GDP, we need to restate the headline export figure in value-added terms, and this means two things: (i) stripping out the associated import content to find out how much of export revenue actually accrued to the domestic economy, and then (ii) converting that domestic content share into value-added terms by subtracting input purchases from other domestic sectors.”
“I intend never again to read an author of whom it is apparent that he wanted to produce a book, but rather only those whose thoughts unintentionally became a book.”