Variety, the spice of life, has measurable value. But it's not easy to determine.
By Virginia Postrel
The New York Times, June 17, 2004
CHAMPAGNE from France. Silk sweaters from China. Winter blueberries from Chile. Video games from Japan. Beer from Ireland. Silver jewelry from India. Cellphones from South Korea. Shoes from Italy.
International trade does not just offer consumers the same goods at lower prices, which is the traditional economic story. It also brings us goods we wouldn't otherwise have access to. Trade increases the number of varieties in the marketplace. It gives consumers more choices.
''The U.S. used to import coffee from around 25 countries,'' says David E. Weinstein, an economist at Columbia University. ''Now we import it from 52 countries. Beer we import from three times more countries than we used to.''
Consider Starbucks. Its Web site lists coffee varieties from Brazil, Colombia, Costa Rica, Ethiopia, Guatemala, Indonesia, Mexico, New Guinea, Panama, Yemen and Zimbabwe. Consumers value this variety for its own sake, not just because of lower prices or higher quality.
''When you compare two types of coffee, you may not think one is necessarily better,'' Professor Weinstein says. ''But sometimes you'd like to drink a certain type of coffee, and other times you'd like to drink another type of coffee.''
Being able to get exactly the coffee you're in the mood for makes you, in a sense, better off. But this improvement in consumer welfare has tended to go unmeasured. In most economic statistics, coffee is coffee, beer is beer and shoes are shoes.
In a recent working paper for the National Bureau of Economic Research, Professor Weinstein and Christian Broda, an economist with the Federal Reserve Bank of New York, estimate how much international trade has benefited consumers simply by increasing variety. (The paper is available at www.ny.frb.org/research/staff_reports/sr180.html.)
The results are striking. Consumers, they estimate, would be willing to pay $280 billion a year, or about 3 percent of gross domestic product, to have access to the variety of goods that were available in 2001, rather than what they could have bought in 1972.
That represents a huge, previously uncounted rise in the standard of living. It also suggests that measurements of real price increases, like the Consumer Price Index, are overstated.
The economists looked at the number of goods, like red wine, and varieties, which they defined as goods from a certain country, like red wine from France. For thousands of goods, they calculated how much an increase in variety mattered to consumers -- how ''substitutable'' the varieties were.
Consumers do not generally care what country a commodity like crude oil comes from, for example. They care much more about varieties of wine, automobiles or cheese, and they value some varieties more than others. Access to French wine is more important to most people than access to Japanese or Australian wine.
''The nasty mathematics,'' Professor Weinstein says about the paper, ''is all about trying to make adjustments for the fact that qualities of varieties may vary across countries.''
Economists generally use the term ''variety'' to mean the least aggregated version of a good in their data, but not necessarily a specific brand, much less an individual item. To a consumer, of course, variety has increased even more than the economists' data indicate -- not all red wine from France is the same. As a result, the paper's calculations probably understate the gains from increasing variety.
The calculations took about four days, using four computers. Ten years ago, the economists estimate, the same calculations, also using four computers, would have taken more than four months. Little wonder that nobody has done this calculation before.
Once the economists determined how much variety mattered for each good, they looked at how much variety had increased. From 1972 to 2001, the number of varieties increased from 74,667 (7,731 goods, from an average of 9.7 countries) to 259,215 (16,390 goods, from an average of 15.8 countries).
Using this information, they calculated a price index that measured how much each variety increase was worth to consumers.
The conventional import price index, they estimate, overstates the price of imports by about 1.2 percent a year, because it does not take the higher value of variety into account.
Interestingly, the greatest gains took place not in the 1990's but from 1972 to 1988, a period when conventional measures show a relatively stagnant standard of living. During this period, major exporters, notably South Korea and China, liberalized their economies.
''Those countries flooded the U.S. market with a lot of varieties that we really liked,'' Professor Weinstein says.
Americans are not the only consumers who are better off. In an article published in The American Economic Review in May, the economists use less detailed data to estimate the worldwide benefits of variety growth.
''Countries like China, Mexico, the former U.S.S.R., and Singapore have welfare gains that are double digits -- three to five times larger than those for the U.S.,'' Dr. Broda says. ''This is really a world phenomenon, beyond the U.S.''
The benefits of variety also help explain why many people are willing to pay more to live in big cities. Thanks to greater variety, urban dwellers get more for their money.
Professor Weinstein, who used to teach at the University of Michigan, explains it this way: ''In Ann Arbor, you have maybe a dozen good restaurants to choose from, and in New York you probably have several thousand good restaurants to choose from. Yet when you compute the price of a meal, you don't take that at all into account.''
Virginia Postrel (www.dynamist.com) is author of The Substance of Style: How the Rise of Aesthetic Value Is Remaking Commerce, Culture, and Consciousness (HarperCollins).