Tuesday, March 31, 2009

Haircuts as Tradables

Economists often use haircuts as a prototypical non-tradable good. But maybe we need to find a new example:
Dear Greg,

I am a professor of economics in Germany and a reader of your blog. I found this funny but true tidbit in a newspaper over here. It's about haircuts. Eastern Europe's financial troubles and the strong nominal depreciations have suddenly turned haircuts into tradable goods.
Here is the original link.

I guess few people read German, so here are a few key facts from the article:

The financial crisis has hit Eastern Europe particularly hard, leading to strong depreciation pressure on exchange rates. As a result, traditional non-tradable goods have suddenly become tradable. The Polish village of Osinow Dolny at the Polish-German border has approx. 200 inhabitants, 100 of which are active hairdressers. Germans come from as far as Berlin (70 km) to take advantage of the zloty exchange rate, which went from 3.30 per euro in the summer of 2008 to well over 4 now. "Salon Teresa" at the end of main street charges 9 euros for ladies and 4 for men.

Best regards
Martin Klein
Thanks, Martin, for the story. It certainly demonstrates that people respond to incentives. And it illustrates the forces that tend to push exchange rates toward purchasing-power parity.