A Haircut in China

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more than you ever wanted to know about

A Haircut in China

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So I got a haircut last week. It could have been a really big story. Maybe they would use strange gadgets to cut the hair. Maybe they would butcher the hair. Maybe I would come out looking like a freshly-bald monk. Maybe they would slice off an ear! Maybe, at the very least, it would be uncomfortable and awkward trying to describe to the stylist how I wanted the hair to be cut.

It was none of these things. I went to the hair cutting place in HuaiYa just 1 minute from my school. Some of my students accompanied me. I told them what I wanted, and they told the hair stylist. We chatted a little in Chinese, but it was mostly silent. 10 minutes later I was a new man.

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The cut was not as short--either on top or on the back and sides--as I prefer, but I purposely kept it long for two reasons: 1) risk factor... too short and my receding hairline becomes double tarmacs that Boeing 747s could land on! and 2) long hair = extra warmth for the approaching winter. Here are the before and after photos:

BEFORE:

AFTER

I like it!

So now I'm left with nothing to say! First haircut in China... this was going to be a big ordeal... I was going to ramble on and on about it. But what more can I say about something so mundane? Well, as usual, when I have nothing to say, I can always ramble on about economics...

The Exchange Rate by the Haircut Standard

When I first decided to come to China, I had to predict my standard of living in China. What would the money I brought with be worth? And what kind of lifestyle would my monthly salary afford me? What would be my purchasing power? These are not easy calculations. My Chinese friend Bo offered a simple equation... earning 1,000 yuan in China is like earning 1,000 USD in America... spending 1,000 yuan in China is like spending 1,000 USD in America. Plugging my monthly salary into this equation, I had a rough idea of the standard of living that I would enjoy in China. But was it accurate?

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This rogue exchange rate has proved generally accurate. By Bo's model, I would be enjoying a standard of living that was more than twice that of a first year teacher. Although I am too thrifty to test the limits of my purchasing power, I do get the feeling each time I buy even the simple things that I am much richer in China than I could have ever been in America in the first 10-20 years as a teacher. My haircut will illustrate this shortly.

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Economists use more sophisticated models to conduct these calculations. The currency exchange rate is one such tool. As of this moment (11/23/2008, 7:02am), one US dollar buys 6.8 Chinese renminbi yuan. But this number alone cannot tell someone what their money will be worth in a foreign economy. Economies are too complex.

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Let's take a look at my haircut. How much does a haircut cost in America (in USD)? How much do you think this one cost (in USD)? Before subtracting the discounts that I receive from Kayleigh (wink wink), my haircuts in the US typically cost between 10-15 USD. Well this haircut cost 4 yuan. Let's consider how this haircut translates into USD by various exchange rates.

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(A) If we use the Bo Model of exchange rate where one USD has the same purchasing power in America as the purchasing power of one RMB Yuan in China, a haircut in the US that costs 15 USD should cost 15 yuan in China. Well, this one cost 4 yuan. So here is an error in the model... but in this case the error overestimated the cost, which means that it underestimated the standard of living I would enjoy with my Chinese salary... US salary to Chinese salary, it means I am roughly 4 times as "rich" as a first year teacher in the US.

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(B) If we plug the 4 yuan cost into the official exchange rate, we're looking at a 60 cent haircut. Can you imagine paying 60 cents for a haircut?!?!?! That's cheap!

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But both exchange rates fail to capture the true complexity of the difference between the Chinese and the American economies. Case in point, let's take a look at Sprite. I like to drink Sprite. In the US, a bottle of Sprite from the vending machine costs about 1 USD. In China, there are bottles of Sprite sold at similar volumes. They cost roughly 3 yuan (bargaining down from the 3.5 yuan price that the clerk may initially ask).

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(A) By the Bo Model, a roughly equivalent volume of Sprite costing 1 USD in America should cost 1 Yuan in China. Well, as you can see, it costs three times as much. My standard of living is only a little better than that of a first year teacher from this perspective.

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(B) According to the official exchange rate, the bottle of Sprite costs about 45 cents. That's pretty cheap!

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Which exchange rate is more reliable? The errors of the Bo Model are obvious. But if you average the two prices, they wash themselves out in balance. According to the Bo Model, a haircut is about 1/3 the predicted price and Sprite is about 3 times the predicted price. If I only consumed haircuts, then I would be a very very rich man! If I only consumed Sprite, then I would find living a bit more difficult. If I consume both, his 1 to 1 ratio is reliable. And indeed there are many things for which the Bo Model is directly reliable. A hearty bowl of noodles here costs about 5 yuan. Well, a hearty bowl of noodles in the US would cost about 5 USD. So, as I said, in general, the Bo Model is pretty accurate.

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What about the official exchange rate? The problem with the official exchange rate is that it makes expensive things seem cheap. It is useful for tourists who will bring their valuable USD to China and then leave. But it is altogether misleading for people living in China earning RMB. If I think of Sprite as 45 cent Sprite, I might consume a lot of it... at 3 yuan, which is a much higher fraction of my salary than the 45 cents of an American salary. I could conceivably blow my entire month's salary on Sprite.

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Thus I think it is useful to add a third exchange rate to put everything into perspective. Consider how the price of one good/service compares to the price of another good/services. In this way, you will most clearly see how different the economy of China is from the economy of America.

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One haircut costs 4 yuan; one bottle of sprite costs 3 yuan... thus a haircut costs about the same as a bottle of Sprite in China. Can you imagine a bottle of Sprite costing the same as a haircut in America! And a two-liter bottle of Sprite costs 7.5 yuan. Can you imagine a two-liter bottle of Sprite being two times as expensive as a haircut?!

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In the "after" picture of this entry, you see my brand-spankin' new sweater. This sweater cost me exactly 40 yuan. Can you imagine a sweater being 10 times as expensive as a haircut? Or a sweater being only 5 times as expensive as a two-liter bottle of Sprite (my God! that's a 6 dollar sweater!... or is it?) ????

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I argue that this third exchange rate--comparing the price of one good to the price of other goods in the same economy with the same currency--is the most reliable and necessary for survival. The supply, demand, and utility of the resources of China are just too different from the supply, demand, and utility of the resources in America. The costs of labor, training, and rent for hair stylists is different from America, so the prices will be different. This sweater from China may seems cheaper but also may fall apart after one washing. It's different. Everything is different. I need to forget about the official exchange rate. I need to forget about American prices altogether. I need to think comparatively. And I need to think with a little perspective. If 5 bottles of Sprite buys one sweater, I need to buy less Sprite and more sweaters. And I can afford to have a haircut every month if I want one!

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Learning the value of the money in your new home involves a learning curve that is a bit steeper than the grade of either the Bo Model or the official exchange rate.