My Balassa-Samuelson haircut

On our macroeconomics class of the first semester, we learned about the Balassa-Samuelson effect. In a nutshell - services tend to be cheaper in poorer countries ad countries with weaker foreign currency.

So, I badly needed a haircut. I have been meaning to have a haircut since March. When I went to Barcelona, for spring break, I considered having a hair cut but the Euro fee I had to pay for the service was more than I wanted.

I have just one disclaimer: I do spend money on haircuts. Unfortunately, I had pretty terrible experiences going to neighborhoods’ salons, so I do pay more for having a nice haircut in a nice salon. If you feel the need to express your judgment, go ahead – I have 4 brothers that are a constant reminder of nonchalance as a virtue.

Anyway, in need of a haircut, I decided to make a rational choice. I decided that I would have a haircut in a less expensive country than the US Over the summer I was heading to Mexico and Brazil and both countries are less expensive than the US. I looked on the Internet and through aardvark (Jenny, you owe me a beer for that) to fabulous salons in Mexico City. After a few calls, I learned that I would spend around U$40 on a haircut. I had one data point.

If you take GDP per capita, Mexico has U$ 7180 and Brazil has U$ 4289. Therefore, you would expect that a haircut in Brazil – because it’s poorer would be cheaper than in Mexico.

Well, it’s not. If I wanted a haircut in a nice salon in São Paulo, I would have spent at least U$ 130.

Why?

1 – By The Economist Big Mac index, Brazil Real is over-valuated and Mexican Peso is under-valuated and therefore services are more expensive in Brazil than they should be by the Balassa-Samuelson effect

2 – Maybe I should consider the GDP per capita of the cities and not of the country.

And here is my new Mexican haircut.