The Ingredients and the Recipes

June 28, 2007

The Ingredients and the Recipes

Hal Varian describes a study that gives insight into the details of globalization.

Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.

...The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.

Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.

I pointed out that if you dropped me alone in the middle of a forest rich with fish, game and edible plants, I would still starve, because of my lack of knowhow. I would even starve if left alone on a productive farm. I owe my wealth to my own knowledge of recipes (broadly defined to include recipes for using statistics, for finding business partners, using the Internet, etc.) along with the recipes for trade that enable us to benefit from recipes known by others.