Showing posts with label purchasing power risk. Show all posts
Showing posts with label purchasing power risk. Show all posts

Thursday 17 December 2020

How do we rank countries?

Economic Growth and Happy Electorate

Economic growth did not necessarily translate into a happy electorate.  

  • Political leaders around the world in the late 2010s were stunned to see that economic growth did not necessarily translate into a happy electorate.  Many political leaders were seeing public approval ratings reach record lows.
  • On the other hand, many authoritarian leaders of countries with declining economies were reelected with record levels of support.


GDP and GNP

GDP is the traditional measure of the total output of goods and services per year.  Basically, GDP adds up the money we as consumers and companies and government entities spend over the course of the year.

GNP - gross national product - picks up where GDP leaves off and includes international expenditures in its summary of economic growth.  

  • Money coming from foreign sales of products or services, make GNP a broader summary of a given economy.  
  • Also included are payments and income from foreign stocks or interest payments on bonds that one country's government has sold to another.  This is an important consideration in the twenty-first century economy, where exporting nations like China and Saudi Arabia hold trillions of dollars in U.S. Treasury bonds.


GNP>GDP or  GDP>GNP

Sometimes GNP is bigger than GDP, and sometimes it is the other way around.  

  • Countries like Ireland, which has a lot of foreign-owned companies, tend to give the country smaller GNP than GDP because the payments to foreign owners are deducted from the GDP figures.  
  • On the other hand, since British, U.S. and Swiss residents tend to own a lot of companies abroad, their GNP is usually larger than their GDP because it includes income from foreign production that is not included in the domestic summary.


How do you compare GDP among countries with different currencies?  

It is difficult, because the value of economic activity in each country is denominated in currencies that are constantly changing in value.  

One method is simply take the value of each country's GDP at the end of the year and translate it into one common currency using official exchange rates.

  • Unfortunately, using official currency exchange rates gives a skewed idea of many countries economic health.  
  • Since the cost of similar goods and services isn't the same in every country, the total value of each countries' goods and services can vary widely.

Most economists and statisticians, try to adjust each country's GDP using a "real world" exchange rate.  

  • This is commonly referred to as purchasing power parity or PPP.  
  • It is an important calculation for anyone wanting to get a clear understanding of the real economic value of every country.  
  • To determine which economy is the biggest in the world, for example, you have to adjust nominal GDP figures using PPP; otherwise the figures are of little value.


PPP is a simple calculation.  

One country's currency, such as the U.S. dollar, is chosen as the base currency.  

The dollar value of a selected basket of goods and services is then compared to the value of the same items in another country using traditional exchange rates.  In most cases, the two values won't be the same.

It is often difficult to come up with a perfectly reliable PPP.  The choice of items to be included in the basket used to determine PPP has to be made carefully.


The Big Mac Index

The Economist magazine, somewhat jokingly, came up with a PPP using the costs of Big Macs around the world.  

Since the Big Mac is identical in every country, and sold all over the world, the Big Mac Index has now become a reliable tool to see how prices vary around the world.


GDP per capita

It can also be useful to relate a country's total GDP to the number of inhabitants, giving us a more realistic view of how wealthy a country really is.  

GDP per capita, is often used to compare economic power among countries.  

By dividing each country's total economic output by the number of people living in the country, we get a more accurate idea of who is richer.  


Impossible to capture the complete picture

No measure of economic growth and economic power, however, is able to capture the complete picture.  

Quality of life

Quality of life, for example, isn't included in traditional measures of GDP.  

The GNP does not allow for the health of our children, the quality of their education, or the joy of their play.  

Neither GNP nor GDP gives us a truly complete picture of our economic health.  


UNHDI measures of Economic well-being (most popular)

The most popular accepted measure of economic well-being is the United Nations Human Development Index (UNHDI), which rates countries according to their levels of health, education, and income. 

The UNHDI measures such areas as 

  • life expectancy, 
  • access to education and adult literacy, 
  • years of schooling, 
  • equitable distribution of income, 
  • GDP per person adjusted by PPP, 
  • health care and 
  • gender equality.  
Countries that pay a lot of attention to quality-of-life issues like education and health care - like Norway, Australia and Switzerland - appear high on the list.


Gross National Happiness Index

Some countries, such as Bhutan, have tried to look less at tangible measures and more at happiness, instituting a Gross National Happiness measure in 1972.  

Although happiness and well-being are notoriously difficult to measure, tracking opinion polls, search request data, and social media activity give us valuable information that can be used to determine which country can justifiably chant, "We're number one!"

Tuesday 24 March 2015

The Shrinking Ringgit































http://www.theborneopost.com/2013/12/22/the-shrinking-ringgit/

From 1980 until 2012, Malaysia GDP per capita PPP averaged US$9,336.30, reaching an all time high of US$14,774.60 in December of 2012 and a record low of US$5,063.40 in December of 1980.

Maximising your ringgit

With all these in mind, what then can you do to stretch your ringgit to its fullest? Sjimons lists eight tips to help the average consumer trim costs and spend wisely:

A. If you have savings beyond two or three times your monthly income, don’t let them sit idle in a low-interest deposit account.

1) Invest a portion of your monthly income in Amanah Saham Bumiputera/National schemes. These have provided average effective yields of 8.81 and 6.11 per cent respectively over the past three years. Although there is no upside through capital appreciation, there is no risk of capital depreciation either.

2) Invest a portion of your savings in Real Estate Investment Trusts (REITs). By law, at least 90 per cent of taxable income is required to be paid out on a quarterly basis. Some REITs even have monthly payouts to unit holders. Yields range between 4.58 per cent  to 7.52 per cent across all 14 Bursa-listed REITs. This is an especially good project for people looking to retire who want to create a regular income stream.


Sunday 21 October 2012

The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk






















Tuesday 2 October 2012

The Sources of Risk in Stock Investing

Total Risk = Unsystematic Risk + Systematic Risk

Unsystematic Risk (diversifiable)
Business Risk
Financial Risk

Systematic Risk (nondiversifiable)
Market Risk
Interest Rate Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk



Wednesday 15 August 2012

The greatest threat to your future financial security

The greatest threat to your future financial security is the loss, over time, in the purchasing power of power currencies.  A dollar today buys less than 5% of what a dollar bought 100 years ago.

Study the fascinating history and theory of money and use this knowledge as a basis in formulating and guiding your investment philosophy.

Tuesday 3 April 2012

Money is actually a debt instrument. So grows the gap between the haves and have-nots.

When it come to personal-finance success, responsibility for how we earn, spend, save and invest is obviously essential. However, financial objectives can easily elude us if we lack the whole story about money. 
Central banks worldwide (Federal Reserve for the U.S.) issue currency at the precise moment it is borrowed via an automated procedure called fractional-reserve banking. Therefore, money is actually a debt instrument (Federal Reserve Note). This private profit, interest-delivering system was designed centuries ago.
Over time debt grows per compounding interest and purchasing power diminishes with increased cost of living. The cost of living rises as businesses add their interest cost from bank loans to the cost of the goods and services we purchase.
And so grows the gap between the haves and have-nots.
That brings me to the pivotal issue of how much purchasing power $1.00 has in the marketplace today. One dollar is only worth 4.5 cents and an online inflation calculator proves my point. An item purchased for $1.00 in 1913 (when the Federal Reserve System was created) would cost $22.10 in 2010; a 2000% increase in inflation!
Without a working knowledge of money as debt, even the most sincere efforts may falter as a rising cost of living erodes hard-won forward movement. When following conventional financial wisdom, the solution to keeping up and making ends meet could well end up, once again, as participation in the vicious cycle of credit and debt. Who benefits?

Thursday 1 March 2012

Volatility is not risk. Risk is the reasoned probability of that investment causing it's owner a loss of purchasing power over his contemplated holding period.


Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.

At Berkshire we take a more demanding approach, defining investing as

  •  the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future
  • More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.


From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. 
  • Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. 
  • And as we will see, a non-fluctuating asset can be laden with risk.


Investment possibilities are both many and varied.



http://www.berkshirehathaway.com/letters/2011ltr.pdf

Thursday 22 January 2009

Purchasing power risk

Purchasing power risk

Purchasing power risk reflects the possibility that the rate of return on an investment will be insufficient to offset the rise in the cost of living.

During the early 1980s, the prime interest rate rose to 23% and inflation hit double-digit rates. At the same time, passbook savings accounts yielded about 5%. In retrospect, bank depositors would have been better advised to purchase canned goods and stack them in the basement. The interest earned from the savings account would have been insufficient to match the increase in the cost of food.

The stock market is generally considered to be a hedge against inflation. (Some analysts disagree with this generalization. Over long periods it is true; over shorter periods in history, it has not always been true.)

A well-diversified stock portfolio has little purchasing power risk, while an investment in fixed rate securities has plenty of it.


Also read: Understanding Risk
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk