Immigration and Wages – a useful diagram

I found this graph in New Zealand Association of Economists publication entitled “Asymmetric Information”. It shows the effects of immigration policy and considers the broader effects of immigration – not just the simple fact that immigration increases the size of the labour force and therefore puts downward pressure on wages. It suggests that immigration shifts the aggregate demand curve to the right and this can increase inflationary pressure which ultimately raises wages. There is also the chance that this could lead to an outward migration of domestic workers as their jobs are taken by those coming into the country. Below is an extract from the article:

The model shows the flow of immigrants in the centre of the diagram, and the well-recognised downward impact on domestic wages through increased supply. The extent to which increased supply of immigrants can impact domestic wages depends on the occupational attainment of immigrants, and the extent to which immigrants are substitutes for domestic labour.

The left-hand side of the diagram shows the added effect of immigration, with an upward effect on domestic wages through increased demand for goods and services and new job creation. This effect can explain why wage decreases may not result after an influx of immigrants. In addition, a feedback loop is shown on the right-hand side, which shows that if downward pressure on wages is created, outward migration of immigrant or domestic workforce would have an increasing feedback effect on wages. The out-migration part of the diagram is pertinent to New Zealand due to its geographic and institutional proximity to Australia.

New Zealand Economy Report Card

The BNZ publish a report entitled “NZ at a Glance” which summarises the current state of the NZ economy. Here are some of the main points:

GDP – Construction is the main driver of growth over the next couple of years – mainly residential. Net exports is likely to take a hit as import penetration starts to build with as the economy recovers. GDP is forecast to increase to 3.6% in 2014 from 2.9% in 2013.

Unemployment – the current rate is 6.2% and the labour market is tightening with the increase in economic activity. Forecast to fall to 5.2% by March 2015. Tighter labour market will mean higher wage growth but also because of higher inflationary expectations as the economy recovers.

Inflation - quite subdued and the annual rate has been 1% or less over the last four quarters. A strong NZD, weakening commodity prices and low inflation globally are conspiring to offset domestic-demand driven price increases. Low inflation also becomes self-fulfilling to the extent that it moderates inflation expectations and price-setting behaviour elsewhere.

Current Account - The current account deficit appears to be stabilising in
a 4.0% to 5.0% of GDP range. This is thanks largely to a resurgence in the commodity prices of the goods that New Zealand exports. This is a welcome development to the extent that it may appease nervous rating agencies for a year or so.

Overall

The New Zealand economic expansion is gaining in momentum. The rebuild of Christchurch is now building up a head of steam and this is supporting increasingly widespread confidence. Very low interest rates and a booming housing market are playing their part too. Eventually this will necessitate a response from the central bank but while annual inflation remains below 1.0% (and set to stay there for a while) it suggests that any such response might be some time in coming. Meanwhile, the NZD remains supported by money printing elsewhere and the relative strength of the economy here.

New Zealand Merchandise Exports – Milk products the driver.

In the year ended March 2013, New Zealand’s merchandise exports totalled $46,182 million. The breakdown is as follows:

Australia $9,738 million
China $7,414 million
USA $4,338 million
Japan $3,143 million

Exports to the top ten destination countries accounted for approximately two-thirds of New Zealand’s merchandise exports by value. See chart below for percentages. With regard to the composition of exports the breakdown is as follows:

Milk power, butter and cheese products are $11,434 million
Meat and edible offal $5,287 million
Logs, wood, and wood articles $3,274 million
Crude oil $1,767 million

The top ten export commodities accounted for 64 percent of export value in the March 2013 year. With regard what destination it was sent from we can see the following:

34% of are sent from the Port of Tauranga
11% exported from the Ports of Auckland and Lyttleton Port
10% exported from Auckland International Airport

Shipping Industry pays for Negative Externalities – is it fair?

The shipping industry is taking a big hit on two fronts as it tries to stay afloat. With the current global conditions the industry itself is in the middle of a major downturn as there is too much supply chasing too little demand. To make matters worse the International Maritime Organisation (IMO) has introduced stricter environmental regulations to curb pollution – negative externalities. New regulations that ships have to adhere to:

1. Ships now have to burn cleaner and better grade fuel like diesel – ships used to burn cheap unrefined crude. This means a 50% increase in the cost of fuel
2. The IMO is making ship operators buy tradeable permits to emit CO2.
3. They are also introducing new standards for cleaner ballast water. It has been estimated that approximately 60,000 ships would need to be refitted and that would cost up to $1.7m each.
4. The EU are also proposing to introduce recycling levies on vessels calling at EU ports to pay for the safer scrapping of old ships

Is this fair? 90% of global trade is carried on shipping containers but they only emit 2.7% of the CO2 in the world. It seems that as a lobby group the shipping industry has been too fragmented and unable to influence policy like that of the airlines. See graph below for negative externalities.

A Level Revision: Contestable Markets

In the A2 course contestable markets is a popular essay question and is usually combined with another market structure.

What is a contestable market?

• One in which there is one firm (or a small number of firms)
• Because of freedom of entry and exit, the firm faces competition and might operate in a way similar to a perfectly competitive firm
• The threat of “hit and run entry” from new firms may be sufficient to keep the industry operating at a competitive price and output
• The key requirement for a contestable market is the absence of sunk costs – i.e. costs that cannot be recovered if a business decides to leave a market
• When sunk costs are high, a market is more likely to produce an price and output similar to monopoly (with the risk of allocative inefficiency and loss of economic welfare)
• A perfectly contestable market occurs only when entry and exit into and out of a market is perfectly costless
• Contestable markets are different from perfect competitive markets
• It is possible for one incumbent firm to dominate the industry
• Each existing firm in the market produces a differentiated product (i.e. goods and services are not perfect substitutes for each other)

There are 3 conditions for market contestability:

• Perfect information and the ability and or legal right to use the best available technology
• Freedom to market / advertise and enter a market
• The absence of sunk costs

Example
• Liberalisation of the European Airline Market in late 1990s
• Traditional “flag-flying” airlines faced new competition
• Barriers to entry in the industry were lowered (including greater use of leased aircraft)
• New Entrants – easyJet- Ryanair

Austerity = negative multiplier effect

In the NYT it was stated that Moody’s are predicting that a tighter fiscal policy – cuts in government spending and increased taxation – will slow economic growth for 2013 by about 1.2 percentage points and prevent the unemployment rate from falling to 6.1 percent by the end of the year. Where is the effect of QE on these figures?

Geoff Riley in New Zealand

Co-founder of Tutor2u and economics guru, Geoff Riley is in Auckland for this week. Currently on a Royal Society Fellowship Geoff is also heading to Melbourne and Hong Kong on his trip downunder.

He is doing a presentation to teachers from around the Auckland area at King’s College on Thursday at 2pm. Please email me if you would like to attend – address below. We are very lucky to have someone of Geoff’s calibre here in NZ.

m.johnston@kingscollege.school.nz

A Level Revision: Comparing living standards over time and between countries

National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below (The Economist – 2nd February) showing the Gini coefficient of income inequality.

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.

Germany is the place to go.

Since the 1950′s the free movement of people has been one of the major goals of European integration. Broadly defined, this freedom enables citizens of one Member State to travel to another, to reside and to work there (permanently or temporarily). The idea behind EU legislation in this field is that citizens from other member states should be treated equally with domestic ones – they should not be discriminated against. With the current austerity measures in a lot of European countries and high unemployment there has been a movement to more bouyant countries in particular Germany. See graph below from WSJ Graphics.

It is the algorithms that outsmart humans not machines.

Whilst away on hockey tour in Malaysia I was able to avail myself of the ‘The Straits Times’ newspaper which is published in Singapore. One article that particularly caught my attention was that concerning the creativity of algorithms. Most are oblivious to their creativity yet highly sophisticated algorithms have created music based on the works of great artists but in a style that is personalised and therefore indicative of you the individual. They are also replacing writers – Professor Phil Parker of the Insead Business School in Paris has published more than a million reports on Amazon in just a couple of years. Using a proprietary algorithm that produces a report in 10 – 20 minutes instead of about 4 weeks. The algorithm pulls information from the web, performs econometric analyses, creates tables, formats the report and publishes it as a Word document. Professor Parker has also developed algorithms to produce poems, videos and video games.

Algo Trading
Although we could question the efficacy of algorithms on intangible dimensions such as “soul’ and “depth”, one area where they trounce human beings is stock trading. With up to 75% of trades on Wall Street done using computer programmes it is no wonder that algorithms execute trade at lightening speed and carry out numerous transactions every second. On the NYSE the average round-trip transaction time is 600 microseconds. To put into perspective if you blinked it takes you 300 milliseconds to complete the action – during that time NYSE executed 500 trades. This desire to improve efficiency in the market has led to extremely low costs of trading and very high stock liquidity. However it has also produced huge swings in stock prices. On 6th May 2010 – know as the ‘Flash Crash’ – the DJIA fell 9% in minutes but then recovered most of that loss in the subsequent few minutes.

The landscape of society was always made up by this uneasy relationship between nature and man. But now there is this third co-evolutionary force – Algorithms – and we will have to understand them as nature and in a way they are. Kevin Slavin Ted Talk

A Level Revision – Fixed, Dirty Float Exchange Rate Systems

For many years after the Second World War most countries operated a system of fixed exchange rates. The external value of a currency was fixed in terms of the US$ and the value of the US$ itself was fixed in terms of gold. In effect, therefore, the values of the currencies were fixed in terms of gold. The ‘fixed’ rate was not absolutely rigid. The value of a currency was allowed to vary within a narrow band of 1 or 2% on each side of the ‘fixed’ rate or parity. For example, if the value of the NZ$ were fixed at NZ$1 = US$0.50, a permitted deviation of 2% would allow it to vary between NZ$1 = US$0.51 and NZ$1 = US$0.49. These limits are often described as ‘the ceiling’ and ‘the floor’. Central banks were responsible for maintaining the values of their currencies within the prescribed bands. They are able to do this by acting as buyers or sellers of the currency in the foreign exchange market. For this purpose each central bank must have a fund containing supplies of the home currency and foreign currencies.

The way in which the Reserve Bank of New Zealand can use its funds of currencies to influence the exchange rate can be explained by making use of the diagram below. Let us assume that the value of the NZ$ has been fixed at A and, initially, the market is in equilibrium at this exchange rate. The permitted band of fluctuation is PP1 and the value of the pound must be held within these limits. A large increase in imports now causes an increase in the supply of NZ$’s in the foreign exchange market. The supply curve moves from SS to S1S1 causing a surplus of NZ$’s at the ‘fixed’ rate (A). If no intervention takes place, the external value of the
NZ$ will fall to B which is below the permitted ‘floor’.

The Reserve Bank will be obliged to enter the market and buy NZ$. In doing so that will shift the demand curve to the right and raise the value of the NZ$ until it is once again within agreed limits. In the diagram below intervention by the Reserve Bank of NZ has raised the exchange rate to C.

When the Reserve Bank of New Zealand is buying NZ$’s, it will be using up its reserves of foreign currencies; when buying NZ$’s it exchanges foreign currencies for NZ$’s. ‘Supporting the NZ dollar’, that is, increasing the demand for NZ$’s, therefore leads to a fall in the nation’s foreign currency reserves. In the opposite situation where an increased demand for NZ$’s tends to lift the value of the NZ$ above the permitted ‘ceiling’, the central bank will hold down its value by selling NZ$’s. This will increase the supply of NZ$’s and lower the exchange rate. When the Reserve Bank is selling NZ$’s it will be increasing its holdings of foreign currencies.

The main argument for a fixed exchange rate is the same as that against a floating rate. A fixed rate removes a major cause for uncertainty in international transactions. Traders can quote prices which will be accepted with some degree of confidence; buyers know that they will not be affected by movements in the exchange rate. The risks associated with international trade are lessened and this should encourage more trade between nations and more international borrowing and lending.

A Level Revision – Floating Exchange Rates

In theory, an advantage of a floating exchange rate is that it will automatically correct any tendency for the balance of payments to move into surplus or deficit. The following sequence of events shows how this automatic correction is supposed to work.

• Assume the NZ balance of payments is initially in equilibrium.
• Assume now that export values remain unchanged, but an increased demand for $ tends to move the NZ B of P into a deficit.
• This increased demand for imports will increase the supply of dollars in the foreign exchange market.
• The external value of the dollar will fall and this will make exports cheaper and imports dearer.
• The changes in the relative prices of exports and imports will increase the volume of exports and reduce the volume of imports and the B of P will be brought back into equilibrium.

In practice it may not work out like this because the supplies of exports and imports may be slow to adjust to the price changes. For example, if the prices of exports fall, it may take considerable time before the increased quantities demanded can be supplied. There are also problems associated with the elasticities of demand for exports and imports. A 10% fall in the prices of exports will not increase the amount of foreign currency earned unless the quantities demanded increase by more than 10%. A further problem is that a depreciation of the pound increases import prices and, since New Zealand imports a large amount of raw materials and manufactures, this has the effect of raising the cost of living and the costs of production in many industries.

A disadvantage of the system of floating exchange rates is the fact that greatly increases the risks and uncertainties in international trade.

For example, an Auckland manufacturer of cotton cloth may be quoted a firm US$ price by his American supplier, payment due, say, in 3 months. He will still not be certain of the costs of his cotton because he does not know what the US$-NZ$ exchange rate will be when he comes to make payment.

If he is quoted US$500 for a bale of cotton and the exchange rate stands at:
NZ$1 = US$0.56, a bale of cotton will cost him NZ$892.86.

If, however, by the time he comes to make payment, the exchange rate has moved to:
NZ$1 = US$0.53, a bale of cotton will cost him NZ$943.40.

Speculators remove some of this uncertainty by operating a forward exchange market where they guarantee to supply foreign currency at some future date at a price agreed now.
A perfectly free market in foreign currency is not likely to be found in the real world. Even when currencies are said to be floating, governments tend to intervene in the market to smooth out undesirable fluctuations. The central bank (Reserve Bank in NZ) is responsible for this type of intervention and the way it operates is explained in the next section.

Advantages of a Strong Dollar

• A high NZ$ leads to lower import prices – this boosts the real living standards of consumers at least in the short run – for example an increase in the real purchasing power of NZ residents when traveling overseas
• When the NZ$ is strong, it is cheaper to import raw materials, components and capital inputs – good news for businesses that rely on imported components or who are wishing to increase their investment of new technology from overseas countries. A fall in import prices has the effect of causing an outward shift in the short run aggregate supply curve
• A strong exchange rate helps to control inflation because domestic producers face stiffer international competition from cheaper imports and will look to cut their costs accordingly. Cheaper prices of imported foodstuffs and beverages will also have a negative effect on the rate of consumer price inflation.

Disadvantages of a Strong Dollar

• Cheaper imports leads to rising import penetration and a larger trade deficit e.g. the increasing deficit in goods in the NZ balance of payments in 2011
• Exporters lose price competitiveness and market share – this can damage profits and employment in some sectors. Manufacturing industry suffered a steep recession in 2011 partly because of the continued strength of the NZ$, leading to many job losses and a sharp contraction in real capital investment spending and the lowest profit margins in manufacturing industry for over a decade
• If exports fall, this has a negative impact on economic growth. Some regions of the economy are affected by this more than others. The rural areas are affected by a strong dollar in that our produce becomes more expensive to overseas buyers.

BRICS: the engine of world growth

The Economist produced a telling graphic that shows the composition of world trade from 2007 to the present day. What is significant is the share of world growth from the BRICS countries – Brazil, Russia, India, China and South Africa. The developed world which is made up of 23 countries contributed just 20% over the same time period. This is mainly due to levels of debt and austerity measures. However the BRICS have contributed 55% of world growth.

ECB contemplating negative interest rates.

Recently the European Central Bank cut its refinancing rate by 25 basis points to 0.5% which is a record low. The catalyst for this rate cut was the continuation of the decline in the manufacturing sector of the EU. Although this lower interest rate did improve the mood of investors ECB President Mario Draghi did hint at the prospect of negative interest rates on deposits at the ECB. This would mean that trading banks would pay for the privilege of parking their money in the ECB. What are the options for banks?

1. The ECB’s thinking is that banks wouldn’t want to pay interest to the ECB and therefore would try and lend money to consumers which would stimulate growth in the real economy.
2. The banks could stop depositing money at the ECB and simply keep it themselves – like a consumer you would keep money ‘under your mattress’.
3. The banks could continue to deposit money at the ECB and pass on the cost of negative interest rate to the consumers who borrow. This would likely reduce the level of borrowing which is exactly what the ECB don’t want.

With the US economy starting to grow is QE a more applicable policy instrument for the EU economy? Will Draghi follow Bernanke? Its seem that he is not keen on the ‘helicopter drop’ but with a 0.5% refinance rate what other options are available?

Rogoff and Reinhart error – but does it really matter?

Lately there has been a lot of media coverage about an Excel error by academics Ken Rogoff and Carmen Reinhart – co-authors of ‘This Time is Different’ – 2009. A student from University of Massachusetts tried to replicate one their models regarding growth rates when a country has a public debt of greater than 90% of GDP. Rogoff and Carmen stated that with this level of public debt growth in a country falls to a mean of -0.1%. However using the same data the student found that a figure of 2.2% was applicable in this context.

However Rogoff and Reinhart have been cautious about saying that high debt causes slower growth rates but it does highlight the validity of analysis connecting debt and austerity to growth rates. Adam Posen in the FT stated that the claim of a clear tipping point for the ratio of Government Debt to GDP past which an economy starts to collapse doesn’t hold. Following the second world war the US, UK, Belgium, Italy and Japan had public debt greater than 90% of GDP but there was not much of an effect on their economies. In Italy and of late in Japan stagnation in economies led to slowly rising debt levels. In the UK and US in the 1950’s growth returned and debt levels declined. What this is suggesting is

Slow growth is at least as much the cause of high debt as high debt causes growth to slow.

But a certain amount public debt is necessary for future development of any economy especially when you think about the construction of infrastructure and government spending on education. Both of which contribute to future growth and in theoretical terms move the production possibility curve outwards. This in turn creates growth and subsequently income for a government.

USA – Mad Spending v EU – Nervous Austerity

With one side of the Atlantic – USA – involved in quantitive easing (printing money) and the other – EU – with severe austerity, maybe somewhere in between would be a logical way to go about things. But is moderation a choice for policy makers when they have already gone so far down the track of their respective plans?

Final thought
What can be concluded is that too much debt has costs for growth but the degree of those costs is dependent on the reasons for debt accumulated and what path the economy is actually taking.

Does being poor mean lack of income?

An engaging article from The Economist suggesting that income is not the only aspect of life that people care about. There are other variables that have an impact on people’s lives. The Oxford Poverty and Human Development Initiative have devised the Multi-Dimensional Poverty Index (MPI) which asks 10 questions:

2 on education
2 on health
6 on household standard of living

Each of these is given a weighting in the overall index. A household is deemed poor if its hardship adds up to at least 33%. The index addresses other developments not just income per day. Nepal improved health and living standards but was slower to improve education or widen access to drinking water. In Rwanda the availability of water and sanitation accounted for a large part of its development. Ultimately the index focuses the importance of measuring standards of living away from consumer durables to that of drinking water, sanitation and health. Policymakers have in the past looked at statistics in a vacuum with a focus on purchasing power rather than other variables of equal importance.

Malaysian Economy – some positive indicators

On a hockey tour in Malaysia and its has been interesting to observe the pace of development here in Kuala Lumpur. Everywhere you look there is a high rise block being built with work continuing well into the night – there is definitely a buzz about the place. However, as yet we haven’t ventured into the more rural parts of the country to experience first hand the local communities and their economies. Here is some information on the main characteristics of the economy:

* Malaysia is well-endowed with natural resources in areas such as agriculture, forestry and minerals.
* It is an exporter of natural and agricultural resources, the most valuable exported resource being petroleum.
* At one time, it was the largest producer of tin, rubber and palm oil in the world.
* In terms of agriculture, Malaysia is one of the top exporters of natural rubber and palm oil, which together with sawn logs and sawn timber, cocoa, pepper, pineapple and tobacco dominate the growth of the sector.
* Palm oil is also a major generator of foreign exchange.

Source: Wikipedia

Malaysia’s product exports in 28 color-coded categories

Outlook for Malaysia from The World Bank

* Malaysia’s economy expanded to 5.1 percent in 2011.

* GDP growth exceeded earlier estimates because the Government stepped up public consumption spending towards the end of the year and also because of higher investments by public and private companies.

* GDP is expected to continue to expand healthily in 2012 by 4.6 percent in 2012 and, assuming the global economic recovery picks up, 5.1 percent in 2013.

* Inflation has started to decline, with stabilizing food prices and falling transport costs.

* Unemployment held steady at low levels. Job creation was healthy, accommodating new workers and a higher participation rate.

* Jobs lie at the core of a strategy to achieve Malaysia‘s objective of becoming a high-income economy that benefits all Malaysians. In this regard, Malaysia needs to create more “modern jobs” and modernize its labor markets. ‘Modern jobs’ involve a higher and more diverse set of skills such as communication, problem-solving, and proficiency in modern information technology. Modern firms in a high-income economy derive their competitiveness from the productivity and talent of their workers, not low wages.

US infrastructure could create those jobs

Some alarming figures have been banded about with regard to America’s infrastructure. It is estimated that over 700,000 bridges are rated as structurally deficient. In 2009 Americans lost approximately $78 billion to traffic delays – inefficient use of time and petrol costs. Also crashes which to a large extent have been caused by road conditions, cost a further $230 billion.

According to the American Society of Civil Engineers the US needs to spend $2.2 trillion bring their infrastructure up to standard. The Congressional Budget Office estimated in 2011 that for every dollar the federal government spent on infrastructure the multiplier effect was up to 2.5. Other indicators state that every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes. – The Economist

Positive Externalities from infrastructure.

Investment in infrastructure has a lot of positive externalities – faster traveling time for consumers and companies, spending less time on maintenance. Research has shown that the completion of a road led to an increase in economic activity between 3 and 8 times bigger than it initial outlay with eight years after its completion. But what must be considered is that now is the best time to invest in infrastructure as it is very cheap – much cheaper than it will be when the economy is going through a boom period.

A2 Revision – Nominal GDP per capita v PPP per capita

Our material well-being
• The standard of living is simply a measure of the economic or material welfare of the inhabitants of a country, a region or a local area.
• The baseline measure is real national output per head of population.
• Real income per capita is an inaccurate and insufficient indicator of living standards

Per Capita National Incomes
National income data can be used to make cross-country comparisons. This requires:

1. Converting GDP data into a common currency (normally the dollar or the Euro)
2. Making an adjustment to reflect differences in the average cost of goods and services in each country to produce data expressed at a ‘purchasing power parity’ standard

Data on per capita income based on a country’s total personal income are rarely available. Thus, the Gross domestic product (GDP) is more commonly used. However, the total personal income is generally lower than the gross domestic income.

A list of the top ten countries, and the lowest-ranking country, by GDP per capita (in terms of purchasing power parity – PPP – and nominal values) for the year 2010

Problems of accuracy:
Officially data on a nation’s GDP tends to understate the true growth of real national income per capita over time e.g. due to the expansion of the shadow economy and the value of unpaid work done by millions of volunteers and people caring for their family members. There may also be errors in calculating the cost of living

The scale of the informal “shadow economy” varies widely across countries at different stages of development. According to the IMF, in developing countries it may be as high as 40% of GDP; in transition countries of central and Eastern Europe it may be up to 30% of GDP and in the leading industrialised countries of the OECD, the shadow economy may be in the region of 15% of GDP

Bitcoin interview with Max Kaiser

Thanks to AS student Carlos McCoy for some information on Bitcoin. BITCOIN, the world’s “first decentralised digital currency”, was launched in 2009 and unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. However in today’s environment it does maintain a good store of value relatively speaking when you look at alternative currencies. Below is Max Keiser with some very good points.