‘V’ is for Volatility – NZ Initiative

ABC_s_of_economic_literacy_2_2_.1The ABC of economic literacy | info@nzinitiative.org.nz

 Economics would be a pale imitation of itself without volatility, or at the very least about as stimulating as watching paint dry. Luckily the world is a complicated place, where prices fluctuate for various reasons, and this, for the most part, is a good thing.

On a microeconomic level, producers wouldn’t be able to discover demand if there was no volatility. Volatility is indeed an essential ingredient for commerce to exist, with entrepreneurs engaging in a process of arbitrage between the price at which they buy inputs and the price at which they sell output. Furthermore, there would be no way of allocating scare resources to their most efficient use if we didn’t have price movements to guide the market.

Price changes are also needed to encourage investment in a particular sector. Long-term trends in commodity prices, such as Asia’s growing demand for protein, tell farmers that the investment needed to convert their land to dairy pasture is likely to payoff in the end (though not guaranteed).

Although price fluctuations usefully steer production and investment, this doesn’t mean all types of volatility (or lack thereof) are equally desirable. The effect of politics on markets can stifle or increase volatility completely separate from fundamental price drivers.

International debt markets are a good example. The yield on 5-year Greek government bonds has been trading at a fairly consistent level of just over 4 percent for some time. Meanwhile Argentinian 4-year bonds (the closest comparable security) are trading at 7.6 percent. The difference has almost nothing to do with economic fundamentals, since both countries are in major financial strife.

An investor, who knew nothing about the political support being lent by the European Union, might conclude from the yields that Greece is responsible with its public finances compared to Argentina. In actual fact Greece’s public debt to GDP stands at 161 percent, whereas Argentina’s public debt is equivalent to 42 percent of GDP.

The opposite can also be true. Investors in New Zealand’s listed electricity sector know only too well how volatile share prices have been due to the Labour and Green’s proposal to restructure the market, when in actual fact the fundamentals of the industry haven’t really changed.

To conclude, change, or volatility is a good thing in economics, provided it is based on market fundamentals and not political hot air.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘W’ for welfare.

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Save to Grow – Sorted.org.nz

Sorted 155x47-badge-v5-orangeWe all fritter away small amounts of money – yet those amounts can add upto a lot overtime. So instead of frittering it away, get into the habit of regular saving. Independent money guide Sorted is running a ‘Grow’ campaign encouraging New Zealanders to start a savings habit – and it’s ok to start small.

The trick is to make it come direct from your pay – so you don’t even miss the money you’re saving. An automatic payment straight into a savings account makes it easy to save.

Use Sorted’s super simple Save-ulator at http://www.sorted.org.nz/grow to calculate how much you could end up with if you saved just 1%, 5%, 10% or even more of your salary. Even with a small amount saved regularly, you’ll soon see your savings grow over time.

You might also like to think about three different purposes for your saving: saving to spend; saving for emergencies and saving for the future.

The ‘Grow’ campaign is the third phase of ‘Think, Shrink & Grow’:

Think – make a plan for your money and prepare for the unexpected;

Shrink – get out of debt fast; and

Grow – save regularly and invest for the future. If you’re doing something in each of these three areas, then the chances are you’ll be more likely to be on your way to getting sorted.

Thanks to the team at sorted.org.nz for this article.

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Originally posted on kiwissoar:
curved bridge another dimension into the mist [gallery type="rectangular" ids="2761,2762"]

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Make this a debt-free Christmas – Sorted

Christmas can be stressful enough. There are all those projects at work to finish, in-laws Sorted 155x47-badge-v5-orangestaying longer than you’d planned, and of course there is the money.

Here are three tips to get through Christmas with your finances intact:

1. Give it some thought now

You’ve got a lifetime of Christmases under your belt, so it’s time to put what you’ve learnt into practice. Which were the best ones and why? Were the best presents the most expensive, the most thoughtful or the most original? Then fast forward to this year – what kind of Christmas would you like?

Get the most Christmas for your money

2. Save to spend

If you’ve started saving, don’t stop now. If you haven’t, now’s the time: putting aside $25 a week for four weeks will give you $100, and $50 a week will give you $200. If you know what you’ve got to spend and stick to it, you’ll be celebrating a Christmas that’s debt-free.

Start saving today

3. Make lists

Lists really are a big help. Start with who you’ll be with on Christmas and what you’ll do.

Put down the things you’ll need, including presents, and add it up. If it’s more than you’ll have saved, rewrite the list before you start shopping. Make it your goal to stick to your list no matter what.

Stick to your plan this Christmas

Thanks to the Sorted.org.nz website for this article.

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‘U’ is for Utility – The NZ Initiative

The ABC of economic literacy | info@nzinitiative.org.nz

ABC_s_of_economic_literacy_2_2_.1Economist John Stuart Mill saw utility as “the feelings of pain and pleasure”. The utility, or usefulness, of something depends on how much it satisfies a person’s needs or wants. Positive utility might be thought of as ‘pleasure’, negative utility as ‘pain’.

While utility is subjective (some people may hate music that others love), people reveal the utility of something to them by how much they are willing to pay for it.

The utility of water is high, because it is necessary for survival. So why is water cheap while diamonds, which are dispensable, are dear?

The Labour Theory of value proposed that the price of something is determined by the “toil and trouble” of the labour. Perhaps a nervous young man slipping a diamond ring onto his true love’s ring finger is thinking of nothing more than the workers in the diamond mines as he considers the two month’s salary just spent.

But the theory of Marginal Utility was revolutionary in resolving the water-diamond paradox.

Marginal utility is the additional utility to the same person from a tiny bit more of the same thing. If you only have access to one litre of water per day, you would likely drink it. With ten litres, you might also prepare food. With 100 litres you could also bathe your family. And with 1,000 litres you might fill your swimming pool.

Each of these activities – drinking, cooking, bathing and swimming for pleasure, is of less value than the preceding activity. The law of diminishing marginal utility proposes that the more we have of something, the less value we will put on having a little bit more.

When water is plentiful, the value of another litre (i.e. the marginal utility) is low. Conversely, diamonds are scarce and coveted, even at the margin. Water is cheap because its marginal utility is low; and diamonds are dear because their marginal utility is high.

That diamond rings are so highly desired brings us back to the subjective nature of utility. Studies show that when people are tricked by cheap wine in a fancy bottle, they will perceive that it tastes better than the same wine served in a plain bottle. Brain scanning technology shows that when participants drink the supposed fancy wine, “the parts of the brain associated with reward and pleasure light up like a Christmas tree”.

The smiles on the faces of the newly engaged pair suggest they are experiencing the same rush of pleasure chemicals. For her, perhaps this is because the diamond is her new best friend. And he is not likely thinking of the diamond mine workers.

Since he so highly values her commitment to him, the diamond’s utility is worth the price.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘V’ for volatility.

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‘T’ is for Tax – NZ Initiative

The ABC of economic literacy | info@nzinitiative.org.nz

ABC_s_of_economic_literacy_2_2_.1Taxes are one of the most tangible links between the government and civil society. We all pay taxes in some form, and in exchange we expect the government to provide certain goods and services: roads, infrastructure, the courts, law enforcement, education, and support for society’s most vulnerable.

From this perspective, the oft-quoted declaration ‘taxes are the price we pay for a civilised society’, widely attributed to Oliver Wendell Holmes, rings true.

However, it is a common misconception that a dollar taxed is a dollar that can be spent by government on goods and services. In reality, a dollar taxed is a dollar that must be spent on collecting tax, ensuring tax compliance, public administration of policy and, of course, the actual public policy.

Besides, increases in tax rates do not automatically lead to an increase in tax revenue, as illustrated by the Laffer curve. Named after Arthur Laffer, this curve popularised the notion that higher tax rates may actually cause the tax base to shrink so much that tax revenues will decline. Conversely, a cut in tax rates may increase the tax base so much that tax revenues increase.

How so?

Taxes distort behaviour by influencing the personal decisions people make about their work and consumption. For instance, people who would prefer to work longer hours or at a higher pay may work less or refuse a pay rise to avoid being taxed at a higher rate. Higher personal income taxes encourage workers to substitute their preference for work to economic activities that they would otherwise not prefer.

This is known as the deadweight loss of taxation, where the tax system causes individuals to pursue actions they would otherwise not prefer. To gain maximum tax revenue, there must be a careful balance between low rates with a greater tax base, and high rates with a smaller tax base.

There is also the issue of tax incidence, which describes who bears the cost of the tax. For example, increasing the tax on high income earners may not necessarily mean that they bear the cost of the tax. If workers are receiving less money in their pocket, for an equal or greater amount of work, employers may feel compelled to raise their wages to ensure employees receive the same take-home pay. Thus it is employers who bear the burden of a higher rate of income tax.

Taxes are not the price we pay for a civilised society. At best they are the price we pay for a civilised government. But they are also the price of overly bureaucratic procedures, unpredictable outcomes, and the loss of freedom to make our own decisions.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘U’ for Utility.

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What’s the point in voting anyway?

What do we want from our media? Honesty, transparency, unbiased views? In an election year this service becomes an integrated part of information source to make choices about whom we want to lead our nation.

An election is a vital piece of the fabric of our society, and for all you investors out there, it is even more important, as voting is a financial event. Whoever gets in can determine how other nations see us and whether or not we keep our current appearance as a nation that is fiscally sound and stable.

Yes the global financial crisis was a financial event, but so is the election of our nations leaders.  As a nation of voters we have the responsibility to use our right to vote, it is vital to democracy, but also a privilege that is not afforded to all in the world. For myself, as a woman, I know that I am lucky to be born into a country that values my opinion alongside my male counterparts.

One of the biggest issues facing our next election is voter apathy, thinking that whatever the polls will say will happen, will happen, so there is no need to vote.

For all of our sakes I urge you, vote.  I have no other motive than to see the collective adult voice be represented, and let us all become aware of our collective responsibility to be collectively responsible our decisions.

No man is an island, whatever one does affects another, lets make it count, whichever way that takes us.


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