Times of Prosperity Lead to Times of Demise
What goes up, must
come down
A saying that helped me as a kid whilst biking up a hill,
however it does seem relevant if we look at economic developments.
Over the
years our western economies have grown at an exponential pace. The exponential
element of the curve is caused by our technological and societal developments.
Dynamic societies allow for change and development, with prosperous economic
times comes the spread of culture and the prominence of a people. The united
states has grown from a group of rebels from the United Kingdom to the most
powerful and influential economy today. Economic performance is commonly
measured through the GDP (Gross Domestic Product). GDP is the value of goods
produced in country X over one year. Production output is the most common
manner in which to measure a country’s GDP; GDP per capita is the total GDP
divided by the number of inhabitants. It is however not to be confused with a
person’s income. GDP is a measure of wealth of a country not of individual
people’s incomes. It is often confused with GNP (Gross National Product) there
is however a dissimilarity. GNP not only measures the production output (much
like GDP) but also measures the income from different sources of the citizens;
it is the total value circulating within the territory of a nation. Therefore
it does not measure accurately the economic strength and/or growth of a
country, GDP on the other hand does. Calculating the GDP can be done in three
different manners all of which will result in comparable results, the manner in
which we calculate the GDP is not truly relevant but the uses and versions of
the GDP are. The most important of them is the Purchasing Power Parity (PPP);
based around the Us dollars its concept is simple: How much can I buy in a
different country with X Dollars and vice versa. It goes beyond the currency
exchange. There are several indexes that measure PPP in various countries,
these indexes are necessary because PPP is not a standalone phenomenon that can
be measured – there is no formula. The solution is to compare not only exchange
rates but various products as well. The same way we measure inflation we
measure PPP, we have a basket of goods and this basket costs price p in country x the same basket costs price q
in country y. Finding goods that are
comparable across the spectrum can cause trouble as culture differences will
cause differences in goods and services as well, therefore a new concept was
developed: the Big Mac index[1].
This index is based on the conglomerates –Mcdonalds’ most famous burger. The reasoning behind this
is that the burger will consist of the same ingredients all over the world[2]
and thusly the price can be accurately measured and compared[3].
Example:
Price in US: 4USD
Price NL: 4.50USD
Exchange rate: 1.36936
Price of burger NL in USD: 4.50
Variance: 0.50
Price in EUR: 3.2862EUR
Here we notice the discrepancy in the
monetary value of the burger in the US a burger costs 4.00USD whilst in Europe
the value of the burger is at 4.50USD looking at the exchange rate[4] the
burger should cost 2.9211EUR but in actuality it costs: 3.2862EUR with a
variance of 0.3651EUR effectively making the EURO a stronger currency as well
as giving countries using the EURO a higher PPP. In one quote PPP can be
explained as: how much can I buy in another country with x amount of money from my own country – or: Can I buy more or less
with x amount of money in another
country compared to my indigenous country?
Economic growth is the focus of the western
world, without growth we go nowhere. How long can we keep up growth? Where does
it end? Eventually we must reach the apex after which everything must slowly
recede.
