Friday, October 10, 2014

Power of denominator

Thought for the day
”The lack of money is the root of all evil."
-          Mark Twain (American, 1835-1910)
Word for the day
Concomitant (Adj)
Accompanying; attendant; occurring or existing concurrently.
(Source: Dictionary.com)
Teaser for the day
I heard Modi implicitly claiming in an election rally that for the first time in the entire history of Bharat because of him the world community has recognized India as a force to reckon with.
Do RSS and other Hindu nationalist organizations accept this?
Have not we always believed that Bharat had been a world leader since the beginning of human civilization?

Power of denominator

My father once explained me the formula of happiness. He said, "your happiness is equal to your income divided by your needs. If your needs are zero, your happiness is infinite and if your needs are infinite, your happiness is zero, notwithstanding whatever is your income.
The problem with most people is that they focus only on enhancing the numerator (income in this case), which is completely irrelevant if you leave the denominator (in this case needs) uncontrolled. The better way to control problems is to focus on denominator, while keeping an eye on the numerator.
Applying this formula to the current economic conditions provides some interesting insights for the managers of the economy. For example consider the following:
The headline employment data in U.S. has shown steady improvement in past many months. The current reported unemployment rate is down to about 5.9% from post Lehman collapse period high of close to 10%. This sounds great at once. But how do we explain the struggle with low inflation, poor wage growth, slow household consumption growth, and higher number of temporary and part time workers, more people living off food stamps and rising stress on state and local authority finances.
I feel it will be useful to evaluate the denominator used for unemployment rate, i.e., the total number of workers offering themselves for work. Data suggests that labor force participation rate remains 3 percentage points lower than before the crisis and part-time employment remains high. A whole generation of labor might have become redundant in past 7years due to technology advancement and closure of many traditional businesses. These people may now be dependant on the State for their food and healthcare. Some of them might take up petty part-time jobs. But this does not restore their purchasing power to pre-crisis level.
Similarly, while talking about the growth rate of Indian economy, most discussions and arguments are focused on the rate of real GDP growth over previous corresponding period.
This growth number certainly has a statistical importance. But for most of the people, including me, the more important number is the absolute amount of per capita real national income in general and my actual real income in particular.
This real GDP growth in percentage terms will have little meaning if the base or the denominator is very low (which is the case at present) or it is not adjusted for the population growth or the real household inflation. A 5% real GDP growth with 2% population growth would mean just 3% growth in per capita income. This is not likely to cause any material improvement in my lifestyle. Especially when it is deflated by WPI and not the household inflation.
The denominator in our case, viz., population, household inflation and lower number for previous periods are too powerful for the official 6% real GDP growth to have any material impact on my lifestyle. Politicians and corporate though may have a reason to cheer!

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