Kenkey Economics- Principles of Sustainable Wealth Creation by Adatsi Franklin

Author:Adatsi, Franklin [Adatsi, Franklin]
Language: eng
Format: epub
Publisher: Unknown
Published: 2016-03-05T16:00:00+00:00

8

The Value of Money

Risks Arising

from the Government’s Monopoly over Money-Supply

What a sound money system does is to stabilize all the elements in it, and reduces the uncertainty that people confront. And the one thing all human beings do when they are confronted with uncertainty is pull back, withdraw, disengage, and that means economic activity, which is really dealing with people, just goes straight down.

—Alan Greenspan, Chairman of the U.S. Federal Reserve from 1987 to 2006.

What is the value of money? Does having more money make one wealthy? The quest for riches or wealth is always associated with having more money. However, wealth may be more accurately determined by the purchasing power for goods and services rather than the amount of money a person has. Having more money does not by itself guarantee higher levels of affordability. Furthermore, when prices are not stable, the connection between the quantity of money a person has and his purchasing power or wealth can break down.

An example to illustrate the superiority of purchasing power over absolute income levels in determining standards of living. Teachers from six countries (see fig. 8.1) were polled to estimate the level of affordability that their wages could command in major cities of their respective countries. For the purpose of this exercise, we use the same consumption basket across all countries and assume that every teacher consumes four main items: housing, food, transportation, and entertainment. We also standardize items in the consumption basket to ensure that they are comparable. For example, in order to compare rental costs, apartments or houses have to be located in a major city and offer a comparable living space.

In this simplified and theoretical example, data on teacher incomes and the cost of living in major cities within their respective countries illustrates that earning more money may not always translate into stronger purchasing power or higher living standards. The Indian teacher commands the highest purchasing power in his city. His monthly income can afford to purchase 130% of his consumption basket, even though he only earns a monthly salary of $300. His purchasing power exceeds that of his US counterpart, who earns much higher wages but can barely afford to live in a major city. In order to make ends meet, the American teacher may be forced to downsize her housing unit and reduce her food and entertainment consumption. Even though the American teacher earns more money, her purchasing power is lower and she may feel poorer than the teacher from India. In order to afford the same purchasing power as the teacher from India, the American teacher needs an income of $3400 per month (i.e. to purchase 130% of her consumption basket in the United States).

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