In the literature of information technology thinkers, organisational
change processes have been conceptualised in terms of a continuum
from automation, rationalisation, and re-engineering, through
to paradigm shifting.
As this column indicated last week, dramatic changes in
the national economic indicators should therefore precipitate
some re-engineering and paradigm shifting for us in the field
of financial planning.
Last week we looked at inflation and what we can do to help
ourselves. We are also told by the Central Bank that GDP has
never been so good. But what exactly is GDP? And what does
GDP have to do with our personal savings programmes?
First of all, what is the economy? One way to understand
this is to simply recognise that there are four major groups
that make up the economy: firms, households, government, and
the rest of the world.
Now GDP! It is the acronym for gross domestic product. This
is a measure of the total output of the economy, during a
given period, in terms of current production or new goods.
Output is reflected in the market value of all the goods and
services produced by everyone. The word domestic emphasises
that it is production located inside the country.
It is calculated by multiplying the real output or income
times the overall price level for final goods and services.
Final goods and services refer to things that are ready for
use, so that a plant which produces iron rods for another
plant to use to make something else for the consumer is not
a final good in itself. Rather, that will be classified as
an intermediate good, and will not be counted.
In effect GDP shows the final value of sales for all new
things produced in the country, and ignores the value of goods
that change ownership if they are not NEW items. For example,
when a house is sold, the value of such a transaction is not
counted in GDP, unless the house is brand new.
Also sales of stock certificates are just ownership transfers
and are not counted in GDP.
However, the fee that may be paid to the stock broker for
his service will be counted since a new service has been rendered.
But a profit realised by the seller is not counted in GDP.
The more specific components that make up GDP are:
1) household spending on consumption items
2) spending by individuals on new residential properties
3) spending by firms on new machinery, inventory goods,
4) the money spent by government
5) gross investments by government, and
6) the sum of exports minus imports.
Of those, the largest portion of spending is typically attributed
to the personal consumption items of the first group: households.
Personal consumption is divided into three types of expenditures.
We buy what is called durable goods such as appliances and
motor cars. The next category is called non-durable goods
such as clothes, rum, and medication. The third in the category
is called services. Services refer to doctors bills,
school fees, bank charges etc.
I have taken the long road to get us to this point. The
crux of the matter is that we have to rationalise our spending
habits against the backdrop of higher prices, and re-engineer
how we distribute limited incomes between durables and non
durables and services.
It is better to be safe than sorry.
Methodology is crucial. According to the old Chinese proverb
told to me recently by a safety consultant: even the faintest
of ink, is more powerful; than the strongest of memory.
More on economic indicators next week.