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Per Capita Income

Per capita income

The per capita income for a group of people may be defined as their total personal income, divided by the total population. Per capita income is usually reported in units of currency per year.

Per capita income as a measure of wealth

Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a commonly-used international currency such as the Euro or United States dollar, and is useful because it is widely known and produces a straightforward statistic for comparison. Particularly when comparing countries with substantially different levels of wealth, however, it has several weaknesses as a measurement.
- Economic activity that does not result in monetary income, such as services provided within the family, or for barter, are usually not counted. The importance of these services will vary widely between different economies, both between countries and among different groups within a country. See: Informal economy
- Per capita income gives no indication of the distribution of that income within the country, so a small wealthy class can increase the measured per-capita income far above that of the majority of the population. See: Income inequality metrics
- Differing currency exchange rates between countries mean that a given amount of money (for example, one US dollar) has differing values in different places. See: Purchasing power

Some national per capita income levels

Data on Per capita income based on a country's total personal income is very difficult to find. Much more commonly used due to its availability is the Gross domestic product (GDP). Total personal income is lower than the Gross domestic income. A ranking of the (probably) top ten countries by GDP per capita (in PPP): # Luxembourg $58,900 # United States $40,100 # Norway $40,000 # Jersey $40,000 # Guernsey, $40,000 # Bermuda $36,000 # San Marino $34,600 # Hong Kong, $34,200 # Switzerland $33,800 # Cayman Islands $32,300 The lowest-ranked is East Timor with a per capita GDP of $400 Source: CIA World Factbook, 2005

Total personal income

Total Personal Income is the value most often used to calculate per capita income. It equals the total value of income received by, or on behalf of, all residents of a particular area. Total personal income is calculated by adding total active income (earnings), passive income, and government transfers. Earned income includes money earned by individuals, such as wages, salaries, and profit of individual business owners. To accurately calculate per capita income, earned income is associated with an individual's place of residence, not their place of work. A high level of earned income reflects positively on an area's economic health. Passive income includes investment income, interest income, income from retirement plans and annuities, and rental income. A local economy does not necessarily benefit from a high level of passive income. Government transfers include payments to individual residents from various federal, state, and local government entitlement programs. These include 1) social security and disability programs, 2) medical payments, 3) income maintenance (welfare), 4) unemployment compensation, and 5) veterans benefits. From the ratio of the three components of Total Personal Income, certain characteristics of a local economy can be deduced. In the United States, areas which have government transfers greater than 20% of the TPI have a high retirement population, a distressed economy, or a combination of both. Category:Income

Finding Total Personal Income Data

Data for personal income levels for the USA are located at the Bureau of Economic Analysis ([http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp?SelectedTable=298&FirstYear=2002&LastYear=2004&Freq=Qtr USA Personal Income Data])

Euro

:For other uses, see (disambiguation) or EUR (disambiguation). The euro (€; ISO 4217 code EUR, Unicode U+20AC) is the currency of twelve European Union member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain, collectively known as the Eurozone/Euroland. The euro is the result of the most significant monetary reform in Europe since the Roman Empire. Although the euro can be seen simply as a mechanism for perfecting the Single European Market, facilitating free trade among the members of the Eurozone, it is also regarded by its founders as a key part of the project of European political integration. Monaco, San Marino, and the Vatican City, which formerly used the French franc or the Italian lira as their currency, now use the euro as their currency and are licensed to mint their own euro coins in small amounts, even though they are not EU states. The euro is also used for payment of debt in other European non-EU jurisdictions such as Montenegro, Kosovo and Andorra. The euro is administered by the European System of Central Banks (ESCB), composed of the European Central Bank (ECB) and the Eurozone central banks operating in member states. The ECB (headquartered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB participate in the printing, minting and distribution of notes and coins, and the operation of the Eurozone payment system. coins coins

Characteristics

:Main articles: euro coins, euro banknotes The euro is divided into 100 cents. In the English language, the form "cent" is officially required to be used in legislation in the singular and in the plural, though the natural plural cents is recommended for use in material aimed at the general public. (For more information on language and the euro, see the relevant section below.) All euro coins have a common side showing the denomination (value) and a national side showing an image specifically chosen by the country that issued it; the monarchies often have a picture of their reigning monarch, other countries usually have their national symbols. All the different coins can be used in all the participating member states: for example, a euro coin bearing an image of the Spanish king is legal tender not only in Spain, but also in all the other nations where the euro is in use. There are €2, €1, 50c, 20c, 10c, 5c, 2c and 1c coins, though the latter two are not generally used in Finland or the Netherlands (but are still legal tender). Euro banknotes have a common design for each denomination on both sides. Notes are issued in the following amounts: €500, €200, €100, €50, €20, €10, and €5. Some higher denominations are not issued in some countries, though again, are legal tender. There is a Europe-wide clearing system for large transactions, set up prior to the launch of the euro - [http://www.ecb.int/paym/target/html/index.en.html TARGET]. For retail payments, several arrangements are used and the general rule is that an intra-eurozone transfer shall cost the same as a domestic one. Credit card charging and ATM withdrawals within the eurozone also are charged as if they were domestic. Paper based payment orders, such as cheques, are still domestic based.

Transition

The euro was established by the provisions in the 1992 Maastricht Treaty on European Union that was used to establish an economic and monetary union. In order to participate in the new currency, member states had to meet strict criteria such as a budget deficit of less than three per cent of GDP, a debt ratio of less than sixty per cent of GDP, combined with low inflation and interest rates close to the EU average. Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The definitive values in euro of these subdivisions (which represent the exchange rates at which the currency entered the euro) are as follows:
- 13.7603 Austrian schillings (ATS)
- 40.3399 Belgian francs (BEF)
- 2.20371 Dutch gulden (NLG)
- 5.94573 Finnish markka (FIM)
- 6.55957 French francs (FRF)
- 1.95583 German Mark (DEM)
- 0.787564 Irish pounds (IEP)
- 1936.27 Italian lire (ITL)
- 40.3399 Luxembourg francs (LUF)
- 200.482 Portuguese escudos (PTE)
- 166.386 Spanish pesetas (ESP) The above rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998, so that one ECU (European Currency Unit) would equal one euro. (The European Currency Unit was an accounting unit used by the EU, based on the currencies of the member states; it was not a currency in its own right.) These rates were set by Council Regulation 2866/98 (EC), of 31 December 1998. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day. Greece failed to meet the criteria for joining initially, so it did not join the common currency on 1 January, 1999. It was admitted two years later, on 1 January 2001, at the following exchange rate:
- 340.750 Greek drachmas (GRD) The procedure used to fix the irrevocable conversion rate between the drachma and the euro was different, since the euro by then was already two years old. While the conversion rates for the initial eleven currencies were determined only hours before the euro was introduced, the conversion rate for the Greek drachma was fixed several months beforehand, in Council Regulation 1478/2000 (EC), of 19 June 2000. The currency was introduced in non-physical form (travellers' cheques, electronic transfers, banking, etc.) at midnight on 1 January, 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new notes and coins were introduced on 1 January 2002. The changeover period during which the former currencies' notes and coins were exchanged for those of the euro lasted about two months, until 28 February 2002. The official date on which the national currencies ceased to be legal tender varied from member state to member state. The earliest date was in Germany; the mark officially ceased to be legal tender on 31 December 2001, though the exchange period lasted two months. The final date was 28 February 2002, by which all national currencies ceased to be legal tender in their respective member states. (Note that some of these dates were earlier than was originally planned.) However, even after the official date, they continued to be accepted by national central banks for several years up to forever (Austria, Germany, Ireland, Spain). The earliest coins to become non-convertible were the Portuguese escudos, which ceased to have monetary value after 31 December 2002, although banknotes do remain exchangeable until 2022. Although some countries are not printing the €500 and €200 banknotes, all banknotes are legal tender throughout the Eurozone. Finland decided not to mint or circulate one-cent and two-cent coins, except in small numbers for collectors. All cash transactions in Finland ending in one or two cents are rounded down and three or four cents are rounded up. Despite this convention, the one-cent and two-cent coins are still legal tender in Finland.

Participation in the economic and monetary union

:Main article: Eurozone

Countries using the euro

At present the member states officially using the euro are Austria, Belgium, Finland, France (except Pacific territories using the CFP franc), Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Overseas territories of some Eurozone countries, such as French Guiana, Réunion, Saint-Pierre et Miquelon, and Martinique, also use the euro. These countries together are frequently referred to as the "Eurozone", "Euroland" or more rarely as "Eurogroup". Monaco, San Marino, and Vatican City previously used currencies that were replaced by the euro, and now mint their own euro coins by virtue of [http://europa.eu.int/scadplus/leg/en/lvb/l25040.htm agreements] concluded with EU member states (Italy in the case of San Marino and Vatican City, and France in the case of Monaco), on behalf of the European Community. Andorra, Montenegro, and Kosovo also used currencies that were replaced by the euro (the French franc and Spanish peseta in the case of Andorra, and the German mark in the case of Montenegro and Kosovo). They have now adopted the euro as their de facto currencies, without having entered into any legal arrangements with the EU that explicitly permit them to do so. In October 2004, Andorra began negotiating a monetary agreement with the European Union that would allow the country to issue euro coins as Monaco, San Marino, and the Vatican City do. Many of the foreign currencies that were pegged to European currencies are now pegged to the euro. For example, the Cape Verdean escudo used to be pegged to the Portuguese escudo, but is now pegged to the euro. Bosnia-Herzogovina uses a convertible mark which was pegged to the Deutsche mark but is now pegged to the euro. Similarly the CFP franc, CFA franc and Comorian franc, all once pegged to the French franc, are now pegged to the euro. The euro is widely accepted in Cape Verde already on an informal basis, and in November 2004, during a meeting in Portugal, the prime minister of Cape Verde considered formally adopting the euro as his country's currency. Also East Timor resumed using the Portuguese Escudo as legal tender in 1999, when the escudo was already a subdivision of the euro. There was no changeover as the USD was later introduced as sole legal tender in the territory. Since December 2002, North Korea has switched from the dollar as its official currency for all foreign transactions to the euro. The euro has since then also replaced the dollar in large parts of the blackmarket and in shops where the dollar was used earlier. In total, the euro is the official currency in 31 states and territories. Also, 27 states and territories that have a national currency are also pegged to the euro including fourteen West African countries including Senegal and Cameroon, three French overseas territories including French Polynesia and New Caledonia, two African island countries where the currency was formerly pegged to the Portuguese or French currency, three former Communist countries where the currency was pegged to the German mark including Macedonia. Morocco, Cyprus, Denmark, Estonia and Hungary are also pegged to the euro.

EU members outside the Eurozone

The ten newest European Union members are required by their treaties of accession to eventually use the euro, as eventual adoption of the euro was part of their accession agreements. Cyprus, Estonia, Latvia, Lithuania, Malta, Slovenia and Slovakia have already joined Denmark in the European Exchange Rate Mechanism, ERM II. The dates these ten states hope to complete the third stage of the EMU vary: 1 January, 2007 for Estonia, Slovenia and Lithuania [http://www.lb.lt/news/pg.dll?lng=EN&did=1014 1](since they are already part of ERM II); 1 January, 2008 for Cyprus; 2008 for Latvia and Malta; 2009 for Slovakia; 2010 and later for the Czech Republic, Poland and Hungary. Estonia finalised the design for the country's coins' reverse side in late 2004. [http://www.eestipank.info/pub/en/majandus/euroopaliit/euro/kavand/_1kava.html 1] [http://www.eestipank.info/pub/en/yldine/press/pressiteated/pt2004/_20041215.html 2] The United Kingdom and Sweden have no plans at present to adopt the euro; however Sweden, unlike the UK and Denmark, does not have a formal opt-out from the monetary union (the third stage of EMU) and therefore must, in theory at least, convert to the euro at some point. Notwithstanding this, on 14 September 2003, a Swedish referendum was held on the euro, the result of which was a rejection of the common currency. The Swedish government has argued that such a line of action is possible since one of the requirements for Eurozone membership is a prior two-year membership of the ERM II. By simply choosing to stay outside the exchange rate mechanism, the Swedish government is provided a formal loophole avoiding the theoretical requirement of adopting the euro. Sweden's major parties continue to believe that it would be in the national interest to join. UK eurosceptics believe that the single currency is merely a stepping stone to the formation of a unified European superstate, and that removing Britain's ability to set its own interest rates will have detrimental effects on its economy. The contrary view is that, since intra-European exports make up 60% of the UK's total, it eases the Single Market by removing currency risk. An interesting parallel can be seen in the 19th century discussions concerning the possibility of the UK joining the Latin Monetary Union [http://www.oup.co.uk/pdf/0-19-924366-2.pdf]. The UK government has set five economic tests that must be passed before it can recommend that the UK join the euro. It assessed these tests in October 1997 and June 2003, and decided on both occasions that they had not all been passed. All three main political parties in the UK have promised to hold a referendum before joining the euro, and opinion polls consistently report a majority of the public to be opposed to joining the euro. Denmark negotiated a number of opt-out clauses from the Maastricht treaty after it had been rejected in a first referendum (namely, Denmark attained an opt-out from joint defence, common currency, judicial cooperation, and European citizenship). The modified treaty was then accepted in another referendum one year after the first one. In 2000, another referendum was held in Denmark regarding the euro; once more, the population decided to stay outside the eurozone for now. However, Danish politicians have suggested that debate on abolishing the four opt-out clauses may be re-opened in late 2005 or early 2006. In addition, Denmark has pegged its krone to the euro (€1 = DKr7.460,38 ± 2.25%), something which Sweden has not done.

Bulgaria and Romania

Although Bulgaria is not a member state yet (member as of 1 January 2007), the Bulgarian National Bank and the Bulgarian government have agreed on the introduction of the euro in mid-2009, when the Bulgarian National Bank is expected to become part of the EMU and will receive the right to issue Bulgarian euro coins. The early accession to the EMU is due to the extremely tight monetary policy currently in use, which is the result of Bulgaria's agreement with the Monetary Board. In 1999 the Bulgarian currency was re-denominated (1 new lev = 1000 old levs) and the value of the lev was fixed to one German mark, therefore its value has since been fixed in relation to the euro. Even at this point of time Bulgaria has fulfilled the great majority of the EMU membership criteria. As for Romania (member as of 1 January 2007), it is likely to join the Eurozone in the 2010–12 period. However, there is a clear strategy of the Romanian government at this point to introduce the euro.

Effects of a single currency

The introduction of a single currency for many separate countries presents a number of advantages and disadvantages for the participating nations. Opinions differ on the actual effects of the euro so far, as most of them will take years to understand. Theories and predictions abound.

Removal of exchange rate risk

One of the most important benefits of the euro will be lowered exchange rate risks, which will make it easier to invest across borders. The risks of changes in the value of respective currencies has always made it risky for companies or individuals to invest outside their own currency zone. Profits could be quickly eliminated as a result of exchange rate fluctuations. As a result, most investors have to either accept the risk or hedge their bets, resulting in further costs on the financial markets. The same is true for exporters and importers. Consequently, it is less appealing to invest outside one’s own currency zone. The Eurozone greatly increases the potentially “risk free” investment area. Since Europe’s economy is heavily dependent on inter-European exports, the benefits of this effect can hardly be overstated. This is particularly important for countries whose currencies have traditionally fluctuated a great deal such as the Mediterranean nations.

Removal of conversion fees

A benefit is the removal of bank transaction charges that previously were a cost to both individuals and businesses when exchanging from one national currency to another. Although not an enormous cost, multiplied thousands of times, the savings add up across the entire economy.

Deeper financial markets

Another significant advantage of switching to the euro is the creation of deeper financial markets. Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. There will be more competition for, and availability of financial products across the union. This will reduce the financial servicing costs to businesses and possibly even individual consumers across the continent. The costs associated with public debt will also decrease. It is expected that the broader, deeper markets will lead to increased stock market capitalisation and investment. Larger, more internationally competitive financial and business institutions may arise.

Price parity

Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease. Differences in prices can trigger arbitrage, e.g. artificial trade in a commodity between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. This should also result in increased competition between companies, which should help to contain inflation and which therefore will be beneficial to consumers. Similarly, price transparency across borders should benefit consumers find lower cost goods or services.

Competitive funding

Competitive funding is also a plus for many countries (and companies) that adopted the euro.

Macroeconomic stability

An important side-effect of the euro will be greater macroeconomic stability for the entire continent. Much of Europe has been susceptible to economic problems such as inflation throughout the last 50 years. Inflation is a very damaging phenomenon from most of society’s perspective. It discourages investment, can cause social unrest, and causes problems for taxation. However, many countries are unable or unwilling to deal with serious inflationary pressures. They often have other priorities that compromise their ability to deal with inflation. Sometimes their economic clout is simply insufficient. However, there have been models, particularly with largely independent central banks, that have successfully countered inflation. One such bank was the Bundesbank in Germany; since the European Central Bank is modeled off of the Bundesbank, is independent of the pressures of national governments, and has a mandate to keep inflationary pressures low, many economists foresee a period of increasing price stability in Europe after the euro’s introduction.

Less-specific monetary policy

Some economists are concerned about the possible dangers of adopting a single currency for a large and diverse area. Because the Eurozone has a single monetary policy, and so a single interest rate, set by the ECB, it cannot be fine-tuned for the economic situation in each individual country (however, prior to the introduction of the euro, exchange rates were already very much in sync after the latest european currency crisis in the early 1990s). Public investment and fiscal policy in each country is thus the only way in which government-led economic stimulus can be introduced specific to each region or nation. This inflexible interest rate might stifle growth in some areas, while over-promoting it in others. The result could be extended periods of economic depression in some areas of the continent, disadvantaged by the central interest rate. Given such a situation resentment and friction within the community, and toward the bank, might well increase. Others point out that in today's globalised economy, individual countries do not have power to effectively manage their monetary policy, as it creates other imbalances. This effect was already visible in the last European currency crises of 1992, when the Bundesbank was effectively coordinating monetary policy for the whole continent. Some proponents of the euro point out that the Eurozone is similar in size and population to the United States, which has a single currency and a single monetary policy set by the Federal Reserve. However, the individual states that make up the USA have less regional autonomy and a more homogeneous economy than the nations of the EU. Of particular concern in accordance with this theory is the notion that the economies of the EU may not all be 'in sync'— each may be at a different stage in the boom and bust cycle, or just be experiencing different inflationary pressures. Labour mobility is also much lower in the Eurozone than across the United States, largely due to the vast differences in language and culture between European nations, and despite labour, capital and goods full mobility rules. It can also be argued that a single currency works for the USA because the US dollar is a hegemonic currency. Before the euro, eighty per cent of the world's currency reserves were held in US dollars. This gives the US economy a huge subsidy in that reserve dollars are invested in US institutions or foreign institutions under US control. This subsidy helps cushion the effects of a possible strong dollar hurting certain regions of the USA. If the euro were to become either a hegemonic currency replacing the dollar or a co-hegemonic currency equal in reserve status to the dollar, some of the subsidy the USA gains would be transferred to the EU and help balance out some of the problems of the present heterogeneous economic structure still in place.

A new reserve currency?

The euro will probably become one of two, or perhaps three, major global reserve currencies. Currently, international currency exchange is dominated by the American dollar. The dollar is used by banks as a stable reserve on which to ensure their liquidity and international transactions and investments are often made in dollars. What makes a currency attractive for foreign transactions? Primarily, a proven track record of stability, a broad, well developed financial market to dispose of the currency in, and proven acceptability to others. The Euro will almost certainly be able to match these criteria at least as well as the U.S. dollar, so given some time to become accepted, it will likely begin to take its place alongside the dollar as one of the world’s major international currencies. There are several benefits to reserve currencies of being such an internationally acceptable currency. If the euro were to become a reserve currency it would benefit member countries by lowering the service charges on their debts. Since the currency would be so broadly acceptable it would make the premiums paid to debt holders lower, since the risk to the borrower is lower. It is estimated that the American government currently saves 10-15 billion dollars a year on 2 trillion dollars of international debt because of this principle. The issuer of the reserve currency is freer to pursue macroeconomic policy adjustments to suit its own needs in terms of financing its debt, or influencing other countries. Reserve status would also lower the cost of many commodities for Europeans.

The euro and oil

The Eurozone consumes more imported petroleum than the United States. This would mean that more euros than US dollars would flow into the OPEC nations, but oil is priced by those nations in US dollars only. There have been frequent discussions at OPEC about pricing oil in euros, which would have various effects, among them, requiring nations to hold stores of euros to buy oil, rather than the US dollars that they hold now. Venezuela under Hugo Chávez has been a vocal proponent of this scheme, despite selling most of its own oil to the United States. Another proponent was Saddam Hussein of Iraq, which holds the world's second largest oil reserves. Since 2000 Iraq had used the Euro as oil export currency. In 2002, Iraq changed its US dollars into euro, a few months prior to the 2003 invasion of Iraq. If implemented by the OPEC, the changeover to Euro would be a transfer of a 'float' that presently subsidises the United States to subsidise the European Union instead. Another effect would be that the price of oil in the Eurozone would more closely follow the world price. When oil prices skyrocketed to almost 50 USD/barrel in August 2004, the oil price in euros didn't change nearly as much because of the concurrent rise in the exchange rate of the euro to the US dollar (to an exchange rate of EUR 1.00 = USD 1.33 in December 2004). Similarly, should oil prices lower significantly, together with the USD/EUR exchange rate, the oil price in the Eurozone would not fall as much. On the other hand, if the exchange rate and the oil price move in different directions, oil price changes are magnified. Pricing oil in euros would nullify this dependency of European oil prices on the USD/EUR exchange rate.

Euro exchange rate

Against the U.S. dollar

After the introduction of the euro, its exchange rate against other currencies, especially the US dollar, declined heavily. At its introduction in 1999, the euro was traded at USD1.18; on 26 October 2000, it fell to an all time low of $0.8228 per euro. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to nearly $0.96. It declined again, although less than previously, reaching a low of $0.8344 on 6 July 2001 before commencing a steady appreciation. In the wake of U.S. corporate scandals, the two currencies reached parity on 15 July 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further. On 23 May 2003, the euro surpassed its initial ($1.18=€1.00) trading value for the first time. At the end of 2004, it had reached a peak of $1.3668 per euro (€0.7316 per $) as the US dollar fell against all major currencies. At that time, some analysts expected the dollar to continue to fall, a few even suggesting $1.60 per euro by the end of 2005, fuelled by the so called twin deficit of the US accounts. However, the dollar recovered in 2005, rising to $1.18 per euro (€0.85 per $) in July 2005 (and stable throughout the second half of 2005). The fast increase in US interest rates during 2005 had much to do with this trend.

Currencies pegged to euro

Drivers

Part of the euro's strength in the period 2001-2004 was thought to be due to more attractive interest rates in Europe than in the United States. The US Federal Reserve had maintained lower rates than the ECB for these years, despite key European economies, notably Germany, growing relatively slowly or not at all. This is attributed in part to the ECB's duty to check inflation across the Eurozone, which in high-performing countries such as Republic of Ireland is above the ECB's target. However, although the interest rate differential formed part of the backdrop, the main a posteriori justification for the euro's continuing ascent against the dollar was the concern over the huge unsustainable US current account deficits. The market has been awash with concerns about the US twin deficits, which have been a key driver of dollar weakness. The US budget deficit is about $427 billion, or 3.7% of gross domestic product (GDP), while the current account—the broadest trade measure since it adds investment flows—hit a record $166.18bn shortfall in the second quarter of 2004. A key factor is that a number of Asian currencies are rising less against the dollar than is the euro. In the case of China, the renminbi was until recently pegged against the dollar, whilst the Japanese yen is supported by intervention (and the threat of it) by the Bank of Japan. This means much of the pressure from a falling dollar is translated into a rising euro. The euro's climb from its lows began shortly after it was introduced as a cash currency. In the time between 1999 and 2002, eurosceptics believed that the weak euro was a sign that the euro experiment was doomed to fail. It may be that its weakness in this period was due to low confidence in a currency that did not exist in "real" form. While the overt conversion to notes and coins had not yet occurred, it remained possible that the project could fail. Once the euro became "real" in the sense of existing in the form of cash, confidence in the euro rose and the increasing perception that it was here to stay helped increase its value. This effect was probably significant in the euro's decline and recovery between 1999 and 2002, but other factors are more significant since then. Another factor in the early decline of the euro was that many investors and central banks sold large portions of their legacy (national) currency holdings once the irrevocable exchange rates were set, as the goal of holding multiple currencies is to dampen losses when one currency falls. Once the exchange rates between Eurozone countries were pegged against each other, holdings in German marks and French francs (for example) became identical. There is also some reason to believe that significant sums of illegally held monies were sold for dollars to avoid an official and public exchange for euros.

Consequences

Despite the euro's rise in value, as well as the value of other major and minor currencies, the US trade deficits continue to rise. Economic theory would suggest that a fall in the dollar and a rise in the euro should lead to an improvement in US exports and a decline in US imports, as the former becomes cheaper and the latter more expensive. However, this depends to some extent on how currency costs are passed down the supply chain. Furthermore, the declining dollar makes foreign investment in the US cheaper (although also reducing the return), so that continuing foreign investment may underpin the dollar to some extent. The role of the dollar as the world's de facto reserve currency helps support both the dollar and the US budget deficit — but it depends on the continued willingness of foreigners to finance both. Central banks and others finance the budget by acquiring newly-issued, dollar-denominated US government bonds, which they need to acquire dollars for. If at some point foreigners become unwilling to accept new bonds at the prevailing interest rate (perhaps because the falling dollar is reducing the bonds' value too much), the dollar will fall even more — or the US will have to raise interest rates, which would reduce economic growth. There is speculation that the strength of the euro relative to the dollar might encourage the use of the euro as an alternative reserve currency; Saddam Hussein's Iraq switched its currency reserves from dollars to euros in 2000. Moves by central banks with major reserve currency holdings such as those of India or China to switch some of their reserves from dollars to euros, or even of OPEC countries to switch the currency they trade in from dollars to euros, will further reinforce the dollar's decline. In 2004, the Bank for International Settlements reported the proportion of bank deposits held in euros rising to 20%, from 12% in 2001, and it is continuously rising. The falling dollar also raises returns for US investors from investing in foreign stocks, encouraging a switch which further depresses the dollar. The rise in the euro should dampen Eurozone exports, but there is little sign of this happening yet. The main reason is that the currencies of Euroland's major world-wide customers are also seeing their currencies rise relative to the dollar. As the current account deficits continue to rise and the US plans no austerity measures to curb foreign imports and increase exports, the situation may cause the US dollar to lose its position as a hegemonic currency replaced by either the euro or the euro and a basket of currencies.
- [http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/currency/13/12/twelve_month.stm Current dollar/euro exchange rates (BBC)]
- [http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html Current and historical exchange rates against 29 other currencies (European Central Bank)]
- [http://www.kshitij.com/graphgallery/eurmth.shtml Historical exchange rate from 1971 till now]

Plural formation and grammar

:Main article: Linguistic issues concerning the euro Several linguistic issues have arisen in relation to the spelling of the words euro and cent in the many languages of the member states of the European Union, as well as in relation to grammar and the formation of plurals. Immutable word formations have been encouraged by the European Commission in usage with official EU legislation (originally in order to ensure uniform presentation on the banknotes), but the "unofficial" practice concerning the mutability (or not) of the words differs between the member states. In the English language, the form "euro" is used both in the singular and the plural in legislation, without much justification apart from an apparent wish not to have to revise older legislation. The natural plurals euros and cents are recommended (by the Translation Section of the European Commission) for use in "all material aimed at the general public", though in the only English-speaking country in the Eurozone, the Republic of Ireland, the government and media do not usually add the "s" in the plural. The term "euro-cent" is sometimes used in countries (such as USA, Canada, Australia) that also have "cent" as a subcurrency, to distinguish them from the local coin. This usage is not correct, though is perhaps understandable, given that the coins themselves have the words "euro" and "cent" displayed on the common side. The terms "eurodollar", which commonly refers to US dollar deposits in European banks, or the non-existent "euro dollar" have occasionally been used incorrectly to refer to the euro by sources in other parts of the world, particularly the United States.

The euro sign

eurodollar The international three-letter code (according to ISO standard ISO 4217) for the euro is EUR. A special euro currency sign (€) was also designed. After a public survey had narrowed the original ten proposals down to just two, it was then up to the European Commission to choose the final design. The eventual winner was a design allegedly created by a team of four experts who have not, however, been officially named. The symbol is (according to the European Commission) "a combination of the Greek epsilon, as a sign of the weight of European civilisation; an E for Europe; and the parallel lines crossing through standing for the stability of the euro". The official story of the design history of the euro symbol is [http://observer.guardian.co.uk/print/0,3858,4325292-102275,00.html disputed] by Arthur Eisenmenger, a former chief graphic designer for the EEC, whose claims to have created it as a generic symbol of Europe are being increasingly accepted by many investigators. Eisenmenger's undisputed design achievements include the flag of the European Union. The euro is represented in the Unicode character set with the character name EURO SIGN and the code position U+20AC (decimal 8364) as well as in updated versions of the traditional Latin character set encodings. In HTML "€" can also be used. The HTML masking was only introduced with HTML 4.0; shortly after the introduction of the euro, many browsers were unable to render it. HTML, Comic Sans, Courier New, Lucida Console, Microsoft Sans Serif, Verdana.]] The European Commission originally specified the euro sign to have exact proportions, not varying from font to font. By this specification, the euro sign would have effectively been a logo, unlike designable characters such as the letters or other currency signs like the dollar and pound signs. Keeping it to exact measurements would have made it rather broad in comparison to other symbols and digits in most fonts and would sometimes have resulted in layout problems. For these reasons, most type designers have ignored the commission and designed their own variants for each font instead, often based upon the capital letter C in the respective font. The illustration at the top of this article is of the official, invariant euro sign. Typing the euro sign on a computer depends on the operating system and national conventions. See Keyboarding the euro sign for details. Some mobile phone companies did an interim software update on their special SMS character set, replacing the rarely used symbol for the Japanese yen with the euro sign: modern phones have both currency signs. No "official" recommendation is made with regard to the use of a cent sign, and sums are often expressed as decimals of the euro (for example €0.05 rather than 5¢ or 5c). The small letter c is often used (as it was for the gulden's subdivision, the cent). In Ireland, the small letter c is often seen (for instance on postage stamps) but in shops the cent sign (¢) makes an appearance from time to time. In Greece, the capital letter lambda (Λ) is widely used, as an abbreviation for lepta (Λεπτά) and indeed the latter is written on the national side of the Greek-issue coins. In Germany, the abbreviation "ct" is widely used for "cent". In Finland, usually the decimal method is shown -,82 €, however sometimes you see the "snt" abbreviation from the Finnish "sentti", e.g. 50 snt. Placement of the symbol is also an example of diversity. While the official recommendation is to place it before the number, people in many countries have kept the placement of their former currencies. This is the case in Spain and France, where people are reluctant to change to a system they find somewhat illogical (writing the currency before, "€2", but reading it after, as in "deux/dos euros"). In France, therefore, € 3,50 is often written as 3€50 instead, following the conventional style for the franc: (example 22F96). Recently people start to write more often 3,75€ in France, Portugal, Spain and sometimes in Belgium. For details please see the Western Latin character sets (computing).

Reactions following the European Constitution votes

Although the failure of the European Constitution to be ratified would have no direct impact on the status of the euro, some pessimism regarding the euro arose after the negative outcome of the French and Dutch referenda in mid 2005.
- A poll by Stern magazine released 1 June 2005 found that 56% of Germans would favour a return to the Mark. [http://www.stern.de/presse/vorab/?id=541124&q=eichel%20category:presse]
- Members of the Northern League Italian political party have discussed calling a referendum to return Italy to the Lira. [http://washingtontimes.com/world/20050614-114629-8803r.htm]
- Members of the Movement for France political party have proposed holding a referendum to return France to the Franc. [http://news.scotsman.com/international.cfm?id=664902005]
- In contrast to Germany a poll in Austria on 7 June 2005 showed the overwhelming support of the euro: 73 percent of the sample said they preferred to keep the common currency with only 21 percent in favour of returning to the old currency the schilling. [http://www.vienna.at/engine.aspx/page/vienna-article-detail-page/cn/vol-news-willie-20050607-011305/dc/tp:vol:oesterreich] However, soon after these suggestions were made, the European Commission issued a statement denying any possibility of this, stating "the euro is here to stay".

Economists who helped realise the euro

Economist Robert Mundell is sometimes referred to as the father of the euro. Other economists that helped include Wim Duisenberg, Robert Tollison and Neil Dowling.

Slang words

Some countries have given local slang words for the euro.
- In Finland, the most common slang word for euro is ege. This comes from huge, the slang word for the now defunct Finnish markka. The etymology and origin of huge are obscure, but it may be a derivation from the common slang word for the one hundred markka bill, huntti, which again is a slang loanword from the Finland-Swedish hundra (one hundred). Cents are sometimes called penni, which was also 1/100th of the markka. Euros are also known as eki, eero, or erkki, which are also Finnish male first names. Another slang name is jörö, the Finnish name of the dwarf Grumpy, because jörö and the English language pronunciation of euro sound similar.
- In France, Cents are commonly referred to as centimes, after the subdivision of the old Franc currency, although the reason for this is most likely to avoid confusion with cent (the French word for hundred)
- In Ireland, the term quid has been transferred from its use as a slang term for the Irish pound to a slang term for the euro. The word fiver is used to refer to the five-euro note, tenner to refer to the ten-euro note and a twenty euro note is often referred to as a score. Another less common nickname is yo-yo.
- In Portugal, the 1 cent coin, because it is so small, was almost immediately nicknamed. The most common nicknames are: feijão (bean), botão (button), and tostão (penny). In Portugal beans are used to gamble when people do not want to play with money, as in the popular expression jogar a feijões ('playing with beans'), implying the 1 cent coin is worth as little as a bean (though worth almost precisely twice as much as the previous one-escudo coin). Some elderly people find hard to pronounce ['euro] so they pronounce it as ouro (gold), while others think it is really named ouro, because of the similarity of both words and also due to some coins being gold-like. The 1, 2 and 5 cents are nicknamed moedas pretas (the black coins) because with time they become darker. The 100, 200 and, especially, the 500 euro notes are nicknamed nota grande (big banknote).
- In Austria and Germany, it has also been called Teuro, a play on the word "teuer", meaning 'expensive'. Many people felt that prices increased dramatically following the introduction of the euro because some groceries and restaurants took the opportunity to camouflage price increases at the time of the euro changeover. In youth culture also the plural-only word Euronen is sometimes used; many people see this as a parody of technology or science fiction vocabulary, after a Star Trek internet parody introduced also the race of the Euronen (Euronians). In the eastern part of Austria the word Eumeln (also plural-only) is seldom used. It combines the word euro with a typical Austrian-German ending (like the word "Semmeln", Austrian for bun or roll) and gives the word a more casual and familiar touch.
- In Italy, the euro is sometimes jokingly called neuro, suggesting it has driven people (and the economy) mad. Also, in Italian the word euro is the same both in the singular and in the plural form, following the rule that shortened words have no different plural (foto, for instance, follows this rule). However, some people informally use the plural form euri.
- In some regions of Spain, euro is sometimes called leru, (seen on a famous webtoon parody of The Lord of The Rings [http://losdosbares.e-alcala.com/default.asp El Señor de los Lerus] ), where the ring (leru) was a broken euro-coin, ebro, lauro, or pavo; the latter commonly used as a translation for the English slang buck in films and books. The 500 euro notes are sometimes jokingly nicknamed Bin Ladens (because "we all know it exists, but no-one has seen it lately"), and the contraction of céntimo de euro into centauro (centaur) is more rarely used for euro cents, it is commonly called centimo (cent) as a reminder of the first-half 20th century céntimo de peseta. Another variation is centavos. The euro currency, like in Italy was also called neuro before 2002, because of the difficulty of the conversion into pesetas.
- In the Netherlands, the nickname for the old rijksdaalder (2½ gulden) 'knaak' is used by many, referring to the similarity in value. (There is some irony in an old joke 2 knaak 50 now being possible and thus no longer funny.) Some people use a different plural: euri, instead of euro's, the word pleuro is also being used instead of euro (to make it sound more Dutch). The 5 cent coin is sometimes called stuiver, which was also the name of the 5 cent coin during the Gulden era. Similarly, 10 cents is sometimes called dubbeltje, which is derived from double stuiver. In prices, the word honderd (a hundred), is sometimes replaced by snip (common Snipe), which featured on the 100 gulden banknote used in the 1980s and 1990s.
- In Greece, euros are humorously called 'evra' in plural, adapted in the language's grammar, simulating a derivation from non-existant
- to evron. They are also ironically called 'evropoula' (meaning 'small euros'), largely derived from the funny speech of TV hostess Annita Pania.
- In Belgium, some Flemings refer to the 1, 2 and 5 cent coins as koper which is the Dutch word for copper, the metal these coins are made of. The term is used in a derogatory way, due to the low value of these coins.

Informal economy

In economics the informal economy is a process of income generation that “is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated.” (Portes et al.) Although informal economy is often associated with developing countries, where up to 60% of the labor force works informally, it exists in all countries. The term “informal sector”, which was used in many earlier studies has been mostly replaced in more recent work.

Definition

Informal economic activity is a dynamic process (not an object) which includes many aspects of economic and social theory including exchange, regulation, and enforcement. By its nature, it is necessarily difficult to observe, study, define, and measure. No single source readily or authoritatively defines informal economy as a unit of study. To further confound attempts to define this process, informal economic activity is temporal in nature. Regulations (and degrees of enforcement) change frequently, sometimes daily, and any instance of economic activity can shift between categories of formal and informal with even minor changes in policy. Given the complexity of the phenomenon, the simplest definition of informal economic activity might be: any exchange of goods or services involving economic value in which the act escapes regulation of similar such acts.

History

Governments have tried to regulate (formalize) aspects of their economies for as long as surplus wealth has existed which is at least as early as Sumer. Yet no such regulation has ever been wholly enforceable. Archaeological and anthropological evidence strongly suggests that people of all societies regularly adjust their activity within economic systems in attempt to evade regulations. Therefore, if informal economic activity is that which goes unregulated in an otherwise regulated system then informal economies are as old as their formal counterparts. The term itself, however, is much more recent. The optimism of the modernization theory school of development had led most people in the 1950s and 1960s to believe that traditional forms of work and production would disappear as a result of economic progress in developing countries. As this optimism proved to be unfounded, scholars turned to study more closely what was then called the traditional sector. They found that the sector had not only persisted, but in fact expanded to encompass new developments. In accepting that these forms of productions were there to stay, scholars started using the term informal sector, which was first used by the British economist Keith Hart in a study on Ghana in 1971 and then taken up by the ILO in a widely read study on Kenya in 1972. Since then the informal sector has become an increasingly popular subject of investigation, not just in economics, but also in sociology and anthropology. With the turn towards so called post-fordist modes of production in the advanced developing countries, many workers were forced out of their formal sector work and into informal employment. In a seminal collection of articles, The Informal Economy. Studies in Advanced and Less Developed Countries, Alejandro Portes and collaborators emphasized the existence of an informal economy in all countries by including case studies ranging from New York City and Madrid to Uruguay and Colombia. Arguably the most influential book on the informal economy is Hernando de Soto's El Otro Sendero (1986), which was published in English in 1989 as The Other Path with a preface by Peruvian writer Mario Vargas Llosa. De Soto and his team argue that excessive regulation in the Peruvian (and other Latin American) economies force a large part of the economy into informality and thus prevent economic development. While accusing the ruling class of 20th century mercantilism, de Soto admires the entrepreneurial spirit of the informal economy. In a widely cited experiment, his team tried to legally register a small garment factory in Lima. This took more than 100 administrative steps and almost a year of full-time work. Whereas de Soto’s work is popular with policymakers and champions of free market policies like The Economist, many scholars of the informal economy have criticized it both for methodological flaws and normative bias. In the second half of the 1990s many scholars have started to consciously use the term “informal economy” instead of “informal sector” to refer to a broader concept that includes enterprises as well as employment in developing, transition, and advanced industrialized economies.

Some Facts

The informal economy under any governing system is diverse and includes small-scaled, occasional members (often street vendors and garbage recyclers) as well as larger, regular enterprises (including transit systems such as that of Lima, Peru). Informal economies include garment workers working from their homes, as well as informally employed personnel of formal enterprises. The above definition rejects the inclusion of certain activities including crime and domestic labor. Crime cannot be included because such acts have no regulated counterpart against which they may be compared. (Of course, by their nature, informal economic activities escape regulation and may then become criminal.) Domestic labor, such as childcare and cooking, cannot be included when performed in the natural course of daily living and to one's own benefit. Such activities can easily be performed for others and exchanged for goods and services with economic value and depending on broader conditions, these can be either formal or informal economic activities. However, when performed for personal benefit they have no external economic value (they cannot be exchanged). Statistics on the informal economy are unreliable by virtue of the subject, yet they can provide a tentative picture of its relevance: For example, informal employment makes up 48% of non-agricultural employment in North Africa, 51% in Latin America, 65% in Asia, and 72% in sub-Saharan Africa. If agricultural employment is included, the percentages rises, in some countries like India and many sub-Saharan African countries beyond 90%. Estimates for developed countries are around 20%. In developing countries, the largest part of informal work, around 70%, is self-employed, in developed countries, wage employment predominates. The majority of informal economy workers are women. Policies and developments affecting the informal economy have thus a distinctly gendered effect.

External links

- [http://www.cato.org/pubs/journal/cj17n1/cj17n1-8.pdf The Informal Economy in Latin America], an article by a collaborator of de Soto, published by the libertarian Cato Institute
- [http://www.openair.org/cross/vendnow2.html Formalizing the informal economy], a working paper describing attempts to formalize street vending in Mexico
- [http://www.ilo.org/public/english/employment/gems/download/women.pdf Men and Women in the Informal Economy] A report by the ILO containing a lot of statistical information
- [http://www.wider.unu.edu/conference/conference-2004-2/conference2004-2.htm Unlocking Human Potential] Conference proceedings of a conference on the informal economy by the World Institute for Development Economics Research at the United Nations University
- [http://www.anthrosource.net/doi/abs/10.1525/city.1987.1.1.6?prevSearch=authorsfield%3A%28Uzzell%2CD%29 A Homegrown Mass Transit System in Lima, Peru A Case of Generative Planning], abstract of an article which discusses large-scale, generative planning
- [http://www.community-links.org/ourwork/informaleconomy_page116.aspx Cheats or Contributors? Self Employed People in the Informal Economy] A report by east London Charity [http://www.community-links.org Community Links] and Microfinance organisation Street UK providing analysis of the motivations of informal workers. Category:Economies

Income inequality metrics

Income inequality metrics or income distribution metrics are techniques used by economists to measure the distribution of income among members of a society. In particular these techniques are used to measure the inequality, or equality of income within an economy. These techniques are typically categorized as either absolute measures or relative measures.

Absolute income criteria

Absolute measures define a minimum standard, then calculate the number (or percent) of individuals below this threshold. These methods are most useful when determining the amount of poverty in a society. Examples include:
- Poverty line - This is a measure of the level of income necessary to subsist in a society and varies from place to place and from time to time depending on the cost of living and peoples' expectations. It is usually defined by governments and calculated as that level of income at which a household will devote two-thirds (to three-quarters) of its income to basic necessities such as food, water, shelter, and clothing.
- Poverty index - This index was developed by Amartya Sen. It takes into account both the number of poor and the extent of their poverty. Sen defined the index as: :I = (P/N)(B − A)/A where: :P = number of people below the poverty line :N = total number of people in society :B = poverty line income :A = average income of those people below the poverty line

Relative income criteria

Relative income measures compare the income of one individual (or group) with the income of another individual (or group). These measures are most useful when analyzing the scope and distribution of income inequality. Examples include:
- Percentile distributions - One percentile is compared to another. For example, it might be determined that the income of the top ten-percentile is only slightly more than the bottom forty-percentile. Or it might be determined that the top quartile earns 45% of the society's income while the bottom quartile has 10% of society's income. The interquartile range is a standard percentile range from 25% to 75%.
- Lorenz curve - This is a graphic device used to display the relative inequality in a distribution of income values. A society's total income is ordered according to income level and the cumulative total graphed.
- Gini coefficient - This is a summary statistic used to quantify the extent of income inequality depicted in a particular Lorenz curve.
- Robin Hood index - Mathematically related to the Gini coefficient, it measures the portion of the total income that would have to be redistributed in order for there to be perfect equality.
- Theil index - This is also a summary statistic used to measure income inequality, based on information entropy. It is similar to, but less commonly used than the Gini coefficient.
- Standard deviation of income - This measures income dispersion by assessing the squared variance from the mean. This metric is seldom seen, its use limited to occasional reference in academic journals.
- Relative poverty line - This is a measure of the number or proportion of people or households whose level of income is less than some given fraction of typical incomes. This form of poverty measurement tends to concentrate concern on the bottom half of the income distribution and pay less attention to ineqalities in the top half. See poverty line for details.

Defining income

Both of the above measures use income as the basis for evaluating poverty. However, 'income' is here understood different than a common understanding: It means the total amount of goods and services that a person receives, and thus there is not necessarily money or cash involved. If a poor subsistence farmer in Uganda grows her own grain it will count as income. Services like public health and education are also counted in. Often expenditure or consumption (which is the same in an economic sense) is used to measure income. The World Bank uses the so-called living standard measurement surveys ([http://www.worldbank.org/lsms/ LSMS]) to measure income. These consist of questionaires with 200+ questions. Surveys have been completed in most developing countries.

Criticisms of income inequality metrics

# It is not clear how income should be defined. Should it include capital gains, imputed house rents from home ownership, and gifts? If these income sources are ignored (as they often are), how might this bias the analysis? How should non-paid work (such as parental childcare) be handled? Wealth or consumption may be more appropriate measures in some situations. Broader metrics of human well-being might be useful. # Should the basic unit of measurement be households or individuals? The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. The metrics will be biased either upward or downward depending on which unit of measurement is used. #These income inequality metrics ignore life cycle effects. An individual tends to start life with little or no income, gradually increase income till about age 50, after which incomes will decline, eventually becoming negative. This will have the effect of significantly overstating inequality. It has been estimated (by A.S. Blinder in The Decomposition of Inequality, MIT press) that 30% of measured income inequality is due to the inequality an individual experiences as they go through the stages of life. #Absolute measures often give very different results than relative measures. For example, in measuring inequality changes due to the development of less developed countries, absolute measures typically show improvements as the general income level rises, but it is also common for relative measures to deteriorate as the new wealth becomes concentrated in the hands of the upper percentiles. The diverging results can be a problem if they are used inappropriately or interpreted incorrectly. #Should real or nominal income distributions be used? What effect will inflation have on absolute measures? Do some groups (eg., pensioners) feel the effect of inflation more than others? #How do we allocate the benefits of government spending? How does the existence of a social security safety net influence the definition of absolute measures of poverty. Do government programs support some income groups more than others? #Income inequality metrics are seldom used to quantify and examine the causes of income inequality. The main causes are: life cycle effects (age), inherited characteristics (IQ, talent), willingness to take chances (risk aversion), the leisure/industriousness choice, inherited wealth, economic circumstances, education and training, discrimination, and market imperfections. These criticisms helps to understand the problems caused by the improper use of inequality measures. However, they do not render inequality coefficients invalid. If inequality measures are computed in a well explained and consistent way, they can provide a good tool for quantitative comparisons of inequalities at least within a research project.

External links

- [http://www.census.gov/hhes/income/histinc/ie6.html Inequality data using various metrics, from the US Census Bureau, 1967-2001]
- [http://www.statistics.gov.lk/samplesurvey/inex/ Survey data from the government of Sri Lanka]
- Software
- Users of the [http://www.r-project.org/ R] data analysis software can install the "ineq" package which allows to compute a variety of inequality metrics including Gini, Atkinson or Theil. Category:Welfare economics

Exchange rate

In finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 120 is worth the same as USD 1. An exchange rate is also known as a foreign-exchange rate, forex rate or FX rate. The foreign exchange market is one of the largest markets in the world. By some estimates, about USD 2 trillion worth of currency changes hands every day. An exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency. For example, in a quotation that says the EUR-USD exchange rate is 1.2 USD per EUR, the price currency is USD and the unit currency is EUR. Quotes using a country's home currency as the price currency are known as direct quotation or price quotation (from that country's perspective) ([http://www.inlandrevenue.gov.uk/manuals/cfmmanual/cfm7011.htm]) and are used by most countries. Quotes using a country's home currency as the unit currency are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.
- direct quotation: Home Currency / Foreign Currency
- indirect quotation: Foreign Currency / Home Currency Note that, using direct quotation, if a unit currency is strengthening (i.e. appreciating, or becoming more valuable) then the exchange rate number increases. Conversely if the price currency is strengthening, the exchange rate number decreases and the unit currency is depreciating.

Free or pegged

:Main article: Exchange rate regime If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. If the value of the currency is "pegged" its value is maintained by the government in question at a fixed rate relative to the other currency. In 1983 the Hong Kong dollar was linked to the United States dollar.

Nominal and real exchange rates

- The nominal exchange rate is the rate at which an organization can trade the currency of one country for the currency of another.
- The real exchange rate is the rate at which an organization can trade goods and services of one country for those of another. For example, say the price of a good increases 10% in the UK, and there is also a 10% appreciation in the Japanese currency against the UK currency, the price of the good remains constant for someone in Japan despite increase in price for people in the UK. In cases where tariffs become an issue, this would be less the case.

Fluctuations in exchange rates

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the Ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan was floating). Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates.

Foreign exchange markets

:Main article: Foreign exchange market The foreign exchange markets are usually highly liquid as the world's main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1.9 trillion in 2004 ([http://www.bis.org/publ/rpfx05.htm Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results]). The biggest foreign exchange trading centre is London, followed by New York and Tokyo.
See also

- Continuous linked settlement
- Financial instruments
- Gold standard
- List of international trade topics
- Hyperbolic coordinates
- Table of historical exchange rates
- Currency Pair
External links

- [http://finance.yahoo.com/m3 Yahoo currency converter and cross rates]
- [http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/currency/default.stm BBC cross rates]
- [http://rate-exchange.org/forex/forex-table-short.cfm RE Exchange Rates] Category:Macroeconomics Category:International trade category:International economics Category:Currency ko:환율 ja:為替レート

Purchasing power

In economics, purchasing power refers to the amount of goods and services a given amount of money — or, more generally, liquid assets — can buy. As Adam Smith noted, having money gives one the ability to "command" others' labor, so purchasing power to some extent is power over other people. If money income stays the same, but the price of most goods go up, the effective purchasing power of that income falls. Falling purchasing power can thus be part of inflation. However, inflation does not always imply falling purchasing power of one's income, since one's money income may rise faster than inflation. In inflation, there are some winners and some losers.

Total personal income

Finding Total Personal Income Data

Gross domestic product

Gross Domestic Product (GDP) is the total value of final goods and services produced within a country's borders in a year. It is one of the measures of national income and output. It may be used as one indicator of the standard of living in a country, but there may be limitations with this view. GDP is often abbreviated as Y.

Definition

GDP is defined as the total value of goods and services produced within a territory during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual product). GDP differs from gross national product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it. Whereas nominal GDP refers to the total amount of money spent on GDP, real GDP adjusts this value for the effects of inflation in order to estimate the actual quantity of goods and services making up GDP. The former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected" GDP -- or "GDP in base-year prices" (where the base year is the reference year of the index used). See real vs. nominal in economics. GDP measures only final goods and services, that is those goods and services that are consumed by their final user, and not used as an input into other goods. Measuring intermediate goods and services would lead to double counting of economic activity within a country. This distinction also removes transfers between individuals and companies from GDP. For instance, buying a Renoir doesn't boost GDP by $20m. (If it did, buying and selling the same painting repeatedly to a gallery would imply great wealth rather than penury.) Note that the Renoir purchase would affect the GDP figure, but not as a $20m receipt, the auctioneer's fees would appear in GDP as consumption expenditure, because this is a final service. The most common approach to measuring and understanding GDP is the expenditure method: : GDP = consumption + investment + exports − imports Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports). Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
- Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
- If separated from endogenous private consumption, Government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. Therefore GDP can be expressed as: : GDP = private consumption + government + investment + net exports : (or simply GDP = C + G + I + NX)

The components of GDP

Each of the variables C, I, G, and NX :
- C is private consumption (or Consumer expenditures) in the economy. This includes most expenditures of households such as food, rent, medical expenses and so on.
- I is defined as business investments in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. 'Investment' in GDP is meant very specifically as non-financial product purchases. Buying financial products is classed as saving in macroeconomics, as opposed to investment (which, in the GDP formula is a form of spending). The distinction is (in theory) clear: if money is converted into goods or services, without a repayment liability it is investment. For example, if you buy a bond or share the ownership of the money has only nominally changed hands, and this transfer payment is excluded from the GDP sum. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of the real economy or the GDP formula.
- G is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the millitary, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. The relative size of government expenditure compared to GDP as a whole is critical in the theory of crowding out, and the Keynesian cross.
- NX are "net exports" in the economy (gross exports - gross imports). GDP captures the amount a country produces, including goods and services produced for overseas consumption, therefore exports are added. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic. It is important to understand the meaning of each variable precisely in order to:
- Read national accounts.
- Understand Keynesian or neo-classical macroeconomics.

Examples of GDP component variables

Examples of C, I, G, & NX: If you spend money to renovate your hotel so that occupancy rates increase, that is private investment, but if you buy shares in a consortium to do the same thing it is saving. The former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its own expenditure on renovation, that expenditure would be included in GDP. If the hotel is your private home your renovation spending would be measured as Consumption, but if a government agency is converting the hotel into an office for civil servants the renovation spending would be measured as part of public sector spending (G). If the renovation involves the purchase of a chandelier from abroad, that spending would also be counted as an increase in imports, so that NX would fall and the total GDP is unaffected by the purchase. (This highlights the fact that GDP is intended to measure domestic production rather than total consumption or spending. Spending is really a convenient means of estimating production.) If you are paid to manufacture the chandelier to hang in a foreign hotel the situation would be reversed, and the payment you receive would be counted in NX (positively, as an export). Again, we see that GDP is attempting to measure production through the means of expenditure; if the chandelier you produced had been bought domestically it would have been included in the GDP figures (in C or I) when purchased by a consumer or a business, but because it was exported it is necessary to 'correct' the amount consumed domestically to give the amount produced domestically. (As in Gross Domestic Product.).

Difference from Aggregate expenditure

An alternative measure of the economy to GDP is the Aggregate expenditure measure, which is identical to GDP except that it excludes items produced but not purchased (net inventory/stock level growth). If the economy produces more goods than are sold, the increase in inventory would generally be included in the GDP figure (as "Investment"). GDP counts these changes in inventory levels as investment.

The GDP Income account

Another way of measuring GDP is to measure the total income payable in the GDP income accounts. This should provide the same figure as the expenditure method described above. The formula for GDP measured using the income approach, called GDP(I), is: : GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports
- Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
- Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
- Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses. The sum of COE, GOS and GMI is called total factor income, and measures the value of GDP at factor (basic) prices.The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the Government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

Measurement

International Standards

The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA93, to distinguish it from the previous edition published in 1968 (called SNA68). SNA93 sets out a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

National Measurement

Within each country GDP is normally measured by a national government statistical agency, as private sector organisations normally do not have access to the information required (especially information on expenditure and production by governments).
- Australia: Australian Bureau of Statistics (ABS).
- Austria: [http://www.statistik-austria.at Statistik Austria].
- Canada: Statistics Canada (StatCan).
- Russia: [http://www.gks.ru/eng/ Federal State Statistics Service]
- United States: Bureau of Economic Analysis (BEA). GDP can measure spending on all goods and services. GDP can also measure all income earned.

Interest rates

Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector is seen as production and value added and is added to GDP..

Cross-border comparison

The level of GDP in different countries may be compared by converting their value in national currency according to either
- current currency exchange rate: GDP calculated by exchange rates prevailing on international currency markets
- purchasing power parity exchange rate: GDP calculated by purchasing power parity (PPP) of each currency relative to a selected standard (usually the United States dollar). The relative ranking of countries may differ dramatically between the two approaches.
- The current exchange rate method converts the value of goods and services using global currency exchange rates. This can offer better indications of a country's international purchasing power and relative economic strength. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms, the number of weapons purchased is entirely governed by current exchange rates, since arms are a traded product bought on the international market (there is no meaningful 'local' price distinct from the international price for high technology goods).
- The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. This can be a better indicator of the living standards of less-developed countries because it compensates for the weakness of local currencies in world markets. The PPP method of GDP conversion is most relevant to non-traded goods and services. There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income (GDP) countries, as compared to the current exchange rate method. This finding is called the Penn effect. For more information see measures of national income.

GDP and standard of living

GDP per capita is often used as an indicator of standard of living in an economy. While this approach has advantages, many criticisms of GDP focus on its use as an indicator of standard of living. The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently. Frequently in that most countries provide information on GDP on a quarterly basis, which allows a user to spot trends more quickly. Widely in that some measure of GDP is available for practically every country in the world, which allow crude comparisons between the standard of living in different countries to be compared. And consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country. The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production would still have a high GDP, but a very poor standard of living. The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. There are a number of controversies about this use of GDP.

Controversies

Although GDP is widely used by economists, its value as an indicator has also been the subject of controversy. Criticisms of GDP include:
- GDP doesn't take into account the black economy, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
- Very often different calculations of GDP are confused among each other. For cross-border comparisons one should especially regard whether it is calculated by purchasing power parity method or current exchange rate method.
- Quality of life is determined by many other things than physical goods (economic or not).
- In 'poor' countries, it may just be that everything is cheap, except for a few western goodies. So one may have little money, but if everything is cheap that evens out nicely. Thus, the standard of living may be quite reasonable, it's just that there are, say, fewer TV-sets, meaning people have to share them (which may actually increase the quality of life in a social sense).
- If many products are of low quality in terms of durability then people will have to (unnecessarily) buy them again and again, thus boosting GDP without increasing their satisfaction. (On the other hand, if products were very durable then that would hamper innovation because people would be less inclined to buy new products, giving producers less of an incentive to develop them.) Similarly, if many products are of low quality in terms of usability and people don't know beforehand which products are the best choice for them, then they will either have to make do with an inferior product or buy again and again until they find something more satisfying. Furthermore, if products have a short lifespan in the market (eg because of fast innovation or fashion) then this process starts all over again when people need a replacement. Note that in a capitalist society these factors working together can easily cause a very high GDP combined with low customer satisfaction.
- GDP doesn't measure the sustainability of growth. A country may achieve a temporary high GDP by over-exploiting natural resources or by misallocating investment. Oil rich states can sustain high GDPs without industrializing, but this high level will not be sustainable past the point that the oil runs out. Economies experiencing a housing bubble or a low private saving rate tend to grow faster due to higher consumption, at the expense of reduced pensions in future.
- GDP counts work that produces no net change. For instance, a hurricane destroying thousands of homes would not be counted by GDP, but the rebuilding of those homes would be. A good recent example would be the aftermath of 2005 Katrina hurricane, which is poised to become the most expensive hurricane in history. GDP would capture the rebuilding activity and suggest a rising living standard, but we're only working toward restoring what was lost for the most part. Therefore, GDP growth would over-estimate the increase in the standard of living. See Negative externalities.
- As a measure of actual sale prices, GD