*Economic Productivity* refers to the efficiency in terms of economic output that is carried out by an organism
Im currently a resident of Vancouver, BC, Canada. And it’s beautiful here, the nature, the city and multi-ethnic population that resides here. Yet when you look at the housing prices, you’re immediately repelled by the prices that is higher than a skyscraper. The unaffordable prices is a long time coming considering the immigration policies that has allowed many immigrants like me to obtain legality to lay my grounds here. It has benefit me in many ways, especially mentally, with the security that is provided from not needing to move purely due to visa. However, the objectively, it hasn’t benefit the country in the way that the country has expected it to.
Not only that, due to the uneven increase in population vs job availability, the unemployment rate increases. And with the generous benefits that are provided by the government, the total expense to sustain the economy increases as the amount of individuals to sustain increases.
Based on basic accounting, an increase in expenses, with a stagnant revenue (economic output), results in a value deficit. And thus, the current state of Canada and its future does not look pretty.
What does this have to do with Economic Output of an individual?
A country, if viewed as an organism, can show abstractions that mirrors an individual. When these abstractions are extrapolated, it provide us with the tools to predict and manage ourselves or the country, whether it’d be a theory or practical implementation that benefit the individual and being extrapolated as a solution for the country or vice versa.
So let’s begin.
As an individual, we are only 1 organism by ourselves. Therefore it is a lot simpler to manage and predict the economic balance sheet within the organism. This of course does not consider the environmental climate that the individual is bound to, like the country that they live in, etc.
The content that follows will cover:
- Extrapolation of accounting concepts in an individual
- Economic climate vs an individual
- Economic output of an individual
Extrapolating accounting into an individual life
Let’s start with discussing how accounting concepts are implied within our individual balance sheets. This provides us with context when evaluating and understanding the economics extrapolation of an organism.
Revenue
Visualize yourself and the income you bring in from your job. The paycheck of $5000 every month, that goes into your bank account. That is your individual revenue.
Expenses
Now consider the things you spend on with the revenue you have. That is the expenses you have in your own organism. The cash that you put into rent, food, clothes, entertainment, etc. All of these are expenses.
Profit
After spending the money, you’re left with a sum of money. That is the profit from your life. You can now keep this money as cash (which can be seen as a liability depending on the economic climate) or can be used to invest into appreciating assets. This is called a positive balance sheet in accounting terms.
Assets
With that extra money, you’ve decided that you want to put half of it in the bank account and half of it into buying an appreciating asset (this could be real estate, stock market, crypto). When you put this money into an appreciating asset, it is not as liquid (readily spendable) as compared to cash. However, assuming it is an appreciating asset or value-maintaining assets. Then the value that you’ve retrieved from your labour is stored and maintained over time.
Liability
You decided that you need a new iPhone and took out a $1k loan to pay for the phone. You’re required to payback this loan over time. This debt that you’ve incur is a liability in your balance sheet.
Liabilities are often seen as a bad thing and repelling. However, liabilities often times provide us with an advanced in liquid assets that allow us to generate economic output at scale and thus producing premature profits that is required to be paid back after. Therefore managed liabilities can be a good thing.
Loss
Assuming the next month, you got laid off and you stop receiving a paycheck. You have to continue to pay rent, food, and your debt. Therefore you’re now required to utilize your savings or liquidate your assets to pay those expenses. This incur in cost and requirement to use up your available financial store is called loss. Or in accounting terms, a negative balance sheet.
Economic climate vs an individual
Let’s re-focus back onto the economic climate that affects an individual. The economic climate points towards the environment that allows for a person to execute economic productive activities. These can be a business that is run by an individual or a job that an individual holds. Intrinsically, these activities provide value to the climate, and thus rewards the individual with income as incentives. The amount in income is determined by the agreed upon price that the individual and consumer has set.
Market Availability
The availability of employment is a prime example of the wealth of an economic climate. If there are more unemployed individuals than available job positions, then the economic productivity is at a loss. Imagine a couple, when a couple are both working, sustaining themselves and accumulating wealth, they’d have a net positive balance sheet. However, when they decided to have kids, who will have 0 economic output, but incurs cost for the survival of them, the net positive of the balance sheet would be lower as compared to when the couple didn’t have kids.
When there are job availability, and people to fill up. Then there is an increase in economic value brought in to the balance sheet. This can be seen in the example again, whereby when a kid has grown to become an adult, and starts contributing to the financial pot within the family, the economic output increases.
In the case where there are more job opportunities than available individuals for employment. The economic output stagnates and can sometimes be detrimental. To circle back to the example, if the family of 3 all had jobs, but no one have the time to help take care of the house, or fix the fused out lights and broken pipes. The debt that will incur within the organism increases and may affect the quality of life of the family themselves.
Market Opportunities
But how does this relate to the amount that an individual brings in to the family?
When there are market opportunities that require an in demand skillset, the payment that can be requested by an individual increases as the available talent is limited.
For example, I’m a software engineer currently. And the job market is saturated. Meaning that there are more software engineers than available positions. This results in employers being able to ask for cheaper price of labor as compared to a few years back.
However, if there are multiple folds of manufacturing job available but not enough manufacturing engineers. And I decide to up-skill and learn manufacturing processes. I may be able to get a job that pays more than a software engineer.
Market opportunities and the revenue that can be generated is again, based on supply and demand.
Market Expenses and Cost
There is limited space within a section of land. When the land is overcrowded by people, the cost per unit of land increases as there is demand for it. When the land is underpopulated, the cost per piece of land decreases as there is an increase of supply.
As humans, we need a place to live and food to eat for our survival. It’s essential. When we live in a city that is overcrowded, the price of rent shoots up due to demand. This increase in cost is added into our individual balance sheet. This not only applies to rent, as the increase in demand for food will also increase the prices of it. These all seep into the rest of the economic climate, as cost of living increases, wages usually increase, thus resulting in price of restaurants to increase, etc. It’s a slow creep into the rest of our lives.
Economic output of an individual
Lastly, economic output. How can we increase the economic output of an individual.
The basic of this is
Net = (Revenue-Cost) + (Assets-Liabilities)
Whereby a +Net = profit and -Net = Loss
The goal of an organism’s balance sheet is to achieve net positive. This organism can be a country, an organization, a family or an individual. The revenue has to be higher than the cost for the country to be wealthy.
This can be achieved by reducing the cost and/or increasing revenue.
Reducing cost
For an individual, we can reduce this by living below our means. For example,
- Choosing a place that cost less rent, or buying a place whereby the mortgage is affordable and cheaper than paying rent.
- Cutting down on eating out in fancy restaurants and cooking more at home.
- Spend less on unnecessary items and entertainment
- Spend on things that brings you true joy rather than impermanent bliss
Reducing cost is important and is often times a mindset. Learning about what is sufficient for ourselves and being okay with it helps us expend less on unnecessary things. And understanding what brings us eternal joy allows us to spend more on that. The word for this is
Conscious spending
Increasing Revenue
The other way to achieve net positive is to increase revenue. These can be done by
- acquiring monetary compensation that are symmetry to the labor or value we provide.
- Up-skilling and provide labor value in a high demand market.
- Creating automated operations and/or services that provides value to the market (and thus receiving compensation for the value provided)
- Arbitrage opportunities through acquiring profits from asymmetrical information between markets (This points towards the price of goods being different in two markets, and an individual coming in benefit from that asymmetry)
Assets as Store of Wealth
Profits that are gained, are put into markets where there is a store of wealth or reinvest into ourselves to increase our economic outputs.
This can be done via
- Investing in assets that has a store of value like Commodities, Stock Market/businesses (note that it’s important to diversify based on risk profile)
- Re-invest in educational material to up-skill oneself
- Re-invest into businesses to improve efficiency or for increased scalability
These allows an increase in profits, increase in economic efficiency, or a assured store of wealth
Managed Liabilities
As mentioned previously, liability is not a bad thing if used wisely. The capital can be used for scaling of a business which increases profit after a period of time. Therefore, don’t stray away from debt, but take calculated actions when pursuing it.
These can be seen in examples like:
A business that you own currently produces 100 cartons of milk a day, 3000 cartons of milk in a month. At a profit of $1 per carton, your business is making $3000 in profit a month.
You recently secured a deal with a grocery store that wants 9000 cartons of milk a month. And you’ve to increase your production rate by 9000 cartons. This would require you to buy more equipments, cows and hire more workers, which would cost an upfront capital of $90,000. The deal that is signed is for 5 years.
Knowing this, you can forecast that you’ll get an increase profit of $9000 per month over 5 years. Thus, increasing revenue by $540,000 ($9000 * 5 * 12) instead of just $180,000 ($3000 * 5 * 12). This is a net positive revenue of $360,000. If the liability of $90,000 is returned at an interest rate of 15% APY which would result in a cumulative interest of around $24,000. This will still be a net profit of $246,000 in 5 years.
Therefore, secure a deal or forecast an opportunity, and take liabilities with calculated risks.
Conclusion: Extrapolating this to a larger organism
These concepts have been discussed in different sizes. Size of individuals, families, businesses/organizations and now countries. As an organism grows larger, the complexity of economic output increases. However, it still follows the same concept.
If a country wants to be wealthy, it has to generate more positive economic output and provide value to other countries, reduce costs, increase assets and manage their liabilities accordingly.
With the current climate that I live in, I hope for the best that we these concepts will arm me with the knowledge to storm the upcoming storm that is bound to come.
