D Murali

Bathtub model of wealth and income

D. Murali | Updated on November 14, 2017

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To explain the relationship between wealth and income, a recent paper ( www.ers.usda.gov) uses the bathtub comparison. Wealth is analogous to the level of the water in a bathtub, while income is analogous to the flow of water into the tub, write John Pender, Alexander Marré and Richard Reeder of the US Department of Agriculture, Economic Research Service, in Rural Wealth Creation: Concepts, Strategies, and Measures. If consumption (including direct consumption and wealth depreciation) — analogous to outflows of water from the bathtub — exceeds income, then wealth will be drawn down over time, the authors explain, drawing from Hoffer and Levy (2010).

“The difference between income and consumption represents net savings, which increases wealth over time if positive and depletes it if negative.”

Pointing out that people may have high wealth and low income or low wealth and high income, as well as the more common positive association between the two, the paper argues that considering only income or consumption as indicators of well-being without also considering wealth can be misguided and can misdirect policy. “Conversely, households that lack adequate net wealth, perhaps because of high debt loads, may face financial hardship despite having high incomes.”

Insights worth exploring in the Indian context.

Boosting corporate investment

The bad news in a recent IMF working paper ( www.ssrn.com) is that the share of corporates in the total investment has fallen in India, since the global financial crisis. The good news, however, is that improving the business environment by reducing costs of doing business, improving financial access, and developing infrastructure could stimulate corporate investment.

Before the global financial crisis, strong corporate investment (gross fixed capital formation) was behind the increase in investment, which was well above levels in most emerging economies (in per cent of GDP), traces Kiichi Tokuoka, in Does the Business Environment Affect Corporate Investment in India? He informs that the growth of investment has slowed to about -0.6 per cent (quarter-on-quarter) on average in the first three quarters in 2011, compared with an average of nearly 3 per cent between 2000 and 2007.

What can be more worrying is that a chart of ‘high frequency production data' speaks of ‘a continued slowdown in corporate investment,' with machinery and equipment production declining.

The author observes that while macroeconomic factors can largely explain corporate investment, they do not appear to account fully for recent weak performance. For, India has considerable room to improve its business environment, he avers.

A topic that merits the attention of all our industry bodies and policymakers.

Published on March 31, 2012

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