Friday, February 19, 2010

Confusing Income and Wealth

It is very common to see income (a flow measure) confused with wealth (a stock period).  Wealth is accumulated through a period of high income. High income alone does not indicate wealth.  Wealth is accumulated with persistent levels of high income.

This reached a peak when after 2006 among non-oil economies Ireland was declared “the richest country in the world”.  A piece in The Irish Independent declared that “Ireland is rated sixth richest country in global wealth league”.  The piece declared:
IRELAND is now the richest non-oil country in the world, apart from the small financial hubs. With the exception of world financial centres like Liechtenstein and Bermuda and the oil kingdoms of Norway and Qatar, Ireland is now the world's richest country with an average income of €44,000.
The Standard & Poor's agency ratings show Ireland lying in sixth position for the second year in a row, easily beating the likes of the US and the UK, who took 11th and 18th places respectively. Ireland's average income has risen from €39,335 last year to a new high of €44,000. The increase in wealth is reflected in spending both on property and on the high street.
There it is in black and white - “Ireland is now the world’s richest country”.  Everyone bought into it.  A couple of good years and we’re suddenly declared the richest country around.  We started in 1995.  Some countries have a head start on us at wealth accumulation of hundreds of years yet we’re supposed to have wiped that out, and more, in a decade.

This report from National Irish Bank provides an interesting analysis of wealth in Ireland.  Maybe we’re not as “rich” as we thought we were.

Today Davy Stockbrokers have released a report of their own which does not confuse income with wealth.  They analyse what we have done with the money we earned during the high income period from 2000-2008.  Their opening remark is stark.
Ireland ranks reasonably well in income tables, but it is not
a wealthy country; high income in 2000-2008 largely wasted.
The report makes for interesting reading and the conclusion is clear.  Here it is in black and white.
We blew the boom!

1 comment:

  1. "Wealth is accumulated with persistent levels of high income."

    Not necessarily true. What if I spend it all on vacations?

    It's not what you make. It's what you keep.