Showing papers on "Purchasing power published in 1967"

Inflation and Sales of Life Insurance

Abstract: The insurance industry has recognized that anticipations of increases in the price level may cause decreases in the sales of permanent life insurance. The first part of this paper indicates that theoretically sales of both permanent and term insurance may decrease if there are anticipations of price level increases. In the second part, two models involving anticipations of price level changes indicate that large increases in the cost of living have been accompanied by relatively smaller sales of term, as well as permanent life insurance. The life insurance industry is very much aware of the effects of inflation upon the real value, as opposed to the money value, of the cash benefits which it pays to its policyholders and beneficiaries. Spokesmen for the industry are constantly urging that the nation's government follow fiscal and monetary policies which will minimize inflation in the American economy, to insure that those people living on fixed Alfred E. Hofflander, Jr., Ph.D., C.P.C.U., C.L.U., is Assistant Professor of Insurance in the Graduate School of Business in the University of California, Los Angeles. Dr. Hofflander's previous teaching included service at Florida State University and the University of Texas. He was a Huebner Fellow at the University of Pennsylvania and is now Associate Editor of C.P.C.U. Annals, Assistant Editor of Journal of Risk and Insurance, and is Secretary-Treasurer of Western Association of Insurance Professors. Richard M. Duvall, Ph.D., is Associate Professor of Statistics in the University of Tennessee. His previous teaching included service at University of Texas and University of Michigan. Dr. Duvall has authored articles which have appeared in the Journal of the American Statistical Association, the Journal of Finance, Accounting Review, and Management Science. The authors wish to express their appreciation to the Connecticut Mutual Life Insurance Company for the financial support which made this research possible. This article was accepted for publication in October, 1966. incomes will not have their purchasing power decreased.1 The insurance industry also has realized that fears of the general public, anticipating future inflation, may change their pattern of insurance purchases, with more term insurance being purchased and less permanent insurance. The consequence will be a smaller volume of premium to the industry. The purchaser asserts that he will invest the difference in common stocks as a hedge against inflation. Some suggestions have been made that life insurance companies invest a larger proportion of their assets in common stocks and have part of the benefits depend upon the results obtained from the equity investments. This, it is urged, would help keep some of the permanent insurance business which the industry feels it is losing because of anticipated inflation.2 Although it has been thought that anticipation of price level changes discour'For example, see David E. Kilgour, "Three Major Forces Attacking Cash-Value Insurance," The National Underwriter, September 24, 1959, Extra Edition No. 39B, Chicago, p. 8, 14-5. 2 F. J. McDiarmid, "Inflation and Insurance," The Commercial and Financial Chronicle, Vol. 188, No. 5800, Dec. 4, 1958, New York, p. 9, 31-4.

Income redistribution in money and in kind

Abstract: It is a tenet of the liberal theory of economic policy that interference by the government with the distribution of real income should normally be confined to transfers of general purchasing power, leaving the allocation of specific goods to the competitive market.2 Among the main arguments in favour of this doctrine is one which invokes the results of welfare economics; it is summarised very clearly in the following extract from a recent paper by Professor K. J. Arrow:3 The interest in the competitive model stems partly from its presumed descriptive power and partly from its implications for economic efficiency. In particular, we can state the following well-known proposition (First Optimality Theorem). If a competitive equilibrium exists at all, and if all commodities relevant to costs or utilities are in fact priced in the market, then the equilibrium is necessarily optimal.... With this in mind, the following statement can be made (Second Optimality Theorem): If there are no increasing returns in production, and if certain other minor conditions are satisfied, then every optimal state is a competitive equilibrium corresponding to some initial distribution of purchasing power. Operationally, the significance of this proposition is that if the conditions of the two optimality theorems are satisfied, and if the allocation mechanism in the real world satisfies the conditions for a competitive model, then socialpolicy can confine itself to steps taken to alter the distribution of purchasing power. For any given distribution of purchasing power, the market will, under the assumptions made, achieve a competitive equilibrium which is necessarily optimal; and any optimal state is a competitive equilibrium corresponding to some distribution of purchasing power, so that any desired optimal state can be achieved. The redistribution of purchasing power among individuals most simply takes the form of money: taxes and subsidies. The implications of such a transfer for individual satisfactions are, in general, not known in advance. But we can assume that society can ex post judge the distribution of satisfactions and, if deemed unsatisfactory, take steps to correct it by subsequent transfers. Thus, by successive approximations, a most preferred social state can be achieved, with resource allocation being handled by the market andpublic policy confined to the redistribution of money income. If, on the contrary, the actual market differs significantly from the competitive model, or if the assumptions of the two optimality theorems are not fulfilled, the separation of allocative and distributional procedures becomes, in most cases, impossible. It is the purpose of this article to point out two new objections to

Beyond Poverty of Income

Abstract: By now it should be evident that there are many conditions associated with poverty which are more degenerating and infectious than the lack of adequate income per se. Indeed, the disadvantages which accrue to families with severely limited incomes frequently are more pervasive in nature than an absence of adequate purchasing power. Conceivably, a prudent family with an annual income of $3,000 may be financially well off; while a spendthrift family with an annual income of $30,000 may be on the verge of bankruptcy.

Gold and the Dollar

Abstract: THE persistent deficit in the United States' balance of inter national payments and the continuing loss of gold have led to increasing discussion of national policies relating to gold and the dollar. While the issues involved are quite technical and complex, they are important to the future of the nation and the world. Broader understanding of the forces impinging on the nation's balance of payments is essential if the United States is to react properly to the changes in its role in the world economy. The authors start from the firm belief that the present gold exchange standard is the most efficient, equitable and powerful international monetary system in the world's history. It has performed remarkably well under conditions of unprecedented world growth, and has contributed significantly to that growth. The objective must be to preserve the present system, while working to improve it by gradually supplementing it with some new source of international liquidity. The key to this proposition is that the official dollar price of gold must remain unchanged regardless of the pressures that might be put on the United States to revalue gold. To achieve this, it is essential to recognize that our responsibility for fiscal and monetary stability extends beyond our borders. Not only are non-inflationary poli cies desirable for domestic reasons; they are necessary to maintain the purchasing power of the large liquid dollar assets held by for eigners. Foreign dollar holders must feel confident that dollars constitute the best available store of internationally acceptable purchasing power. It should continue to be a major objective of U.S. policy to achieve a viable balance in international payments, but this objective should be pursued through responsible mone tary and fiscal policies rather than through new controls over international capital movements, foreign exchange transactions or tourism.

The Price-Level Controversy: A Reply

Abstract: In their comments on my price-level paper,' Professors Chambers, Moonitz, and Winborne2 seem to have misunderstood my position on accounting for price changes as represented in my current valuation system. To a large extent the differences between us are differences of definition although Chambers also charges me with an error of logic and attacks the averaging procedures which I (and others) have used in measuring income and financial position. Because accounting information is needed for purposes of economic evaluation and decision-making, I suggested that financial statements should incorporate current value data which can assist in these tasks. The first and main requirement is that all items in the income statement for a particular period, and in the balance sheet at the end of the period, should be valued in terms of current prices of the period. In my current valuation system, I interpret current prices as pertaining to particular goods and services which are recorded in the financial statements in question, and not the prices of a hypothetical collection of goods and services which are valued by reference to a general purchasing power index. My income concept is restricted to the increment in wealth resulting from productive activities as represented by actual transactions, with both revenue and cost flows expressed in current prices. Income is not derived by reference to the change in balance sheet measures of generalized purchasing power between two points of

A Comparison of the Interregional Purchasing Power of Industrial Wages in Pakistan (Notes & Comments)

Abstract: Data on regional income and its various components are frequently used in Pakistan in economic planning and to formulate and evaluate other economic policies. Characteristically, these regional income magnitudes are estimated on the basis of the prices prevailing in different regions. Generally speaking, any comparative analysis of the regional real incomes on the basis of such estimations is inadequate and in certain cases misleading if the intra-regional price structure is substantially different in various regions. Although work has been done in measuring different components of regional income in Pakistan, no significant effort has so far been made to measure the purchasing power of income or its components in various regions