Wednesday, 6 October 2010

Three economic items

The economy consists of economic items and economic entities.

Economic items have economic value. Accountants value economic items when they account them. Utility, scarcity and exchangeability are the three basic attributes of an economic item which, in combination, give it economic value.

It is generally accepted that there are only two basic, fundamentally different economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy. This is an economic fallacy.

The three fundamentally different basic economic items in the economy are:
a) Monetary items

b) Variable real value non-monetary items

c) Constant real value non-monetary items

The SA economy consequently consists of not just two – the monetary and non-monetary economy, but, three parts:

1. Monetary economy

The SA monetary economy consists of Rand bank notes and coins and other Rand monetary items, e.g. bank loans, savings, credit card loans, car loans, home loans, student loans, consumer loans and other monetary items making up the money supply in SA.

2. Variable item non-monetary economy

The variable item economy is made up of non-monetary items with variable real values over time; for example, cars, groceries, houses, factories, property, plant, equipment, inventory, mobile phones, quoted and unquoted shares, foreign exchange, finished goods, etc.

3. Constant item non-monetary economy

The constant item economy consists of non-monetary items with constant real values over time, e.g. salaries, wages, rentals, all other income statement items, balance sheet constant items, e.g. issued share capital, share premium, share discount, capital reserves, revaluation reserve, retained profits, all other items in shareholders´ equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and all other non-monetary receivables, etc.

The variable and constant item non-monetary economies in combination make up the non-monetary or real economy. The real and monetary economies constitute the SA economy.

The monetary economy can disappear or be totally destroyed like in the case of Zimbabwe as a result of hyperinflation. The real or non-monetary economy (houses, properties, buildings, infrastructure, inventories, finished goods, consumer goods, trademarks, goodwill, logos, copyright, trade debtors, trade creditors, royalties payable, royalties receivable, taxes payable, taxes receivable, all other non-monetary payables, all other non-monetary receivables, etc,) can not be destroyed by hyperinflation: inflation is always and everywhere a monetary phenomenon - inflation has no effect on the real value of non-monetary items.

Trade debtors and trade creditors are constant real value non-monetary items and not monetary items as stated by the US Financial Accounting Standards Board, the International Accounting Standards Board, in International Financial Reporting Standards and by PricewaterhouseCoopers, amongst others

Copyright © 2010 Nicolaas J Smith