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Population Economics Fall 2012

Population Economics Fall 2012. Economic Growth and the Long Run Rate of Return on Equities. Short Run Rate of Return. rr S = g P + D/P Where g P equals appreciation And D/P equals rate of cash returns. We can calculate the short run rate of return as follows. g P = g P/E + g E

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Population Economics Fall 2012

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  1. Population EconomicsFall 2012 Economic Growth and the Long Run Rate of Return on Equities

  2. Short Run Rate of Return • rrS = gP + D/P • Where gP equals appreciation • And D/P equals rate of cash returns

  3. We can calculate the short run rate of return as follows • gP = gP/E + gE • And D/P = (D/E) / (P/E) • So short run rate of return is: • rrS = gP/E + gE +(D/E) / (P/E)

  4. A numerical example • rrS = gP/E + gE +(D/E) / (P/E) • rrS = 1.5% + 3.5% + 50%/25 • rrS = 1.5% + 3.5% + 2% • rrS = 5% + 2% = 7%

  5. Long Run Rate of Return • rrS = gP/E + gE +(D/E) / (P/E) • In the long run gP/E =0 and gE = gY • So rrL = gY +(D/E) / (P/E)

  6. A numerical example using SS growth assumptions • rrL = gY +(D/E) / (P/E) • rrL = 1.5%+(50%) / (25) • rrL = 1.5%+2% • rrL = 3.5%

  7. There is no advantage to investment in equities • Given the long term growth rate of GDP assumed by the SS Trustees, (1.5%) • Equities will return only 3.5% and not do any better than holding long term government bonds.

  8. The End

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