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Population Economics
Fall 2012
Economic Growth and the
Long Run
Rate of Return on Equities
Short Run Rate of Return
rrS = gP + D/P
Where gP equals appreciation
And D/P equals rate of cash returns
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)
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%
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)
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%
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.
The End
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