Poverty In Pakistan: Causes, Effects And Solutions

"In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of." (Chinese Proverb)

Poverty in Pakistan is one of the most burning issues. As of 2010, "about 40 percent of the total population was living below the poverty line" (World Bank). It means more than one-third of the total population or in other word about 70 million out of 180 million people are living below the poverty line. The history shows that there was declining rate of poverty in 1970s and 1980s. However, from 1990s till today the poverty is in increasing trend. This phenomenon has been called POVERTY BOMB.

The main reasons of Poverty in Pakistan is the destabilizing of democracy, unbridled corruption, fast growing population, sorry state of education sector, ineffective management of natural resources, feudalism, uncontrolled inflation etc. Besides these national factors there are some International factors which have added fuel to the fire. Like global financial crisis, increasing price of oil, world food crisis etc

"Poverty is like punishment for a crime you did not commit". (Eli Khamarov)


1. Child Labor


The first and most immediate Effects of Poverty in Pakistani Society is that People will not send their child to Schools. As we know that "CHILD IS THE FATHER OF TOMORROW", if our child wasted in this way then not only our Society but Country will face problems in the future. Today in Pakistan about 4 million Children in the age group of 5-14 years are working (Federal Bureau of Statistics).

This is poverty which force them to work in the formative years at very risky places ie Underground mines, work with live electrical wires over 50 V, Cement industry, Tobacco process and manufacturing etc.

2. De-track from Moral and Religious values

"No man can worship God or love his neighbor on an empty stomach." (Woodrow- T. Wilson)

From the above quotation we can very easily understand that what people are doing in the state of Poverty. They did not care of the Moral or Religious value. What is good for them is that which satisfy their needs and necessities.

3. Crimes and Violence

Crime and violence is the direct Effect of Poverty in Pakistan. The most common form of human trafficking is for prostitution (violence), which is largely fueled by poverty. According to a survey, most of poor men violence on their wives for income purposes. They force their women family members to earn something even by selling their bodies. Street crime is also the ultimate Effect of Poverty in Pakistan.

4. Health Problems

Poor people are suffering from so many diseases. They have not enough resources for treatment. This is the reason that Pakistan is ranked 135th out of 194 countries in the Index of Life Expectancy at the time of Birth. In Pakistan the life Expectancy rate at the time of Birth is very low ie 65 years. Whereas, in western countries it is 80+ years ie Japan, Hong Kong, Australia, Switzerland, Iceland etc

5. Sub-standard lives

By observing above factors one can very easily understand that overall Effect of Poverty in Pakistani Society is that, they are living Sub-Standard life.


Monetary Policy and Interest Rates

Among other things that influence interest rates, monetary policy is also one of them. Democratic governments use two policy tools to help their economies thrive. There is the fiscal policy and monetary policy.

First, let us discuss the difference of fiscal policy to monetary policy. Fiscal policy pertains to the power of the government with congresses or parliament's consent to increase or decrease tax rates. To increase tax rates, would mean to take away the disposable income of civilians. Think of it this way, the economy is a wheel. The movement of money makes the wheel turn. When people spend less money, the economy turns slowly. So the government increases taxation. The extra money the government collects is then spent on projects that will pour money back into companies for government mandated projects. These companies in turn will give them back to the people by employing more employees or by paying their existing ones with more. Such spending is also known as "pump-priming" activities.

Another instrument of fiscal policy would be for the government to borrow money for its expenditures. They do this so as not to over tax their citizens and provoke protest actions against their management. However, borrowing is not always an option. Lenders do not easily part with their funds. The general economic environment is placed into consideration.

But enough about fiscal policy, we are here to discuss the influence of monetary policy on interest rates. Now, bearing in mind that the economy is a wheel with money as the gas, monetary policy is the power of the government to control the flow of money in its society. When interest rates are high, the tendency of people is to control their spending and as much as possible stay away from borrowing money. This in turn slows down the movement of money in society. So one strategy the government employs is to lower down the interest rates, to attract people to borrow money and spend them on projects or businesses. Who among us would not suddenly think of purchasing houses, cars or expansion of current businesses when very low interest rates prevail? Such interest rates would make you think your money will earn more by investing it where yields are higher. When the economy is in danger of overheating (when growth is too fast, threatening a rise in inflation), the government increases interest rates to make access to excess money more expensive and arrest spending. Normally, such policies are implemented by a central bank that has more influence with creditors such as banks and other financial institutions.

The main reason that governments undertake such measures is to spur or to impede the economic growth through introduction of the monetary policy. Interest rates become a tool to help manage the economy.

In effect, the monetary policy can be gleaned to be tied up with interest rates. However, just as stated earlier, there are a lot of macroeconomic factors that affect interest rates. Inflation, supply and demand for money and other general economic indicators are normally related to one another, which in turn dictates which interest rate to peg.

Reasons Why Local Banks in Cameroon Failed Within the 1980-1990 Peroid

Financial distress has afflicted numerous local banks IN Cameroon, many of which have been closed down by the regulatory authorities or have been restructured under their supervision. In
Cameroon banks such as the BICIC Meridian BIAO Cameroon Bank were closed
Many more local banks were distressed and subject to some form of
"Holding action". Failed local banks accounted for as much as 23 per cent of total commercial
bank assets in Cameroon.

The cost of these bank failures is very difficult to estimate: much of the data is not in
the public domain, while the eventual cost to depositors and / or taxpayers of most of the
bank failures which occurred between the 1988 to 2004 period will depend upon how much of the failed banks' assets are eventually recovered by the liquidators. The costs are almost certain to be substantial.

Most of these bank failures were caused by unprofitable loans. Areas affecting more
than half the loan portfolio were typical of the failed banks. Many of the bad debts were
attributable to moral hazard: the adverse incentives on bank owners to adopt imprudent
lending strategies, in particular insider lending and lending at high interest rates to borrowers
in the most risky segments of the credit markets.

Insider lending

The single biggest contributor to the bad loans of many of the failed local banks was
insider lending. In at least half of the bank failures referred to above, insider loans accounted
for a substantial proportion of the bad debts. Most of the larger local bank failures in Cameroon,
such as the Cameroon Bank, BIAO Bank and BICIC Bank, involved extensive insider
lending, often to politicians. Insider loans accounted for 65 per cent of the total loans of
these local banks, virtually all of which was unrecoverable.

Almost half of the loan portfolio of one of the local banks local banks had been extended to its directors and employees .The threat posed by insider lending to the soundness of the banks was exacerbated because many of the insider loans were invested in speculative projects such as real estate development, breached large-loan exposure limits, and were extended to projects which could not generate short-term returns (such as hotels and shopping centres), with the result that the maturities of the bank assets and liabilities were imprudently mismatched.

The high incidence of insider lending among failed banks suggests that problems of moral
hazard were especially acute in these banks. Several factors contributed to this.
First, politicians were involved as shareholders and directors of some of the local banks.
Political connections were used to obtain public-sector deposits: many of the failed banks,
relied heavily on wholesale deposits from a small number of firms.

Because of political pressure, the small banks which made these deposits are unlikely to have
made a purely commercial judgement as to the safety of their deposits. Moreover, the
availability of micro deposits reduced the need to mobilize funds from the public. Hence
these banks faced little pressure from depositors to establish a reputation for safety.
Political connections also facilitated access to bank licences and were used in some cases to
pressure bank regulators not to take action against banks when violations of the banking laws
were discovered. All these factors reduced the constraints on imprudent bank management.

In addition, the banks' reliance on political connections meant that they were exposed to
pressure to lend to the politicians themselves in return for the assistance given in obtaining
deposits, licences, etc. Several of the largest insider loans made by failed banks in Cameroon
were to prominent politicians.

Second, most of the failed banks were not capitalized, in part because the minimum
capital requirements in force when they had been set up were very low. Owners had little of
their own funds at risk should their bank fail, which created a large asymmetry in the
potential risks and rewards of insider lending. Bank owners could invest the bank deposits
in their own high-risk projects, knowing that they would make large profits if their projects
succeeded, but would lose little of their own money if they were not profitable
The third factor contributing to insider lending was the excessive concentration of
ownership. In many of the failed banks, the majority of shares were held by one man or one
family, while managers lacked sufficient independence from interference by owners in
operational decisions. A more diversified ownership structure and a more independent
management might have been expected to impose greater constraints on insider lending,
because at least some of the directors would have stood to lose more than they gained from
insider lending, while managers would not have wanted to risk their reputations and careers.

The high cost of funds meant that the local banks had to generate high earnings from
their assets; for example, by charging high lending rates, with consequences for the quality of
their loan portfolios. The local banks almost inevitably suffered from the adverse selection of
their borrowers, many of who had been rejected by the foreign banks (or would have been
had they applied for a loan) because they did not meet the strict creditworthiness criteria
demanded of them. Because they had to charge higher lending rates to compensate for the
higher costs of funds, it was very difficult for the local banks to compete with the foreign
banks for the "prime" borrowers (ie the most creditworthy borrowers). As a result, the
credit markets were segmented, with many of the local banks operating in the most risky
segment, serving borrowers prepared to pay high lending rates because they could access no
alternative sources of credit. High-risk borrowers included other banks which were
short of liquidity and prepared to pay above-market interest rates for inter bank deposits and
loans. We all experienced in Douala and Yaounde how some of the local banks were heavily exposed to finance houses which collapsed in large numbers in the 1990s.

Consequently, bank distress had domino effects because of the extent to which
local banks lent to each other.

Within the segments of the credit market served by the local banks, there were probably
good quality (ie creditworthy) borrowers as well as poor quality risks. But serving
borrowers in this section of the market requires strong loan appraisal and monitoring
systems, not least because informational imperfections are acute: the quality of borrowers'
financial accounts are often poor, many borrowers lack a track record of successful business,
etc. The problem for many of the failed banks was that they did not have adequate
expertise to screen and monitor their borrowers, and therefore distinguish between good and
bad risks. In addition, credit procedures, such as the documentation of loans and loan
securities and internal controls, were frequently very poor. Managers and directors of these
banks often lacked the necessary expertise and experience.

Recruiting good staff was often difficult for the local banks because the established banks
could usually offer the most talented bank officials better career prospects. Moreover, the
rapid growth in the number of banks outstripped the supply of
experienced and qualified bank officials.

Macroeconomic instability to an extent contributed to these failures;

The problems of poor loan quality faced by the local banks were compounded by
macroeconomic instability. Periods of high and very volatile inflation occurred in Cameroon, just before the devaluation of the FCFA. With interest rates liberalized, nominal lending rates were also high, with real rates fluctuating between positive and negative levels, often in an unpredictable manner, because of the volatility of inflation.
Macroeconomic instability would have had two important consequences for the loan
quality of the local banks. First, high inflation increases the volatility of business profits
because of its unpredictability, and because it normally entails a high degree of variability in
the rates of increase of the prices of the particular goods and services which make up the
overall price index. The probability that firms will make losses rises, as does the probability
that they will earn windfall profits .This intensifies both adverse selection and adverse incentives for borrowers to take risks, and thus the probabilities of loan default.
The second consequence of high inflation is that it makes loan appraisal more difficult for
the bank, because the viability of potential borrowers depends upon unpredictable
developments in the overall rate of inflation, its individual components, exchange rates and
interest rates. Moreover, asset prices are also likely to be highly volatile under such
conditions. Hence, the future real value of loan security is also very uncertain.
Conclusively, we should not be scared when we see micro financial houses multiplying in the economic capital of Cameroon, Douala, and Yaounde today, all, heavily involved in the banking sector, it is merely as a result of these huge bank failures recorded in the past years.

What Are the Factors to Consider When Buying Life Insurance?

As you are shopping around for insurance quotes and insurance companies, these are a few basic factors you need to consider before you make any decision.

Here is a quick guide if you are not doing this with a financial planning professional yet. For ease of calculation and explanation, we are not taking time value of money and inflation into consideration.

Financial Obligations
Take into account any financial obligation that needs to be paid off if premature death or unfortunate event such as total & permanent disability or critical illness should occur. Examples could be business or personal loans or debts to be repaid or mortgage loan repayments.

Financial Support
Is there anybody who is dependent on you for financial support? Maybe aged parents, spouse or children? If there is, you may want to plan for the financial support to continue should any unfortunate event happen. For example, you may be planning to provide for your aged parents or a young kid for the next 20 years with an annual sum of $ 20,000. You would need a sum assured of $ 400,000 should that sum of money be needed right now.

Financial Gift
Is there a lump sum of money you would like to provide if an unfortunate event should happen? Is there someone you would like to leave a financial gift for when you are not around anymore? Or maybe a charitable cause you would like to contribute to? If there is, be sure to take this into consideration in your calculation of how much insurance cover to buy.

Replacement of Income
This is the tricky one where you will read of many differing opinions. The reason why this question is not so straightforward to answer is that guesswork of your income growth rate is involved.

There are general (very general) rules of thumb for this though.
You need to know how many years you would like your income to be replaced for. For example, if you would like your income replacement to be for 10 years. You will need a $ 500,000 sum assured if you are earning $ 50,000 currently. That will enable you to withdraw $ 50,000 per year for 10 years.
Alternatively, some may suggest for you to have insurance cover of 20 times your annual income. If you have a cover of 20 times your annual income, an investment return of 5% from your insurance proceeds will be able to replace your current income perpetually.

Knowing how long you need the protection of insurance for will play a part in knowing what types of life insurance products may be suitable. Do you need the insurance cover for a specific number of years only such as for a specific loan payment period or do you prefer the insurance protection for the whole of your life?

Knowing how much sum assured and how long you need the coverage for is one thing but your ability to pay the insurance premiums also need to be considered. For example, if you require a specific sum assured but your budget is limited, you may need to buy a term life insurance policy to get the required insurance cover even if you may prefer an insurance policy that can accumulate cash values.

There are different life insurance products to suit different financial needs and wants. Find one that is suitable for yours. There are mainly four types of life insurance products.

Term Insurance
For protection needs with no accumulation of cash value

Whole-Life Insurance
Mainly for protection needs with accumulation of cash value

Endowment Insurance
Mainly for savings needs with accumulation of cash value

Investment-Linked Insurance
Accumulation of cash value through investments. Whether it is for protection or investment needs depends on the specific policy.

The pointers listed above is catered to the Singapore market. They are meant for general information and discussion. It is not intended to provide any insurance or financial advice and you should always seek advice from a qualified adviser if in doubt.

Benjamin Ang has a Bachelor of Business Administration and holds the designation of Associate Financial Consultant (AFC) and Associate Estate Planning Practitioner (AEPP). He writes about wealth matters to share financial knowledge with the public and also writes regularly on living and experiencing all the wonderful things that life has to offer.

Out more about the find him at Http://www.benjamin-ang.com/

Symptoms of an Abscess: How to Identify an Abscess

An abscess is a kind of skin crack which looks like a leak containing pus; one of the major discomforts of abscess is the inflation in the abscessed area surrounding tissues. Mostly abscess is formed due to certain localized infection. Abscess may occur in different parts of organ however, external abscess can be treated by localized treatment as well as it can be identified by symptoms, whereas only a doctor and relevant medical examination can identify an internal abscess problem.

Common sites for abscess are breast, peri-rectal region, gums, armpit, and groin area. The sites and the intensity of infection may differ from one patient to another.

The symptoms of abscess are mostly visible and a few of them are felt as associated complications. The intensity of complications also may vary from one person to another.

The affected area which is infected seems swollen, reddish in skin tone, and touch-sensitive; if touched one can feel the unusual warmth under the skin tone. An abscess is, in general painful, but the intensity of pain again differs from one person to another depending on the tolerance of an individual.

When an abscess gets matured, it forms a point and may come to create a head. In case of advanced stage of skin abscess, spontaneous rupture and pustular drainage may occur also as a part of its auto-drainage system. Therefore an abscess needs to be treated with utmost care and with proper medical intervention; arrangement of proper incision and drainage of the pus accumulated inside due to the infection is the general process for initial treatment of severe abscess. In Case an abscess left untreated, it may harm tissues at deeper level and may cause infection in bloodstream which may lead to septicemia.

In case of an abscess with severe infection concerned patient may feel a spell of headache, mild to moderate temperature, urge of vomiting on and on, muscular cramp, increasing pain, etc issues and at the same time the patient may feel restless due to increasing pain and irritation on the skin surface.

In some cases the patient with abscess may feel certain shivering or abnormal sweating on contrary due to extreme restlessness in body. However, unconditional restlessness is one of the major symptoms of severe abscess.

In case of minor abscess, proper care, localized application of antibiotic ointment may heal the infection whereas there are some complicated conditions which may demand better scale of alertness for prevention for further worsening of the case at the earliest hints of any of these discomforts.

Some of these alarming symptoms are fever, extreme redness of skin on the affected area, severe pain, visible swelling of the wound, tenderness, and certain kind of drainage out of the wound or the cavity of abscess. In these case it is necessary to contact a medical professional at the earliest.

Twelve Basic Predictive Analytics Techniques

Predictive analytics is a solution used by many businesses today to gain more value out of large amounts of raw data by applying techniques that are used to predict future behaviors within an organization, it's customer base, it's products and services. Predictive analytics encompasses a variety of techniques from data mining, statistics and game theory that analyze current and historical facts to make predictions about future events.

Predictive models examine patterns found in historical and transactional data to identify opportunities and risks. Predictive models capture relationships among many factors to allow assessment of risk or potential associated with a particular set of conditions, guiding decision making for candidate transactions.

There are some basic and more complex predictive analytics techniques. Three basic techniques include:

Data Profiling and Transformations Sequential Pattern Analysis Time Series Tracking.

Data profiling and transformations are functions that analyze row and column attributes and dependencies, change data formats, merge fields, aggregate records, and join rows and columns.

Sequential pattern analysis discovers relationships between rows of data. Sequential pattern analysis is used to identify frequently observed sequential occurrence of items across ordered transactions over time. Such a frequently observed sequential occurrence of items (called a sequential pattern) must satisfy a user-specified minimum support. Understanding long-term customer purchase behavior is an example of the sequential pattern analysis. Other examples include customer shopping sequences, click-stream sessions, and telephone calling patterns.

Time series tracking tracks metrics that represent key behaviors or business strategies. It is an ordered sequence of values ​​of a variable at equally spaced time intervals. Time series analysis accounts for the fact that data points taken over time may have an internal structure (such as autocorrelation, trend or seasonal variation) that should be accounted for. Examples include patterning customer sales that indicate product satisfaction and buying habits, budgetary analysis, stock market analysis, census analysis, and workforce projections.

More advanced predictive analytics techniques include:

Data Profiling and Transformations
Bayesian Analytics Regression
Classification Dependency or Association Analysis
Simulation Optimization

Time series forecasting predicts the future value of a measure based on past values. Time series forecasting uses a model to forecast future events based on known past events. Examples include stock prices and sales revenue.

Data profiling and transformation uses functions that analyze row and column attributes and dependencies, change data formats, merge fields, aggregate records, and join rows and columns.

Bayesian analytics capture the concepts used in probability forecasting. It is a statistical procedure which estimate parameters of an underlying distribution based on the observed distribution. An example is used in a court setting by an individual juror to coherently accumulate the evidence for and against the guilt of the defendant, and to see whether, in totality, it meets their threshold for 'beyond a reasonable doubt'.

Regression analysis is a statistical tool for the investigation of relationships between variables. Usually, the investigator seeks to ascertain the causal effect of one variable upon another-the effect of a price increase upon demand, for example, or the effect of changes in the money supply upon the inflation rate.

Classification used attributes in data to assign an object to a predefined class or predict the value of a numeric variable of interest. Examples include credit risk analysis, likelihood to purchase. Examples include acquisition, cross-sell, attrition, credit scoring and collections.

Clustering or segmentation separates data into homogeneous subgroups based on attributes. Clustering assigns a set of observations into subsets (clusters) so that observations in the same cluster are similar. An example is customer demographic segmentation.

Dependency or association analysis describes significant associations between data items. An example is market basket analysis. Market basket analysis is a modeling technique based upon the theory that if you buy a certain group of items, you are more (or less) likely to buy another group of items.

Simulation models a system structure to estimate the impact of management decisions or changes. Simulation model behavior will change in each simulation according to the set of initial parameters assumed for the environment. Examples include inventory reorder policies, currency hedging, military training.

Optimization models a system structure in terms of constraints to find the best possible solution. Optimization models form part of a larger system which people use to help them make decisions. The user is able to influence the solutions which the model produces and reviews them before making a final decision as to what to do. Examples include scheduling of shift workers, routing of train cargo, and pricing airline seats.

About the Author

Walgreens, CVS, and Rite Aid – What RE Investors Should Know

There are 3 major drugstore chains in the US: Walgreens, CVS, and Rite Aid. Below are some key statistics about the 3 major drugstore chains as of 2012:

1. Walgreens ranks first with market cap of $ 28.51 Billion, $ 72.2 Billion in 2011 total revenue ($ 45.1B from prescription revenues), and an S & P rating of A. According to Walgreens, 75% of the US population lives within 3 miles from its stores . In April 2010, it acquired 258 Duane Reade drug stores in New York Metropolitan area which brings a total of 7841 drug stores Walgreens operates as of February 2012, including 137 hospital on-site pharmacies.

2. CVS ranks second with market cap of $ 56.56 Billion, $ 107.1 Billion in revenue ($ 40.5 Billion from CVS prescription revenues and $ 16.1B from its Caremark prescription mail order revenue), and an S & P rating of BBB +. As of December 31, 2011, CVS operates 7404 drug stores.

3. Rite Aid ranks third (fourth, behind Walmart in terms of prescription revenues) with market cap of $ 1.49 Billion, $ 26.1 Billion in revenue ($ 17.1B from prescription revenues), operates 4714 drug stores as of February 2011 and has an S & P rating of B-.

Investors purchase properties occupied by these drugstore chains for the following reasons:

1. The drugstore business is very recession-insensitive. People need medicine when they are sick, regardless of the state of the economy. Both rich and poor people in the US have access to medicine. Some even argue that low-income people use more medicine due to free or low-cost drugs offered by government-assisted programs. So the tenants should do well during tough time and have money to pay rent to landlords.

2. The drugstore business has a good prospect in the US:

· People are living longer and need more medicine to sustain longevity, eg Actonel for osteoporosis, Aricept for Alzheimer's symptoms. Older people tend to use more medicine than younger ones as they often have more medical problems. As the 78 million baby boomers are getting closer to retiring age starting from 2008, the drugstore chains anticipate the demand for medicine to increase in next 20 years.

· The drug market continues to expand as the US population continues to grow. More and more Americans suffer from various diseases. The number of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million people per Fortune magazine. They spent $ 5.4 Billion in 2009 for allergy drugs. As their waist lines balloon (75% of Americans are forecasted to be either overweight or obese by 2020), more Americans are diagnosed with diabetes, along with high cholesterol at younger and younger ages. In addition, doctors also recommend treating various diseases sooner than later due to better understanding about the diseases. For example, doctors now prescribe antiretroviral drugs for patients soon after infected with HIV virus instead of waiting for the infection to become AIDS. More doctors combine insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors increase the size of the drug market.

· Advance in genetic engineering has introduced various new genetic DNA testing kits which allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest growth segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug stores in the near future.Upon FDA approval, these new products will potentially bring in additional revenue for drug stores.

· Using a new method of tailoring molecules called structure-based design; drug companies come up with new medicines that they might not have discovered otherwise, eg Xalkori by Pfizer to treat lung cancer.

· The passage of Health Care Reform Bill on March 23, 2010 provides insurance coverage to an estimated 33 million more American. This is a great present to the drugstore industry.

· There are new drugs to treat previously untreatable illnesses, and new diseases, eg Viagra for men's unhappiness, Avastin for colon cancer, Herceptin for breast cancer ,. The new medicines are very expensive, eg a year's supply of Avastin costs about $ 55,000. Eli Lilly has sold about $ 4.8 billion of Zyprexa in 2007 for schizophrenia and yet most people have never heard of this medicine.

· There are existing drugs now approved to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damagein people with diabetes. It is now approved by FDA to treat Fibromyalgia which affects 5.8 million Americans per WebMD.

· Big advances in genetics, biology and stem cells research are expected to produce a new class of drugs to treat diabetes, Parkinson's and various rare genetic disorders. For example the new drug Ilaris from Novartis targets genetic causes of an inherited disorder that there are only 7000 known cases worldwide. However, Novartis hopes to gradually broaden its drugs to a blockbuster drug to more common disorders caused by similar genetics.

· Technology and modern life introduce and require new products, eg pregnancy test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Propecia for male hair loss, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, contact lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly $ 26B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting company that monitors pharmaceutical sales.)

· Before the customers can get to the medicine aisles or pharmacy counters, they have to pass by chocolates, sodas, digital cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. Drug stores hope you use the one-hour photos services there. The stores also carry seasonal items, eg Halloween costumes, and "As Seen on TV" merchandise, eg Shamwow. As a result, customers buy more than their prescriptions and medicine in these drugstores. CVS reported that non-pharmacy sales represented 30% of the company's total sales in January of 2007. The figure for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are in effect convenience stores especially ones that are in residential or rural areas. And so Walgreens hopes that customers also pick up WD-40, and screwdrivers at its stores instead of at Home Depot; Thai Jasmine rice, and fish sauce to avoid a trip to Safeway or Kroger Supermarkets. During the recession, sales of these non-drug items are down as customers buy what they need and not what they want. Walgreens tries to reduce the number of items by 4000. It also introduces its own private label which has higher profit margins.

· There are more and more generic medications on the market as a number of enormously popular brand-name blockbusters lose their 20-year long patents, eg Lipitor (best selling drug in the world to lower cholesterol) in 2010, Viagra (you know what it's for) in 2012. Drugstores prefer to sell generic drugs to customers due to higher profit margins than the brand-name medications.

· Many people are addicted to pain killers, eg Hydrocodone / Oxycodone. Per the DEA in 2012, there are 1.5 million American addicted to cocaine but 7 million addicted to prescription drugs.

· This author estimates that at least 10% of the dispensed prescription drugs are not used at all and sit idle in the medicine cabinets. They are eventually expired and thrown away.

3. These companies sign very long-term NNN leases, guaranteed by their corporate assets. This makes the investment in the underlying property fairly low risk, especially for Walgreens with a S & P "A" rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent promptly and timely. This author is not aware of any properties leased by one of these drugstore chains in which the tenants failed to pay rents. Even when the stores are closed due to weak sales (Walgreens closed 119 stores in 2007), these companies may sublease the properties to other companies, eg Advance Auto Parts and continue to pay rents on the master leases.

· A typical Walgreens lease consists of 20-25 year primary term plus 8-10 five-year options. During primary term and options, there will be no rent increases in most of the leases. This is the main disadvantage of investing in Walgreens drugstores.

· A typical CVS lease consists of 20-25 year primary term plus 4-5 five-year options. The rent is normally flat during the primary term and then there is a 2.5% -10% rent increase in each 5-year option.

· A typical Rite Aid lease consists of 20-25 year primary term plus 4-8 five-year options. The lease often has a rent increase every 5-10 years.

Investment Risks

Although the pharmacy business in general is recession-insensitive, there are risks involved in your investment:

1) The main downside about investing in pharmacies is there is little or no rent bump for a long time, eg 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not appeal to younger investors, especially when the cap rate is low.

2) The 3 drugstore chains now have a new formidable competitor, Walmart. Walmart sells prescription drugs in more than 4000 Walmart, Sam's Club and Neighborhood Market stores in 49 states. As of 2012, Walmart is the third largest drug retailer with $ 17.4B in prescription sales, just ahead of Rite Aid with $ 17.1B in prescription sales. The retail giant is known for launching in 2006 a highly-publicized $ 4 generic prescription drug program which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Walmart probably makes very little profits on these medications if any. However, the marketing campaign – created by Bill Simon, the President and CEO of Walmart US, generates a lot of publicity for Walmart. Walmart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Walmart at the middle. Other drug chains try to counter Walmart in different ways. Target now offers the same 350 generic medications for $ 4 for a 30-day supply. Walgreens has a Prescription drugs club with membership fee which offers 1400 generic medications for as little as $ 1 / week. CVS says it will match any offers from its competitors.

3) Chief Business Correspondent Rick Newman from US World & News Report predicted that Rite Aid might not survive in 2009. Rite Aid is still around in 2012. The prediction seems to go away in 2012 as Rite Aid as it was able to refinance the long terms debts and sales revenue has increased.

4) Drugs are also sold in thousands of supermarkets, Target stores, and Costco warehouses. However, there are no drive-through windows at these stores or Walmart to conveniently drop off the prescriptions and pick up medicines. Customers will not be able to pick up their prescriptions during lunch hour or after 7PM at Target stores or supermarkets. They need to have membership to buy medicines at Costco. Others may not fill their prescriptions at Walmart because they do not want to mingle with typical Walmart customers who are in lower income brackets. And some baby boomers do not want their prescriptions filled at Target or Walmart because there are no comfortable chairs for them to sit down and wait for their medicines.

5) Drugs retail business to some degree is controlled by the Pharmacy Benefits Managers (PBMs). Customers normally get prescription coverage from their health insurance companies, eg Blue Cross. These PBM manage prescription benefits on behalf of the insurance companies. In 2012 Walgreens lost a contract valued at over $ 5 Billion with Express Scripts, a major PBM. Walgreen revenue was immediately fallen in the first quarter of 2012 as Express Scripts customers can not fill their prescriptions at Walgreens. The PBMs are also in the drugs retail business via mail orders which do not require leasing expensive retail spaces. The prescription mail orders currently capture over 20% market share of the total prescription revenue. Should customers change their prescription purchase habits to mail orders (there is no such evidence in 2012), it could have negative impact to the business of drugstore chains.

6) Many leases in areas with hurricanes and tornadoes are NNN leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.

7) The tenant may move to a new location down the road or across the street when the lease expires. This risk is high when the property is located in small town where there is low barrier for entry, ie lots of vacant & developable land.

8) The tenant may ask for rent concession to improve its bottom line during tough times. The possibility is higher if the tenant is Rite Aid and if the store has low sales revenue and / or higher than market rent.

9) More Americans are walking away from their prescriptions, especially the most expensive brand-name medicines. This may have negative impact on the sales revenue and profits of drug stores and consequently may cause drug store closures. According to Wolters Kluwer Pharma Solution, a health-care data company, nearly 1 in 10 new prescriptions for brand-name drugs were abandoned by people with commercial health plans in 2010. This is up 88% compared to 4 years ago just before the recession began. This trend is driven in part by higher and higher co-pays for brand name drugs as employers are shifting more insurance costs to their employees.

Among 3 drugstore chains, Walgreens and CVS pharmacies in general have the best locations-at major intersections while Rite Aid has less than premium locations. Walgreens tends to hire only the top graduates from pharmacy schools while Rite Aid settles with bottom graduates to save costs. When possible, all drugstore chains try to fill the prescriptions with generic medications which have higher profit margins.

1) Walgreens: the company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has existed for more than 100 years, most stores are only 5-10 years old. This is the best managed company among the three drugstore chains and also among the most admired public companies in the US. The company has been run by executives with proven track records and hires the top graduates from universities. Due to its superior financial strength – S & P A rating– and premium irreplaceable locations, properties with leases from Walgreens get the highest price per square foot and / or the lowest cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increases for 20 to 60 years. The cap rate is often in the low 5% to 6.5% range in 2012. Investors who buy Walgreens tend to be more mature, ie closer to retirement age. They are looking for a safe investment where it's more important to get the rent check than to get appreciation. They often compare the returns on their Walgreens investment with the lower returns from US treasury bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and thus you see many new Walgreens stores for sale. It will slow down this expansion in 2010 and beyond and focus on renovation of existing stores instead.

2) CVS Pharmacy: CVS Corporation was founded in 1963 in Lowell, MA by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name CVS stands for "Consumer Value Stores". As of 2009, CVS has about 6300 stores in the US, mostly through acquisitions. In 2004, CVS bought 1,200 Eckerd Drugstores mostly in Texas and Florida. In 2006, CVS bought 700 Savon and Osco drugstores mostly in Southern California. And in 2008 CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $ 2.9B dollars. The acquisition of Long Drugs appears to be a good one as it CVS did not have any stores in Northern CA and Arizona. Besides, the price also included real estate. It is also bought Caremark, one of the largest PBMs and changed the corporation name to CVS Caremark. When CVS bought 1,200 Eckerd stores, it formed a single-entity LLC (Limited Liability Company) to own each Eckerd store. Each LLC signs the lease with the property owner. In the event of a default, the owner can only legally go after the assets of the LLC and not from any other CVS-owned assets. Although the owner loses the guaranty security from CVS corporate assets, this author is not aware of any incident where CVS closes a store and does not pay rent.

3) Rite-Aid: Rite Aid was founded by Alex Grass (he just passed away on Aug 27, 2009 at the age of 82) and opened its first store in 1962 as "Thrif D Discount Center" in Scranton, Pennsylvania. It officially incorporated as Rite Aid Corporation and went public in 1968. By the time Alex Grassstepped down as the company's chairman and chief executive officer in 1995, Rite Aid was the nation's largest drugstore chain in terms of total stores and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid's earnings in the late 1990s. Rite Aid is now the weakest financially among the 3 drugstore chains. In 2007, Rite-Aid acquired about 1,850 Brooks and Eckerd drugstores, mostly along the East coast to catch up with Walgreens and CVS. In the process, it added a huge long term debt and is the most leveraged drugstore chain based on its market value. The integration of Brooks and Eckerd did not seem to go well. Revenue from some of these stores went down as much as 20% after they change the sign to Rite Aid. In 2009, Rite-Aid had over 4900 stores and over $ 26 Billion in revenues. The figures went down in 2010 to 4780 stores and $ 25.53 billion in revenue. On January 21, 2009 Moody's Investor Services downgraded Rite Aid from "Caa1" to "Caa2", eight notches below investment grade. Both ratings are "junk" which indicate very high credit risk. Rite Aid contacted a number of its landlords in 2009 trying to get rent concession to improve the bottom line. In June 2009, Rite Aid successfully completed refinancing $ 1.9 Billion of its debts. In 2012, Rite Aid benefits from Walgreens contract problem with Express Scripts. Same store sales increased 2.2%, 3.2%, and 3.6% for January, February and March of 2012, respectively. Rite Aid is still losing money in fiscal year 2012 which ended in March 3, 2012. However, it is losing less, $ 0.43 per share in 2012 versus $ 0.64 per share in fiscal year 2011. The company expects better outlook in fiscal year 2013.

Things to consider when invested in a pharmacy

If you are interested in investing in a property leased by drugstore chains, here are a few things to consider:

1. If you want a low risk investment, go with Walgreens. In stable or growing areas, the degree of safety is the same whether the property is in California where you get a 5.5% cap or Texas where you may get a 6.5% cap. So, there is no significant advantage to invest in properties in California as the property value is based primarily on the cap rate. In 2012, the offered cap rate for Walgreens seems to come down from 7.5% -8.4% in 2009 to 5.5% -6.5% for new stores.

2. If you are willing to take more risk, then go with Rite-Aid. Some properties outside of California may offer up to 9% cap rate in 2012. However, among the 3 drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it declare bankruptcy, Rite Aid has the option to pick and choose which locations to keep open and which locations to terminate the lease. To minimize the risk that the store is shuttered, choose a location with strong sales and low rent to revenue ratio.

3. Financing should be an important consideration. While the cap rate is lower for Walgreens than Rite Aid, you will be able to get the best rates and terms for Walgreens.

4. If you are not a conservative investor or risk taker, you may want to consider a CVS pharmacy. It has BBB + S & P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer better rent bumps. On the other hand, some CVS leases, especially for properties in hurricane areas, eg Florida are not truly NNN leases where landlords are responsible for the roof and structure. So make sure you adjust the cap rate down accordingly. Some of the CVS locations have onsite Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it's not clear having a clinic inside CVS is a plus or minus to the bottom line of the store.

5. All 3 drugstore chains have similar requirements. They all want highly visible, standalone, rectangular property around 10,000 – 14,500 SF on a 1.5 – 2 acre lot, preferably at a corner with about 75 – 80 parking spaces in a growing and high traffic location. They all require the property to have a drive-through. Hence, you should avoid purchasing an inline property, ie not standalone and property with no drive-through windows. There is a chance that these drugstores may not want to renew the lease unless the property is located in a densely-populated area with no vacant land nearby. In addition, if you acquire a property that does not meet the new requirements, for example a drive-through, you may have a problem getting financing as lenders are aware of these requirements.

6. If the pharmacy is opened 24 hours a day, it is in a better location. Drugstore chains do not open the store 24 hours day unless the location draws customers.

7. Many properties may have a percentage lease, ie the landlord can get additional rent when the store's annual revenue exceeds a certain figure, eg $ 5M. However, the revenue used to compute percentage rent often excludes a page-long list of items, eg wine and sodas, tobacco products, items sold after 10 PM, drugs paid by governmental programs. The excluded sales revenue could account for as much as 70% of store's gross revenue. As a result, this author has seen only 2 stores in which the landlord is able to collect additional percentage rent. The store with a percentage rent is required to report its annual sales to the landlord. As an investors, you want to invest in a store with strong gross sales, eg over $ 500 per square foot a year. In addition, you also want to check the rent to revenue ratio. If the figure is in the 2-4% range, the store is likely to be very profitable so the chance the store is shut down is low.

8. It does not matter how good the tenants are, avoid investing in declining, eg Detroit and / or low-income areas or small towns with less than 30,000 residents within 5 miles ring. In a small town, it may be the only drug store in town and captures most of the market share. However, if a competitor opens a new location in the area, revenue may be severely affected. In addition, the tenant can always moves to a new location down the road when the lease expires since there is low barrier to entry in a small town. These properties are easy to buy now and hard to sell later. When the credit market is tight, you may have problems finding a lender to finance these properties.

9. Many properties have an existing loan that the buyer must assume. If you have a 1031 exchange, think twice about buying this property. You should clearly understand loan assumption requirements of the lenders before moving forward. Should you fail to assume the existing loan (assuming an existing loan is a lot more difficult than getting a new loan), you may run out of time for a 1031 exchange and may be liable to pay capital gain.

10. With few exceptions, drugstore chains do not own the stores they occupy for several reasons. Here are just a couple of them:

– They know the pharmacy business but do not know real estate. Stock investors also do not want Walgreens to become a real estate investment company.

– Owning the real estate will require them to carry lots of long term debts which is not a brilliant idea for a publicly-traded company.

11. About 10% of the drugstore properties for sale and typically CVS pharmacies require very small amount of equity to acquire, eg 10% of the purchase price. However, you are required to assume an existing fully-amortized loan with zero cash flow. That is, all of the rent paid by the tenant must be used to pay down the loan. The cap rate may be in the 7-9% range, and the interest rate on the loan could be attractive in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, you have no positive cash flow. This requires you to come up with outside cash to pay income tax on the rental profits (the difference between the rent and mortgage interest). The longer you own the property, the more outside cash you will need to pay income taxes as the mortgage interest will get less and less toward the end. So who would buy this kind of property?

– The investors who have substantial losses from other investment properties. By acquiring this zero cash flow property, they may offset the income from the drugstore tenant against the losses from other investment properties. For example, a property has $ 105,000 of rental profits a year, and the investor also has losses of $ 100,000 from other properties. As a result, the combined taxable profits are only $ 5,000.

– The uninformed investors who fail to consider that they have to raise additional cash to pay income taxes.

Out of the Box Thinking

If you put too much weight on the S & P rating of the tenants, you may end up either taking a lot of risks or passing up good opportunities.

  1. A Good location should be the key in your decision on which drug store to invest in. It's often said a lousy business should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is closed down later on (yes, Walgreens closed 119 stores in 2007) is still a bad investment even though Walgreens continues paying rent on time. So you do not want to blindly invest in a drug store simply because it has a Walgreens sign on the building.
  2. No company is crazy enough to close a profitable location. It does not take rocket science to understand that a financially-weak company like Rite Aid will make every effort to keep a profitable location open. On the other hand, a financially-strong Walgreens will need justifications to keep an unprofitable location open. So how do you determine if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The answer is you can not. However, you can make an educated guess based on the store's annual gross revenue which is often reported to the landlord as required by the percentage clause in the lease. With the gross revenue, you can determine the rent to income ratio. The lower the ratio, the more likely the store is profitable. For example, if the annual base rent is $ 250,000 while the store's gross revenue is $ 5M then the rent to income ratio is 5%. As a rule of thumb, it's hard to make a profit if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to income ratio then you know it's likely a very profitable location. In the event Rite Aid declares bankruptcy, it will keep this location open and continue paying rent. If you see a Rite Aid drug store with 3% rent to income ratio offering 10% cap, chances are it's a low risk investment with good returns and the tenant will most likely to renew the lease. The weakness of corporate guaranty from Rite Aid is probably not as critical and the risk of having Rite Aid as a tenant is not really that significant.
  3. Drug stores with new 25 years leases tend to sell at lower cap, eg 6-7% cap on new stores versus 8.0-8.5% cap on established locations with 5-10 years remaining on the lease. This is because investors are afraid that the tenants may not renew the leases. Unfortunately, lenders also have the same fear! As a result, many lenders will not finance drug stores with 2-3 years left on the leases. The fact that drugstores with new leases have a premium on the price means they have potential of 20% depreciation (buying new at 6% cap and selling at 7.5% cap when the leases have 8 year left). Some investors will not consider investing in drug stores with 5-10 years left on the lease. They might simply ignore the fact that the established stores may be at irreplaceable locations with very strong sales. Tenants simply have no other choices other than renewing the lease.

Why You Should Buy Silver Now Before the Price Goes Crazy High

"What's that you say? You're going to buy silver?" my friend of over 20 years replied, looking at me as if I were about to club her over the head and throw her in the back of my van. Actually, the verbal exchange was not exactly like that, but she did give me an odd look (and just for the record, we own a minivan with lots of windows and very comfortable seating). Think about it for a second, dear reader … if I were standing in front of you right now telling you that I was going to buy silver, how would you respond? First of all, you would certainly wonder who this stranger is and why is he talking to me about silver. Granted, but let's try to focus on the silver part, friend …

Do you know what the price of silver has done over the last 15 years or so? It went from around $ 4 an ounce in the very late '90s to almost $ 50 an ounce in 2011. That's quite a hefty return, no? And I can tell you that was only the beginning. "So what has silver done for you lately?" You ask. Well, it's kind of gone down a little. How "little?" Well, it's gone from about $ 50 to its current price of $ 19 or so. Alright, close your mouth. You can stop giggling too. I know it might sound crazy when I tell you that now is the perfect time to buy silver. Post why? Simple – because the price has fallen from $ 50 to $ 19! Here's a little tip for ya '- Buy low; sell high? Heard that one already? Well, price is low, so it's time to buy. Could price go lower? Sure it could, possibly a buck or two, but odds are that the bottom is in for this correction and soon prices are going to start going up again. How high will they go? Well, there is plenty of talk these days of silver going to $ 60, $ 100, even $ 200 per ounce; and if our government and the Federal Reserve keep printing $ 118,000,000 an hour (that's right, per hour – they are creating $ 85 billion a month!) we might even might even see silver hit four figures before its all over.

Why is silver going to go up?

I am not a fortune teller, friends, nor I am not a financial advisor (who is basically a fortune teller in a suit, no?) I am not a silver salesman either. I am merely a husband and a father looking around at this world of ours; at the shaky governments and economies; at the bail outs and imminent bail ins; at the real inflation around us (not the inflation rate that the government tells us); at the incessant printing of dollars and euros and most all currencies world-wide, and I know that we can not continue like this. There are some rough times a 'comin' and when there is instability, people seek stability and security. In financial-speak, that means precious metals – silver and gold. The time is now to purchase your security in the form of silver and ride the wave of higher and higher prices to come.

Accounting Conventions and Accounting Concepts

(1) Relevance

The convention of relevance emphasizes the fact that only such information should be made available by accounting as is relevant and useful for achieving its objectives. For example, business is interested in knowing as to what has been total labor cost? It is not interested in knowing how much employees spend and what they save.

(2) Objectivity

The convention of objectivity emphasizes that accounting information should be measured and expressed by the standards which are commonly acceptable. For example, stock of goods lying unsold at the end of the year should be valued as its cost price not at a higher price even if it is likely to be sold at higher price in future. Reason is that no one can be sure about the price which will prevail in future.

(3) Feasibility

The convention of feasibility emphasizes that the time, labor and cost of analyzing accounting information should be compared vis-à-vis benefit arising out of it. For example, the cost of 'oiling and greasing' the machinery is so small that its break-up per unit produced will be meaningless and will amount to wastage of labor and time of the accounting staff.

Accounting Concepts

(1) Materiality

It refers to the relative importance of an item or event. Those who make accounting decisions continually confront the need to make judgments regarding materiality. Is this item large enough for users of the information to be influenced by it? The essence of the materiality concept is: the omission or misstatement of an item is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the item.

(2) Accounting period

Though accounting practice believes in continuing entity concept ie life of the business is perpetual but still it has to report the 'results of the activity undertaken in specific period (normally one year). Thus accounting attempts to present the gains or losses earned or suffered by the business during the period under review. Normally, it is the calendar year (1st January to 31st December) but in other cases it may be financial year (1st April to 31st March) or any other period depending upon the convenience of the business or as per the business practices in country concerned .

Due to this concept it is necessary to take into account during the accounting period, all items of revenue and expenses accruing on the date of the accounting year. The problem confronting this concept is that proper allocation should be made between capital and revenue expenditure. Otherwise the results disclosed by the financial statements will be affected.

(3) Realization

This concept emphasizes that profit should be considered only when realized. The question is at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash. For answering this question the accounting is in conformity with the law (Sales of Goods Act) and recognizes the principle of law ie the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when 'property in goods passes to the buyer' viz. when sales are affected.

(4) Matching

Though the business is a continuous affair yet its continuity is artificially split into several accounting years for determining its periodic results. This profit is the measure of the economic performance of a concern and as such it increases proprietor's equity. Since profit is an excess of revenue over expenditure it becomes necessary to bring together all revenues and expenses relating to the period under review. The realization and accrual concepts are essentially derived from the need of matching expenses with revenues earned during the accounting period. The earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. The matching concept requires that expenses should be matched to the revenues of the appropriate accounting period. So we must determine the revenue earned during a particular accounting period and the expenses incurred to earn these revenues.

(5) Entity

According to this concept, the task of measuring income and wealth is undertaken by accounting, for an identifiable Unit or Entity: The unit or entity so identified is treated different and distinct from its owners or contributors. In law the distinction between owners and the business is drawn only in the case of joint stock companies but in accounting this distinction is made in the case of sole proprietor and partnership firm as well. For example, goods used from the stock of the business for business purposes are treated as a business expenditure but similar goods used by the proprietor ie owner for his personal use are treated as his drawings. Such distinction between the owner and the business unit has helped accounting in reporting profitability more objectively and fairly. It has also led to the development of "responsibility accounting" which enables us to find out the profitability of even the different sub-units of the main business.

(6) Stable Monetary Unit

Accounting presumes that the purchasing power of monetary unit, say Rupee, remains the same throughout. For example, the intrinsic worth of one Rupee is same and equal in the year 1,800 and 2,000 thus ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or inflation. In spite of the fact that the assumption is unreal and the practice of ignoring changes in the value of money is now being extensively questioned, still the alternatives suggested to incorporate the changing value of money in accounting statements viz., Current purchasing power method (CPP ) and current cost accounting method (CCA) are in evolutionary stage. Therefore, for the time being we have to be content with the 'stable monetary unit' concept.

(7) Cost

This concept is closely related to the going concern concept. According to this, an asset is ordinarily recorded in the books at the price at which it was acquired ie at its cost price. This 'cost' serves the basis for the accounting of this asset during the subsequent period. This 'cost' should not be confused with 'value'.

It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an assets is wrongly recorded in the books. The book value of the assets as recorded do not reflect their real value. They do not signify that the values ​​noted therein are the values ​​for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they become reduced in value on account of depreciation charges. In certain cases, only the assets like 'goodwill' when paid for will appear in the books at cost and when nothing is paid for, it will not appear even though this asset exists on name and fame created by a concern.

Therefore, the values ​​attached to the assets in the balance sheet and the net income as shown in the Profit and Loss account can not be said to reflect the correct measurement of the financial position of an undertaking, as they do not have any relation to the market value of the assets or their replacement values. This idea that the transactions should be recorded at cost rather than at a subjective or arbitrary value is known as Cost Concept. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost.

These changes or variations in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at their cost and not at market value is the underlying principle in cost concept. According to them, the current values ​​alone will fairly represent the cost to the entity.

The cost principle is based on the principle of objectivity. The supporters of this method argue so long as the users of the financial statements have confidence in the statements, there is no necessity to change this method.

(8) Conservatism

This concept emphasizes that profit should never be overstated or anticipated. Traditionally, accounting follows the rule "anticipate no profit and provide for all possible losses. For example, the closing stock is valued at cost price or market price, whichever is lower. The effect of the above is that in case market price has come down then provide for the 'anticipated loss' but if the market price has gone up then ignore the 'anticipated profits'.

Critics point out that conservation to an excess degree will result in the creation of secret reserve. This will be quite contrary to the doctrine of disclosure. However, conservatism to a reasonable degree may not come in for criticism.

Accounting Equation

Dual concept may be stated as "for every debit, there is a credit." Every transaction should have two sided effect to the extent of same amount. This concept has resulted in Accounting Equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. This may be expressed in the form of equation:

AL = P


A stands for assets of the entity;

L stands for liabilities (outsider's claims) of the entity; and

P stands for Proprietor's claim (Capital) on the entity.

(The form of presentation of equation AL = P is consistent with the legal interpretation of financial position. Thus it emphasizes that properly speaking the proprietary claim is the balance after providing for outsider's claims against the business from the total assets of the business).

How to Write an IB Economics Evaluation Essay

Economics evaluation essays are often regarded as one of the most difficult assessment components of the IB Economics program. Students often struggle with structuring their evaluations and applying their economic knowledge to the question. However, evaluations do not need to be difficult and students often overcomplicate their thinking when writing evaluations. In this guide, we will examine first, the wrong way to approach evaluation essays and then how to correctly structure an evaluation. For this, we will use this question to demonstrate the essay writing process:

"Evaluate the extent to which a depreciating exchange rate may benefit or harm an economy."

The wrong way

Many students adopt this approach when writing evaluation essays:

1. Define

2. Descriptions and analysis

3. Evaluate

Evaluation should not be the "icing on the cake". Rather, the evaluation should be the cake itself. Writing an economics essay using the above approach can easily lead to the mistake of describing everything about a depreciation and leaving only a small part of the essay for evaluation.

The next problem is that, when reading this type of essay, it is unclear as to what the student is evaluating until near the conclusion. As the student, it's also easy to get sidetracked.

Some students using this approach may often run out of time and not do any evaluation whatsoever, which will make earning even a 6 difficult.

Finally, this with this approach, it is difficult to effectively tackle different types of economics essays. With the approach in this guide, evaluations can be tackled almost systematically which means that less thinking time is required, leaving more precious writing time.

Note: This approach can work and I'm sure there are students who have scored 7s with this approach. But it is much more difficult to learn if you are unfamiliar with economics evaluations. What I recommend, is to use a systematic strategy and structure that can be applied to almost all types of essay questions.

The correct way

First, let's think about what evaluation actually is.

This can be found in most economics mark schemes:

Effective evaluation may be to:

· Consider short-term versus long-term consequences

· Examine the impact on different stakeholders

· Discuss advantages and disadvantages

· Prioritize the arguments.

The third description is the one that we recommend as it can suit the widest range of possible examination questions. Stakeholder and long run versus short run analyses are often subsets of a discussion of advantages and disadvantages, ie the advantages and disadvantages to different stakeholders, or in the short run and long run. Regardless of the question, there will always be advantages and disadvantages. However, there may not be enough to discuss regarding short run versus long run, or regarding various stakeholders.

You should prioritize your arguments anyway, listing the most important advantages / disadvantages first.

The approach I recommend can be used for almost all types of evaluation essays (With some minor tweaks). The key here is that with practice, you can do evaluations almost systematically, which saves on planning time and keeps your essay focussed.

So, the 5 steps to getting full marks in your economics evaluation essay (Using the advantages and disadvantages approach):

1. Define key terms in the question

This is fairly straightforward. The mark scheme awards a few easy marks just for defining the key terminology. It also helps to focus the essay and for the student to get into "essay writing mode."

2. Answer the question in 1-2 sentences

Essentially what this means is, summarise the entire essay into 1-2 sentences. This sentence is crucial and is designed to focus your essay. All of your future paragraphs from here will support this.

It is also important to demonstrate your intention to evaluate here. Your 1-2 sentence summary must have elements of evaluation – ie useful phrases to use include, "it depends on" or "there are advantages and disadvantages" or "there are many costs and benefits associated" etc.

This sentence can be fairly vague. What's important is clarification on the direction you will take with your essay.

3. List and explain advantages

Note: For policy choices, this can be replaced with "benefits" and for questions where you are required to evaluate a statement, simply replace this with "arguments supporting the statement"

The more detailed the explanation of the advantage, the fewer advantages you need to discuss and vice versa. Aim for at least 2 and at most 3, although in rare instances you may only have one advantage that you discuss in length.

With practice, you will intuitively work out how the length and detail that each advantage needs to be discussed in. Ideally, include one diagram per advantage discussed.

As you become more advanced in your essay writing, it is often useful to qualify these advantages as well. Rather than simply writing "One key advantage is that the policy will reduce unemployment," write "Given that the economy is likely to be experiencing a deflationary gap, an key advantage of the policy is that it will help to bring the economy closer to full employment. "

4. List and explain disadvantages

Note: Replace with "costs", or "arguments against the statement" as appropriate to the question.

The principles behind this are the same as for advantages.

5. Weigh up advantages and disadvantages

It is often the case that the advantages and disadvantages do not carry equal weight. Depending on what is being evaluated and the economy in consideration, it is often more appropriate to lean one side or another rather than simply writing "it depends."

This is essentially your conclusion. For the vast majority of evaluations, this should be a tentative conclusion, ie "It is likely to be advantageous overall" rather than "It is definitely advantageous overall."

For evaluations of policies, it may be powerful here to consider some alternative policy options. Remember also that doing nothing is a possible policy choice.

Key things to remember

1. Your essay's purpose should be to evaluate. Evaluation should not be the "extra" part you add on for bonus marks.

2. Answer the question and only the question. But use the question as an opportunity to show off your economic knowledge

3. Diagrams should always be "sandwiched." Relevant text should always be used to introduce the diagram and subsequently to explain the diagram. Do not have a diagram hanging at the end of a paragraph or randomly inserted before a chunk of text.

4. Diagrams must be labelled accurately and titled. Diagrams should also show a shift of some kind. This can be done by using an arrow. I also recommend labelling diagrams Figure 1, Figure 2 etc. This makes them easier to refer back to.

5. Use real world examples. Tackling this is easy. Go on Google and find a statistic for:

a. A country that is experiencing rapid growth (Hint: China)

b. A country that is experiencing very slow growth

c. A country experiencing high inflation

d. A country experiencing low inflation or deflation (Hint: Japan)

e. A country with low GDP / capita

f. Countries with high and low income inequality (HL)

g. Countries with fixed and floating exchange rates

h. A country with high levels of debt

i. A country that is a net exporter

j. A country that is a net importer

The list goes on. Basically, you can get some quick and easy marks just by having some real world knowledge handy.

6. Have some original thought

Original thought is essentially using your creativity to add a little extra flavour to your response. Try to go a little beyond what is mentioned in the text book. The easiest way to do this is to qualify your advantages and disadvantages to the question specifically.

For instance, if the country has high debt levels and you are evaluating depreciation, it may be useful to include something like: "Given that the economy is experiencing high debt levels, a depreciation is likely to make it more difficult to service debt repayments. "

Your essay should not be generic. To achieve the highest marks, it needs to be targeted to the question. This is especially true for the 8 mark data response evaluation question.

7. Explain concepts linearly

What this means is do not have your analysis jump from A straight to D. Explain your reasoning in a step-by-step manner, as if you are an economics teaching explaining the concept to a student.

For instance, if you are trying to explain that lowering interest rates is likely to increase aggregate demand, your explanation should look something like this:

"Lower interest rates represent a lower cost of borrowing. As such, firms more likely to invest in capital, which is likely to increase the level of investment in the economy. Furthermore, a lower interest rate results in a lower return on savings, which is likely to result in a lower marginal propensity to save and thus a higher marginal propensity to consume. All else being equal, this is likely to result in higher consumption. Since investment and consumption are both components of aggregate demand, lowering interest rates are likely to lead to an increase in aggregate demand. "

The wording could probably flow a little better, but you see the point. Explain concepts in a linear fashion or the examiner may get lost, or assume that you do not fully understand what you are writing.

8. Practise, practise, practise!

Write as many economics essays as possible before your final exam. This is the only way that you will be able to master the art. After you have written each essay, ask for feedback from your economics teacher. If you are doing past paper questions, look at the mark scheme to see what you may have missed.

In your final exam, do not expect to have much time left remaining. Through practice, you will be able to write faster and not need to commit as much time to thinking. In your final, planning time should take no more than 5 minutes and for the most part, if you have this structure memorised, you should be able to think ahead as you are writing.

At first, it is acceptable to use the textbook / Google as you are writing. But I have a rule for this – do not use the textbook twice to look up the same concept!

9. If you're doing HL, make sure to include HL content.