Quote:
Originally Posted by Haech
See, I should clarify this a little. In terms of discounting, if you're measuring the opportunity cost of making an investment versus putting it in a risk-less bank deposit, then the interest rate as the method of discount is probably appropriate. However in terms of many other situations, this is not very clear to me. Consider natural resources, say a body of forest, I really am not sure whether a market interest rate (which is mostly determined by the central banks and security traders) work in terms of capturing the dynamics of opportunity cost. In this case, the discount rate should be based on the utility of forest to the present population measured between the present and far into the future.
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I think that you may be confusing opportunity cost of goods with opportunity cost of money. Goods are just goods. Money, on the other hand, is labor.
Opportunity cost of goods is embedded in the price of goods. Goods are sold in today's market for today's money, and that is the end of it. If goods have useful life over one year, then goods can be depleted or depreciated over the life of goods. (which is not the discount rate).
Money on the other hand is discounted. Say, you receive payment of $100,000 for lost opportunity to work for the next 20 years. The $100k payment includes money that should be received 3, 5, 11 years from today. Yet, you are receiveing money today. If the payor was to pay you annually, the payor could put the money in the bank and receive interest, and then pay you 11 years from now. Thus payor loses opportunity, and you receive the opportunity to grow the money from today. You must then receive the $100k at a discount.
There are 4 ways discount is generally calculated. One is to take $100k and multiply it by inflation coeeficient, and then reduce that amount by prevailing interest rate. Second, prevailing interest rate is reduced by the rate of inflation, and than the $100k is reduce by that rate. (same results in both cases.)
Third, and this is the mehtod which would support your argument that we do not know about the future, is that we assume that the difference between inflation and interest rate is always between 1.5-2.0 percent (arbitrary selection); and then we discount the $100k by that number.
Fourth method is we do not do anything. We presume that labor, interest rate, inflation, etc., will wash out and todays purchasing power is equal to future purchasing power.
