Economics in Action: Motorcycles

Today's weather:  High = 27  Low = 15

Sunny

 

With the holiday over it's back to work.  Aw shucks.  Aside from that, it's been a somewhat enlightening time crunching numbers on a spreadsheet for two ongoing financial things about Shanghai expat life that concern me outside of work:   apartments and motorcycles

 

What I want to illustrate with this post is the difference between how an accountant or an economist would write up a financial spreadsheet and interpret the results.  I side heavily with the economists in the way I do things, and so my bias will be obvious here.   However, I also want to show that when writing up spreadsheets or reading ones that others do, you need to be careful in what the spreadsheet is NOT saying, as well as what it is saying.  In other words, if an accountant presents a financial spreadsheet to you in a way that looks fixed and absolute, then he is probably cooking the books.   The economist would be the first one to tell you that a spreadsheet can't be truly objective or absolute due to opportunity cost. 

 

Nonetheless, a spreadsheet is powerful since you can project in the past as well as the future and then use that information to make decisions in the present.  Decisions such as:  is it worth buying a new motorcycle now or later?  Is it worth it to switch to a new apartment now or run the course of the current lease until next May?  After crunching the numbers out, the answer couldn't be clearer:  wait until spring for both.

 

We've talked a lot about motorcycles in the last few posts, let's continue to do so here.  In general they are a depreciating asset.  For example I paid around 10,000 RMB for both the former Yahama 125cc scooter and motorcyle, both bikes were new at the time, and I sold for approximately 4500 RMB each.  Both bikes lasted roughly a year and got about 10,000 km on each of them.  After calculating fuel costs (about 0.2 RMB per km) and various work put into the bikes (oil changes, clutch work, chain repair jobs, fake plates, etc.)  it turns out that each bike was an overall total "loss" of 8000 RMB for the 12 months I was running each bike.    That translates into about 667 RMB per month of a loss over the course of 2 years. 

 

At this point, an accountant would look at the spreadsheet, say it ends here, and I came out a loss, boo hoo, sucks to be you. 

 

However, an economist would consider opportunity cost and ask the question, "How much would the transport cost each month without the bike?"   To answer that, the monthly transport spreadsheet I have for a bike-less September shows roughly 500 RMB as I used the subway a lot and took cabs occasionally.  So the bikes almost broke even, with a slight loss.

 

But keep in mind the 500 RMB figure is since I live close to a subway station and Line #1 is a convenient option and taxis aren't essential in Shanghai.  Last year in Wuhan, it was a different story where they didn't have a subway and the traffic jams on the ground were also atrocious.  Factoring in a cost for wasted time, then the real cost without a bike would have been closer to 800 RMB, if not 1000.  So in this sense, the bikes were an overall profit.

 

All this being said, you can see how tricky it is to say what the criteria is for "coming out ahead" or "being at a loss"  The economist knows this, which is why he doesn't rely too heavily on spreadsheets in the absolute sense, yet as a guideline, they can be useful for economic decisions.