The Projected Stock Return equals the dividend % yield plus 100% of the past 2.5-year average GDP % growth rate, plus the Market Cap to GNI % discount (or minus the Market Cap to GNI premium). The GDP growth rate is reduced to its 2.5-year average because the dividend yield already captures part of the country's GDP growth. To the extent the Market Cap to GNI ratio is above average (indicating the stock market is over-valued), this premium is subtracted from the Projected Stock Return. Conversely, to the extent the Market Cap to GNI ratio is below average (indicating the stock market is under-valued), this discount is added to the Projected Stock Return.
Real values subtract the inflation rate from the growth rate. They are more important than nominal values for various economic measures, such as gross domestic product (GDP) and personal incomes, because they help ascertain the extent to which increases over time are driven by actual growth as opposed to what is driven by inflation. Readers should assure themselves that any comparison is comparing real with real, or nominal with nominal values.
The Real Effective Exchange Rate measures the strength of a country’s Exchange Rate against a basket of currencies that are weighted by the amount of trading the country has with its major trading partners. Differing weights are assigned to imports and exports, and the weights are adjusted every 3 years to account for changes in the country’s particular mix of imports and exports (i.e., if computers previously accounted for 5% of a country’s imports but now make up 10%, the country’s import mix will change). The real effective Exchange Rate adjusts the nominal Exchange Rate by the appropriate foreign price level and deflates it by the home country price level. Effective Exchange Rates are useful for gauging whether a currency has appreciated overall relative to trading partners. They are volatile over short periods of time and a poor guide for comparing standards of living across countries. For that purpose, Purchasing Power Parity measures are more appropriate.
