Thinking Like An Economist: GST Edition

[UPDATE: Changed comment on petrol prices]

I was at Giant supermarket this weekend, doing my usual grocery shopping. Of course, there was a massive crowd stocking up on everything from flour to diapers, as this article aptly describes.

Some of the purchases are warranted; some are not. Personally, I only bought what my family needed this week and no more. It wasn’t worth the time and effort for me to get more. The point I want to make here today is that calculating the cost-benefit of stocking up isn’t as simple as calculating the money savings one might have relative to after GST comes in.

For high-ticket items, the logic is pretty clear – it’s worth the trouble…mostly. Buying a new smartphone now for instance – say one costing RM1k – one would save about RM60. For the vast majority of the population, such savings are worth it.

The cost-benefit for groceries is not nearly as simple.

Economists always think of trade-offs, what we call opportunity costs. Going to the supermarket in such a crowd means taking more time than usual – queuing for trolleys, buying more stuff, queuing again at the checkout. If your monthly grocery bill was RM500, and you stock up in one go, you’d save at most RM30. Even that’s assuming that all the items you buy are standard rated and wasn’t previously subject to the sales tax. But let’s be conservative and take that as the upper bound.

Decades ago, Nobel Laureate Gary Becker came up with an economic theory of the allocation of time. As an aside, this was the precursor to the rational expectations conceit that higher unemployment was a voluntary choice for more leisure time, but I digress. For our purposes, the main insight is that *gasp* time is money, and any choice can be weighed in those terms.

The time use cost for a family earning an income of RM3000 is about RM17.9 per hour (RM3000 / no of hours worked per month). For a savings of RM30, it’s worthwhile stocking up if you only take 1 hour and 40 minutes and NO MORE. For a family earning RM5000, the equivalent time falls to just 1 hour. This is of course at the margin, so the time estimates need to be added on top of the usual time you spend grocery shopping. At RM10k, the extra time that should be allotted falls to a miserly 30 minutes extra.

What about a more realistic calculation? About a third (IIRC) of the items in the CPI basket is subject to sales or service taxes, but two-thirds (again going by memory) will be subject to standard rate GST. For a RM500 basket of goods, that works out to a difference of just RM2.76.

For a family earning RM3k, that works out to about 9.3 minutes extra. At RM5k, you should spend no more than 5.5 minutes. At RM10k, no more than 2.8 minutes.

Given the queues I saw last weekend, stocking up maybe makes economic sense for households in the bottom 20%-30%. For the rest of us, and especially for those living in the Klang Valley, not so much.

Oh BTW, since petrol is likely to go up again tonight (I hear about 10 sen) (turned out to be a false report), You might want to calculate your own time use cost before queuing for petrol today. Chances are, if you’re reading this, it’s not worth it. Go spend time with the family instead – that’s a lot more valuable.