Editing Language/Multiple-languages/Culture/Basics-of-Economy

When you read news, the “finance” section is often puzzling. What is the interest rate that Federal Reserve System is raising and why do so? Why are German enterprises investing the People's Republic of China, even in Xinjiang? What has Erdoğan been doing?

We also have seen that currently, every major economy doesn't have a clear future. So, it is starting to be necessary to have some knowledge of economy.

In this lesson, we will first learn the basic ideas of economy in understandable language by common people concisely, then we will see the history from Yalta Conference till nowadays from different perspectives of different countries, as well as introducing possible strategies of the major economies.

I make mistakes from time to time. As a result, don't believe what I say without critical thinking.

To practise and understand economy, you can play the game [https://www.enlight.com/capitalism2/ Capitalism 2], where several masters of business administrations participated in its development. In FLOSS gaming, there is [https://www.openttd.org/ OpenTTD], where you can experience the transportation business. The Massachusetts Institute of Technology has its teaching materials including [https://mitsloan.mit.edu/teaching-resources-library/management-simulations management simulations].

In progress

== Basic ideas ==
Let's start from asking questions.

=== Currency ===
==== What is the currency? ====
Currency is a tool for storing the value and exchange.

Imagine you were living as a primitive. You had harvested some fruits and want to eat meat, meanwhile someone has hunted animals and want to eat fruits. You two exchanged your goods and the deal is done. Sometimes you found beautiful shells and pebbles that everyone likes, then things start to change: if you have fruits and want to eat meat, meanwhile no one has meat and someone wants fruits, you can exchange fruits for those shells and pebbles, save them and when someone has meat, exchange the shells and pebbles for meat.

When the metallurgy had come into being. Gold and silver are hard to suffer damage and rare, so everyone value them highly and they have become the currency.

In Song dynasty, some people with a large amount of silver opened a store, saying that if you store your gold and silver in one of their stores and pay some fee, you can get a paper note and take the same amount of silver out in another store with it. The paper note is very cheap and it is the trustworthiness of the store owners that makes the paper notes value as much as the silver or other currencies. Later, you and other people simply exchange the paper notes.

Today, someone invented an algorithm based on cryptography. In this system, every user has a same ledger of all transactions by all users. To add a transaction to the ledger, computers need to try out random series of number to find a valid one, based on the details of the transaction. Who has found it will get paid. If someone tried to forge a ledger, then his/her ledger will be shorter than anyone else's, because his/her computer can't compute as fast as the combination of all computers in this system, so it should be fake.

On Yap Islands in Micronesia, the stone money ''[https://en.wikipedia.org/wiki/Rai_stones raay]'' was used. Because all the stones are public, the ownership of each of them is public, there is nothing under the table.

https://upload.wikimedia.org/wikipedia/commons/0/0f/Presentation_of_Yapese_stone_money_for_FSM_inauguration.jpg

In the game franchise ''Metro'', the military grade 5.45x39mm rounds are used as the currency.

==== What if I have two currencies in a society? ====
Then Gresham's law will apply. Given that there are gold and silver circulating in a society, people will tend to store the gold and use the silver, so the gold will stop circulating. This phenomenon is called “bad money drives out good”.

==== Will people get rich if I simply print banknotes and distribute them? ====
When the banknotes become too much for the value in the society, they will devalue. Given 100 apples, if there have 10 banknotes, then each banknote corresponds to 10 apples; if there are 100 banknotes, then each banknote corresponds to 1 apple.

Values in a society will increase. When there are 1000 apples and you still have 100 banknotes, then each banknote corresponds to 10 apples. In order to maintain the price, you need to print 900 banknotes to make it 1000 banknotes, each banknote corresponds to 1 apple again.

In the situation where the increase of value doesn't catch up the increase of banknotes, it is an “inflation”; in the contrary situation, it is a “deflation”. In fact, inflation and deflation are not limited to banknotes, but any other currencies. After a war, there could be much gold and silver moving from the one country to another, causing deflation and inflation separately.

==== What determines the price? ====
The price of a service or product is mainly determined by its cost, supply and demand.

To reduce its price, new technologies can be applied, the price of materials, energy and labour can be reduced; increase its supply or decrease its demand.

==== Who decides the exchange rate? ====
The governments decide them. The government decides the exchange rate of its own currency to the foreign currency that the government has. As for currencies like Euro, their exchange rate to USA dollar is determined by international organisations.

Some governments don't have their own currencies, so they don't have any control over exchange rates. Some governments or organisations decide to peg its own currency to a foreign one, like West African CFA Franc, Central African CFA Franc, which are currently pegged with Euro (which means having a fixed exchange rate with Euro).

There are a lot of theories for deciding the exchange rate. Different governments/organisations adopt different ones. It may be based on the purchase power, the international revenue and expenditure, interest rate, etc.

==== What if I print paper money proportional to the amount of gold? ====
In this system, an amount of gold is the standard unit of account. It is called “gold standard”. The “silver standard” was also practised earlier.

Great Britain started to adopt the gold standard in 1816. Since then, the gold standard was halted during wars and economic crises. In 1944, Bretton Woods Agreements were signed, in which the USA dollar became the predominant international currency and gold standard was introduced for USA dollar; in 1917, the “Nixon shock” ended gold standard of USA dollar since then.

Since the industrial revolution, products are getting easier and easier to produce, so their prices keep decreasing, which means the currency appreciates. For consumers, they would like to buy it cheaper tomorrow than more expensive today, so the consumption keeps decreasing, which means deflation. As a result, the amount of gold is no longer a suitable standard for the amount of currencies.

==== Inflation and deflation, which one is better? ====
During an inflation, people tend to buy earlier, so inflation can incite consumption. On the contrary, deflation suppresses consumption.

A society can't only rely on itself. People need to trade with other societies to satisfy their needs. Currencies are also merchandises. Different societies have different currencies. If the A currency appreciated (increased in value), then you can get more B currency when you exchange for it, which means buying more goods in another society; if your A currency depreciated (decreased in value), then you need to spend more A currency for B currency, which means buying less goods in another society.

You can see that during an inflation, people outside your society buy more of your products, i.e. you can export more products; during a deflation, people inside your society buy more products outside your society, i.e. you can import more products.

==== How to measure the inflation? ====
There is a measure called “consumer price index”. It is calculated by these steps:

# Find a list of goods necessary for living (which is called a “market basket”);
# Calculate their weighted average price (which means if something is more important or less important, then multiply its price with a number higher or lower than 1, then calculate their average);
# Select another year and do the last step for it;
# Divide the new value with the old value, then multiply the quotient by 100.

Assume that your weighted average price of market basket is 100¤ last year and 101¤ this year, then the CPI is 101/100 * 100% = 1%

If the CPI to the last year's has reached 3%, it is usually considered alarming.

This index is not perfect. For example, it doesn't tell you the change of quality of the goods.

To make the CPI look better, tricks include modifying the market basket and the weights for goods.

==== How can I make money with money? ====
If you would like to do so, you have to prepare for the worst situations, where you lose all your investment.

There are financial products. Here are the most common ones: currencies, commodities, securities.

Currencies are the tools for storing and exchanging values. You can see their exchange rates at [https://www.exchange-rates.org/ Exchange-Rates.org].

Commodities are physical objects. You don't move the commodities into your house and rely on other people to store them instead. To learn more, visit [https://commodity.com/ Commodity.com].

Securities are certificates of possession of value. Common securities are
* stocks, which are a portion of ownership of a listed company in a stock market;
* bonds, which are IOU with interests in a bond market;
* warrants, which can only be issued by an entity like a listed company and not individuals, where one side has the right to buy specified amount of stocks at the specified time in the future or during the specified period at the negotiated price from the other side.

Derivatives are a type of securities. They are contracts that base values of products on other variables. Common derivatives are
* futures, where a trade happens in the future with the price at that time;
* forwards, where a trade happens in the future with the present or negotiated price;
* options, which are contracts standarised by an exchange, where one side has the right to buy specified amount of stocks at the specified time in the future or during the specified period at the negotiated price from the other side;
* swaps, where two sides swap their financial products or other properties at the specified time;
* contracts for difference, where differences between prices are paid and received, instead of the full prices. This is outlawed in many countries.

A little challenge: can you tell the difference among warrants and options? If you failed, then try to avoid memorising them together.

=== Business Entity ===

==== What does a bank do? ====
The function of a bank is to gather the unused money and provide the money to those who need it.

To gather the money, a bank will provide some interests to those who save money, then lend the money and ask for interests from those who borrow the money. However, in some countries, a bank won't provide interests for depositors and even charge for the service of saving money. This is to stimulate consumption.

There are central banks, controlled by the government to implement policies; commercial banks, which mainly focus on deposits and loans. Investment banks don't belong to banks.

There is also the Islamic banking, where banking activities must comply the Islamic law. In an Islamic bank, Muslims can save money free of charge and non-Muslims are charged, because the Quran says that Muslims are superior. There are no interests, because Quran prohibits getting something for nothing and interests are included. Any profiting activity based on uncertain events in the future are also prohibited, which includes gambling, trading of derivatives, and so on.

If you borrow money from an Islamic bank to buy something expensive, then the bank may agree to buy it and lend it to you. You will need to pay more money than the original price to change its ownership to yourself.

If you need money from an Islamic bank to invest something, then the bank may agree to join you and participate in your invest and share the profit and risk with you.

==== What is a corporate? ====
A corporate is a legal entity that is formed by multiple people to make profit. It acts like a natural person, and so it is a “judiciary person”. Both natural person and judiciary person are a “legal person”.

There are several types of corporate:
* A cooperative is an association for its members to helping each other.
* A company is an association of legal people with a specific goal.
* A conglomerate is a combination of many business entities.
* A corporation is an organisation comprised by natural persons or legal persons to act as a single business entity.

There are several types of companies:
*
** In a private company, the company is owned by individuals.
** In a joint-stock company, the company's share capitals are tradable. If its stocks are available on a stock exchange, it is then called a “public company”, then its important decisions must be made public as it is funded by the public.
*
** In a limited company, the liability of members of the company is limited, which means its members are not liable to repay the debts of the company with the members' own money.
** In an unlimited company, the liability of members of the company is unlimited. It is easy to organise and gain trust, with high risks, difficult to transfer assets, etc.. In many countries, they are replaced by “general partnerships”.
* A holding company manages other companies through holding their stocks to form a corporate group.

==== What is a partnership? ====
A partnership is not a legal person, but a relationship among many people. They must share the risks and have unlimited liability to debts.

a general partner is a person who joins such partnership and take responsibility in its business actions.

* In a general partnership is a partnership that requires at least two general partners.
* In a limited partnership, there are at least one general partner and at least one limited partner.
* In a limited liability partnership, some or all partners have limited liabilities.

==== Why do I often see the foreign words when foreign business entities are mentioned? ====
That is a convention to distinguish foreign ones from local ones since they comply different laws from local ones.

Of course, it may cause confusions when a country has more than one languages and more than one country has one language.

Here is the child page: [[Language/Multiple-languages/Vocabulary/Similar-Business-Entities]]