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.

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

In progress

Basic ideas

Let's start from asking questions.

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 raay was used. Because all the stones are public, the ownership of each of them is public, there is nothing under the table.

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 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”. There were also “silver standard” and “gold and silver bimetalism”.

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:

1. Find a list of goods necessary for living (which is called a “market basket”);
2. 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);
3. Select another year and do the last step for it;
4. 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 as 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.