Understanding Finance from scratch

Chapter 5 No one speaks Chinese these days, everyone speaks CPI——Learn some financial terms every day (1)
The "barometer" of the country's economic situation: GDP
In a small town, a dissolute rich man died, and the whole town mourned him.When his coffin was lowered into the grave, there were weeping and moaning everywhere, such is not even when priests and saints die.The next day, another rich man in the town also died.Contrary to the previous rich man, he was frugal and abstinent, eating only dry bread and radishes.He was very religious all his life, studying the codes in a luxurious study room all day long.When he died, no one mourned him except his family, and the funeral was deserted.

Puzzled by this, a stranger asked, "Please explain to me why the people of this town honor a licentious man and ignore a saint."

The residents of the town replied: "The rich man who was buried yesterday, although he was a pervert and a drunkard, was the biggest giver in the town. He was extravagant and squandered his money all day long, but everyone in the town All benefit from him. He buys wine from one, chicken from another, cheese from a third, and the GDP of the town keeps growing because of him. But what does another rich man who died do? He ate dry bread and turnips all day, and no one made a penny off of him. Of course no one will miss him."

Think about it, how does GDP come into being?
GDP (gross domestic product) is the sum of the value of final products and services produced and provided by all resident units in a country or region within a certain period of time.To put it bluntly, it is the new material wealth created by a country or region within a year. GDP is known as the "Esperanto of the economy", and it is also the most intuitive barometer to measure a country's economic status.

Among all the economic indicators we already know, GDP is the most basic and the most important one.U.S. Secretary of Commerce William Daly said: "When we look for the greatest achievements in America created by the pioneers of the Department of Commerce, the invention of the National Accounts—today called Gross Domestic Product or GDP— It deserves it.” And Paul Samuelson even concluded: “GDP is one of the greatest discoveries of the 20th century.” In his view, it is very similar to satellites in space that can describe the weather conditions of the entire continent. GDP It provides a complete picture of the state of the economy and helps the President, Congress and the Federal Reserve determine whether the economy is shrinking or expanding, needs stimulus or rein, and is in deep recession or threatened by inflation.Without a beacon-like aggregate like GDP, policymakers would be overwhelmed by a sea of ​​disjointed numbers.

In the past 20 years, my country has paid more attention to GDP and chased GDP than any other place in the world.The major strategic goals of my country's development (such as quadrupling, achieving a moderately prosperous life, etc.) are all linked to GDP, and the determination of national strategic goals, as well as the corresponding fiscal and financial policies, are all related to the judgment of GDP.As the first indicator of China's economy, GDP lives up to its name.

So, how should GDP be counted?

The most common way economists determine GDP is by accounting for the market value of all final goods and services produced within a country in a given year.So how to count the actual GDP?Let's start with the furniture example below:
A forest farm cuts a large number of trees every year and sells the wood to a furniture company at a price of 1000 yuan per meter. Next, the furniture company intercepts the wood, polishes it, makes it into furniture, and sells it to a furniture retailer at a price of 2500 yuan.In the end, the furniture retailer makes another 500 yuan and sells it to consumers for 3000 yuan.So let's calculate how much GDP was created in this process?
You may add up the price of each transaction: 1000+2500+3000=6500 yuan.However, such a result overstates actual output because it counts the value of lumber three times and the value of carpentry work twice.

A good way to avoid double counting is to focus only on the added value of each production stage:
Since the forest farm sells the lumber it cuts for 1000 yuan and does not buy any raw materials, it adds 1000 yuan to the value of the entire economy.

Since the furniture company paid $1000 for raw material inputs and eventually produced $2500 of furniture, the furniture company added $1500 in value.

In the end, the sales company spent 2500 yuan on the furniture and sold it at 3000 yuan to increase its value by 500 yuan, so an output worth 500 yuan was created.

因此，根据每个部分新增价值就是：3000［1000+（2500-1000）+（3000-2500）］元。

But this calculation is still too cumbersome. What if the circulation process is more complicated?So the smart economist came up with a simpler solution, focusing only on the final sales.Since the consumer paid $3000 for the final product, the desk and chair, a total output worth $3000 is created.This method is called the expenditure method.Today's economists have discovered many methods of calculating GDP, but the expenditure method above is the most commonly used one and has been most widely used.

In particular, it should be pointed out that GDP is not "accurate". GDP reflects the overall and total amount of the national economy, but in reality, the national economy is always in constant change, and there are always some emerging industries and enterprises. Due to the short production time and irregular statistics, it is difficult to be included in the national economy. In economic accounting, economic activities such as the current technical consulting industry, business service industry, and entertainment industry are difficult to accurately include in GDP accounting, so GDP at any point in time can only be relatively accurate data.Due to the continuous standardization of emerging industries and enterprises and the continuous improvement of accounting conditions, some necessary adjustments will often be made to historical GDP data, which is a special phenomenon in national economic accounting.

GDP is not omnipotent. GDP does not measure social costs (that is, costs that should be borne by enterprises but are borne by outsiders), and does not reflect resource depletion and environmental losses.People cut down forests and discharge pollution into the air and water. These activities actually reduce the total resources and net wealth of society, but in reality accounting can increase GDP.

Some GDP is practically useless.The meaning is very simple. When calculating GDP, the positive and negative will not be offset by the positive and negative of the construction and destruction, but the negative and negative will be positive.It may sound like a myth, but it is true.For example, a commercial building was built with an investment of 1 million yuan in a certain place, and the construction generated a GDP of 3000 million yuan. However, due to the need for road construction, the commercial building had to be blown up and rebuilt in another place.Then the GDP followed: 200 million yuan for blasting, 200 million yuan for the necessary dismantling before blasting, and another 1 million yuan to rebuild the commercial building, which generated a GDP of 3000 million yuan... Demolition and construction, construction and demolition, the resulting GDP is useless - there is no increase in national wealth.

GDP can even be harmful at times.For example, if two cars are driving on the road, if everything is normal, no GDP will be generated.But if there is a car accident, well, GDP follows: medical expenses for the injured, funeral expenses for the dead, car repair costs, insurance company payouts, etc.But has the GDP generated in this way contributed to the growth of social wealth?We only see huge property losses and casualties suffered by units or individuals.

In short, GDP is very important, but it is wrong to worship GDP blindly.The fault is not in GDP itself, but in people's understanding and pursuit of GDP.If we use any means to increase GDP, we will fall into "alienation of growth"—growth without development, growth that is false and ineffective, growth that is short-term behavior, growth that cannot be sustained, growth that is structurally unbalanced, growth that is disproportionate, and growth that endangers society. increase.

GNP reflects the economic level of the country

There is such a family in a certain place. The husband and wife each have their own careers: the wife runs a cattle ranch at home, with an annual output value of 1 yuan, and the husband is engaged in building materials business in other places, with a yearly output value of 10000 yuan.In addition, they also rent out a shop to a company as an intermediary company. The annual output value of this company is 1 yuan.We know that the relationship between GDP and GNP is: GDP=GNP+ (gross product value of foreign capital - gross product value of nationals in foreign countries).Then, the "gross domestic product" (GNP) of this family is the total output value of the husband and wife, which should be 20000 yuan; the "gross domestic product" (GDP) of this family is the total output value of the wife and that company. Value, namely GDP=1+100000-30000=30000 yuan.

Please think about it, what is the difference and connection between GNP and GDP?Which one can more truly reflect the living standards of the people?
Compared with GDP, everyone is very unfamiliar with GNP, and a large number of people don’t even know what GNP is. But in fact, GDP (gross domestic product) was only adopted in the mid-20s. Before that, my country had been using GNP ( Gross National Product).

As mentioned earlier, GDP refers to the sum of the value of all final products and the value of all labor services within a country’s borders within a certain period of time (usually within one year).It should be noted that this refers to whether it is the value of domestic enterprises or foreign enterprises, as long as it occurs within the territory of the country, it should be included in the statistics.Because of this definition of GDP, many people believe that it is statistically biased, especially in today's increasingly globalized economy, this natural bias is even more serious.Therefore, many countries use the "gross national income" or GNP indicator to measure the economic prosperity of a country. GNP is called "gross national income" in the world, and "gross national product" in China. It refers to the final results produced and the value of labor services provided by all resident units in a country or region within a certain period of time at home and abroad.

Fundamentally speaking, there is no essential difference between GDP and GNP. They both measure the output level of a country in a certain period of time.However, it can still be seen from the meanings of GDP and GNP that the difference between them is mainly reflected in the fact that the former measures the wealth of a country based on the territorial principle, while the latter measures the wealth of a country based on the personal principle.This can be clearly seen from our previous short story.

In general, when a country is in a stage of development where capital inflows are greater than outflows, its GDP will be greater than GNP; conversely, when a country is in a stage where capital outflows are greater than inflows, GDP will be smaller than GNP.As far as the main direction of capital flow in the world is concerned, the developed countries in Europe, America and Japan are the main net capital outflow countries, while the developing countries are the main net capital inflow countries.This means that for most developing countries, the output level calculated by GDP will be greater than the output level calculated by GNP.

That is to say, if the gross domestic product of foreign investment in the country is equal to its gross domestic product abroad, then the country's GDP is equal to its GNP.If these two values ​​are not much different, then the country's GDP is approximately equal to GNP.If the gross domestic product of foreign capital in a country is much greater than its gross domestic product abroad, then the country's GDP is far greater than its GNP.If in a country, the gross domestic product of foreign capital is much smaller than its foreign gross domestic product, then the country's GDP is far smaller than its GNP.

So, which one can truly reflect the living standards of a country's citizens, GDP or GNP?Some people think it is GNP.Because GNP is the total output value of the country's national product, and no matter how large the output value of foreign capital in the country is, it does not belong to the country.

But now there is another view that GNP reflects the total income of a country’s permanent residents staying in the country. It is not directly related to nationality and is not the total income of Chinese people. GNP emphasizes permanent residents, which have nothing to do with nationality.If a foreign-invested enterprise produces in China, as long as the profits it earns are not remitted back or reinvested, this part of the income is still included in my country's GNP, only when it repatriates the profits or reinvests them in its own country, This part of the profit is deducted from the country's GDP to form GNP.Similarly, we also need to add the profits of our country's foreign investment and repatriation to our country's GDP to form GNP.In this way, although GNP is an income concept, it does not only reflect the total income of Chinese people, but the total income of permanent residents.

Finally, let us take a look at the calculation method of GNP?
First, the production method, which subtracts intermediate products and labor consumption from the total output value (income) of each sector to obtain value added.The sum of the added value of each sector is the gross national product.

Second, the expenditure method, that is, personal consumption expenditure + government consumption expenditure + gross domestic asset formation (including fixed capital formation and net increase or decrease in inventory) + the difference between exports and imports;

The third is the income approach, which regards the gross national product as the total added value created by various factors of production (capital, land, labor).Therefore, it must be distributed among various factors of production in the form of wages, interest, rent, profits, capital consumption, and net indirect taxes (that is, indirect taxes minus government subsidies).In this way, the gross national product can be calculated by summarizing the above-mentioned items of each sector (material production sector and non-material production sector) across the country.

Don't talk about cold data, just talk about the CPI on the citizens' books
There are three people, A, B, and C in a certain inland city. A has 3 apartments in a better location, and can live comfortably by collecting rent without going to work; B has a suite, and earns wages at work; Sell ​​vegetables to make a living.

Suddenly one day the real estate tax will be collected, C said: "Great, I don't have a house, and I fully support the tax from those real estate speculators. The house price has plummeted, so I can buy a house." B said: " It doesn't matter, I only have one set, and I support the tax of those house speculators, and the house price has plummeted, so I can buy another set." A said: "Oh, how much is the property tax? 1%, right, next month Rent increases by 5%."

The rent has risen, C is very depressed, and wants to change houses, but finds that everyone's rent has risen, so he has to endure it.But you can't suffer, the price of vegetables will also increase by 5% tomorrow, um, let's do it like this. B and A went shopping for vegetables and found that the prices of vegetables had risen. They were very depressed. They wanted to change to another vegetable market, but they found that the prices of vegetables had all risen, so they had to eat less.

In a word, for people with stable income, if the CPI rises, your living standard will drop like this.

In recent years, CPI is the most frequently used hot word in people's economic life.So what is CPI? CPI is the consumer price index, which mainly reflects the price changes of goods and services paid by consumers. It is also a tool to measure the level of inflation, expressed in the form of percentage changes.If the increase in CPI is too large, it indicates that inflation has become an unstable factor in the economy, so an excessive increase in CPI is often not welcomed by the market.Under normal circumstances, unless there are major emergencies such as the financial crisis in the economic life, it is impossible for the CPI to fluctuate greatly.

From the perspective of macroeconomic management, the positive CPI signifies that my country’s economy has gradually shaken off the shadow of the financial crisis and is a good sign of economic recovery; for experts and scholars, the positive CPI may be a turning point for judging China’s defense against austerity and inflation.So for the people who are directly affected by it, what does the conversion of the CPI mean?
The first thing to be sure is that the positive CPI indicates that the economy is developing in a good direction. The biggest benefit for the people is to increase employment opportunities and reduce worries about unemployment and employment difficulties.For example, the situation of dozens of college students vying for a job may be eased, and some psychological comfort and stability can be obtained.But on the other hand, the rise in CPI has also increased the pressure on life. When income does not increase and the level of income cannot keep up with rising prices, people's actual living standards will decline.

CPI is not a cold data, it comes from the daily life of ordinary people, and it will also affect our life.

For the general public, the three English acronyms of CPI are actually measuring and affecting the combination of dishes in the basket.At the beginning of the year, the prices of miscellaneous grains such as mung beans and black beans began to rise, and the price of mung beans even soared to 10 yuan per catty. The price of mung beans is still high.Immediately afterwards, the price of garlic also soared all the way, reaching a maximum of 10 yuan per catty, the price of meat sold.Just when everyone was joking about "you play with beans" and "you are ruthless with garlic", ginger also joined the ranks of price increases, and then news of price increases for eggs, milk powder, etc. was heard endlessly.Vegetables are more expensive, eggs are more expensive, oil is more expensive, meat is more expensive, and everything related to food is more expensive.The price increase on the dining table started with grain, was driven by pork, and finally developed into an increase in the price of the entire food category, and food prices played a "pole vault".The price changes of these necessities are finally reflected in the CPI, which makes the CPI a value that the whole country pays attention to.

(End of this chapter)