Learn a little bit of finance every day

Chapter 10 Understanding Macroeconomic Indicators in Life (2)
Generally, the total demand is divided into four parts:
1. Consumer demand: it is the daily consumption of residents;

2. Investment demand: It is the demand for goods and labor services formed in the process of investment and reinvestment by enterprises;
3. Government expenditure: it is the purchase of goods and services by government departments;
4. Net export: It represents foreign demand for domestic goods and services.

The aggregate demand curve shifts when the non-price determinants of aggregate demand change.From a macroeconomic point of view, the main factors that cause the shift of the aggregate demand curve are consumption, investment, government purchases, and net exports.

The total supply is the sum of the products and services produced by various sectors of the national economy in a certain period of time.The total supply can be expressed by the sum of the factors of production supplied by the society in a certain period of time or the sum of the rewards received by the factors of production.In the long run, aggregate supply does not depend on the overall level of prices, but on the economy's capital, labor, and production technology used to convert inputs into outputs.In the short term, when the price level deviates from people's expectations, due to the effect of illusion, sticky wages or sticky prices, the supply will deviate from the natural level determined by various production factors.When prices are higher than expected, quantity supplied is above its natural rate, and when prices are lower than expected, quantity supplied is below its natural rate.

Excessive social aggregate demand is often the cause of economic overheating.If aggregate social demand exceeds aggregate supply, the excess demand for goods must be met through excessive consumption of resources, such as by employing workers for additional shifts or using machinery beyond recommended working hours.This type of production is considered unsustainable because excessive consumption cannot be sustained.Often, when the aggregate demand and aggregate supply of a society reach equilibrium or are close to equilibrium, the economic operation tends to be safe and stable.The economy is in equilibrium when aggregate supply equals aggregate demand.At the point of equilibrium, the product and money markets, which determine aggregate demand, and the labor market, which determines aggregate supply, are simultaneously in equilibrium.At this time, the aggregate demand determined by the equilibrium of the product and money markets just makes the products produced by the employment determined by the equilibrium of the labor market fully realize the change.

Engel's Coefficient of Consumption Expenditure
In the past, when Chinese people met each other, they used to say hello: "Have you eaten?" This greeting, which has been popular in China for thousands of years, was replaced by "Ni Hao" at some point.But why is "Have you eaten" slowly replaced by "Hello"?Economists believe that the reason is that with the development of the economy, people spend less and less on food and more and more on clothing, cars and entertainment.This phenomenon is called "Engel coefficient" reduction.

武汉市统计局2009年初公布了2008年武汉市居民收入与消费调查结果。2008年武汉居民人均消费支出为11432.97元，比2007年增加832.97元，增长7.9％，其中食品支出增长最多，为11.8％。

Since 2008, the price of food in Wuhan has risen significantly, especially the price of oil, meat, and aquatic products has risen rapidly, which has led to an increase in residents' food consumption expenditure.The per capita food expenditure of urban residents in Wuhan was 4880.31 yuan, an increase of 514.03 yuan over the previous year, an increase of 11.8%.

Affected by food prices, the Engel's coefficient (the proportion of food expenditure in consumption expenditure) of Wuhan residents in 2008 was 42.7%, and the Engel's coefficient was 39.5% after removing the price factor, a slight increase from the previous year.

Consumption expenditure refers to all the daily expenditures of a family, including food, clothing, household equipment and services, medical care, transportation and communication, entertainment, education and cultural services, housing, and miscellaneous goods and services.Consumption expenditure reflects the price and consumption level of residents, is a very important macroeconomic variable, and is used as one of the basis for macro-control.

The Engel coefficient refers to the proportion of total food expenditure in total personal consumption expenditure.

Engel, a German statistician in the 19th century, based on statistical data, came up with a rule for changes in consumption structure: the less a family’s income, the greater the proportion of family income (or total expenditure) used to buy food. As household income increases, the proportion of household income (or total expenditure) spent on food decreases.By extension, the poorer a country is, the greater the share of per capita income (or average expenditure) that is spent on food, which tends to decline as countries get richer.Simply put, the smaller the Engel coefficient of a family, the richer the family is.Conversely, if the family's Engel coefficient is larger, it means that the family's economy is more difficult.

The significance of Engel's coefficient is that it can be used to measure the living standards of people in a country and region.According to the standards proposed by the Food and Agriculture Organization of the United Nations, an Engel coefficient of more than 59% is poor, 50%-59% is food and clothing, 40%-50% is well-off, 30%-40% is rich, and less than 30% is the richest.When my country uses this standard to make international and urban-rural comparisons, it is necessary to take into account those incomparable factors, such as differences in price comparisons of consumer goods, differences in living habits of residents, and special factors resulting from differences in social and economic systems.For the non-comparable problems in these cross-sectional comparisons, corresponding elimination should be done in the analysis and comparison.In addition, when observing changes in historical conditions, it should be noted that Engel's coefficient reflects a long-term trend, rather than an absolute tendency to decline year by year.It seeks long-term trends while smoothing out short-term fluctuations.

Investment spending and the "multiplier effect"

Under the impact of the financial crisis, there is great uncertainty in the economic outlook, and the consumer confidence index has declined. At the end of 2008, the central government decided to implement a proactive fiscal policy and a moderately loose monetary policy, while increasing investment. It planned to invest 2010 trillion yuan before the end of 4 to expand domestic demand and promote economic growth.

In the government fiscal expenditure, the 4 trillion yuan belongs to the government's investment expenditure.The definition of investment expenditure in economics refers to the expenditure incurred by the government (or its authorized unit) entering the investment market as an investor.Specific investment expenditure means that the invested funds can not only be recovered, but also value-added, and all national productive investments have this nature.Investment expenditure in a broad sense also includes capital construction expenditures that the state finances use in non-productive areas, such as the construction of office buildings for administrative agencies and the purchase of medical equipment for state-owned hospitals.

The famous economist Keynes made an easy-to-understand analogy about the role of investment in macroeconomics.

After a storm, the glass of a department store was scratched.The department store took out 5000 yuan to repair the glass.After the decoration company reinstalled the glass, it got 5000 yuan, took out 4000 yuan to buy a computer for the company, and deposited the remaining 1000 yuan in the bank as working capital.The computer company sold the computer and got 4000 yuan. They bought a motorcycle with 3200 yuan and deposited the remaining 800 yuan in the bank.After the owner of the motorcycle shop got 3200 yuan, he bought a set of fashion with 2650 yuan and deposited 640 yuan in the bank.In the end, the sum of the income received by each company far exceeds the figure of 5000 yuan.The series of investment increases triggered by the scratched glass of department stores is the multiplier effect.

Multiplier Effect (Multiplier Effect) is a macroeconomic effect, which refers to the degree of chain reaction of changes in economic aggregate caused by the increase or decrease of a certain variable in economic activities.In economics, the multiplier effect is more completely the multiplier effect of expenditure and income. It is a concept in macroeconomics and a means of macroeconomic control. It means that changes in expenditure lead to disproportionate changes in total economic demand. .

The multiplier effect is a multiplier acceleration in which a change in one variable causes an increase in the final quantity.It includes both positive and negative aspects.When government investment or public expenditure expands and tax revenue decreases, it will double the effect on national income, thereby producing a macroeconomic expansion effect.When government investment or public expenditure is cut, and taxation is increased, it will double the contraction effect on national income, thus producing a macroeconomic contraction effect. ?
Why is the multiplier greater than 1?For example, if a government increases 100 billion yuan to purchase investment goods, then the 100 billion yuan will flow into the hands of the producers of the investment goods in the form of wages, profits, and interest, thereby increasing the national income by 100 billion yuan. It is the first round of increase in national income caused by the increase in investment.The 100 billion yuan transformed into wages, interest, profit, and rent flowed into the pockets of the owners of all the factors of production used to manufacture the investment product. Therefore, an increase of 100 billion yuan in investment will increase the national income by 100 billion yuan in the first round. Yuan.As those who get these capitals will start the second round of investment and the third round of investment, the economic growth will increase with a multiplier greater than 100.

The "multiplier effect" is also called "Keynesian multiplier" because it came from Keynes.In fact, before Keynes, someone had proposed the idea and concept of the multiplier principle, but Keynes further improved the theory.Keynes's multiplier theory played a major role in helping Western countries get out of the "Great Depression".Some people even compare it with Einstein's theory of relativity, thinking that the two greatest formulas in the 20th century are the basic formula of Einstein's theory of relativity and the basic formula of Keynes' multiplier theory.The important role of the Keynesian multiplier theory in macroeconomics was valued after the 1929-1923 world economic crisis, and once became the driving force behind the "economic pull" after the Great Depression in the United States.

Crowding out effect: the trade-off of investment intensity
2007年的股市曾因市场中的“挤出效应”而两度出现仅次于“6·4”、“5·30”的暴跌行情。经济学家分析，愈演愈烈的“挤出效应”是股市暴跌极为重要的推手。

Since the Shanghai Composite Index fell back from 6124 points, many heavyweights may have been under pressure and have undergone short-term adjustments.However, shortly thereafter, the market resumed frantic speculation in heavyweight stocks again.Since Sinopec will be issued by PetroChina, it gapped and opened high and pulled to the daily limit, which obviously aroused the enthusiasm of the market to speculate on heavyweight stocks again.This is the first round of "squeeze out" of heavyweights to non-heavyweights.

After the "October" in 2007, the Hong Kong market and the mainland market also experienced a period of H-share and A-share market.Numerous arbitrage funds are frequently directors to speculate on A-shares, making huge profits on H-shares or related warrants; .However, when the Hong Kong stock market has repeatedly hit new highs, the relevant A-shares in the mainland are no longer running in the same direction.What is the reason?Because with the gradual increase in the price-earnings ratio of the Hong Kong stock market itself, the continuous upward momentum of the H-share market itself has been greatly reduced.As a result, there is an extremely obvious "crowding out effect" of H shares on A shares.

The "crowding out effect" does exist widely in all aspects of economic life, and the reaction in the stock market as in the material is very intuitive.But in fact, this situation is just a metaphor for the "crowding out effect".The real "crowding out effect" refers to government actions.It refers to the fact that the expansionary fiscal policy leads to an increase in interest rates, thereby crowding out private investment, and then offsetting the increase in national income to a certain extent. This phenomenon is called the crowding out effect.Or to be more specific, both the government and enterprises are investing. Under certain conditions for investment projects, the government will invest too much and the enterprises will be squeezed out.

In general, the fiscal "crowding out effect" is manifested as: the government implements an expansionary fiscal policy by borrowing from the public (enterprises, residents) and commercial banks, which causes competition for rising interest rates and rising demand for borrowing funds, leading to private sector ( or non-government sector) spending, thereby offsetting some or all of the expansion in fiscal spending.The decrease in private expenditure is mainly due to the decrease in private investment, but there are also decreases in consumption expenditure and net exports.

Western economists have two different opinions on crowding out effect.Economists who oppose state intervention argue that crowding out is undeniable.Because whether the money for public expenditure comes from private taxation or private borrowing, if the money supply remains unchanged or increases little, the increase in public expenditure will cause pressure on money demand, forcing interest rates to rise, thereby reducing private investment.Therefore, the crowding out effect does not change aggregate demand.Keynesians who advocate state intervention believe that: (1) The crowding out effect of public expenditure must be analyzed on a case-by-case basis.Generally speaking, the crowding out effect will only exist when full employment is reached.Under the condition of insufficient effective demand, there is no problem of crowding out private investment by public expenditure during a depression. (2) In addition to the interest rate level, there are factors such as the expected profit rate that affect private investment.If increasing public spending can increase the expected rate of profit, then public spending does not "crowd out" but "squeeze in" private investment.In addition, even if public spending affects the level of the rate of profit, public spending cannot "crowd out" an equivalent amount of private investment because private investors are more sensitive to changes in the expected rate of profit than to changes in the interest rate.Therefore, increasing public spending can still increase aggregate demand.

Therefore, according to the viewpoint of the Keithians, if the strength of the fiscal policy is well grasped, the crowding out effect is not obvious, but it does exist.As for the supply crowding-out effect of expansionary fiscal policy, its performance is a long-term process.The reason for this is the low efficiency of state-owned investment. If the efficiency of state-owned investment is improved, this crowding-out effect will not appear.Therefore, when the government implements an expansionary fiscal policy that expands investment, it must especially consider the impact on business investment.

Deflation: Worse Than Inflation

In the 19th century, the famous Russian writer Rylov wrote a fable "Demian's Soup".The fable says that the main character, Jamyan, entertains guests with delicious and hearty fish soup.This was a good thing at first, but he treated the guests to eat one after another, without stopping. Finally, the guests couldn't stand it anymore, and ran away from the table, never daring to come to the door again.This story shows that everything has a quantitative limit to maintain its quality.Within a certain limit, the change of quantity will not affect the quality, but once this limit is exceeded, the change of quantity will cause the change of quality.Delicious fish soup is undoubtedly a good treat, but in excess, it becomes a disaster.Currency is like fish soup. Too much issuance will make the market unbearable and collapse, while too little will also cause adverse effects: deflation.

Many people are familiar with inflation. The most mentioned in history textbooks is that during the Kuomintang rule in the 40s, the currency depreciated severely. In the morning, a bag of French currency or gold coupons can buy a bag of rice, but in the afternoon, you may only be able to buy one grain. Rice, the people are in dire straits. In the late 20s, inflation also occurred in China: At that time, prices soared, and people desperately moved things to their homes, grabbing what they saw, and the most grabbed items were daily necessities such as soap and washing powder.But for deflation, many people feel strange.What is deflation?Simply put, there are fewer popular currencies on the market, money is more valuable, and the same money can buy more things.

(End of this chapter)