In my first post about COVID-19 and the economy, I went into why we shouldn’t panic and be fearful in the midst of this situation, and how the stress of the crisis was causing mass Capitalization off of people’s overreactions.
In this second post, however, I do want to dig more deeper into the actual economics of COVID-19, not just the mass Capitalization that these difficult times are causing.
First, we’ll begin with an overview of G.D.P., and then we’ll move on from there.
G.D.P. means Gross Domestic Product, and can be measured in 4 different ways: G.D.P. per capita, Nominal G.D.P., Real G.D.P. and G.D.P. P.P.P. (G.D.P. Purchasing Power Parity).
G.D.P. per capita is the easiest to understand, to calculate, and is the most widespread form of G.D.P. that is used. G.D.P. per capita is the total amount of worth of products created by a certain population divided by that total population.
For example, if, say, a village of 100 people created, say, 10 rugs as the only product, worth $10,000 each (Note: Worth as in the price of the products; however, the product does need to sell to be counted), then the G.D.P. would be $1,000: The total amount of worth of products (10 rugs; $10,000 each) divided by the total population (100): (10 * 10,000) / 100 = 1,000 ([10 rugs * $10,000] / 100 people = $1,000). So, the G.D.P. of that village would be $1,000.
However, in the case of, say, 9 rugs not selling, then the equation would be: (1 rug * $10,000) / 100 people = $10. The G.D.P. would be only $10, since the product does need to sell to count.
Of course, prices matter as well. In the case of the rugs costing, say, $100,000 each, then the equation would be: (10 rugs * $100,000) / 100 people = $10,000.
But in the case of the village switching to blankets, what would happen? Well, the unit would just change (Using the original case): (10 blankets * $10,000) / 100 people = $1,000. The G.D.P. would remain at $1,000.
But in the case of the village deciding that they want to create BOTH rugs and blankets, what happens? Well, both units are counted. Say the village makes 10 rugs worth $1,000 each and 100 blankets worth $100 each in one year. The equation would be: ((10 rugs * $1,000)+(100 blankets * $100)) / 100 people = $200. The G.D.P. equation would simply grow to include all units. So, G.D.P. per capita is simply a measurement of each individual’s contribution.
But what about Nominal G.D.P.? Nominal G.D.P. is the total amount of money a certain population makes, using several factors. The equation for Nominal G.D.P. is: C + I + G + (X – M), where: C is Private Consumption, I is Private Investment, G is Government Investment, X is Exports and M is Imports.
So, say Village 1 produces 10 rugs worth $10,000 each. 5 rugs are bought within the Village, while in Village 2, 3 people buy one rug each, all from Village 1. Back in Village 1, 2 people give $1,000 each to the Rug Business as an investment, to help the business grow (Note: the amount of percentage of holdings that they gain from the company does not matter). The Village Government also decides to invest $3,000 into the Rug Business, so that the business may contribute more to the economy (Note: the government does not usually look to make a profit from investments, but rather, they simply want the business to grow, to contribute more to the economy). Meanwhile, Village 2 has 10 pillows worth $100 each that they have produced, and are available, so 2 people from Village 1 buys one pillow each.
Wow! A lot of numbers there, but let’s put that into our equation: $50,000 (5 rugs bought; $10,000 each) + $2,000 (2 people investment; $1,000 each) + $3,000 (1 government investment; $3,000 each) + ($30,000 [3 rugs; $10,000 each] – $200 [2 pillows; $100 each]) = $55,000 + ($29,800) = $84,800. So, the Nominal G.D.P. is $84,800. This measurement reflects the economic SECURITY that a population has. More consumption means more people have enough money to buy things, as opposed to being poor, with little money to spare. More investments means more confidence in the economy, that the economy will continue to grow and be successful, and is thus safe enough to risk money investing into, to get a profit from the money that was invested. As opposed to, of course, little confidence that the economy will return a strong profit. More exports than imports shows more confidence that the economy is strong enough to support both the population of that economy and the population of another place. However, more imports than exports shows a sort of dependency on other economies – not a lot of confidence that the economy can support the original population, much less the population of another economy entirely.
Now for Real G.D.P. Real G.D.P. measures the true worth of all products. Real G.D.P. requires Nominal G.D.P. to work. The equation for Real G.D.P. is: N.G.D.P.BASE YEAR * (G.D.P.D.BASE YEAR / G.D.P.D.CURRENT YEAR). N.G.D.P. is the Nominal G.D.P. of the starting year. G.D.P.D. is simply saying the amount of consumption by a population of the economy. So, let us say that the N.G.D.P. of Village 1 in the year 2019 is $20. Say the consumption is $2. But in 2020, the consumption rises to $8 (Note: the N.G.D.P. of the second year does not matter; also note that you do not need to measure by year, but that other periods of time are acceptable, however, the periods of time do need to be consistent [Units of time and even combinations of units of time are fine]). The equation would be R.G.D.P. = $20 * ($2 / $8) = $20 * ($0.25) = $5. So, the R.G.D.P. (Real G.D.P.) would be $5. But what does this number mean? This number, $5, is the actual worth of all products produced by that economy, in that period of time. While the village may produce 5 rugs, costing $10,000 each, for a total of $50,000, the real total worth of those rugs is $5 – or $1 per rug. So, each rug costs $1 to make, but is selling at $10,000 each. However, several products will simply be combined, and will be averaged out. This allows economists to understand the total income of the population, through things such as profits, and such.
G.D.P. P.P.P. is easy to calculate, and is a measure of the cost of products in one economy, versus another. G.D.P. P.P.P. reflects the safety of a currency. The equation for G.D.P. P.P.P. is: X / Y. Yes, a very easy formula, where X is the cost of the product in currency 1, and where Y is the cost of the product in currency 2. So, a rug in Village 1 costs 10,000 Village 1 Dollars, whereas in Village 2, that same rug costs 20,000 Village 2 Dollars. Why? Because, in Village 2, there is more money – the government prints more money. More specifically, Village 2 prints twice as much money as Village 1, or 100% more money than Village 1, or 200% as much money as Village 1, for a ratio of 1:2; 1 Village 1 Dollar for every 2 Village 2 Dollars. This is called an exchange rate. This simple calculation allows economists to understand inflation rates, or how fast a government prints money.
High inflation means that people will lose money by simply putting that money in the bank – as more money becomes available, the $100 dollars they put in the bank last year, may only be worth $50 the next year, in relation to the previous year. Something might cost $1 one year, then the next, might cost $2. The product isn’t becoming more expensive – the manufacturer is simply keeping up with inflation. As such, businesses seem to pay their workers more money every year, but they’re not – they are simply keeping up with inflation. So, we now see the dangers of inflation.
Especially hyperinflation, when a country prints so much money at such a fast speed that banks are overwhelmed by people withdrawing their money, wanting to spend the money immediately (So that they do not keep on losing money, by default). In fact, businesses struggle to keep on updating prices, as the worst cases of hyperinflation require prices to double every few days, or every few hours. This is bad because businesses that don’t raise their prices will not make enough money, as a $10 product quickly reduces in worth to only $1, and as the number of people with $10 rises from, say, 5 to 50. So, they need to raise the product’s price to $100 to ensure that only 5 people have access to the product, so that the products don’t sell out and cause the business a shortage in supplies. Also, a low worth product will mean that the businesses will not make enough money. And businesses that don’t make a profit collapse, and the last thing you need during hyperinflation is collapsing businesses that are forced to fire scores of people at a time (Rising unemployment rates).
Rich people are hit the hardest, actually – not poor people. This is because most rich people have their wealth set in physical assets, such as expensive cars or houses. They have a high solvency (Solvency is the ability to pay off long term debts, such as a loan from the bank), and a low liquidity (Liquidity is the ability to pay off short term debts, such as being able to pay for groceries at the grocery store). They have little actual bills of money. So, when they buy virtually anything, they don’t pay on the spot – they just postpone the payment until their next paycheck. So, when the value of money plummets, the rich find themselves in a hard position. Most of their bank money is plummeting in value, along with their paychecks, so they can’t pay off short term debt. Afterall, they can’t pay for their groceries with their car! So, they are forced to sell their assets, so that they may have enough liquid currency to pay off short term debt. And payments delayed for the long term are demanded to be paid off now, which forces rich people to lose their high quality of living, in order to preserve their wealth.
Debts are usually paid off immediately as soon as hyperinflation starts, since the creditor (The person to whom money is owed) demands that the debtor (The person that owes the money to) pay off of the debt immediately, so that the creditor may use that money before the, say, $100 debt plummets to a worth of only $10.
Of course, the poor are hit hard as well – everyone is – but since they do not own expensive assets, and more liquid currency, they are able to pay off long term debts easier, and are able to manage their money easier, and are thus able to thus go to the grocery store and buy groceries – and pay for them on the spot; that is, able to pay off short term debt.
So, the more inflation there is, the less stable a currency is, and thus the less confidence people will have to invest in that currency.
But is there an opposite of inflation? Un-inflation? De-inflation? Yes. Deflation. Deflation is the anti-inflation, the negative-inflation that seldom happens. Deflation means currency being taken out of circulation, versus currency being brought into circulation. Deflation can make people richer as money sits in the bank, rising in value as money becomes more and more valuable. But the problem with deflation is that poorer people will not be able to become richer – so the rich become richer as the poor… stay poor. Why? Because poor people can not afford to leave money in the bank. They need all the money that they have to support themselves. As such, deflation can lead to a greater wealth gap, which creates a problem in the functioning of an economy. And a problematic economy will not attract many investors, despite a stable and constantly stabilizing currency.
So there’s hyperinflation. But is there hyperdeflation? Well, yes. Hyperdeflation is problematic, like hyperinflation, but less so, since the currency is actually stabilizing. Prices will plummet as businesses struggle to keep up with lowering prices, because a $100 product available to 100 people will quickly be available to only 10 people, and soon, the business won’t be selling enough product, and so they won’t make enough money, and will collapse, causing unemployment rates to rise.
So, both inflation and deflation, hyperinflation and hyperdeflation, can cause problems to an economy, although deflation, and even hyperdeflation, are more beneficial to an economy than inflation, and hyperinflation.
So, the best shot for an economy to stabilize the currency is to simply stop printing money. This allows the government to regulate their currency, as the rest of the world continues to print money, and to thus allow the rest of the world to catch up with that nation. Sometimes, the government will even allow themselves to pass the rest of the world in the value of their currency, by simply continuing to regulate their currency, versus resuming printing as soon as they are equal in value of their currency. 2 currencies that are exactly equal to each other in value are ‘at par’ with each other; that is, they maintain a ratio of 1:1. Sometimes, the currencies may even have the same denominations; that is, the same types, or face values, of bills and coins. Usually, such accurate relations are maintained via a currency union, when 2 or more countries agree to use the same currency (Such as the Euro via the European Union). The relationship between 2 currencies over a period of time is called currency correlation.
Now, there’s one last thing to go over before we dive into the actual statistics relating to the economical world and COVID-19: C.P.I. C.P.I., or Consumer Price Index, is a measure of the average cost of products within an economy. The equation for this is a simple one, one that is commonly used in mathematics to find the MEAN of a range of numbers, by simply adding up all of the numbers, and then dividing by the number of numbers within that range: (X + Y) / Z, where X is the cost of the first product, Y is the cost of the second product, and Z is the number of products available within that economy. Of course, more variables could be added within the parentheses, as more and more products become available within the economy.
For example, in the case of Village 1 making 10 rugs costing $10,000 each, and 5 blankets that cost $1,000 each, along with importing 15 pillows from Village 2, costing $100 each (Note: Although the pillows were not produced within that economy, they are still available there, and so they still count towards the C.P.I.), then the equation would be: ($100,000 + $5,000 + $1,500) / 30 = $106,500 / 30 = $3,550. So, the average price of products within that economy costs $3,550. This measurement allows economists to deduce a number of things. Firstly, that the population of that economy may or may not be rich enough to buy such expensive products. Secondly, that the cost of manufacturing in that economy may or may not be expensive, and thus businesses are forced to price their products highly. Thirdly, that the economy may or may not be in ruins, and thus businesses are forced to price their products highly. And the opposite is also true: a low C.P.I. may or may not mean that the population is too poor, that manufacturing is very cheap and/or that the economy is in danger. Of course, an economist can not deduce which one of these, or what combination of these, is or are correct, until the economist looks at the forms of G.D.P.
So, firstly, let us start with the Nominal G.D.P. of the world economy, then we’ll get into the worldwide unemployment rates.
At the most, $16 trillion dollars of the world economy, in Nominal G.D.P., could be lost to COVID-19.
Now, $16,000,000,000,000 is a LOT of money. The world’s Nominal G.D.P. is $86,600,000,000,000, so for $16,000,000,000,000 to just be lost from that total is a large amount of money.
On top of that, 47,000,000 jobs could be lost to COVID-19: a major rise in unemployment as businesses lose money and are forced to fire workers.
But, this is not all bad. Trillions of dollars of relief aid are being sent all over the world, and a rise in production of the necessary supplies are helping to fill supply shortages. Countries are sharing resources and information with each other, while government news coverages, medical infrastructure and the medical system are all being kept up to date and are advancing in the midst of this crisis.
So, really, the only people that should be truly concerned about this virus are the economists.
Of course, I am saying this as cases hit 1,000,000 and deaths hit 50,000. And as the people continue to panic and live in constant fear.
And as the world economy sees a crash in G.D.P. and a rise in unemployment that we haven’t seen since the Great Recession of 2007 to 2009, so the world is going into an economic recession.
All. Because. Of. One. Little. Tiny. Virus.