gross domestic product
(1) The meaning of GDP
Gross Domestic Product (Gross Domestic Product) refers to the value of all final products and services produced in the economy of a country or region within a certain period (one quarter or one year). It is often recognized as a measure of the country’s economic conditions. The best indicator. It can reflect a country's financial performance and reflect a country's national strength and wealth. Generally speaking, there are four different components of GDP, including consumption, private investment, government spending, and net exports. Expressed by the formula as:
GDP: C+I+C+X where: C is consumption, I is private investment, C is government expenditure, and X is net exports.
Whether the economy of a country or region is in a growth or decline can be observed from the change in this number. Generally speaking, there are no more than two forms of GDP announcement, with the total and percentage rate as the calculation unit. When the GDP growth number is positive, the region’s economy is in an expansion phase; conversely, if it’s negative, it means that the region’s economy has entered a period of recession. Since GDP refers to the total amount of goods and services produced in a certain period multiplied by the "currency price" or "market price," it is the nominal GDP. The nominal GDP growth rate equals the sum of the real GDP growth rate and the inflation rate. Therefore, even if the total output does not increase but the price level rises, the nominal GDP will still rise. In the case of price increases, the increase in GDP is only an illusion. However, it is the rate of change of real GDP that has a substantial impact. Therefore, when using GDP as an indicator, the GDP deflation index must accurately adjust the nominal GDP to reflect output. The actual changes. Thus, an increase in the GDP deflation index in a quarter is enough to indicate the inflation situation in the current quarter. If the GDP deflation index increases significantly, it will hurt the economy. It will also be a harbinger of the tightening of the money supply, the rise in interest rates, and foreign exchange rates.
(2) Interpretation of GDP
The substantial increase in a country’s GDP reflects the country’s vigorous economic development, increasing national income, and rising consumption power. In this case, the country’s central bank will likely raise interest rates and tighten the money supply. The country’s economic performance and rising interest rates will increase the attractiveness of the country’s currency. Conversely, if a country’s GDP shows negative growth, it indicates that its economy is in recession and its consumption power is reduced. At that time, the country’s central bank may cut interest rates to stimulate economic growth again. The decline in interest rates and the weak financial performance will reduce the attractiveness of the country’s currency. Therefore, generally speaking, a high economic growth rate will promote the national currency exchange rate. In contrast, a low economic growth rate will cause the country's currency exchange rate to fall. For example, from 1995 to 1999, the average annual GDP growth rate in the United States was 4.1%. Among the 11 Eurozone countries, except Ireland (9.0%), the GDP growth rate of major countries such as France, Germany, and Italy was only 2.2%. 1.5% and 1.2%, which are much lower than the US level. This prompted the euro to decline in its exchange rate against the US dollar since it was launched on January 1, 1999, depreciating by 30% in less than two years. But in fact, the difference in economic growth rates has many effects on exchange rate changes:
First, a country’s high economic growth rate means that income increases and domestic demand levels increase, which will increase the country’s imports, leading to a current account deficit, which will cause the country’s currency exchange rate to fall.
Second, suppose the country’s economy is export-oriented and economic growth is for producing more export products. In that case, exports will compensate for the increase in imports and reduce the pressure on the country’s currency exchange rate.
The third is that a country’s high economic growth rate means that labor productivity will increase rapidly, and cost reduction will improve the competitive position of its products, which is conducive to growing exports and inhibiting imports. The high economic growth rate makes the country’s currency favored in the foreign exchange market. Therefore, the currency exchange rate of the country will have an upward trend.
In the United States, the Department of Commerce is responsible for analyzing and statistics of GDP, and it is customary to estimate and count it every quarter. Every time the preliminary estimates (The Preliminary Estimates) are published, there will be two revisions (The First Revision & The Final Revision); the central publication time is the third week of each month. GDP is usually used to compare with the same period last year. If it increases, it means that the economy is faster, which is beneficial to the appreciation of its currency; if it decreases, it means that the economy is slowing down, and its money is under pressure to depreciate. For the United States, a 3% growth in GDP is the ideal level, indicating that the economic development is healthy. Higher than this level indicates currency pressure; growth of less than 1.5% indicates an economic slowdown, and there are signs of decline.
(1) The meaning of interest rates
In terms of its manifestation, interest rate refers to the ratio of the amount of interest to the total borrowed capital in a certain period. For many years, economists have been working hard to find a set of theories that can fully explain the structure and changes of interest rates. The "classical school" believes that interest rates are the price of capital. The supply and demand of capital determine the changes in interest rates; Keynes took the interest rate Think of it as "the cost of using money." Marx believed that the interest rate is a part of surplus-value, and it is a manifestation of the participation of borrowing capitalists in the distribution of surplus-value. Interest rates are usually controlled by the country's central bank and managed by the Federal Reserve Board in the United States. Now, all countries regard interest rates as one of the essential tools of macroeconomic regulation. When the economy is overheated and inflation rises, interest rates will be raised, and a credit will be tightened; when the overheated economy and inflation are under control, interest rates will be appropriately lowered. Therefore, interest rates are one of the essential fundamental economic factors.
(2) Interpretation of interest rates
Interest rates significantly impact foreign exchange rates, and interest rates are the most critical factor affecting exchange rates. We know that the exchange rate is the relative price between the currencies of two countries. Like the pricing mechanism of other commodities, it is determined by the relationship between supply and demand in the foreign exchange market. Foreign exchange is a financial asset, and people hold it because it can bring capital theft. When people choose to have their currency or a particular foreign currency, they must first consider which money can get them more significant returns. And the rate of return of each country’s currency is preferably determined by its financial Measured by market interest rates. If the interest rate of a particular currency rises, the interest income of holding that kind of currency will increase, attracting investors to buy this kind of currency. Therefore, the money is favorable (the market is optimistic) and supports it; if the interest rate drops, this kind of currency holds. The income will be reduced, and the attractiveness of the money will be weakened. Therefore, it can be said that "the interest rate rises, the currency is strong; the interest rate falls, the currency is weak."
From an economic perspective, when the foreign exchange market is in equilibrium, the benefits of holding any two currencies should be equal: Ri=Rj (interest rate parity conditions). Here, R represents the rate of return, and i and j mean the currencies of different countries. If the benefits of holding two currencies are not equal, arbitrage will occur: buying A foreign exchange and selling B foreign exchange. There is no risk in this kind of arbitrage. Therefore, once the rates of return of the two currencies are not equal, the arbitrage mechanism will make the rates of return of the two currencies similar. That is to say, there is an inherent tendency and trend of equalization in the interest rates of different countries' currencies. This is an interest rate indicator. The key aspects that affect the direction of foreign exchange rates are also the key to our interpretation and grasp of interest rate indicators. For example, after August 1987, as the U.S. dollar fell, people rushed to buy the pound, a high-interest currency, which caused the pound exchange rate to rise from 1.65 U.S. dollars to 1.90 U.S. dollars in a short period, an increase of nearly 20%. To limit the pound's rise, the United Kingdom lowered interest rates several times from May to June 1988, from 10% to 7.5%. With each interest rate cut, the pound would fall. However, due to the rapid depreciation of the pound sterling and increased inflationary pressures, the Bank of England was forced to raise interest rates several times, and the pound exchange rate began to rise again gradually.
Under the conditions of an open economy, the scale of international capital flows is enormous, significantly exceeding the volume of international trade, indicating the tremendous development of financial globalization. The impact of interest rate differences on exchange rate changes is more important than in the past. When a country tightens credit, interest rates will rise, and interest rate differentials will be formed in the international market, which will cause short-term funds to move internationally. Capital generally always flows from countries with low interest rates to countries with high interest rates. In this way, if the interest rate level of a country is higher than that of other countries, it will attract a large number of capital inflows, and the outflow of domestic funds will decrease, leading to the rush to buy this currency in the international market; at the same time, the capital account balance will be improved, and the domestic currency exchange rate will be increased.
Conversely, if a country loosens its credit, interest rates fall. If the interest rate level is lower than other countries, it will cause a significant outflow of capital, reduce foreign capital inflows, and worsen capital account balances. At the same time, the currency will be sold on the foreign exchange market. , Causing the exchange rate to fall.
Under normal circumstances, when US interest rates fall, the trend of the US dollar will be weak; when US interest rates rise, the direction of the US dollar will be biased. From the price changes of US Treasury bills (especially long-term Treasury bills), the movement of US interest rates can be explored, which can help predict the direction of the US dollar. If investors believe that U.S. inflation is under control, the interest income of existing Treasury bills, especially short-term Treasury bills, will favor investors, and bond prices will rise. Conversely, if investors believe that inflation will intensify or worsen, interest rates may curb inflation, and bond prices will fall. In the first half of the 1980s, the US dollar remained strong despite a large trade deficit and a substantial fiscal deficit. This resulted from the high-interest rate policy implemented by the United States, which prompted a large amount of capital to flow from Japan and Western Europe to the United States. The trend of the US dollar is greatly affected by interest rate factors.
After the 1970s, as floating exchange rates replaced fixed exchange rates, the impact of inflation on exchange rate changes became more critical. Inflation means an increase in the domestic price level. When the prices of most goods and services in an economy generally rise for some time, it is said that the economy is experiencing inflation.
Since price is a currency expression of the value of a country’s commodities, inflation means that the amount of value represented by the country’s currency has fallen. Under the condition that domestic and foreign commodity markets are closely related to each other, generally, inflation and domestic price increases will cause a decrease in exports and an increase in imports, which will affect the supply and demand relationship in the foreign exchange market and lead to fluctuations in the country’s exchange rate. At the same time, the decline in the internal value of a country’s currency will inevitably affect its external value and weaken the credit status of the country’s currency in the international market. People expect the currency’s exchange rate to cut due to inflation and hold the money in their hands. The national currency is converted into other currencies, which causes the exchange rate to fall. According to the law of one price and the theory of purchasing power parity, when the inflation rate of one country is higher than the inflation rate of another country, the actual value of that country’s currency decreases relative to that of another country’s money, and the country’s currency exchange rate will be decline. Otherwise, it will rise. For example, before the 1990s, an important reason for the strong exchange rate of the Japanese Yen and the former West German Mark was that the inflation rates of these two countries had been meager. The inflation rates of the United Kingdom and Italy are often higher than the average level of other Western countries, so the exchange rates of the currencies of these two countries are in a downward trend. Specifically, there are three leading indicators for measuring the changes in the inflation rate: the production price index, the consumer price index, and the retail price index, which we will discuss separately below.
(1) The meaning and interpretation of the producer price index (PPI)
The Producer Price Index (Producer Price Index) measures the price index of goods sold by manufacturers and farmers to stores. It mainly reflects the price changes of the means of production and is used to measure the cost price changes of various commodities at different stages of production. Generally, the statistics department collects the quotation data of multiple products from major manufacturers and then weights the data into hundreds of digits to facilitate comparison. For example, my country had a constant price in 1980 and a regular fee in 1990. The United States uses the 1967 index as 100 for comparison. This indicator is published by the Ministry of Labor once a month, and it has a significant impact on the future (usually after three months) price level rise or fall. It also indicates the trend of the overall market price in the future. '
Therefore, the producer price index is a leading index of inflation. When the price of raw materials and semi-manufactured products rises, it will be reflected in the price of consumer products a few months later, which will cause the overall price level to rise, leading to inflation. Intensify. On the contrary, when the index drops, the prices of production materials have a downward trend during the production process, which will also affect the overall price level and reduce the pressure of inflation. However, because the data did not include some commercial discounts, it could not entirely reflect the actual price increase rate, so that sometimes the effect was exaggerated. In addition, because agricultural products change seasonally, and energy prices also change periodically, this dramatically impacts the price index. Therefore, it is necessary to sort out or exclude food and energy prices before analysis is appropriate when using this index.
In the foreign exchange market, traders are very concerned about this indicator. Suppose the production price index is higher than expected. In that case, there is a possibility of inflation, and the central bank may implement a tightening monetary policy, which will positively impact the country's currency. If the production price index falls, it will have the opposite effect.
(2) The meaning and interpretation of the consumer price index (CPI)
The Consumer Price Index (Consumer Price Index) measures the price of a fixed basket of consumer goods. It mainly reflects the changes in the prices of goods and services paid by consumers. It is also a tool to measure the level of inflation. It is expressed as a percentage change. The primary commodities that constitute this indicator in the United States are divided into seven categories: food, wine and beverages, housing; clothing; transportation; medicine and health; entertainment, and other commodities and services. In the United States, the consumer price index is published monthly by the Bureau of Labor Statistics, and there are two different consumer price indexes. One is the Consumer Price Index of Workers and Staff, or CPW for short. The second is the Consumer Price Index for urban consumers, referred to as CPIU.
The CPI price index indicator is significant and enlightening. It must be carefully grasped because sometimes it is announced that the hand has risen and the currency exchange rate is improving, and sometimes the opposite is true. Because the consumer price index level indicates the purchasing power of consumers and reflects the economic situation, if the index falls, it reflects the economic recession, which will inevitably be detrimental to the currency exchange rate trend. But if the consumer price index rises, will the exchange rate be positive? Not necessarily; it depends on the "rise" of the consumer price index. If the index rises moderately, it means that the economy is stable and upward, which is, of course, beneficial to the country’s currency. Still, if the index rises too much, it will have an adverse effect because it is inversely proportional to the purchasing power. The more expensive the price, the lower the purchasing power of the currency. , It is bound to be detrimental to the country’s currency. If you consider the impact on interest rates, the effect of this indicator on foreign exchange rates is more complicated. When a country’s consumer price index rises, it indicates that its inflation rate has increased; that is, the currency's purchasing power has weakened. According to the purchasing power parity theory, the country’s currency should weaken.
Conversely, when a country’s consumer price index falls, it indicates that the country’s inflation rate has fallen; that is, the currency's purchasing power has risen. According to the purchasing power parity theory, the country’s currency should strengthen. However, since every country takes control of inflation as its primary task, rising inflation will also bring opportunities for interest rates to grow, so it is suitable for the currency. If the inflation rate is controlled and falls, interest rates will also tend to fall, adversely affecting the region's currencies. Policies to reduce the inflation rate will lead to the "tequila effect," a common phenomenon in Latin American countries.
You can also read Fundamental analysis: Basic theory.