Home > On Finance > Building an Economy Chapter 3 - 6 Review
On Finance: Building an Economy Chapter 3 - 6 Review
Wow, what a series of events.. most of which went unnoticed. It almost went completely unnoticed until Mary, in a quiet moment by the lake, began to pondered on a few things…
Having talked with everyone at the picnic Mary realized that the Village income for the summer was $5,000. She decided to call this the Gross National Product (GNP) —that is, the sum of all the goods and services created in the village.
She thought back and remembered that the winter GNP was $1,740. Because it was so low people felt unhappy and worried that they made so little during the winter. The “economy” seemed to be pretty bad. Because people didn’t make much money they didn’t spend much. That meant that others didn’t make much and hence didn’t spend much. An untidy little circle. They didn’t have many new things and only spent what the really needed.
During the spring the GNP for the village shot up to $5,000! That was 287% increase by Mary’s calculation! Everyone was elated and feeling comfortable — thinking about vacations and enjoying all the things they bought during the spring. The economy was moving right along. People made money, or had it coming, so they spent easily. The spending generated income for others who, likewise, spent more because they felt confident about their income.
So, almost a 300% increase in the economic engine for our little village. But Mary noticed something very interesting. During the winter there was $10,000 in the village. During the spring there was $10,000 in the village. Both periods had the same amount of money but a completely different result. As she pondered this she came to understand that it didn’t matter how much money was in the village, what mattered was how many time it changed hands during the three months she measured. It was the speed of money, not the amount of money, which determined how “good” the economy was.
She also came to an astounding realization… With $10,000 in the village they could have an unlimited amount of income between them. If they moved the money fast enough they could each make $15,000 during the summer for a total GNP, or income, of $60,000 total. Oh My Gosh! They’d all be rich! But… on the other hand… If they didn’t move it they would all make $0 and they would all be poor. Fascinating…
She also realized something else. They used to work for hours. An hour of John’s work for an hour of James’s work for an hour of Patricia’s efforts. The change to the dollar just meant that they kept track of the hours with dollars… one dollar for one hour. However, this all changed at the beginning of the spring because John offered a discount to get Mary’s work earlier. The seemed to happen all spring with people offering discounts to get a job earlier, offering a discount to get a little more work on extra items on a project. When Patricia was too busy to move some materials for Mary’s project, Mary offered her an extra 25% bonus if she’d moved her cable spools first so that John could install it.
Somewhere along the lines, without realizing it, they had gone off the “hour” standard… just as the US had gone off the gold standard. A dollar wasn’t worth an hour, it was worth… it was worth… ummm… hmmm.. it was worth…. what????? Mary had to give this some serious thought.
Mary decided there was a lot more to think about in this new economy of the dollar…. it wasn’t all that it originally seemed to be. It wasn’t worse… just very, very different than it seemed like on the surface.
So the total winter income for all the village was $5,000 (compared to $1,740 for the winter). Spending was $5,000 compared to $1,740 for the winter.Again, those number are equal because no one borrowed any money and there is no trading with other villages.
Posted by Paul Gernhardt on Monday, November 24, 2008