how money works for you and against you?

7/30/2019 How money works for you and against you?

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A Two Person Closed Economy

Illustration of key macroeconomic principles

Property boom, benefits from trade andinflation


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On a lonely island in the middle of

nowhere


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Lived two men

Robinson Crusoe (RC) and Man Friday (MF)


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RC owned the only piece of

arable land on the island


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Every year, RC gave MF some grains and MF gave RC

some fruits & vegetables


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It worked well foryears but one fine

day, RC developed

an appreciation for

fresh fruits andvegetables which

were a rarity for

him unlike MF


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Sadly MF had no

use for grains mid-

season.

RC and MF sat

together andagreed on a

monetary measure

to facilitate mid-

season transactions


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They gathered all

the pebbles of arare kind on the

island (100) and

split them equallybetween them. The

pebbles were to be

used as the money

for exchange.

50 50


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Now RC freely tookfruits & vegetables

from MF around

the yearThey exchanged

goods worth 40

pebbles each year


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RC being the smartAlex he was,

figured that he may

purchase a small

portion of theorchard for the 10

pebbles that were

always in spare


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So he bought a

tenth of the

orchard from MFfor 10 pebbles


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MF was very happy

that year for he had

20 pebbles inreserve after

buying all the grain

he needed.

RC too was full of

joy for he now

owned a little morethan what he had.


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Next year MFdiscovered that his

reserve has

depleted to 12pebbles only as RC

bought lesser fruits

& vegetables


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MF requested RCfor a tenth of his

arable land for

which RCdemanded 12

pebbles MF

readily agreed


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RC was very happy

as he had 20

pebbles in reservenow and owned

assets worth 120

pebbles.

MF too was quite

happy as he now

had 16 pebbles inreserve in addition

to assets equal to

RC.


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Next year, RC

approached MF

with a proposal to

buy a further tenth

of his orchard.

MF realizing hisfolly last time,

demanded 20

pebbles this time,

which RC readily

agreed to.


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Now RC was very

happy that heowned assets

worth 220 pebbles.

MF was alsooverflowing with

joy for he now had

36 pebbles inreserve in addition

to assets slightly

less than RC.


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BLACK SWAN HELICOPTER MONEY

A tsunami struck the island that year. Fortunatelyboth the arable land and orchard remained safe.

MF while gaping in awe at the damage to the trees

on the seaside on which Tsunami struck discoveredto his amazement 30 rare pebbles of the same kind

he and RC were using as money.


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MF with his coffersover-flowing with

pebbles ran to RC

and offered topurchase a further

tenth of the arable

land


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RC with no great

want of pebbles

casually asked for

30 pebbles towhich MF

surprisingly (to RC)

agreed


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RC was very happy

now for he had

assets valued at

300 pebbles along

with 30 pebbles in

reserve

MF too was

overjoyed as he

also had similarly

valued assets with

36 pebbles in

reserve


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And so the

On that isolated Island continued


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After a few years,

both RC and MF

owned half ofarable land and half

of orchard - assets

valued at 500

pebbles each

Their trend analysis

also suggested thatassets will continue

to rise at 20% in

value.


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They also owned 65

pebbles each all

in reserve.


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In the meantime,

RC with no greataptitude for

maintaining an

orchard saw theproduction of fruit

& vegetables in his

owned part come

down to half


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Elsewhere food-grain yields halved

in MF owned arable

land for MF did not

know how toproperly maintain

the right mix of

manures in the soil.


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RC suffering fromlack of fruits &

vegetables in his

diet and MF from

lack of grainsstarted trading

again with their

pebbles.


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The prices they

settled at now was

3x higher than the

initial price.

They could only

afford to trade half

the initial trade

volumes now.


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Since there was noscope for further

improvement, they

learnt to keep them

satisfied with 75%of the grains and

fruits & vegetables

now.


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Yet each of them

was content that he

owns assets valuedat 500 pebbles

growing at 20%.

And he owns 65

pebbles, up from

50.

And he sells goods

worth 60 pebblesannually, up from

40 pebbles.


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Lessons

Trade improves specialization

Means of production should be managed by peoplebest qualified to do so

Price rise does not equate with rise in value

Helicopter money may stimulate investment andconsumption temporarily but cannot be a substitutefor greater specialization and technologicalimprovement /innovation

It is important to decide whether to live well or tolive seemingly well, both may not necessarily be thesame depending on perspectives


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Hope You Enjoyed It!

Coming Soon!

Part 2 RC and MF decide to relive their life

how money works for you and against you?

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