What makes the world go round, go up and down?

Down through the ages money has taken many forms. It has varied from cows and beads to wives and shells to precious metals . . . and of late, to pieces of paper. In the world today we have dollars and yen, we have marks and rubles and shekels and pesos and so forth.

But basically, money is supposed to have three characteristics:

  1. It needs to be portable, of such character that it can be easily carried.
  2. It needs to be readily divisible. If you want three things instead of ten things, money must have the ability to satisfy both quantities and prices.
  3. The most important characteristic of money is it should represent a storage of value. If you have enough money in your pocket on Monday to buy ten loaves of bread, money should be such that on Friday, or next year, the same amount will still be enough to buy those ten loaves of bread.

 Now there are other characteristics, such as the degree of difficulty one would have in counterfeiting, and durability, but these are minor considerations. Let’s return to the fictitious country in our economic model, Noz. And so as not to confuse the doings in Noz with any other country, let’s call the money unit in Noz a ‘Buk’, and let’s assign somewhat arbitrary to our ten citizens the amount of Buks they earn in the course of a year:

  • Carpenter  — 20 Thousand Buks
  • Doctor — 40 Thousand Buks
  • Automaker — 30 Thousand Buks
  • Janitor — 10 Thousand Buks
  • Farmer — 15 Thousand Buks
  • Artist — 25 Thousand Buks
  • Tailor  — 20 Thousand Buks
  • Movie Producer  — 50 Thousand Buks
  • Repairman — 25 Thousand Buks
  • Baker — 15 Thousand Buks

Remember from a previous blog that the Gross Domestic Product (GDP) of any economic entity is the total of all goods and services produced, and the Standard of Living is the sum of all they consume. We’ll add up the earnings of our ten citizens for a GDP and a Standard of Living for the country of Noz of 250,000 Buks and the Standard of Living on average for each citizen is 25,000 Buks (250,000 / 10 people)

Now, let’s say the movie producer made only four movies instead of five, so his production totaled 40 thousand Buks instead of 50. Now the Movie Producer’s GDP is going to drop by 10 thousand Buks, but somehow the GPD of the whole country of Noz is also going to drop by 10 thousand Buks. The Standard of Living for the Movie Producer will drop and the average Standard of Living for each citizen of Noz will also drop by 1 thousand Buks to 24 thousand Buks.

Now the automaker, instead of making three cars a year at an income of 30 thousand Buks, produces four cars a year. The automaker’s GDP and Standard of Living both rise, and the average Standard of Living for each citizen of Noz is back to 25 thousand Buks.

By adding the concept of money to Noz what we are doing is no different than we did before, we are simply adding monetary values to help us more clearly understand what’s happening.

For whatever reason if somebody or some people or all people somehow produce more one year than they did the previous year, the Standard of Living goes up. Likewise, if for some reason people don’t produce what they did the previous year, the Standard of Living goes down. Not necessarily equally for everyone, but on average.

This is how you compare one family to another family, one nation to another nation, one tribe to another tribe. It’s the average Standard of Living, which is the GDP divided by the number of people, and measured in money.

Now you might be asking yourself, “Is it right to talk about the average Standard of Livingwhen some people are so poor and other people are so rich?” These things may be very important to you, as well they should be. But what you’re talking about is politics, not economics. It is the politician who says how the wealth is divided.

Economics makes no moral or political judgments . . . economics measures, economics forecasts . . . but economics does not decide how wealth is divided. Others do that.

Okay, now we see where the average Standard of Living of Noz is 25 thousand Buks a year. How do you think Noz fares compared to the land of Roz . . . let’s say their average Standard of Living is 10 thousand Buks a year? Folks in Noz have got to be way better off than folks in Roz. Why? Because they possess more things, more products, more services and they consume more things, their Standard of Living is higher. They have more to live with. Anybody disagree?

And how about people in Noz compared to people in Koz where the average Standard of Living is 50 thousand Buks a year? Sounds like Koz is the place to live. They have twice as much as the people in Noz. How well off people are depends on the quantity and, of course, the quality of the goods and services they are able to have. These are whatever goods and services are produced. Sounds like production is the key to economic health.

Now stop and think about this. The head of every country, the head of every political party, the head of every tribe, the head of every nation, the head of every union, the head of each faith say to their people or say to their subjects or say to their constituencies . . . ‘Do it my way, my way is the best for you.’ The king says it, the communists say it, the capitalists say it, the Democrats say it, the Republicans say it, conservatives say it, liberals say it, the leader of the clan says it . . . the say, ‘I know what’s best for you; do it my way and you will be better off.’ Some even say do it my way or I will eliminate you.

But despite what they say, remember we know: whenever as a result of people’s efforts production increases, the net result is the average Standard of Living must increase. And if the average Standard of Living increases that means the net result for the country is either all people or maybe just certain people will enjoy a better life. And we know the opposite is true in that any time production goes down, the net result is people will be worse off.

So now you can look at any event in ANY economy to see if the result of the event causes production to go up or down and know how people must fare because of it.

The great thing about economics is that people from different parts of the country, with different educational backgrounds, having diverse political views . . . so far do any of these differences, in any way, affect the economic principles we’ve derived to this point?

Professor Frankum

How to Understand Economics in 1 Hour

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