Go Back   Team-BHP > Around the Corner > Shifting gears


Reply
 
Thread Tools Search this Thread
Old 19th December 2011, 19:48   #1
BHPian
 
FanaticOnWheels's Avatar
 
Join Date: May 2009
Location: Chennai
Posts: 293
Thanked: 68 Times
Default Understanding Economics

I just had this question in mind, and I thought I'd put it up for discussion.


Suppose you have a company that makes a profit of x rupees. That more or less means, it started of with, say, 100/-, and ended up with 100+x /-. Now, if the total amount of money in this world (which, I believe, is printed based on the gold reserves of a nation), is constant, then every company in this world cannot make a profit, right? (As that would mean generation of x/y/etc rupees at every point, which would keep adding up indefinitely!)

Plus, if I make a profit, that means I sell something more than what it's worth, so someone is buying it at more than what its worth, so he, in a way, is making a loss? (Though this approach might be shaky).

So it only makes sense that if the net money reserves in the world is constant, the total losses and the profits must be equal?

Am I going wrong somewhere?
FanaticOnWheels is offline   Reply With Quote
Old 19th December 2011, 20:31   #2
BHPian
 
huntrz's Avatar
 
Join Date: Feb 2007
Location: Hyderabad
Posts: 66
Thanked: 18 Times
Default re: Understanding Economics

This requires an elaborate reply. I am sure some one would take the pains to put it here. Let me try to answer you in very brief-

1. Wrong assumption#1 Total amount of money in the world is constant-
Total money in the world is NOT constant. Banks "create" money by the way of lending. You can google on this to know how it works.

2. Wrong assumption#2 When one makes profit another one makes a loss-
Assume an isolated economy/village of only 3 people- one is a farmer, another is a fisherman and the third is weaver. Let us assume that each one of them can produce enough produce for 10 people(even though there are only 3 people in the village). Since each one of them have plenty so they can exchange their products with the other two in the village to buy what he doesn't otherwise produce but needs. Thus each of them will have enough for their consumption and still have some savings and therefore we can say that all 3 in the economy of the village are not only making profits but also wealthy with enough savings. Same works in real life too.

Since you are only 21, if you have questions like these in your mind you would enjoy studying economics in you academic career.
huntrz is offline   Reply With Quote
Old 19th December 2011, 20:33   #3
BHPian
 
Gandhi's Avatar
 
Join Date: Jul 2009
Location: Bay Area, CA
Posts: 960
Thanked: 199 Times
Default re: Understanding Economics

I'm not an expert on these matters, but as far as I know the net worth of this world is not constant. It keeps increasing. Also the notion of bills printed based on gold reserves of nation doesn't hold true for countries like US of A as they don't disclose their gold reserves.
Gandhi is offline   Reply With Quote
Old 19th December 2011, 20:40   #4
Senior - BHPian
 
vivekiny2k's Avatar
 
Join Date: Feb 2005
Location: cincinnati, jabalpur,chennai
Posts: 1,241
Thanked: 163 Times
Default re: Understanding Economics

supply of money increases, though not necessarily at the same pace as actual production of the world. that's why we have bubbles and bursts.

as far as stocks are concerned, it's a non ending ponzi scheme. you invest hoping somebody else will invest in it at a higher prices. again you get bubbles and bursts.

keeping those two aside, theoretically trade always generates more value because voluntary trade only happens when people exchange things they value differently. when you pay 10 rs for a tea cup, you value it at more than 10 rs, the vendor values it at less than 10 rs. hence both of you profit at the end of the trade.
vivekiny2k is offline   Reply With Quote
Old 19th December 2011, 21:25   #5
Senior - BHPian
 
Join Date: Dec 2010
Location: Ghaziabad/Hyderabad/Mysore
Posts: 1,416
Thanked: 313 Times
Default re: Understanding Economics

Quote:
Originally Posted by FanaticOnWheels View Post
I just had this question in mind, and I thought I'd put it up for discussion.


Suppose you have a company that makes a profit of x rupees. That more or less means, it started of with, say, 100/-, and ended up with 100+x /-. Now, if the total amount of money in this world (which, I believe, is printed based on the gold reserves of a nation), is constant, then every company in this world cannot make a profit, right? (As that would mean generation of x/y/etc rupees at every point, which would keep adding up indefinitely!)

Plus, if I make a profit, that means I sell something more than what it's worth, so someone is buying it at more than what its worth, so he, in a way, is making a loss? (Though this approach might be shaky).

So it only makes sense that if the net money reserves in the world is constant, the total losses and the profits must be equal?

Am I going wrong somewhere?

You have asked the question that Instructors asked in the first lecture of Economics 101

You basically need to read a few texts, but here are a few things to ponder:
  1. Money is not the same as wealth (not in moralisic terms -> money = medium of exchange, wealth = purchasing power, or exchange power ...)
  2. wealth of the world usually increases with time
    1. Reverse happens in depression.
    2. Recession is merely slowing down of the growth
  3. Money supply can increase faster than or slower than the wealth of the world.
    1. If it increases faster, you get inflation
    2. If it increases slower, you get disinflation (also incorrectly called deflation)

For example, in a small "classroom economy" if there is X dollars in circulation and all you can buy with them a Y number of identical toys, then X/Y is the price of each widget (it is more complex than that, demand/supply enter, but humour me for a minute). Now let us say somebody dumps more toys (let's say an equal number) into this "world" - the average price of the toys will have to go down, even though wealth (as measured in toys) has gone up 100%. Now let us say the "government/RBI" of this world gives every child more money (let us say doubles the money for each child) such that the total money/number of toys comes back to the same level, you do not have inflation but everyone has more money. However their wealth (as measured in toys) is still the same.




the confusion usually occurs because money (as in how much currency you have) is usually talked about synonymous with wealth. And it usually is on a short time scale. But keep in mind - even with equal wealth thanks to inflation (basically a tax on those who hold their wealth in currency denominated assets - i.e. usually all liquid assets) money keeps increasing.
vina is offline   Reply With Quote
Old 19th December 2011, 21:52   #6
Senior - BHPian
 
thedreamcatcher's Avatar
 
Join Date: Mar 2009
Location: Dubai
Posts: 1,205
Thanked: 61 Times
Default re: Understanding Economics

Let me keep it brief. As someone as already pointed out, supply of money is not constant, but that does not mean its creation is liberal either. It is regulated. For instance, when a bank lends money, it is not doing so by 'actually' transferring someone else's money to you. There is a lot more behind that and a lot more interesting yet unknown facts too. I will save that explanation for later, if needed and it is definitely something more interesting than reserve ratios and fractional reserve banking theory that you usually see.

But anyhow, let me answer your question. When you earn something, say 100+x, and some else contributed to growing that x by paying you, it is not his loss. He obviously is getting a service, product or utility for the 'x' he gave you, right? And you in turn sell him a service or physical product which he needs. So, where is the question of loss to him. Unless he did charity, but that again is what it will be called and not a 'loss'.

Further, for you to go from 100 to 100+x, you would have also spent y amount over the year too. So, you have also released Y into the system.

So, in the above scenario, it is definitely not a case of someone else's loss at your company making money. Everyone derives utility and it is a normal economic cycle

Last edited by thedreamcatcher : 19th December 2011 at 21:58.
thedreamcatcher is offline   Reply With Quote
Old 19th December 2011, 22:07   #7
SDP
Team-BHP Support
 
SDP's Avatar
 
Join Date: Jan 2010
Location: Mumbai
Posts: 3,660
Thanked: 7,517 Times
Default re: Understanding Economics

A lot has been explained in the responses received so far.
Let me add my bit by sharing a link:


This debunks the misconception that money and gold-reserves have a co-relation and shades light on a lot of other aspects about money.
SDP is offline   Reply With Quote
Old 19th December 2011, 22:10   #8
BHPian
 
hellmet's Avatar
 
Join Date: Oct 2005
Location: GTA
Posts: 810
Thanked: 637 Times
Default re: Understanding Economics

Quote:
Originally Posted by Gandhi View Post
I'm not an expert on these matters, but as far as I know the net worth of this world is not constant. It keeps increasing. Also the notion of bills printed based on gold reserves of nation doesn't hold true for countries like US of A as they don't disclose their gold reserves.
As a matter of fact, the entire world now uses fiat currency. Fiat currency is not even worth the paper it is printed on, and is backed by nothing but trust in government that the currency will not erode in value sharply. Inflation is built into a fiat system and is desired to help growth going. Inflation is an increase in costs due to either a) Rise in prices due to scarcity (demand supply imbalance) b) Increase in money supply due to increase in loans (a.k.a debt) in the system. Google "Fractional Reserve System"

However, when inflation starts going bananas like it has in the last 5 years, here is a sample of what you get:

Name:  IMG_1965_1.JPG
Views: 2116
Size:  100.4 KB
Understanding Economics-img_1977_1.jpg
hellmet is offline   Reply With Quote
Old 19th December 2011, 22:54   #9
Senior - BHPian
 
vivekiny2k's Avatar
 
Join Date: Feb 2005
Location: cincinnati, jabalpur,chennai
Posts: 1,241
Thanked: 163 Times
Default re: Understanding Economics

Quote:
Originally Posted by hellmet View Post

However, when inflation starts going bananas like it has in the last 5 years, here is a sample of what you get:
you just made me realize that it's been 4 years since I have been in india. I might freak out if somebody gave me those coins thinking they are fake
vivekiny2k is offline   Reply With Quote
Old 20th December 2011, 09:19   #10
BHPian
 
Join Date: Jan 2007
Location: Pune
Posts: 258
Thanked: 26 Times
Default re: Understanding Economics

Quote:
Originally Posted by huntrz View Post
This requires an elaborate reply. I am sure some one would take the pains to put it here. Let me try to answer you in very brief-

1. Wrong assumption#1 Total amount of money in the world is constant-
Total money in the world is NOT constant. Banks "create" money by the way of lending. You can google on this to know how it works.

2. Wrong assumption#2 When one makes profit another one makes a loss-
Assume an isolated economy/village of only 3 people- one is a farmer, another is a fisherman and the third is weaver. Let us assume that each one of them can produce enough produce for 10 people(even though there are only 3 people in the village). Since each one of them have plenty so they can exchange their products with the other two in the village to buy what he doesn't otherwise produce but needs. Thus each of them will have enough for their consumption and still have some savings and therefore we can say that all 3 in the economy of the village are not only making profits but also wealthy with enough savings. Same works in real life too.

Since you are only 21, if you have questions like these in your mind you would enjoy studying economics in you academic career.
Money in terms of gold / silver is almost constant. He is not talking abt the printed fake money that the govt is forcing everyone to use.
Quote:
Originally Posted by FanaticOnWheels View Post
I just had this question in mind, and I thought I'd put it up for discussion.


Suppose you have a company that makes a profit of x rupees. That more or less means, it started of with, say, 100/-, and ended up with 100+x /-. Now, if the total amount of money in this world (which, I believe, is printed based on the gold reserves of a nation), is constant, then every company in this world cannot make a profit, right? (As that would mean generation of x/y/etc rupees at every point, which would keep adding up indefinitely!)

Plus, if I make a profit, that means I sell something more than what it's worth, so someone is buying it at more than what its worth, so he, in a way, is making a loss? (Though this approach might be shaky).

So it only makes sense that if the net money reserves in the world is constant, the total losses and the profits must be equal?

Am I going wrong somewhere?
Where you are going wrong...
You work to make money. You earn money to use it (mean make others work for you). Thus consider money (any money like gold or the fake/fiat currencies) to be a "bank (pun intended)" or a "storage" wherein later you can make others work for you. You work for others - you increase your "battery" charge. Others work for you - you decrease your "battery" charge.
Since you have already worked for someone (and earned money/made profits etc), and later you will use your money/profits to make others work for you, it all boils down to NILL.
Above is a very very simplified explanation. But it can be expanded for companies, nations and various other things.

So to answer your title question... If you make a profit, you have worked for someone and he has given / transferred his money to you - perhaps because he feels or needs that the work you are doing is valued to the money he has payed or transferred. Its a no profit/no loss thing in the very 1st place.

Note from the Team-BHP Support Team: Please use the "edit" button if posting within 30 minutes of the first post, instead of creating another back-to-back post.

Also use "Multi Quote" option for quoting Multiple posts.

Last edited by Rudra Sen : 20th December 2011 at 10:27.
subscrive is offline   Reply With Quote
Old 20th December 2011, 09:41   #11
Team-BHP Support
 
tsk1979's Avatar
 
Join Date: Feb 2005
Location: New Delhi
Posts: 22,913
Thanked: 15,582 Times
Default re: Understanding Economics

Quote:
Originally Posted by FanaticOnWheels View Post
I just had this question in mind, and I thought I'd put it up for discussion.


Suppose you have a company that makes a profit of x rupees. That more or less means, it started of with, say, 100/-, and ended up with 100+x /-. Now, if the total amount of money in this world (which, I believe, is printed based on the gold reserves of a nation), is constant, then every company in this world cannot make a profit, right? (As that would mean generation of x/y/etc rupees at every point, which would keep adding up indefinitely!)

Plus, if I make a profit, that means I sell something more than what it's worth, so someone is buying it at more than what its worth, so he, in a way, is making a loss? (Though this approach might be shaky).

So it only makes sense that if the net money reserves in the world is constant, the total losses and the profits must be equal?

Am I going wrong somewhere?
As an individual consumer, you are always at loss. Corporations, and people with wealth(enough to buy legistlation) are always at profit. Thats how it works. Loss/profit, balance of trade, economic theory, recession, boom, bubble are terms which highly paid executives coin up to make a fool of you and me

In the end the rich get richer, middle class goes along with inflation, and poorer get poorer until you have something like a "event".

Event can be french revolution, russian revolution etc.,

After "event", things go closer to normal, and then cycle again starts.

That is all is there to economics.
tsk1979 is offline   Reply With Quote
Old 20th December 2011, 10:03   #12
Distinguished - BHPian
 
phamilyman's Avatar
 
Join Date: Jul 2007
Location: Gurgaon
Posts: 5,578
Thanked: 3,323 Times
Talking re: Understanding Economics

Quote:
Originally Posted by subscrive View Post
Money in terms of gold / silver is almost constant. He is not talking abt the printed fake money that the govt is forcing everyone to use.
What is the true value of gold/silver?

Like anything else - there is demand and supply. i.e all notional.

If tomorrow, some nuclear physicist would find a fusion process to convert iron into gold by the tonnes, then gold would become far less costlier.
phamilyman is offline   Reply With Quote
Old 20th December 2011, 11:26   #13
Team-BHP Support
 
tsk1979's Avatar
 
Join Date: Feb 2005
Location: New Delhi
Posts: 22,913
Thanked: 15,582 Times
Default re: Understanding Economics

Quote:
Originally Posted by phamilyman View Post
What is the true value of gold/silver?

Like anything else - there is demand and supply. i.e all notional.

If tomorrow, some nuclear physicist would find a fusion process to convert iron into gold by the tonnes, then gold would become far less costlier.
Maybe not. For example, diamonds are abundant in nature, and can be manufactured also using pressure and heat, yet the diamond cartel keeps prices artificially inflated by creating an image of scarcity, as well as a successful brainwashing ad campaign
tsk1979 is offline   Reply With Quote
Old 20th December 2011, 11:33   #14
BHPian
 
Join Date: Dec 2009
Location: Ghaziabad
Posts: 994
Thanked: 737 Times
Default re: Understanding Economics

Can I suggest "Wealth of Nations" by Adam Smith.
A very old book, and a bit of a slow read, but it will pretty much answer these questions sufficiently, with good examples. This is still the basis of most modern day economic theories.
roy_libran is online now   Reply With Quote
Old 20th December 2011, 12:49   #15
Distinguished - BHPian
 
phamilyman's Avatar
 
Join Date: Jul 2007
Location: Gurgaon
Posts: 5,578
Thanked: 3,323 Times
Default re: Understanding Economics

Quote:
Originally Posted by tsk1979 View Post
Maybe not. For example, diamonds are abundant in nature, and can be manufactured also using pressure and heat, yet the diamond cartel keeps prices artificially inflated by creating an image of scarcity, as well as a successful brainwashing ad campaign
You can still distinguish both types. The day it becomes indistinguishable is the day the diamond industry vanishes. overnight.

+1000 to Roy. I mean dear OP, you need to do a fair bit more homework before you leverage the collective brain, that is TBHP.

In the interest of the forum quality, may I ask you to now google up basic macroeconomics (wikipedia etc can get you started), and come back when you've done some extensive homework and are ready to leverage TBHP appropriately?

PS: Your q is okay for 1-1 setting, but not for TBHP where a bit more homework results in an engaging quality discussion useful for all.
phamilyman is offline   Reply With Quote
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search


Similar Threads
Thread Thread Starter Forum Replies Last Post
Protectionism, Indian Car Pricing, Development Economics etc jesal The Indian Car Scene 140 9th April 2017 10:22
Need help with economics book and Baron's GMAT/GRE English book Nikhilb2008 Shifting gears 2 30th June 2008 11:05
Help needed regarding Bombay School of Economics Nikhilb2008 Shifting gears 2 8th April 2008 17:14
Palio 1.6 Sport Vs Palio MJD- pure economics zaks The Indian Car Scene 11 17th March 2008 14:22


All times are GMT +5.5. The time now is 12:16.

Copyright 2000 - 2017, Team-BHP.com
Proudly powered by E2E Networks