Money (in theory) is just another good (like cloths, bread, meat, etc.) except new money isn’t produced (ideally) and money isn’t destroyed (ideally). This means there is a fixed amount of money in the economy giving it a flat amount of supply and demand if I using the terminology correctly here.
Money (in theory) is just another good (like cloths, bread, meat, etc.) except new money isn’t produced (ideally) and money isn’t destroyed (ideally).
I do not think changing the amount of money is bad per se, provided the cost of producing money is high enough (e.g., mining gold).
Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping.
The graph represents relationship between utility of two goods, why do you want to treat one of them preferentially?
This is getting a bit off topic and if you are interested in a discussion about it I would be interested in discussing the merits of inflation/deflation in another thread. However, I think that for money to optimally serve it’s purpose no inflation or deflation should occur. Both inflation and deflation, while not terrible for money, is suboptimal in my opinion.
The preference is arbitrary. The demand and the supply curves could had been easily priced in terms of clothes, instead of bread (as per the above example), and the roles would had been reversed.
If you can get it with real goods in a barter system, money is even easier…because remember money is just a commodity too…it just happens to be a commodity that gets value from its utility as a facilitator of trade…a “medium of exchange”.
So when you say the “price” of something goes down in terms of dollars due to increased productivity, what you’re really saying is that the value of that good relative to the value of the currency has gone down…therefore, the purchasing power of the money has increased. This means that everyone who holds that money is able to buy more stuff with the same amount of money…they are, for our purposes here, wealthier.
It’s great to see that you’re so interested in learning this and putting such effort into it as well as making progress. The best read for you at this point might be Peter Schiff’s How an Economy Grows and Why it Crashes. It goes into this as well as many other basic economic concepts in a very easy-to-follow way. It’s an update and expansion of his father’s book of a similar title. You’ll have to check out a library or bookstore to get Peter’s updated book, but his father’s version is available in pdf here, and our own Nielsio posted a nice reading of it here.
My little model here on my paper (took 6 hours to figure out) shows that when productivity increases for the butcher, his marginal cost of production goes down and so the price relative to other goods of meat goes down. In response to the movement down their demand curves, the baker and the tailor request far more than before of meat. As a result the butcher has more bread and clothes than before and the other two have more meat. Here are my numbers…
Relative prices: Meat $100 - Bread $183 - Clothes $225
Incomes Spending
Butcher $8500 $8500
Baker $7500 $7500
Tailor $5000 $5000
I simply convert any of the incomes into the price of one of the three goods to compare their incomes in terms of the goods.
NGDP is $21,000. No cash balances are ever held. So the demand for money is zero.
What is the money supply? Can this info be put int terms of the equation of exchange MV = PQ, or into the cambridge k, M = kY?
I will try to go from here and figure out how this transforms when productivity for the butcher goes up. Will take some time
The problem is that transition from barter to money can’t be done without an intermediate step. Money is a commodity just like any other good.
In the former British colonies in America, some of them use tobacco as a form of money. Tobacco had its direct use for consumption, and its indirect use as a medium of exchange for exchanging other goods.
For the barter model, introduce Producer D as a tobacco farmer, who supplies tobacco to Producer A, B, and C, and then establish appropriate exchange ratios for good D with respect to goods A, B, and C.
Have each producer consume some of the tobacco himself, but have some leftover for trade.
Remove direct barter exchange among Producers A, B, and C, and replace it with indirect exchange. For example, let’s say Producer A wishes to trade with Producer B. Instead of a direct exchange of good A for good B, this will happen:
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Producer A trades with Producer D, exchanging good A for good D.
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Producer A trades with Producer B, exchanging good D for good B.
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Producer B trades with Producer A, exchanging good D for good A
Money supply is that total amount of good D in existence. For your purposes, the Equation of Exchange (MV = PQ) is more appropriate, since the Cambridge equation (M (1/k) = PY) is simply a derivation of the Equation of Exchange.
Can you help me understand the difference between the two?
The Fisher equation is MV = Y and the cambridge k us M = kY
Let’s say k = 1/12, that means that on average moneyholdings are 8% of nominal income. Why does that mean that the veolcity of each dollar is 12? Weird.
Thanks.
Equation of Exchange (per Fisher, et al.) is:
MV = PQ
But sometimes economists substitute quantity Q for real output Y:
MV = PY
Therefore PY is nominal output, while Y by itself is real output.
For the Cambridge Equation, velocity V is defined as:
V = 1 / k
Therefore plug the above back into the Equation of Exchange:
M * (1/k) = PY
Yes.