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Methods for teaching simple economics - Ajay Alcos - 07.03.2016 12:35

I've quite a few friends who seem to be extremely curious about economic cycles and how it correlates with their everyday lives. Notably though, whenever I use my technical knowledge on the subject to describe various things (aggregate demand, inflation, deflation etcetera) and the cause & effects each have, plus the correlations they ultimately bring into other aspects of economics - they quickly find my descriptions unintelligible. As a result I decided to do a bit of outside-thinking and find easily relatable real-world examples that correspond with the logic behind basic economic theory. Therefore, I've decided to share the one's I've thought up in case any of you guys encounter problems when describing economic theories to others. Here's a few examples below:

Quote:
Circulation
"Think of money as you would blood. Now, I'm not saying that all human beings are economic vampires, but rather we need blood to both survive, as much as society needs money to function. For example, a person can have plenty of blood, but if that blood isn't used (i.e. being pumped into your various organs) then that volume of blood becomes useless, and ultimately you'll die. Money is the same thing as blood in that if it isn't used - it isn't circulated. And if it isn't circulated, economies start suffering from organ failure. So in essence circulation is mostly about how frequently money is moved-around and used, hence the term."


Quote:
Assets vs Capital
"Do you know why footballers earn so much whilst an Olympic athlete earns less? It's quite simple, they differ in value. Let's take paintings and cash for example. It's 1985 and Linda and Josh have $1 million each. Linda decides to spend her $1 million on a valuable painting while Josh simply buries it under a tree. 20 years pass and it's 2015. The painting Linda has bought is now worth $2 million because that money has become less valuable compared to 1985. However the $1 million Josh kept buried under his tree is still - $1 million dollars, and so unlike Linda, he can't gain any profit as a result."


Feel free to share other examples below.


RE: Methods for teaching simple economics - Helsworth - 07.03.2016 12:49

The text book view on price or value is that supply & demand figures that out. In reality, however, supply & demand aren't the only factors that determine price/vale. Arbitrary decisions + the strength of factions to bargain against each other's interests come in to play as well. So for example, if you're Romania, you'll see the price at your gas station to be higher than it was when crude was in the triple digits - even though today's crude is priced at its historically double digit figure. Corruption, cartels, monopolies - these things impact price. And it's useful to tell people that nominal growth + inflation = real growth. A lot of inflation worries don't take output into account; to them, output is always irrelevant (i.e. always capped & utterly inelastic). And that's why they continue to cling to the failed QTM.

Yes, blood flow can be used as an analogy to the flow of funds in the economy. So can energy flows. Money is the economy's token, not its actual substance. The most important point is for people to understand double-entry accounting. To understand that Spending is Income. That there are 2 sides of a balance sheet - and how the plus & minus switch sides depending on your point of view.
For instance, someone spending money on you is your income. Someone's debit to you is your credit. Net flows accrued over time are stocks, which can be positive (savings) or negative (debts). Leaving the micro-realm aside, at the macro-level, everything balances out to zero. Gov + Domestic private sector + Foreign sector.

In the case of banking; I like stress out the aspect of money hierarchy. Though the majority of transactions are resolved via bank credit/debt - banks use reserves to make settlement payments between themselves & between themselves and the Treasury + the Central Bank. So the bank gives you a loan & in return obtains your promise to pay HPM (high powered money). When the private sector's stock of HPM & its ability to borrow HPM via leveraging off of its stock of HPM goes down - that makes the private credit structure unsustainable and private debt deflation kicks in. More money is canceled than it's created. As such, Aggregate Demand goes down - i.e. the economy's ability to spend. Less spending = less income = fewer sales = less production = fewer jobs = more unemployment = lower economic activity = lower government tax revenue = higher welfare spending due to more people collecting welfare checks = higher fiscal deficit = higher debt to GDP ratio = the national debt increases. In the end, it's just the automatic stabilizers working counter-cyclically to correct the economy.

Going back to metaphors. An individual's ability to maintain positive net flows of $ in his account determines his overall ability to provide for himself (food, utilities, shelter, clothes, ability to obtain a loan & service it etc). Ergo, he is able to spend as he sees fit whilst also being able to save some funds for rainy days, as it were. When an individual doesn't have this ability - on the contrary, if he receives no positive net flows or his net flow of funds is negative, he'll soon lose his assets and his livelihood. Because not everyone can be in a position to net save, it makes sense to have the government always be in a position of net debt - because unlike a firm or household, it can issue net debits without any solvency risk. If people understood this, the political debate would be entirely different.


RE: Methods for teaching simple economics - Ajay Alcos - 07.03.2016 17:47

Helsworth Wrote:
The text book view on price or value is that supply & demand figures that out. In reality, however, supply & demand aren't the only factors that determine price/vale. Arbitrary decisions + the strength of factions to bargain against each other's interests come in to play as well. So for example, if you're Romania, you'll see the price at your gas station to be higher than it was when crude was in the triple digits - even though today's crude is priced at its historically double digit figure. Corruption, cartels, monopolies - these things impact price. And it's useful to tell people that nominal growth + inflation = real growth. A lot of inflation worries don't take output into account; to them, output is always irrelevant (i.e. always capped & utterly inelastic). And that's why they continue to cling to the failed QTM.

Yes, blood flow can be used as an analogy to the flow of funds in the economy. So can energy flows. Money is the economy's token, not its actual substance. The most important point is for people to understand double-entry accounting. To understand that Spending is Income. That there are 2 sides of a balance sheet - and how the plus & minus switch sides depending on your point of view.
For instance, someone spending money on you is your income. Someone's debit to you is your credit. Net flows accrued over time are stocks, which can be positive (savings) or negative (debts). Leaving the micro-realm aside, at the macro-level, everything balances out to zero. Gov + Domestic private sector + Foreign sector.

In the case of banking; I like stress out the aspect of money hierarchy. Though the majority of transactions are resolved via bank credit/debt - banks use reserves to make settlement payments between themselves & between themselves and the Treasury + the Central Bank. So the bank gives you a loan & in return obtains your promise to pay HPM (high powered money). When the private sector's stock of HPM & its ability to borrow HPM via leveraging off of its stock of HPM goes down - that makes the private credit structure unsustainable and private debt deflation kicks in. More money is canceled than it's created. As such, Aggregate Demand goes down - i.e. the economy's ability to spend. Less spending = less income = fewer sales = less production = fewer jobs = more unemployment = lower economic activity = lower government tax revenue = higher welfare spending due to more people collecting welfare checks = higher fiscal deficit = higher debt to GDP ratio = the national debt increases. In the end, it's just the automatic stabilizers working counter-cyclically to correct the economy.

Going back to metaphors. An individual's ability to maintain positive net flows of $ in his account determines his overall ability to provide for himself (food, utilities, shelter, clothes, ability to obtain a loan & service it etc). Ergo, he is able to spend as he sees fit whilst also being able to save some funds for rainy days, as it were. When an individual doesn't have this ability - on the contrary, if he receives no positive net flows or his net flow of funds is negative, he'll soon lose his assets and his livelihood. Because not everyone can be in a position to net save, it makes sense to have the government always be in a position of net debt - because unlike a firm or household, it can issue net debits without any solvency risk. If people understood this, the political debate would be entirely different.


As always, you seem to hit the nail where it matters. Thanks for the info.