Islands, Economics and Currency

The laws of economics are much like the laws of gravity. If you drop a space shuttle, gravity will have the same effect on it as it does a pebble. With that in mind many times I attempt to simplify economics by thinking of it in smaller terms. So you guessed it, I reduce things down to an island with only a few inhabitants.

On this island let’s say that there is no currency, only bartering. Let’s also say that you are a maker of furniture. Now, desiring fruit, you go to the farmer and begin negotiating the purchase of some apples. So it must be determined how many apples, say, one chair, is worth. A factor that will arise quickly in this negotiation is the farmer’s lack of need of furniture. This would reduce the “demand” the farmer has for your chair and as such will reduce the number of apples he may be willing to exchange. But, he may need a new plow. So perhaps you could go to the blacksmith and trade your chair for a plow and ultimately get more apples for your chair.

It’s easy to see that the absence of a currency is awkward. Furthermore, all the extra time spent trading takes time away from the thing that you do best: build furniture. This results in less furniture for the island to enjoy. Now while that may be a good thing for you on the short term—less furniture means higher prices for furniture—the islanders as a whole have to live with less furniture and so have a lower standard of living.

There’s another factor that will also change the dynamics of your situation considerably. That factor is competition. This comes into play if you’re not the only person on the island that makes furniture. But for now I must honor my post limits. (300ish words)

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Filed under Business, Competition, Economic Science, Economics, Money

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