The Free Market Center
The Free Market Center
Does an economic loss mean a loss of money for the system?
| Transactions Summary | ||||
| Grower | Dealer | Bank | Total | |
| Dollars | $ 0 | $ 1,000 | $ (1,000) | $ 0 |
| Corn Seed | 0 BU | -500 BU | 0 BU | -500 BU |
| Balance Summary | ||||
| Grower | Dealer | Bank | Total | |
| Money | ||||
| Beginning Balances | $ 0 | $ 2,250 | $ 1,250 | $ 3,500 |
| Ending Balances | $ 0 | $ 3,250 | $ 250 | $ 3,500 |
| Change | $ 0 | $ 1,000 | $ (1,000) | $ 0 |
| Corn Seed | ||||
| Beginning Balances | 0 BU | 1200 BU | 0 BU | 1200 BU |
| Ending Balances | 0 BU | 700 BU | 0 BU | 700 BU |
| Change | 0 BU | -500 BU | 0 BU | -500 BU |
| Grower | Dealer | Bank | Total |
|---|---|---|---|
| Lost nothing; because he had nothing at risk. | Gained by selling 500 bushels of corn to the grower, for which he received $1,000 in payment. | Bears all of the loss (assume the grower skipped town.) Lost $1,000 of principal and $175 of unrealized interest, |
The total amount of corn seed in this system has decreased by 500 bushels. |
In this case the total system has incurred an economic loss, yet, the quantity of money has not declined from the original amount.
The 500 bushels of corn which the grower purchased from the seed dealer was lost in the flood. The dealer, however, did get paid for that seed; therefore the dealer suffered no economic loss. The bank, on the other hand, suffered a loss of $1,000 (not coincidentally the same as the thousand dollars received by the seed dealer). In spite of the economic loss, in terms of bushels of corn, the quantity of money at the end of these transactions remained unchanged.