Hello everyone..!!! Welcome to "INTROSPECTION". Today I'm back with an exciting topic "BOOM OR BUST". I mentioned the word 'exciting' because I'm going to talk about "MONEY" and how it is used for the growth of the economy?". Now, I know that many people feel that economy is very complicated to understand. No..!! not anymore because I have made my best effort to keep it simple for you to understand. Let's dive in...
INTRODUCTION: The economy is driven by simple transactions. Every time you buy something you create a transaction. Any transaction consists of a buyer and a seller. Where buyer exchanges money or credit in exchange of goods, services, or financial assets.
For example, There's a person named Ramesh, who just completed his graduation and he's about to join his new job of salary 30,000. Which he got on campus. To go to the office he went on to buy new clothes. So when he went to the shop, he exchanged money to buy clothes. There he created a "TRANSACTION" as mentioned above.
In this way, people, businesses, and even the Government engage in transactions. Out of everyone the big buyer and seller is Government. It majorly consists of two parts. The central Government and The Central bank. The role of the Central Government is to collect taxes and spend money accordingly. While Central bank controls the money and credit, by regulating the interest rates and printing new money.
Example: After going to the office for a month, Ramesh thought to buy a bike. But he thought to buy one, on second-hand as he is not that confident in his driving skills. He already has his savings of rupees RS.25,000, he took a debt of another RS.25,000 and finally bought a bike of RS.50,000. The person who sold this bike to Ramesh is Sanjeev. As I mentioned above Ramesh took the loan and he spent it buying a bike from Sanjeev, now Ramesh's spending is Sanjeev's income.
Here when a person's income increases he become more creditworthy, i.e., he is eligible to take more loan than he was. Therefore, he borrows more and spends more which is the income for the other person.
Ex: Now with his increased income Sanjeev is eligible for more loans. Even Sanjeev is an employee with a monthly salary of 60,000. who is planning to start a small business? For which he uses his loan eligibility and takes the loan. Talking about numbers, Sanjeev has his savings of 50,000 rupees and he earned more RS.50,000 by selling the bike to Ramesh. And he takes a loan of 1,00,000 rupees. Adding up everything, he now has a total of 2,00,000 rupees. Which he uses to buy a very small shop from a person called "Ravinder". In this case, Sanjeev's spending is Ravinder's income.
THE GROWTH: Credit or debt or loan actually helps people in spending more than they actually earn by working which is called "PRODUCTIVITY".
On the whole,
increased income->increased borrowing->increased spending->increased income for another person->increased borrowing->again increased spending, this goes on and goes on.
As we know more sales and more transactions lead to "ECONOMIC GROWTH".
If we consider our example, Ramesh's income from work is rupees 30,000 but has spent RS.50,000 to buy a bike with the help of a loan(CREDIT). While Sanjeev's income from work is RS.60,000 and spent 2,00,000 rupees to buy a shop which is again with the help of a loan. We can clearly observe that there spending is way more than what they earn by working.
NOTE: These examples are for your understanding only, cases may vary in reality.
And yes..!! "Credit matters more for the growth of economy than productivity", but only in the short run. That is why our economy is often referred to as "DEBT BASED ECONOMY". Although loan or credit looks like money, it is different from money. Loan or credit helps us spend more than our productivity when we take it, and makes us spend less than we produce when we have to pay it back. And even in our country what many people think as money is actually credit. This may make you feel that credit is bad, not exactly we can say that. Because credit is bad only if it is used for non-productive activities.
Ex: Here Ramesh used his credit to buy a bike which does not increase his productivity. While on the other hand, Sanjeev used his credit to buy a shop for his business which increases his productivity and helps in repaying his debt. Hence out of these two people Sanjeev used his debt for better purposes than Ramesh. This may lead Ramesh to cut off his expenses to clear the debt in the future. This justifies the statement "Credit helps you spend more than your productivity when you take it, but it makes you spend less than your productivity when you have to pay it back".
In fact, there is only 3% physical money in the whole world and the other 97% is credit.
NOTE: The economy, in reality, is way more complicated, what we are trying to show is the very basic template of how it runs for the sake of your understanding.
CONSEQUENCE: In an economy with credit, where spending obviously increases faster than production, because spending is fuelled by credit which can be created out of thin air. Spending and incomes of people continue to grow way faster than productivity, which leads to the raising of demand faster than supply and in turn leads to an increase in prices. And this scenario is what we call "INFLATION" which is a very famous term, but very few actually know what it means. It is to be noted that inflation can occur at different rates in different sectors which is quite common and does not cause damage to the country's economy. But after a certain threshold, it can cause a lot of problems to the country's economy and public. Which is why the central bank has to do something about it..!!
You will have to wait for the next week's BOOM OR BUST-II which provides more clarity about the topic. Consider sharing with those economy enthusiasts who find this post helpful.
THANK YOU..!!!
FEEL FREE TO PUT A COMMENT, IF YOU LIKE IT.....
FEEL FREE TO SHARE IT TO OTHERS, IF YOU LEARN SOMETHING FROM IT...
NOW YOU CAN EVEN SUBSCRIBE(ON THE TOP), SO THAT YOU CAN RECEIVE AN E-MAIL WHEN WE PUT ON A NEW POST.
INTRODUCTION: The economy is driven by simple transactions. Every time you buy something you create a transaction. Any transaction consists of a buyer and a seller. Where buyer exchanges money or credit in exchange of goods, services, or financial assets.
For example, There's a person named Ramesh, who just completed his graduation and he's about to join his new job of salary 30,000. Which he got on campus. To go to the office he went on to buy new clothes. So when he went to the shop, he exchanged money to buy clothes. There he created a "TRANSACTION" as mentioned above.
In this way, people, businesses, and even the Government engage in transactions. Out of everyone the big buyer and seller is Government. It majorly consists of two parts. The central Government and The Central bank. The role of the Central Government is to collect taxes and spend money accordingly. While Central bank controls the money and credit, by regulating the interest rates and printing new money.
THE MOVEMENT: As buyers and sellers make transactions, so do lenders(banks) and borrowers. Lenders need to increase the money with their existing money. While borrowers need to buy something which sometimes they can't afford. Both these needs can be satisfied by "CREDIT". When a person takes a loan from a bank it is called "DEBT" from our side and called "CREDIT" from the bank's side. When the borrower gets the loan his spending(expenditure) increases. And this spending is that which "MOVES THE ECONOMY" because one person's spending is another person's income and that person's spending is another person's income and this moves on, creating the movement in the economy.
Example: After going to the office for a month, Ramesh thought to buy a bike. But he thought to buy one, on second-hand as he is not that confident in his driving skills. He already has his savings of rupees RS.25,000, he took a debt of another RS.25,000 and finally bought a bike of RS.50,000. The person who sold this bike to Ramesh is Sanjeev. As I mentioned above Ramesh took the loan and he spent it buying a bike from Sanjeev, now Ramesh's spending is Sanjeev's income.
Here when a person's income increases he become more creditworthy, i.e., he is eligible to take more loan than he was. Therefore, he borrows more and spends more which is the income for the other person.
Ex: Now with his increased income Sanjeev is eligible for more loans. Even Sanjeev is an employee with a monthly salary of 60,000. who is planning to start a small business? For which he uses his loan eligibility and takes the loan. Talking about numbers, Sanjeev has his savings of 50,000 rupees and he earned more RS.50,000 by selling the bike to Ramesh. And he takes a loan of 1,00,000 rupees. Adding up everything, he now has a total of 2,00,000 rupees. Which he uses to buy a very small shop from a person called "Ravinder". In this case, Sanjeev's spending is Ravinder's income.
THE GROWTH: Credit or debt or loan actually helps people in spending more than they actually earn by working which is called "PRODUCTIVITY".
On the whole,
increased income->increased borrowing->increased spending->increased income for another person->increased borrowing->again increased spending, this goes on and goes on.
As we know more sales and more transactions lead to "ECONOMIC GROWTH".
NOTE: These examples are for your understanding only, cases may vary in reality.
And yes..!! "Credit matters more for the growth of economy than productivity", but only in the short run. That is why our economy is often referred to as "DEBT BASED ECONOMY". Although loan or credit looks like money, it is different from money. Loan or credit helps us spend more than our productivity when we take it, and makes us spend less than we produce when we have to pay it back. And even in our country what many people think as money is actually credit. This may make you feel that credit is bad, not exactly we can say that. Because credit is bad only if it is used for non-productive activities.
Ex: Here Ramesh used his credit to buy a bike which does not increase his productivity. While on the other hand, Sanjeev used his credit to buy a shop for his business which increases his productivity and helps in repaying his debt. Hence out of these two people Sanjeev used his debt for better purposes than Ramesh. This may lead Ramesh to cut off his expenses to clear the debt in the future. This justifies the statement "Credit helps you spend more than your productivity when you take it, but it makes you spend less than your productivity when you have to pay it back".
In fact, there is only 3% physical money in the whole world and the other 97% is credit.
NOTE: The economy, in reality, is way more complicated, what we are trying to show is the very basic template of how it runs for the sake of your understanding.
CONSEQUENCE: In an economy with credit, where spending obviously increases faster than production, because spending is fuelled by credit which can be created out of thin air. Spending and incomes of people continue to grow way faster than productivity, which leads to the raising of demand faster than supply and in turn leads to an increase in prices. And this scenario is what we call "INFLATION" which is a very famous term, but very few actually know what it means. It is to be noted that inflation can occur at different rates in different sectors which is quite common and does not cause damage to the country's economy. But after a certain threshold, it can cause a lot of problems to the country's economy and public. Which is why the central bank has to do something about it..!!
- There are some countries like Venezuela, zimbabwe, yugoslavia...etc which are experiencing hyperinflation rates. Due to which, these countries are in serious economic turmoil and the people are suffering. You can google about them for complete information.
You will have to wait for the next week's BOOM OR BUST-II which provides more clarity about the topic. Consider sharing with those economy enthusiasts who find this post helpful.
THANK YOU..!!!
FEEL FREE TO PUT A COMMENT, IF YOU LIKE IT.....
FEEL FREE TO SHARE IT TO OTHERS, IF YOU LEARN SOMETHING FROM IT...
NOW YOU CAN EVEN SUBSCRIBE(ON THE TOP), SO THAT YOU CAN RECEIVE AN E-MAIL WHEN WE PUT ON A NEW POST.