A Two Person Closed Economy

Illustration of key macroeconomic principles Property boom, benefits from trade and inflation

On a lonely island in the middle of nowhere

Lived two men

Robinson Crusoe (RC) and Man Friday (MF)

RC owned the only piece of arable land on the island

And MF owned the only orchard there

Every year, RC gave MF some grains and MF gave RC some fruits & vegetables

It worked well for years but one fine day, RC developed an appreciation for fresh fruits and vegetables which were a rarity for him unlike MF

Sadly MF had no use for grains midseason. RC and MF sat together and agreed on a monetary measure to facilitate midseason transactions

They gathered all the pebbles of a rare kind on the island (100) and split them equally between them. The pebbles were to be used as the money for exchange. 50 50

Now RC freely took fruits & vegetables from MF around the year They exchanged goods worth 40 pebbles each year

RC being the smart Alex he was, figured that he may purchase a small portion of the orchard for the 10 pebbles that were always in spare

So he bought a tenth of the orchard from MF for 10 pebbles

MF was very happy that year for he had 20 pebbles in reserve after buying all the grain he needed. RC too was full of joy for he now owned a little more than what he had.

Next year MF discovered that his reserve has depleted to 12 pebbles only as RC bought lesser fruits & vegetables

MF requested RC for a tenth of his arable land for which RC demanded 12 pebbles MF readily agreed

RC was very happy as he had 20 pebbles in reserve now and owned assets worth 120 pebbles. MF too was quite happy as he now had 16 pebbles in reserve in addition to assets equal to RC.

Next year, RC approached MF with a proposal to buy a further tenth of his orchard. MF realizing his folly last time, demanded 20 pebbles this time, which RC readily agreed to.

Now RC was very happy that he owned assets worth 220 pebbles. MF was also overflowing with joy for he now had 36 pebbles in reserve in addition to assets slightly less than RC.

BLACK SWAN HELICOPTER MONEY

A tsunami struck the island that year. Fortunately both the arable land and orchard remained safe.

MF while gaping in awe at the damage to the trees on the seaside on which Tsunami struck discovered to his amazement 30 rare pebbles of the same kind he and RC were using as money.

MF with his coffers over-flowing with pebbles ran to RC and offered to purchase a further tenth of the arable land

RC with no great want of pebbles casually asked for 30 pebbles to which MF surprisingly (to RC) agreed

RC was very happy now for he had assets valued at 300 pebbles along with 30 pebbles in reserve MF too was overjoyed as he also had similarly valued assets with 36 pebbles in reserve

And so the

On that isolated Island continued

After a few years, both RC and MF owned half of arable land and half of orchard - assets valued at 500 pebbles each Their trend analysis also suggested that assets will continue to rise at 20% in value.

They also owned 65 pebbles each all in reserve.

In the meantime, RC with no great aptitude for maintaining an orchard saw the production of fruit & vegetables in his owned part come down to half

Elsewhere foodgrain yields halved in MF owned arable land for MF did not know how to properly maintain the right mix of manures in the soil.

RC suffering from lack of fruits & vegetables in his diet and MF from lack of grains started trading again with their pebbles.

The prices they settled at now was 3x higher than the initial price. They could only afford to trade half the initial trade volumes now.

Since there was no scope for further improvement, they learnt to keep them satisfied with 75% of the grains and fruits & vegetables now.

Yet each of them was content that he owns assets valued at 500 pebbles growing at 20%. And he owns 65 pebbles, up from 50. And he sells goods worth 60 pebbles annually, up from 40 pebbles.

Lessons
Trade improves specialization Means of production should be managed by people best qualified to do so Price rise does not equate with rise in value Helicopter money may stimulate investment and consumption temporarily but cannot be a substitute for greater specialization and technological improvement /innovation It is important to decide whether to live well or to live seemingly well, both may not necessarily be the same depending on perspectives

Hope You Enjoyed It!

Coming Soon! Part 2 RC and MF decide to relive their life