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Unread 12 Sep 2006, 02:00   #1
Nadval
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A question for economists...

Probably very easy to answer for someone who knows their stuff, but I have never studied economics and all I know on the topic is what I have read myself.

If I were to put a £20 note through a paper shredder, without informing anyone, would the country be £20 poorer?

Just dropped one and it landed perfectly in the mouth of my shredder and, having got over the relief that it was turned off, started pondering on what it would have meant if it had gone through (apart from myself being £20 poorer). My first guess was that the country would be down £20, since the people who decide how much money should be printed surely wouldn't account for the amount of people who, on average, burn/destroy their money and that there would therefore be £20 less in circulation. Then I started considering that it would probably just lower inflation by a miniscule fraction which, according to my understanding, wouldn't necessarily reduce Britain's GNP - therefore leading me to believe that the country would only be poorer by the amount it cost to print the note. After that I got tied up in knots over how the rate of inflation is measured and by whom (which led me onto considering similar things about exchange rates) and now I just want to have it all explained to me I'm sure the answer will come very easily to an educated mind, so if someone could shed some light on where my understanding of inflation/economics is lacking then that would be appreciated. I have an inkling that, once explained, I will feel like an idiot for having asked

Last edited by Nadval; 12 Sep 2006 at 02:09.
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Unread 12 Sep 2006, 02:07   #2
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Re: A question for economists...

lol, thats quite an interesting way of looking at it actually, and since im probably worse off informed about the economy than yourself i cant answer, also are you stoned again?
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Unread 12 Sep 2006, 02:11   #3
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Re: A question for economists...

First day without in a while, so I've got a few more hours to burn before I can sleep
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Unread 12 Sep 2006, 02:13   #4
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Re: A question for economists...

asif you still check these forums though, so how did your a-levels go
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Unread 12 Sep 2006, 02:17   #5
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Re: A question for economists...

Someone who knows more about macroeconomics may tell me I'm wrong, but I doubt it would make the country richer or poorer. A £20 note isnt worth anything in any objective sense; its just a bit of paper that would cost about a penny to make, and acquires its 'value' purely by the role it plays in the fiat currency system. Nothing concrete is being destroyed when you burn the bit of paper - its not like youre destroying £20 worth of food, or a £20 pair of headphones. In an abstract sense your 'purchasing power' is being reduced, but this would be compensated by the deflation that would occur. No real value is either entering or leaving the system, so theres no reason why thered be any change.

Look at it in a more extreme sense; what if £10000000 in banknotes were to be destroyed? There would be ridiculous deflation and a lot of wealth redistribution, but you still arent creating or destroying any actual goods*. Ditto if you were to print £100000000 worth of £50 notes. Fiat currency is intrinsically valueless - its just paper. All that really matters is the distribution of the paper in terms of who has what percentage of it, not how much of it there actually is (if everyone's money doubled overnight, noone would be poorer or richer). If you burn money then you become poorer, but everyone else becomes minisculey richer becuse they own a greater percentage of the total money than they did before.


* Although depending on who's wealth youre destroying, you will affect the capacity for goods to be produced in the future. There are lots of subtelties here; what were you planning on doing with the £20 before you destroyed it? If you were going to use it to buy paper and pens then draw a picture that some art collector valued at £10000, then yeah, in some abstract sense the system would be 'down' by £10000 in terms of lost potential. The problem is that an economist could only give you a broad statistical answer at best, which would be based on treating you as an 'average' person burning an average £20 note. But in reality, your personal circumstances are going to determine the effect that it would have - if you're the sort of person who keeps his savings stuffed under a matress; then there would be pretty much no effect. Similarly if you were a highly productive person who generally spent all his money on business ventures, there would probably be a bigger effect than average in terms of missed opportunities. If you were going to use the £20 to pay an assassin to randomly shoot artists and businessmen, then burning it instead would probably make the country richer in the long term. It all depends on the specific details, there's no general answer here.

Last edited by Nodrog; 12 Sep 2006 at 02:53.
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Unread 12 Sep 2006, 02:19   #6
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Re: A question for economists...

I'm not sure how to explain this - and tbh i've never thought of it as you have. However digging up my Economics degree...

If you burn cash in essence you are decreasing or shrinking the money supply (governments use this for monetary purposes as well). When you reduce the money supply interests rates get pushed up and this increases the cost of borrowing leading to lower investment. GDP goes down.. consumers decrease real consumption spending and we get a sort of multiplier effect where the GDP thus falls further.

In reality there is a much more complex system behind the m3 & money supply which is all mathematical and probably wont mean anything to you. I think this should hopefully answer your question somewhat?

The country won't be £20 poorer, it isn't as simple as that. Do note however that legal tender makes up less than 5% (I think) of broad money supply

What we really should be talking about is the effect on the nominal cash balances and how this effects the PP of the remaining currency in real terms.

edit: ah I just thought of the real (cash) balance effect.. hmm this might be a more appropriate response to your question

edit2: im now confused :/

Last edited by Zar; 12 Sep 2006 at 02:31.
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Unread 12 Sep 2006, 02:36   #7
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Re: A question for economists...

Quote:
Originally Posted by Zar
If you burn cash in essence you are decreasing or shrinking the money supply (governments use this for monetary purposes as well). When you reduce the money supply interests rates get pushed up and this increases the cost of borrowing leading to lower investment. GDP goes down.. consumers decrease real consumption spending and we get a sort of multiplier effect where the GDP thus falls further./
In theory the central bank would expand the money supply to balance this out though and there'd still be no net change, wouldnt it?
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Unread 12 Sep 2006, 02:38   #8
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Re: A question for economists...

Quote:
Originally Posted by Nodrog
In theory though the central bank would expand the money supply to balance this out and there'd still be no net change, wouldn't it?
yes - but there would be a lag in discovering said money has disappeared and them discovering it. This would be reflected in the markets.

In the long term like you have said, there would be no net change (as long as the currency is replaced). I just said that assuming the currency isn't replaced.
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Unread 12 Sep 2006, 02:39   #9
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Re: A question for economists...

I could go into some detail as to what happens, as a third year economics student, alas i have to run off to do an International Trade presentation. So watch this space .

First thing that sprang to mind, though, was the velocity of money...
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Unread 12 Sep 2006, 02:43   #10
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Re: A question for economists...

Quote:
Originally Posted by Ultimate Newbie
I could go into some detail as to what happens, as a third year economics student, alas i have to run off to do an International Trade presentation. So watch this space .

First thing that sprang to mind, though, was the velocity of money...
it has nothing to do with the velocity as we are not debating the rate of exchange of money to another transaction

although it is integral if you are exploring mv = pq (m3 money supplies). That wont answer his question - it will confuse him

m is the important variable in this equation.

Last edited by Zar; 12 Sep 2006 at 02:48.
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Unread 12 Sep 2006, 02:46   #11
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Re: A question for economists...

Quote:
Originally Posted by Zar
I'm not sure how to explain this - and tbh i've never thought of it as you have. However digging up my Economics degree...

If you burn cash in essence you are decreasing or shrinking the money supply (governments use this for monetary purposes as well). When you reduce the money supply interests rates get pushed up and this increases the cost of borrowing leading to lower investment. GDP goes down.. consumers decrease real consumption spending and we get a sort of multiplier effect where the GDP thus falls further.

In reality there is a much more complex system behind the m3 & money supply which is all mathematical and probably wont mean anything to you. I think this should hopefully answer your question somewhat?

The country won't be £20 poorer, it isn't as simple as that. Do note however that legal tender makes up less than 5% (I think) of broad money supply

What we really should be talking about is the effect on the nominal cash balances and how this effects the PP of the remaining currency in real terms.

edit: ah I just thought of the real (cash) balance effect.. hmm this might be a more appropriate response to your question

edit2: im now confused :/
It seems you went on a similar route to me hehe. I was considering that noone KNEW that the £20 left - who decides inflation is that bit lower? Who can know that it is no longer in circulation to sent interest rates up? It occured to me that money can lie dormant for some time without it being considered out of circulation, which would in effect be the same as what I did with my £20, except I have no choice but to keep it that way.

I like Nodrog's idea as that is what I ended up deciding on, but it didn't seem concrete enough at the time. Let us say I secretly destroyed £10,000,000. That, the economists would say, would deflate the economy by perhaps a noticeable amount. Would there be the same effect if I withdrew £10,000,000 from my bank account and kept it in my house (i.e. decided NOT to destroy it but to leave the bonfire for another day)? And then suddenly I decide one day to put it back into my account, would it bounce inflation back in the other direction? I then realised I have never asked who it is that says "this is what inflation is today", and decided it must be measured over time since it is a rate. That got me onto exchange rates and who decides "ok, the £ is clearly worth less in comparison to the $ than it was yesterday". I think Nodrog's answer is still the most likely, but it doesn't provide an answer to those latter questions.

Last edited by Nadval; 12 Sep 2006 at 02:58.
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Unread 12 Sep 2006, 02:47   #12
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Re: A question for economists...

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Unread 12 Sep 2006, 02:56   #13
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Re: A question for economists...

very well done mate, even though they were piss easy this year so oxford then?
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Unread 12 Sep 2006, 02:57   #14
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Re: A question for economists...

check ur priv msgs, yer
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Unread 12 Sep 2006, 03:02   #15
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Re: A question for economists...

I'm pretty sure the central bank allows for a certain percentage of wastage anyways so you'd fall under that or something.
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Unread 12 Sep 2006, 07:12   #16
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Re: A question for economists...

Just take the shreded pieces of note to the Bank of England, and they`ll give you another.
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Unread 12 Sep 2006, 07:36   #17
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Re: A question for economists...

Quote:
Originally Posted by pyirt
Just take the shreded pieces of note to the Bank of England, and they`ll give you another.
Or they'll have you arrested for defacing the Queen's image (maybe).


EDIT: Oh, and to answer the original question, as other people have said it would cause deflation due to the fact that the money is now out of circulation. I have a degree in Economics and that's the best answer I can come up with


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Unread 12 Sep 2006, 08:20   #18
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Re: A question for economists...

Quote:
Originally Posted by Nadval
If I were to put a £20 note through a paper shredder, without informing anyone, would the country be £20 poorer?
Yes. You would be £20 poorer and you are a citizen of your country so your wealth is (in some sense) included in the national statistics.
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Unread 12 Sep 2006, 09:05   #19
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Re: A question for economists...

Quote:
Originally Posted by Dante Hicks
Yes. You would be £20 poorer and you are a citizen of your country so your wealth is (in some sense) included in the national statistics.
You're right. It is as easy as that. Your country's GDP just dropped by 20 pounds. Bad boy!
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Unread 12 Sep 2006, 09:14   #20
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Re: A question for economists...

Quote:
Originally Posted by laputa
You're right. It is as easy as that. Your country's GDP just dropped by 20 pounds. Bad boy!
ANd if everyone's money doubled overnight then the GDP would eventually double. The country isnt any richer or poorer though.

Also the GDP wouldnt necessarily change anyway, it would depend on what you were planning to do with the £20 otherwise.
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Unread 12 Sep 2006, 09:29   #21
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Re: A question for economists...

Quote:
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Unread 12 Sep 2006, 09:41   #22
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Re: A question for economists...

Quote:
Originally Posted by Nodrog
ANd if everyone's money doubled overnight then the GDP would eventually double. The country isnt any richer or poorer though.
That I didn't say

Quote:
Originally Posted by Nodrog
Also the GDP wouldnt necessarily change anyway, it would depend on what you were planning to do with the £20 otherwise.
Yes, I was assuming that he would either spend it or invest it.
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Unread 12 Sep 2006, 09:54   #23
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Re: A question for economists...

Quote:
Originally Posted by Nodrog
The country isnt any richer or poorer though.
Well, it depends how quickly currency exchange rates reflected this change. If everyone's money doubled overnight (but somehow no-one noticed this except on an individual level regarding their own money) then a hell of a lot of that money would be exchanged for foriegn money / goods before those prices reflected the new exchange rate.

But anyway, I don't think you can analyse what would happen if you burnt by £20 by looking at what would happen if the money supplied doubled or if you burnt a billion quid. Markets and governments would react in an entirely qualitiatively different way.
Quote:
Originally Posted by Nodrog
Also the GDP wouldnt necessarily change anyway, it would depend on what you were planning to do with the £20 otherwise.
Well the GDP would be reduced in a notional sense, in the same way that if you murdered someone you would be reducing the population of a country - even though of course population (or GDP) statistics aren't accurate enough to reflect an individual death (or burning of a £20 note).
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Unread 12 Sep 2006, 10:26   #24
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Re: A question for economists...

Quote:
Originally Posted by Nadval
The 20£ dilemma
Inductively thinking. Let's start from microeconomics (rather than macroeconomics, to put an effect on it on smaller scale).

You've got a certain budget you are working on. The money you have, you either consume or save - it's nowadays safe to assume people hold their savings in bank accounts, government bonds, stock market, and so on (generally broader money; cash is usually held for transactions only, and is being replaced by card money). The money you save, let's assume, on a bank account, is money your bank lends ahead for other people (sectors that need to borrow money; ie. if your neighbour takes a loan to buy a house, he's a negative saver, and he lends the money you, as a positive saver, saved to the account); and the money you consume you pay for different instances to gain goods for (after which these instances either consume or save the money; when generally someone else consumes it).

While currency is (by definition) not valuable as a good that would produce you utility (you'll enjoy a bottle of coke a lot more than sniffing 20 quid bill, right?), but it has a value bound to different agreements made by the economy.

By destroying 20£ (which is, as liquid money, worth different goods (utility, hence, you gain utility by purchasing goods) totaling 20£), you effectively decrease your budget by 20£. Your budget, is part of the national aggregate budget; the sum which all inhabitants (including state and corporates) have to consume on different goods and products. You've just reduced it by 20£, causing a minor cyclical effect (I won't go into macroeconomical details on how reducing consumption by 20£ actually reduces the total transactions made by the economy by more than 20£). Destroying 20£ reduces the financial capitol you hold (that you could invest, or buy goods with) by 20£. It reduces the aggregate financial capitol of the economy by 20£.

If we expand it; should someone (say Bill Gates) decide to raise 2,500,000,000 £ off his bank account and burn all the money it would definately cause a huge impact on the economy. Those money *do* have a value agreed upon. You're just causing a minor impact. A very minor, but imagine if every british person smoked 20£?

Quote:
Originally Posted by Toggata
if I destroyed a car no one would notice (accept the car's owner) if I started destroying lots of cars it would have an affect on the economy because it would interrupt the flow of production.
Yes, nobody would notice - except those whom the destruction of the car concerns. Yet, it's lost capitol. GNP is a bad measurement in the way that it does not take into account capitol depreciation (and it's a bad measure because of a lot of other things, not to start listing them here). It's likely that the owner of the car will replace the destroyed car, but it will cost someone money to do it. I think here's where the general issue of your case is; the GNP's lack to take into account depreciation. Maybe another perspective to look at it (now that I suddenly got smarter taking a dump):

If a corporate has to renew it's machinery in a factory (maybe the machinery has been destroyed in a fire, or maybe it's just been running for a year too many and needs be replaced), it invests money for new machinery. This doesn't (unlike the effect on the GNP would point out; as investments like this are added value to GNP, while they in practise don't really add to it) actually increase output, but it maintains the original level of output! Cash works a little different because it's a tool of transaction. Every destroyed car does count towards GNP. The same way a destroyed WTC tower counts towards GNP. It just weighs more (the destruction of the WTC towers caused some capitol damage but then another firm(s) gained a lot rebuilding them).

Oh, mind you, did I confuse myself too?


Inflation. In practise, the rise of prices during a period. There's a lot of reasons to inflation. Inflation can be measured on a level of a certain product, or on broader level (when the TV reporters on the financials talk about inflation, they usually refer to the local central bank's defined inflation; which usually comes from an elected basket of goods; bananas, cars, computers; means, the aggregate change (growth in case of inflation) in the prices of these products is the inflation rate they refer to). Now, we come to the point where keynesians and monetarists would fiercely argue on the effect of money on inflation.

Quote:
Originally Posted by Nodrog
All that really matters is the distribution of the paper in terms of who has what percentage of it, not how much of it there actually is (if everyone's money doubled overnight, noone would be poorer or richer)
This is a very distinct monetarist view - kinda. Yes, if everyone's money is doubled overnight, nobody would be richer or poorer - or would they - would the local grocery store catch up on it and manage to change the prices before nodrog, realizing he's got quite a quid now, runs into the shop buying some bananas to satisfy his needs with? On the other hand, we're talking about a case where one person is getting poorer, the amount of money isn't reduced from everyone; and if everyone destroyed 20£, yes, everyone would be worse off; ie. poorer; it's not like the economy as whole would adjust prices overnight when people get an itch to burn a 20£ bill. Even if you've lost say 0,001% of your wealth, the petrol isn't 0,001% cheaper on the station after it.

Nobody probably got any smarter, but inflation itself would require a textbook to comperhensively explain, or perhaps two or three; or at least a chapter to explain the basics of it. The effect of a given amount of cash on a nation's GNP would also take a long rant.


Quote:
Originally Posted by Nodrog
Also the GDP wouldnt necessarily change anyway, it would depend on what you were planning to do with the £20 otherwise.
No. If you don't spend the money, you save it - and someone else will spend it. If you spend the money, you spend it, then someone else either spends it or saves it, resulting in a cycle. You can't really avoid an amount of money having effect on the economy.
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Unread 12 Sep 2006, 11:12   #25
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Re: A question for economists...

So basically you've gone from smoking pot to destroying your country's economy? I've always said you were growing up to be no good
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Unread 12 Sep 2006, 11:17   #26
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Re: A question for economists...

What people are getting too bogged down in this.

How silly.

You having £20 less simply means that you have £20 less to spend on things.

It means that overall the UK (you representing a consumer in the UK) has less buying power than it did before (by an infinitesimally small amount). Less buying power means the pound's strength is decreased.

That's it.

It's nothing to do with the GDP.
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Unread 12 Sep 2006, 11:58   #27
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Re: A question for economists...

Quote:
Originally Posted by Tomkat
What people are getting too bogged down in this.

How silly.

You having £20 less simply means that you have £20 less to spend on things.

It means that overall the UK (you representing a consumer in the UK) has less buying power than it did before (by an infinitesimally small amount). Less buying power means the pound's strength is decreased.

That's it.

It's nothing to do with the GDP.
Nadval was asking if the country was getting poorer. One way to describe the wealth of a country is its GDP. The loss of the 20 pound bill might reduce this indicator. That is, if Nadval was about to spend or invest the bill. Hence there is a correlation to GDP.
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Unread 12 Sep 2006, 13:05   #28
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Re: A question for economists...

Quote:
Originally Posted by Tomkat
What people are getting too bogged down in this.

How silly.

You having £20 less simply means that you have £20 less to spend on things.

It means that overall the UK (you representing a consumer in the UK) has less buying power than it did before (by an infinitesimally small amount). Less buying power means the pound's strength is decreased.

That's it.

It's nothing to do with the GDP.
Actually, we might want to re-think that. We safely assume that part of the 20£ that was possessed, would have been spent buying domestic goods part buying imports (should it have been saved, part of the savings would have been invested abroad by the bank or further lenders, and some in the home market). So, the fact that 20£ were destroyed, this means, the import demand of an open economy would decrease.

(we can fairly well say UK sterling is a floating currency that mainly trades to other floating currencies - the euro and the dollar).

UK importers would pay in sterlings, but the americans request dollars; hence less pounds are exchanged for dollars (because of the destroyed 20£) than before. This can be derived from the reduced import demand caused by the fact that Nadval can no longer buy Coca-Cola with his 20£. Because British residents (on aggregate) now want less dollars at each exchange rate (because the purchasing power has gone down by a split of the 20£), the equilibrium international value of the pound will rise (if we assume we started from an equilibrium, the British now want less dollars than they wanted before and the Americans want the same amount of pounds; there's excess demand, and pound appreciates). The same is true for exchange with other floating regimes.

A currency appreciates (ie. "get stronger") when the foreign/domestic (in this example, $/£) rate rises. Conversely, a currency depreciates when the foreign/domestic rate decreases. A direct quote from David Begg's Economics (p. 486) would say "a fall in UK demand for US goods shifts the supply of pounds to the left, and the equilibrium $/£ rate rises (conversely, saying, "The pound appreciates when $/£ exchange rate rises").

I probably confused a lot of you again.

edit. appreciation refers to increase in international value of the currency. depreciation is obviously the opposite.

re-edit.

Quote:
Originally Posted by nodrog
If you were going to use the £20 to pay an assassin to randomly shoot artists and businessmen, then burning it instead would probably make the country richer in the long term.
Unless the businessman you had the assassin nail would have tomorrow made huge errors on the stock market, causing massive losses to his company. We can speculate into the very infinity, but to simplify things, I think it's just to assume that eventually, that 20£ will be either spent purchasing goods the person enjoys (that grant him more utility; an average consumer would hardly spend it on hiring an assassin after a local businessman, rather than to purchase himself beverages or food, or perhaps a movie ticket), or then deposited to a bank account (ie. saved, which will cause the bank to lend out or invest a share of it, to be respent again). And we need to remember, that, the assassin would probably have bought or deposited the 20£ too (running into assumptions on how the poor financers fate would have affected the economy at large is speculating and just tossing dice).
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Last edited by Tietäjä; 12 Sep 2006 at 13:15.
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Unread 12 Sep 2006, 13:08   #29
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
I probably confused a lot of you again.
Not really because I read the first paragraph, saw there were 3 more just as long and then I remembered that economics is hideously dull and what am I doing in this thread when it's a lovely day outside.
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Unread 12 Sep 2006, 13:32   #30
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Re: A question for economists...

Quote:
Originally Posted by Zar
If you burn cash in essence you are decreasing or shrinking the money supply (governments use this for monetary purposes as well). When you reduce the money supply interests rates get pushed up and this increases the cost of borrowing leading to lower investment. GDP goes down.. consumers decrease real consumption spending and we get a sort of multiplier effect where the GDP thus falls further.
The issue is, you aren't really reducing money supply. You're reducing the money base, you're reducing your own capitol assets. Money supply can generally be only reduced by central banks by a few mentionable ways: first, by raising interest rates they lend money with to banks. If money costs more to a bank (in interests), they'll ask for less, and increase their interest rates to cover up. This effectively soaks up money from the market, as people lend less (due to higher interest rates), and deposit more (due to higher interest rates). In addition to this, central banks can enforce controls on the monetary reserves held by banks. A bank must have reserves in compared to it's deposits: the higher the reserves are, the larger share of their deposits they're forced to hold in monetary reserves. They can loan less money, hence, the money supply is limited.
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Unread 12 Sep 2006, 14:05   #31
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Re: A question for economists...

The £20 note has not gone away. Take the shreds to the Bank of England, and they will replace it with an intact note. Noone is necessarily poorer. Or you could just reassemble with sticky tape.
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Unread 12 Sep 2006, 14:23   #32
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
The issue is, you aren't really reducing money supply. You're reducing the money base, you're reducing your own capitol assets. Money supply can generally be only reduced by central banks by a few mentionable ways: first, by raising interest rates they lend money with to banks. If money costs more to a bank (in interests), they'll ask for less, and increase their interest rates to cover up. This effectively soaks up money from the market, as people lend less (due to higher interest rates), and deposit more (due to higher interest rates). In addition to this, central banks can enforce controls on the monetary reserves held by banks. A bank must have reserves in compared to it's deposits: the higher the reserves are, the larger share of their deposits they're forced to hold in monetary reserves. They can loan less money, hence, the money supply is limited.
I don't need to be lectured on how the government induces monetary policies.

Additionally I wasn't saying that burning money is how the government could reduce the money supply - I was saying the government also uses the reduction on money supply for economic purposes.

Lastly one can destroy paper monetary bills and this will reduce the money supply if the money is taken out of circulation. The money base is part of the money supply. The reserve (banks) and currency make up the base and the base usually represents the liquid form of money. What we haven't established and what has been mention by myself and others is whether anyone will notice and what might have been done with the money.
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Unread 12 Sep 2006, 14:59   #33
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Re: A question for economists...

So my next question: Is taking money out of the bank and putting it in a safe in my house as good to the economy as burning it, except with the added effect that one day I could start spending it again.

To use an example, Bill Gates gets pretty pissed off at Americans; the government, the people, the culture, the economy, the bank. So, in his 80s he decides to try out a little trick. He takes out $25billion, waits a month for inflation to catch up, then deposits it, waits a month, withdraws it, waits a month etc etc. Couldn't that do quite a lot of damage to an economy, without actualy doing a great deal or (to my knowledge) breaking the law. This is of course hypothetically speaking, since the banks would wisen up quite quickly and probably, if they haven't already, make him sign a contract limiting withdrawals.

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Unread 12 Sep 2006, 18:35   #34
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Re: A question for economists...

The Bank of England (or whatever you national bank is called) prints up new money every year, based on calculations on how much have been destroyed, gone to waste etc.
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Unread 12 Sep 2006, 18:47   #35
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Re: A question for economists...

If it had fallen into the shredder you could easily have taken it to a bank and I belive they would provide you with a new one, as long as it clear what you are giving them.
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Unread 12 Sep 2006, 21:44   #36
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Re: A question for economists...

Quote:
Originally Posted by Nadval
Probably very easy to answer for someone who knows their stuff, but I have never studied economics and all I know on the topic is what I have read myself.

If I were to put a £20 note through a paper shredder, without informing anyone, would the country be £20 poorer?
Isn't this basic economics for 14 year olds?

First of all, I haven't read any others posts.. coz it's all way too much txt

Second, thinking informing anyone about you destroying your valuta would affect anything is just silly
Economics are based on supply and demand (are those the english terms?),
company's don't raise their prices when they hear that someone is destroying money
They mainly check their cashflow and interest

If you destroy £20, put it in a shoebox, or eat it you will eventually spend £20 less
Some company will have £20 less income, and they will have the option to raise or lower the prices or fire someone
It;s most likely they will fire someone and/or raise prices to make up for your lost £20
Less productivity > less supply > inflation > people will start saving > cry cry
Central bank lowers interest rates > people start spending + company's will borrow and invest > higher productivity > lower inflation

Deflation is not really an option in this case I think

Owyeah and a country will proberbly get richer, able to buy more foreign stuff due to inflation, when you burn your £20
But it will also make the goods in your country more expensive for foreigners so your country will also get less profit from foreign trade, it can lower the demand for goods from your country which can lower inflation
depending how your trade ratios are

This is just one scenario tho

And to be fkin honest, I don't think anyone will miss your £20
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Last edited by Alessio; 12 Sep 2006 at 21:54.
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Unread 12 Sep 2006, 22:19   #37
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Re: A question for economists...

I find that this thread is full of hot air. I agree with the sentiment, if you accidentally shred it, take it to the bank and they get you a new one, they'll just "recycle" the old one which is what they do to thousands of old paper currency every day. Governments are usually smart enough to allow for an individual or 400 to accidentally lose, or destroy (accidentally or on purpose) a certain amount of there currency, they just print more, and no one notices except the guy who lost or destroyed the individual legal tender in question.

I don't know about England, but in US if you have 51% of the currency in question in your possession and take it to a bank, they will replace it.
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Unread 13 Sep 2006, 00:10   #38
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Re: A question for economists...

Quote:
Originally Posted by Alessio
Less productivity > less supply > inflation > people will start saving > cry cry
Central bank lowers interest rates > people start spending + company's will borrow and invest > higher productivity > lower inflation
Does inflation automatically mean (or less supply so) that people will start saving? According to what, exactly? Also, if we think about short term Phillips' graph, higher productivity (inducting lower employment; as you said companies investing; it's rather ackward to assume productivity increases through companies investing, mind if I ask you, where do you get that "fact" from?) finds higher, not lower, inflation.

Quote:
Originally Posted by Alessio
Owyeah and a country will proberbly get richer, able to buy more foreign stuff due to inflation, when you burn your £20
So, burning all money, up to every pence, in your country, actually makes your country richer due to inflation? So, destroying capitol assets makes your country richer? Wow, Alessio, you've just formed a brand new branch of economics. I bet the country of England would get a lot richer just killing all it's inhabitants and destroying all infrastructure and wealth it has, right? Due to inflation!. Actually, the 20£ is more off from buying foreign products; the effect of inflation is generally a lot lower; oh yes, and, inflation, doesn't necessarily cause you to be able to buy more foreign products; why would the rise in price of domestic goods actually enable you to buy more imports?

Please, do elaborate. I am waiting for you to give an actual theory to back up your ridiculous arguments.

Quote:
Originally Posted by Alessio
And to be fkin honest, I don't think anyone will miss your £20
And if the post was originally about someone badly missing the burnt 20£, I don't believe it really would have been posted as it was posted.

Quote:
Originally Posted by jt25man
I agree with the sentiment, if you accidentally shred it, take it to the bank and they get you a new one, they'll just "recycle" the old one which is what they do to thousands of old paper currency every day
This was neither the point of the thread. I assume (the thread starter please correct me if I am wrong) the thread was about the effect of utterly demolishing 20£ on an economy; hence, economic fundamentals; rather than "the bank will refund if you rip your 20£ in two pieces and bring it in".

Quote:
Originally Posted by jt25man
or destroy (accidentally or on purpose) a certain amount of there currency, they just print more
Also, I am willing to put all my fortune (for what it's worth) in stake that if a person burns, let's say, 1,000,000,000£, the central bank will definately not be printing the person in the situation more money to replace the money he "accidentally lost". Oh, I just destroyed 1,000,000£, please refund me ok?

Quote:
Originally Posted by Toccata & Fugue
To summarise: "the less money in supply the more money is worth."

And lets have less David Begg Economics 101 please, those text books are god awful.

I think you confused yourself more.
So, to summarize; who said "less money in supply the more money is worth"? Did I? Then I must have confused you more than I confused myself. Yeah, to an extent, the less domestic currency is sold to foreigners, the scarcer the domestic currency gets (to foreigners), hence, the more expensive domestic currency gets. You really might want to realize, that it's not necessarily a pile to pile puzzle, even if it initially might appear so. If you don't know what you are talking about (to responding a thread topiced "a question for economists"), you might really not want to reply at all - espcially if your reply is just of guessing and "logical" thinking.

Quote:
Originally Posted by Nadval
To use an example, Bill Gates gets pretty pissed off at Americans; the government, the people, the culture, the economy, the bank. So, in his 80s he decides to try out a little trick. He takes out $25billion, waits a month for inflation to catch up, then deposits it, waits a month, withdraws it, waits a month etc etc.
Merely withdrawing 25$ billion won't cause a sufficiently sharp increase in inflation, so it's all in vain. For all the bankers care, Gates can deposit - withdraw his money as much as he wishes, because his 25$ billion is really not invested on a bank account. If I want to be a jerk and asshole (like certain posters here), I can just post replies like this one, full of utter "facts" based on no explanation whatsoever, and yeah, appear like a ****ing know-it-all.

Quote:
Originally Posted by Alession
Second, thinking informing anyone about you destroying your valuta would affect anything is just silly
Economics are based on supply and demand (are those the english terms?),
company's don't raise their prices when they hear that someone is destroying money
They mainly check their cashflow and interest
Huh? The informative content of this text was exactly, what? Economics isn't based on supply and demand solely, it's a far more complex a scheme. Also, to go through models of economics, you have to go through certain assumptions; assuming companies hear someone is destroying capitol assets in an amount sufficient to concern them the will react. Unless they're not acting rationally; we do assume they work their best to gain the best profits, right?
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Last edited by Tietäjä; 13 Sep 2006 at 00:37.
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Unread 13 Sep 2006, 00:32   #39
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Re: A question for economists...

Quote:
Originally Posted by Nadval
If I were to put a £20 note through a paper shredder, without informing anyone, would the country be £20 poorer?
The country would be poorer to the wasted cost incurred from economists wasting time finding their arse trying to work it out.
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Unread 13 Sep 2006, 00:36   #40
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Re: A question for economists...

This is why Business Studies is infinitesimally more interesting than Economics.
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Unread 13 Sep 2006, 00:43   #41
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Re: A question for economists...

Quote:
Originally Posted by Tomkat
This is why Business Studies is infinitesimally more interesting than Economics.
With the rather "ackward" facts thrown around in this post (such as; inflation > people will start saving; and companies will start borrowing and investing > higher productivity), I'm really beginning to agree with you here.
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Unread 13 Sep 2006, 01:19   #42
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
Also, I am willing to put all my fortune (for what it's worth) in stake that if a person burns, let's say, 1,000,000,000£, the central bank will definately not be printing the person in the situation more money to replace the money he "accidentally lost". Oh, I just destroyed 1,000,000£, please refund me ok?
I didn't say to refund the person's money, I said to replace the money in the economy.
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Unread 13 Sep 2006, 01:20   #43
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Re: A question for economists...

Quote:
Originally Posted by Tomkat
This is why Business Studies is infinitesimally more interesting than Economics.
Business studies isn't a real subject. It is about as real as sociology.
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Unread 13 Sep 2006, 07:34   #44
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
Does inflation automatically mean (or less supply so) that people will start saving? According to what, exactly?
WHen people have less buying power they will be more carefull about how they spend their money
Especially if their bank accounts drop below their usual point
Alot of people will try to compensate that, by buying less luxery goods and save up money
for when they need it
Companies will not invest in that, they will save too for when the inflation drops
Its a fistrule for large companies
People always want to have a bit of money in the bank just incase, they might need it when something happends, or they really want something later
theirs no need for extra saving for that if they can keep their money flowing and everything will stay just as affordable
People will be more eager to spend their money if theirs no inflation
(Besides saving companies also have the option to invest in foreign branches
If that keeps up for long enough they might even drop some expansive branches here)

Quote:
Also, if we think about short term Phillips' graph, higher productivity (inducting lower employment; as you said companies investing; it's rather ackward to assume productivity increases through companies investing, mind if I ask you, where do you get that "fact" from?) finds higher, not lower, inflation.
Higher productivity doesn't have to induct lower employment, only if they specialise that 'might' hold true
But that's not always the preferable way to go
If a company invests, it could be in a commercial campaign which will result in more demand
Or to specialise investing on certain products
or broaden their production
To make a silly example:
If a farmer buys a location, a new truck and hires 100 people with fancy anti-mudstickin boots that will increase capacity and productivity
I can't really think of companies that do not focus on increasing their capacity, productivity and new branches when they invest
Can it even be called an investment if you spend your money on something else?

Even if they deside to buy stocks they will invest in some other company (and their own) which will spend it's money on the same things

Quote:
So, burning all money, up to every pence, in your country, actually makes your country richer due to inflation? So, destroying capitol assets makes your country richer? Wow, Alessio, you've just formed a brand new branch of economics.
You act like i'm the one thats thinking to simply, but clearly you don't have a clue at all
"Woah I burn money and now it dissapears!!1 suddenly all the unnamed models i refered to earlier dissapeared too!!1 Maybe I should go nittypickin on certain terms!!1"

We weren't talking about burning all the money
if half the country burns all it's money the other half of the moneyowners will get richer by the same amount
As nodrog mentioned earlier, the total value will stay the same
money represents it's value in gold, that gold doesn't dissapears, the money still represents the same amount of gold
If people see the pound is getting more value, people will exchange their dollars for pounds
If theirs less pounds for example banks and goverments start invest in that and buy more pounds for example
which in turn will increase its marketvalue
It;s the way the stock market works
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Unread 13 Sep 2006, 08:03   #45
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Re: A question for economists...

Quote:
Originally Posted by Alessio
WHen people have less buying power they will be more carefull about how they spend their money
Especially if their bank accounts drop below their usual point
And this has what exactly to do with inflation? Or lower supply? I'm not quite following you.

Quote:
Originally Posted by Alessio
If a company invests, it could be in a commercial campaign which will result in more demand
Or to specialise investing on certain products
or broaden their production
If a farmer buys a location, a new truck and hires 100 people that will increase productivity
I'm very sure you are mixing up things now. You do mean, increase production, not productivity? An increase in productivity would mean we'd be getting more off a certain unit of producing (let's say, a single farmer gets more productive, ie. works harder instead, hence reaping 110% the grain he did before), an increase in production would mean, for example, that a company builds up a new factory (similar to the existing one) and decides to produce more.


Quote:
Originally Posted by Alessio
If theirs less pounds for example banks and goverments start invest in that and buy more pounds for example
which in turn will increase its value
money represents it's value in gold, that gold doesn't dissapears, the money still represents the same amount of gold
This doesn't exactly go through; gold standard was abandoned ages ago; nowadays, money doesn't represent "it's value in gold", it represent it's value in implicite deals; notice that an amount of euros might exchange for a certain amount of gold today, and for a very different amount of gold in a week. If there are less pounds, this does not automatically mean banks and governments start invest in that and buy more pounds; the fact that there is less pounds means nothing, as 99,5% of the pound sterling are account money anyways, and don't "really" exist. Why would a bank or a government invest in more pounds if UK suddenly gets a little poorer?

And above all, what all does this have to do with what you mentioned earlier, inflation?

The demand of the pound comes mainly from the need to exchange with the British and the British's need to exchange with others. A speculative motive can exist, but in what comes to money, it's rather low and useless (and Tobin taxes prevent - well, don't prevent, but hinder - quick swappings anyways)


Quote:
Originally Posted by Alessio
If people see the pound is getting more value in gold, people will exchange their dollars for pounds
It;s the way the stock market works
I can't sufficiently press this to you: gold standard (ie. Bretton Woods system) which ment you could always swap the same amount of a currency (in Woods dollars) to the same amount of gold you were able to swap it to earlier. This no longer happens. It's past, bygones. The market value of gold is defined freely nowadays, and central banks have no commitments (at least European Central Bank, and as far as I know, American Central Bank, and most others, to be honest) to exchange money back into gold on certain rates. Bretton Woods, the last real gold standard system so far, hasn't been in use since it crashed 1971.

http://en.wikipedia.org/wiki/Gold_standard

Quote:
Originally Posted by Alessio
if half the country burns all it's money the other half will get richer by the same amount
That and the earlier mentioned increasing demand of the money that's left it will increase in value
If half the country burns all it's gold, it's a largely significant impact that causes the other half to get a lot poorer. It might not result in inflation, but actually deflation, as people would be, in general, a lot poorer, and be able to purchase less; the prices would have to go down, or some companies forced to close. This would increase the demand of the pound sterling through decreased domestic prices eventually increasing exports. Any more direct effect it could have would be beyond my comperhension.

The gold explanation is really haywired. Is there another explanation you could offer that would explain why the half of the people get richer, or why the demand of the pound sterling goes on a sharp increase when a lot of financial capitol is destroyed?

Quote:
Originally Posted by Alessio
If people see the pound is getting more value in gold, people will exchange their dollars for pounds
It;s the way the stock market works
Uh-oh. Why would the pound get more in value in gold if people destroyed a lot of financial capitol in England?


Also, in your first post, you spoke a lot about inflation, and I, in return, asked you a few questions about inflation. Now what happened to that? None of this has anything to do with inflation, does it?
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Unread 13 Sep 2006, 09:03   #46
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
And this has what exactly to do with inflation? Or lower supply? I'm not quite following you.
Omfg do you even know what inflation is?
You do not see the relation between buying power and inflation?!


Quote:
I'm very sure you are mixing up things now. You do mean, increase production, not productivity? An increase in productivity would mean we'd be getting more off a certain unit of producing (let's say, a single farmer gets more productive, ie. works harder instead, hence reaping 110% the grain he did before), an increase in production would mean, for example, that a company builds up a new factory (similar to the existing one) and decides to produce more.
Sorry for not having a degree in english?
I explained it quite well in the second post if I say so myself


Quote:
This doesn't exactly go through; gold standard was abandoned ages ago; nowadays, money doesn't represent "it's value in gold", it represent it's value in implicite deals;
It's not gold exactly but it's still the basic idea, the sum of all pounds stands for a certain value
That's why printing money won't create money but will just make individual pieces less worth
Which happened in venezuela
Same goes for destroying money
Quote:
notice that an amount of euros might exchange for a certain amount of gold today, and for a very different amount of gold in a week. If there are less pounds, this does not automatically mean banks and governments start invest in that and buy more pounds; the fact that there is less pounds means nothing, as 99,5% of the pound sterling are account money anyways, and don't "really" exist. Why would a bank or a government invest in more pounds if UK suddenly gets a little poorer?
Because less money can stand for more in other currency


Quote:
And above all, what all does this have to do with what you mentioned earlier, inflation?
Inflation means the currency's value stays the same, while they ask for more, I know that
But that only goes for it's value landinwards
For you the money will be worth less, for others it will be worth the same
Which basicly means that if you trade it with foreigners, you will get more profit
Goverments and banks love to buy pounds for example if they see that trends gonna continue

Quote:
If half the country burns all it's gold, it's a largely significant impact that causes the other half to get a lot poorer. It might not result in inflation, but actually deflation, as people would be, in general, a lot poorer, and be able to purchase less; the prices would have to go down, or some companies forced to close. This would increase the demand of the pound sterling through decreased domestic prices eventually increasing exports. Any more direct effect it could have would be beyond my comperhension.
Half the country will get poorer, the total value will stay the same, deflation, and then rest will get richer by a significant amount

You actually used a deadlink as a source for your info?
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Last edited by Alessio; 13 Sep 2006 at 09:30.
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Unread 13 Sep 2006, 09:29   #47
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Re: A question for economists...

Quote:
Originally Posted by Zar
Business studies isn't a real subject. It is about as real as sociology.
No, because it seems even economists can't agree on a simple piece of logic like what would happen if one person burnt one £20 note. It just shows what a load of theoretical rubbish it really is.

(also I'm not sure how you decided it isn't a "real subject" but ok)
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Unread 13 Sep 2006, 09:45   #48
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Re: A question for economists...

Quote:
Originally Posted by Tomkat
No, because it seems even economists can't agree on a simple piece of logic like what would happen if one person burnt one £20 note. It just shows what a load of theoretical rubbish it really is.
Obviously, nothing would happen except somebody being out £20, as overall currency-loss would still be within the 'expected loss'-range.

.. so to get something interesting out of the question, you have to make assumptions on what's done & what's happening; which is what mostly everybody seem to be doing..just not the same assumptions . so obviously the answers will differ until they agree on what they're actually discussing
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Unread 13 Sep 2006, 10:13   #49
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Re: A question for economists...

Quote:
Originally Posted by Alessio
Omfg do you even know what inflation is?
You do not see the relation between buying power and inflation?!
Yes, I do, your references to it have been vague at best.


Quote:
Sorry for not having a degree in english?
I explained it quite well in the second post if I say so myself
Funny, that you added a lot of pieces to your post after I had quoted it: this may be the reason why I found the original post lacking. Original one, not the edited version. I don't have a degree in English either, and I'm living in an European Union country that uses Euro as it's currency, in the 21st century, not in a mid 1960's country with Bretton Woods standard. Also I find it very hard to argue with you when your terminology is very different from what I've been used to, or what they teach here and in UK, for example.

Quote:
Inflation means the currency's value stays the same, while they ask for more, I know that
For example, inflation. The currency's value stays the same while they ask for more? What? I don't really understand. Uhm, this is a real dummy ratio now, but I'll quote from Dictionary.com

"in‧fla‧tion [in-fley-shuhn] Pronunciation Key - Show IPA Pronunciation
–noun 1. Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation)."

By definition, the currency's value doesn't stay the same with inflation. Let me give you another link to study inflation a little (hopefully this one works). It's John Gribbin's Inflation for Beginners. Works pretty well to let you into the basics of inflation.

http://www.lifesci.sussex.ac.uk/home...bbin/cosmo.htm


Quote:
It's not gold exactly but it's still the basic idea, the sum of all pounds stands for a certain value
That's why printing money won't create money but will just make individual pieces less worth
Which happened in venezuela
Same goes for destroying money
What you need to realize here, that destroying money is totally different from printing it; printing money is a means (of fiscal policy, so can be said) of gaining more money out of nowhere; it's a sudden shock that may help on very brief term, but which has an inflatory reputation and usually results in bad things happening (poor countries print money, drown into inflation, the announce default, and the world trade organization cries). Destroying money is depreciation as in where destroying other (non-financial or financial) capitol would be.


Quote:
You actually used a deadlink as a source for your info?
Excuse the dead link. It's now fixed; blame it on my lack of skill to use this type of forum interface (which, looking at the amount of enter whacking you do, you don't really master either).


Even so, I really won't argue with you any longer, as it's obvious that your definitions on the basic terms (look at the inflation as an example) are very haywired; and after I stated this, you will probably edit your text regarding inflation and claim you knew it anyways.
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Unread 13 Sep 2006, 10:20   #50
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Re: A question for economists...

Quote:
Originally Posted by Tietäjä
For example, inflation. The currency's value stays the same while they ask for more? What? I don't really understand. Uhm, this is a real dummy ratio now, but I'll quote from Dictionary.com
"in‧fla‧tion [in-fley-shuhn] Pronunciation Key - Show IPA Pronunciation
–noun 1. Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation)."
If you scroll down you see more and better definitions of inflation

One definition states it is caused by an increase in money
other definitions leave out money entirely

If you scroll down to the definition of the princeton university it says

n 1: a general and progressive increase in prices; "in inflation everything gets more valuable except money"

Definitions can especially differ when their not talking about the same market
I don't think a dictionary is a proper source for economic definitions Tiet
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Last edited by Alessio; 13 Sep 2006 at 10:33.
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