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This is a very simplified example.

If I fill a vending machine with sodas that cost \$0.50 each and someone comes along and pays \$1 for it, am I creating an extra \$0.50 of wealth for the economy? The wealth being that I've taken the beverage and delivered it to someone in a convenient format.

I am referring to the idea that the economy is not a zero sum game. If I buy something and sell it for a higher price we are not just shifting money around the economy but actually creating new money (assuming I provide some value in the process, but that is determined by the consumer).

So in the above example with the vending machine, does the federal reserve have to create an extra 50 cents of the currency in order to avoid deflation?

Another example: the company I work for generates an extra \$10m in sales this year than last year. So people in the economy have transferred \$10m from them to us. That equates to the creation of \$10m of wealth, right? And the fed just then issue another \$10m to keep the currency at the same level?

Note: I am a total laymen without any education in economics. These concepts - currency values, value / wealth creation - are simply of interest to me

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    $\begingroup$ It is not so much wealth as income (or better still value added). Though you may have prevented a retail shop selling the same soda, possibly at the same or a different price, so reducing their income. Money is just the mechanism for payment, so is transferred but not created or destroyed in this transaction. $\endgroup$
    – Henry
    Mar 29 at 13:37
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You have to be very careful with your definitions here. Following the basic definitions (e.g. see use of terms in Mankiw Principles of Economics):

Value: Value depends on your marginal utility and typically it is the amount of money you are willing to give up for something.

Wealth: Is by the value of net assets.

Income: Is the net return to some activity.

You are right that economy is not necessary zero-sum game (although there are economic interactions which can be zero-sum), but your use of the term wealth is improper.

If someone pays you to fill the soda machine, you have costs \$0.5 but get paid \$1 your income will be \$0.5, you created at least \$0.5 of value because the person who paid you clearly valued the filled vending machine for at least \$1 otherwise they would not exchange that 1 dollar for your work, but at the same time you had 0.5 costs, so you are creating at least \$0.5 extra value.

The wealth is accumulated by saving (whether you save by buying house or putting money on your account value of your net assets increases). Hence if you have \$0.5 income and you save it all you also create \$0.5 wealth. If you consume half you only create \$0.25 wealth and so on.


So in the above example with the vending machine, does the federal reserve have to create an extra 50 cents of the currency in order to avoid deflation?

Here the answer is maybe. Inflation/deflation does not depend just on the value of output that you create.

Inflation/deflation is just positive/negative change in the price level which is in turn determined by the money market equilibrium. The money market equilibrium, in its simplest form is given by equation of exchange (See Mankiw Macroeconomics pp 87) as:

$$MV=PY$$

Where $M$ is the money supply, $V$ velocity of money, $P$ price level and $Y$ output.

Solving for price level and log-linearizing (so % changes in right hand side variables give us the % change in $P$) we get:

$$\ln P=\ln M + \ln V − \ln Y$$.

If you perform those extra services you increase real output by \$0.5, ceteris paribus, you are correct that Fed would have to create additional \$0.5 dollars to prevent inflation. But the, ceteris paribus, assumption might not hold in real life because velocity of money can change as well (plus in more complex models of money market equilibrium expectations play role and so on). Consequently, the correct answer here would be maybe. Under ceteris paribus assumption yes, but it is not guaranteed.


PS: Note sometimes even economists in casual speech equate wealth creation with value creation, so you might have heard some pundit or economists use similar example to argue wealth was created, but that is not how the two terms are rigorously defined in the literature.

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  • $\begingroup$ Thanks for the answer, it's helped clear some of my questions up. I am a total layman with zero education in economics - I maybe should said that in the question - so a lot of your answer is way over my head. $\endgroup$
    – MSOACC
    Mar 29 at 15:14
  • $\begingroup$ If you consume half, you are paying someone else to create wealth, right? The wealth is still created, it just can't be attributed to you? $\endgroup$
    – user253751
    Mar 29 at 15:40
  • $\begingroup$ @user253751 no you are creating an income for someone else. Unless someone actually saves that portion of income to become wealth it won’t. It is theoretically possible to consume whole production even with economic growth (eg every year consume everything that is produced even if production increases) meaning there would be zero wealth added. For adding wealth, under definition of wealth in economics, you have to save portion of your income $\endgroup$
    – 1muflon1
    Mar 29 at 15:49
  • $\begingroup$ @1muflon1 oh is that because of the economic definition of saving? If I buy something and don't consume it, it's savings and therefore wealth? $\endgroup$
    – user253751
    Mar 29 at 16:56
  • $\begingroup$ @user253751 it is because of both definition of saving and wealth. A wealth is by definition value of net assets over some period. In order to turn income into net asset you can’t consume it. Eg if we define our time period as a day if at t=1 you receive 10USD that is your income for that period. Saving is income not consumed so if you decide to consume just 5USD in t=1 your saving will be 5 and that becomes your wealth next period. In next period you could dissave by consuming your income of t=2 plus some of your net assets $\endgroup$
    – 1muflon1
    Mar 29 at 17:12

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