The Free Market Center
The Free Market Center
The complexity of markets precludes creating models that accurately depict the effect of a broad range of actions in the economy. I do not, therefore, present this model as a complete depiction of all interrelated market activities. I do, however, believe that it accurately represents the relationships of an isolated segment of a market. So, by eliminating, countervailing influences from outside that segment, I can demonstrate the influences of the elements within that segment.
In order to eliminate external influences I have first assumed that the segment upon which I want to focus exists within an otherwise evenly rotating economy.
The evenly rotating economy consists of an economy in which all needs get satisfied by the market. In over-simplified terms all supply and demand achieves equilibrium (which, contrary to classical economics never exists in functioning economies).
The imaginary market segment that I have created with this model exchanges pairs of shoes and bushels of wheat. The exchange of goods in other segments of the market do not influence these two goods.
In the model the market clears itself. All wheat production gets exchanged for all shoe production.
Based on the assumption of full exchange (all of one product for all of another) the model calculates an exchange ratio (or price.) Because of this limitation, this market does not require a form of indirect exchange. I have, however, assumed the use of indirect exchange to demonstrate the relationship to and influence by changes in the quantity of money.
The indirect exchange relationship (using money) permits the model to also calculate dollar prices.
In order to maintain the market clearing assumption I have further assumed shoe and wheat producers exchange an equal number of dollars for the full production of the other producers. The dollars used by each trader equals half of the total dollars available at any specific point in time.
The important changes that affect dollar prices in an economy consist of:
I have varied the increases and decreases in the supply of goods and the supply of money in order to simulate changes in both direct exchange and dollar prices.
I have established the following base production and sales percentages from which to make calculations.
|
Base Production |
Sales % |
Base Sales |
Shoe Production |
50 pairs/mo |
80.00% |
40 pairs/mo |
Wheat Production |
100 bushels/mo |
90.00% |
90 bushels/MO |
The current production rate times the sales percentage yields the sales rate of the product at the current time. (e.g. with no change in production, shoe production equals 50 pairs/month times an 80% sales rate yields sales of 40 pairs/month at each current time throughout the 60 month period.)
I have applied the following percentage growth and decline rates to the base production rates:
I have applied the production assumptions within the following contexts of monetary change:
The money supply begins with 1,000 dollars of money.
The money supply remains unchanged, at 1,000 dollars, throughout the 60 months.
The money supply increases steadily by 0.5% per month for 60 months.
The money supply decreases steadily by 0.5% per month for 60 months.
The money supply increase surges from 0.0% per month to 2% per month for 10 months from month 20 through month 30.
The money supply decrease surges from 0.0% per month to -2% per month for 10 months from month 20 through month 30.
At each point in time the sellers of shoes and the sellers of wheat each have half the available money. In other words each groups exchanges all their money for the goods of the other group. This makes the direct exchange and money exchanges consistent.
© 2010—2020 The Free Market Center & James B. Berger. All rights reserved.
To contact Jim Berger, e-mail: