Tuesday, April 27, 2010

rumblings - I

so i was thinking of some basic economics and thought to put down in a basic form so as to improve my understanding.

So how will be new jobs created in a economy? Let take an example comprising of three people where all of them are involved in food gathering and they work for 12 hours every day to gather enough food(3 portion) to satisfy hunger for each of the three. In this case, each of the person has wages equal to 1 portion of food. All have 12 hours of leisure everyday.

Now lets think of situation that by trial and error and working in 2 hours of leisure, they figure out a way of producing food out of land which is agriculture. By this method, they can produce enough food using only 24 manhours per day so as to satisfy hunger of three people. Now in this case, there are two choices.

First choice is that all three now work 8 hours a day, produce three portion of food which they divide among themselves. But each of them will have 16 hours of leisure in this case. The economy remains the same and in the way we calculate GDP, the GDP has stagnated. This is socialism at its best.

The second choice is that two of them decide to continue working 12 hours a day to produce three portions of food. And the third one becomes unemployed because he doesn't know the technique of agriculture. So what will happen now.

Case one is that he dies of hunger. Since there is no one to consume 3 portions of food, they will start producing 2 portions of food and start spending more leisure time. The GDP will reduce but per capita GDP remains the same. This is capitalism at its worst if one has even a slight bit of humanitarianism in his soul.

Case two is that the third person innovates and create a product which is useful for all three. Say that he learns to weave clothes for which the two farmers are ready to provide one portion of food to him for his survival. This situation increases the economy and GDP grows to three portion of food and three portion of clothes. The per capita GDP also increases. This is capitalism at its best.

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