Why do we Trade?

let’s talk money isn’t it magical you give a bunch of the to desert State and boom out comes the modern-day city money pays for all your shiny devices residents education is just amazing what’s giving away some piece of paper or rather lowering some numbers in a databank can do for your quality of life but where does money come from not your money in particular you got it from the company you hate to work for with the boss you can’t stand but where did they get it from sure from all those customers who buy their products and services and they got it from their employers just like you so is it just a circulation of money that drives everything and if it is just circulating does this mean someone’s gain is somebody else’s loss but that’s the case then how come the world today as a whole has more money than ever before in history

what are banks for what as politics got to do with it at the end of this two-part series you should be clear about all those questions to start off we will focus on the most fundamental truths about the economy from which all other aspects of it follow the two human activities value creation and trade before we talk money we need to talk about value the creation of money and value happens separately from another but in correlation with each other and you will understand why right now the important thing to remember is that money has no inherent value it’s just a representational value value creation is the process which transforms things of lower value to humans into things of higher value to humans take 150 grams of silicon plastic iron glass and iminium copper and a dash of gold you can’t eat or derive much value from

those materials as they are but transform them into a smart phone and the monkey and you finds value that’s why for the materials you would only be willing to pay the spot market price of less than five dollars while for the phone you are happy to pay 700 by remodeling our environment into things that we deem useful we create more collective value for us each year another way we create value is through services which don’t produce anything physical that increase the value of your time value creation first started when humans made stones into Spears clay into pots and used oxen to plow their fields these days we try to measure the amount of value whole economies have created each year as GDP however there are a few problems with the way we measure GDP for example GDP doesn’t account for value destruction houses breakdown so do streets cars are disposed off phones and food gets thrown away using the current measure of GDP it might sound like a brilliant idea to destroy a road just rebuild it just to destroy it again just to rebuild it again on paper GDP will tell you that two roads were built which sounds great when in fact a lot of time and energy was wasted while no net value was created this is just one of many problems GDP has in measuring how much better off we are each year nevertheless value creation is what drives the economy only 2% of worldwide value creation lies in the extraction of natural resources the other 98% is what we make of them just being resource rich isn’t enough to be a wealthy nation transforming and putting them to good use is where it’s at because skill and resources are not equally distributed we live in a world based on trade trade doesn’t just happen on a national scale but also on a small scale every day you go to work you trade your skill and time for money which you then trade against everything else you own your bike your coffee and of course your the rest of us hoodie exact description you didn’t make any of these it’s just trade trade is a non zero sum game meaning if done right every side will win it’s easy to believe that trade is zero-sum because on a single transaction basis one sides dollar win is the opposite sides dollar loss the problem with that thinking is that it treats money as wealth and ignores utility we trade to maximize our utility imagine you are stranded in the desert with a briefcase containing a million dollars just bear with me someone comes along and offers you a bottle of water for $1,000 you think bastard but you do the trade because in that situation money has a very low utility to you and approaches its inherent value of the paper it is printed on whereas water has huge comparable utility we trade to maximize our utility so even though one side may win money and the other side may lose money they both increase their utility otherwise the consensual trade wouldn’t happen let me show you why okay example time one is the magic trick I’ll show your magic trick imagine a two-person economy that produces brick and wood one person is really skilled at and has a resource advantage for making bricks and can produce up to 60 kilograms a day as for wood production use lousy and can only chop 20 kilograms a day if he has to provide both for himself he needs to split his efforts resulting in a so called productivity frontier everything he can possibly gain each day is on that line his neighbor on the other hand is disadvantaged at brick production but quite the woodchopper who could shop for the entire day this is his productivity frontier since both need brick and wood they each decide to go for a mixture now let them trade each can focus on what they do best and at the end of the day they trade half for half vallah they’re both better off than before that’s the magic of trade the trick lies in the fact that value creation drives the economy and trade makes value creation way more efficient of course that’s just the simplified model of trade when we look at the real world the same mechanics apply just with a bit more complexity there are rock based economies Sheba’s economies you get the idea if they all focus on producing what they are best at and at the end of the day trade with each other then they will all maximize their generated value that’s the reason why economic sanctions work when all players decide not to trade with one player because they aren’t succeeding and putting their differences aside then they have to go back to an inefficient self providing economy which means less wealth for them so if you are a country that doesn’t have the most natural resources or the best manufacturing in the world but can literally print the most trusted currency in the world then you want to give away these dollars in exchange for products and resources from elsewhere even if on paper it says more money is leaving your country than is coming in from the outside your utility is maximized but how exactly is money created how does it enter the economy and how is it connected to value creation these questions will be answered in part 2 [Music]

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