Game of the economy


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Its a case study written by me in context of economy and how does bubble in an Economy takes place...

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Game of the economy

  1. 1. Game of the economy…There was a small country MIT with a small piece of land and two denominationof currency say dell, these was the total asset of that country. A piece of land andtwo units of dell. These was the centre of the economy, the only asset in the MITis a piece of land and two dells. In this country there were three citizens A B C.owner of the land was Mr. A and Mr. b & Mr. c were the owner of those twocurrency, one each.How the economy of the MIT is working-Mr. B wished to purchase that piece of land; he approached to Mr. A and boughtthat piece of land for 1 dell. Now the owner of that land was Mr. B and Mr. A &Mr. c were the owner of one-one dell. Now piece of that land was valued at 1 dell.Now the total asset of the MIT was 3 dells, a land of 1 dell, and two coins of 1 dell.Now Mr. C thought as there is only 1 piece of land, value of these land willincrease in the future, because everything can be produced and generated butnot the Land. Keeping these thought in the mind he borrowed 1 dell from Mr. Aand approached Mr. B to buy the land for 2 dell.Now the situation is –Mr. A has given loan to Mr. C so his total asset is 1 dell.Mr. B has sold the land to Mr. C so his total asset is 2 dells.Mr. C has the piece of the land whose value is 2 dells, but he has taken a loan of 1dell from Mr. A so his real asset is 1 dell.Nitesh Jaiswal304128 Page 1
  2. 2. But total asset of the MIT is now 4 dells. Two coins of 1-1 dell and a piece of landwhose value is 2 dells.Now Mr. A has a regret that he is the real owner of the land which he has sold toMr. B. he thought that in future the price of the land will go up, so he took 2 dellsfrom Mr. B as a loan and went to Mr. C to buy the land, as Mr. C has taken a loanfrom Mr. A he didn’t have any other option but to sell the land, so he sold theland to Mr. A for 3 dells.Now Mr. A again became the owner of the land by paying 3 dells, which once hehad sold to Mr. B for 1 dell, so now Mr. A has a land whose value is 3 dells, but hehas taken loan of 2 dells from Mr. B, so his real asset is 1 dell.Mr. B has given a loan of 2 dells to Mr. A so his total asset is 2 dells.Mr. C has two coins of dells so his asset is also 2 dells.But total asset of the MIT has increased to 5 dells.Now formation of bubble in the economy started, now Mr. B thought that theprice of the land is increasing day by day, and before its price increases more hedecides to buy back that land. He offered 4 dells to Mr. A for the piece of land,Mr. A agreed, Mr. B took loan of 2 dells from Mr. C and bought that land from Mr.A who already has to pay 2 dells to Mr. B and in these way Mr. A’s debt was paidoff.After these deal Mr. A does have to pay anything to anyone, and he has those twocoins of 1-1 dell. Mr. B has the piece of land whose value is 4 dells, but he has topay 2 dells to Mr. C which he has taken from him, so his real asset is 2 dells. Mr. CNitesh Jaiswal304128 Page 2
  3. 3. has given 2 dells to Mr. B so his asset is 2 dells. But total asset of the MIT hasincreased to 6 dells although still the total asset of the MIT is a piece of land andtwo coins of 1-1 dell.Everybody made money and were happy and thought that there assets hasincreased. Suddenly Mr. C thought what if the price of the land stopsappreciating, if these happens than how Mr. B will repay his loan of 2 dells thereare only 2 dells in the economy, and the initial price of the land was 1 dell, Mr. Aalso thought the same thing.As a result now no one was willing to buy that piece of land.So transactions stopped working, Mr. A has 2 dells; his total asset is 2 dells.Mr. B has to repay his loan of 2 dells to Mr. C, he has the piece of land which wasvalued 4 dells but now it is been valued at 1 dell, so his total asset is 1 dell and aloan of 2 dells. Mr. C has given a loan of 2 dells to Mr. B which is now bad debt ashis land is been valued 1 dell.Also the total asset of the MIT is now 3 dells, a piece of land and 2 coins of dell.Now the question is how the total asset of the MIT which was 6 dells before fewdays is now 3 dells. Who has stolen these 3 dells? Now the bubble of economyhas evaporated, before this Mr. B thought that the value of the land is 4 dells, inreality the total asset of the country was 6 dells on paper. Mr. A’s asset is 2 dellsbut still he is tensed, Mr. B has no option but to declare him as bankrupt, Mr. Ccan’t do anything apart from considering it as bad debt, but he takes that piece ofland whose value is 1 dell.Nitesh Jaiswal304128 Page 3
  4. 4. So Mr. A has a total asset of 2 dells, Mr. B is bankrupt and Mr. C has a piece ofland with a valuation of 1 dell. Still total asset of MIT is 3 dells, but those assetshas been transferred and Mr. A is the winner of these game, Mr. B is the looserand Mr. C still stands with an asset of 1 dell, earlier also he had 1 dell.What we can learn?When bubble of economy starts every other person becomes the debtors of eachother. These happened in one country so no one was victim of foreign debt, andvaluation of the land was also in domestic currency so there was no harm to theeconomy. When bubble evaporated person having the case won, those had landor those who had given loans were in the loss. That means value of property canbe decreased and can also lead to bankruptcy.For instance if there would have been one more citizen either with 1 dell or apiece of land but would have not taken part in the game of economy so he wouldhave experienced the valuation of his asset (whatsoever) going up and down.Everybody made money in this game when there was bubble in the economy. Butif you are smart enough and have realized that there is bubble in the economy, sotaking loan like Mr. A and participating in the game is not wrong decision but youshould know when to convert everything into cash.Now to understand it more clearly consider piece of the land as stock, value ofthe land or stock depends on the demand or rather say on the mindset of thepeople. If we apply same concept into these situation than Mr. A is an investor,Mr. B in the role of hedge fund and Mr. C can be considered as American FDI.Nitesh Jaiswal304128 Page 4