How does wealth get generated in the world? Is it a zero-sum economics?
Similarly, when you are overspending, the stores, restaurents, airlines are making money. So your money is getting distributed there somewhere. You are getting poorer.
Can someone explain me these fundamentals of economics?
Answer:
The wealth that's created through voluntary excahange is not a zero-sum game. In order to see this consider your example from the following perspective:
Your Example: Essentially, the $50K that you are getting are coming from other people. Does it mean the richer you get, the poorer the rest of the world gets?
Perspective: The people who spend $50,000 are getting more than $50,000 in value for their expenditures. Additionally, the seller who gets $50,000 is getting more than he or she values the items sold for $50,000.
For example, if I buy a gallon of gasoline for $3.00/gallon, I must value that gallon of gasoline at at least $3.00 and the seller must value it at no more than $3.00.
So my point, though it's trite and even a cliche, is that voluntary excahnge is mutually beneficial!
Market economy is not a zero sum game.
You engage in the trade by free will, so you must gain something from it.
Here's how it works for a restaurant meal:
A man pays $10 for a lunch at a restaurant, and he's done with it in 30 minutes.
If he didn't go to a restaurant, it would cost him $5 in raw food to make a similar meal, and an hour to cook, eat and clean up.
If he earns $20 an hour, he's can make more money by eating at a restaurant.
Another example, is a classic Ricardo's story of two countries. One has a good climate for grapes (which makes wine), another -- for wheat (makes bread).
Grape country could do both and produce 2 units of wine and 1 unit of bread, or specialize and make 4 units of wine. Same for bread country - 2 bread+1wine or 4 bread.
If they do not trade, they eat 2+1
If they trade, they can both eat 2+2, or 2.5+1.5, which is better than 2+1
Finally, amount of money in economy is not constant. Commercial banks create money by giving loans.
When you get a loan, you get more money in your checking account. But it did not come out of anybody's checking account, so it's brand new money.
I am not an economist but here's what I think. When an economy is healthy money circulates through it. You spend money with someone and others spend money with you. The government controls the money introduced to the market in the form of currency. It is supposed to be backed up by something valuable, in the case of the USA this is gold. If the government introduces too much money to the economy it becomes worthless. Some people think that allowing the rich to have more money (through lower taxes) allows more money to "trickle down" to the people in lower income brackets because they invest the money in expanding business, thus creating jobs.
Money is for spending. It is not destroyed by spending. The recipient of money needs to find something to do with the money. Investing is just a different way to spend money. It is true that money is not evenly distributed but the amount of money in the world is growing.
There are several ways that money is created.
1. Money is created when governments print money.
2. Money is created when governments borrow money.
3. Money is created when producers of products and services sell their product or service on credit. Money is created when people create products that get sold and people delay getting paid for their work till payday.
4. Money is created when anyone makes somethings that others are willing to trade for the products and services those others can provide.
There are very few ways to destroy money. The volume of money in the world grows. In general the quantity of money in the world is growing faster than the population. In my life the cost of a loaf of bread has grown from a dime to over a dollar. The amount of money in the world has grown much faster than the population. There is more money per person today than there was 50 years ago. It appears that throughout the history of the United States(230 years) there has seldom been a time when the amount of money in distribution has not grown. Those times when the volume of money shrunk or grew slower than the population are called depressions.
I'll spare you all of the economical rhetoric. A economy grows (gets wealthy) from being productive. The US is rich because its very good at making 'stuff'. The things we are not good at we buy from other countries (coffee, low skilled labor) The less time it take us to do something the more time we have to make more 'stuff' or spend on FunQA.com. Does this make sense?
So productivity and free trade is what makes the pie grow. The problem is that a small percent of the population have very large slices and the majority have very thin slices.
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