Economics 101 Puzzle for Dummies ????

Crazy Horse

Well-known Member
This is an interesting little story. I am going to keep the last part of it out of the story for now because I think it will distract from the "puzzle" part of this. For now, just reply if you can give a simple explanation, I'm sure it's not all that complex but it seems like it might be .... here ya go .... I'll come back later with "the rest of the story."


It's a slow day in a small town and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100.00 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100.00 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100.00 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100.00 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.

At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything.

However, all these individuals are now out of debt and there is an atmosphere of optimism and glee.
 
Probably not the answer, but the travel would have had time to get a good nap while the $100 was making it's rounds!
 
This is why Buying American is not the answer to the problem for financial stability in this country. We need to Sell American to outsiders.
 
The proprietor is out the money because the hooker does not owe him any more and the patron left.
 
The debts were owed in a circle to begin with, the chain reaction payment was opportunistic, and was more or less a stimulus package caused by the filching of the not owned 100 dollar bill. Jim
 
That is how the nnalert figure they will pay for all of their socialist programs without raising taxes.
 
As was stated, all of them are out of debt, but all of them have the same amount less in accounts receivable, so all are the same off as before. The same could have been accomplished by having a group meeting with all of them laying the cards out on the table and all agreeing to call it even.
 

That is how the economy works. The money goes around and around and the faster it goes around and the more exchanges there are in the day the more everyone makes, and as John in LA said the gov't takes its cut at every transaction of that same $100.00 so the more people get in on it the more the gov't has. Then everybody can stop working because the gov't. has lots of $ to give away.
 
That may be fine at the moment, but then comes the quarterly sales, bed, land/building taxes, school taxes, and income taxes. Lets not forget the cost of insurance and maintenance of brick and mortar. Yes maybe these costs are factored into the $100 price, but they all come out of it. The only one who prospered was the prostitute. Cash sale, no record, and no overhead. Everyone else just passed the buck.-------------------Loren
 
Loren ..... I believe she did have overhead, she was paying for a hotel room. From the information you mention about her business finances, sounds like you might know more about that kind of operation than I do ..... LOL !!!
 
So if we print some money (tourists money) and feed it into the system we will all be debt free? And then, since we live in the real world, when the printer takes it back in the form of interest and inflation our hotels, pig farms and the like will all be worth the same?
 
This is not economics so much as an exercise in accounting.

The accounting equation states that assets = liabilities + equity.

So if we take one of the business owners at random, and assume that individual's net worth is $100,000. Also, his assets include an accounts receivable of $100 and his only liability is an account payable of $100.

Assets = Liabilities + Equity
100,100 = 100 + 100,000

He receives the C-note, which moves $100 from accounts receivable to cash on hand. There is no change in the total assets, the asset just moves from one bucket to another:

Assets = Liabilities + Equity
100,100 = 100 + 100,000

Now he uses the $100 cash on hand to pay his $100 liability, which reduces both assets and liabilities by $100.

Assets = Liabilities + Equity
100,000 = 0 + 100,000

The important thing is that AT NO TIME did the business owner's equity change! His net worth before, during and after the series of transactions remained $100,000. The idea that his financial situation improved is simply not true.

Now you say, "well what about the hotel owner, who grabbed the C-note that wasn't his?" When he took the $100, that became both an asset (cash on hand) and a liability. And when he returned it $100 was deducted from both assets and liabilities. No change.
 
He is out the money because the hooker no longer owes him the $100.00 and the hundred is gone, so he is out the hundred.
 
How would the story have worked out if the last person (hooker) had paid for a car repair, paid the butcher (who then keeps the $100 bill) or paid off the cop instead of paying the motel owner?
 
(quoted from post at 13:14:02 10/08/19) The proprietor is out the money because the hooker does not owe him any more and the patron left.

Yes Jon but you are forgetting that the hotel owner no longer owes the butcher.
 
I thought about this some more and Mark is right and just beat me to it. Nobody is out of money. Everyone has just exchanged accounts receivable for debt. The motel owner borrowed the money, payed his debts, then ended up paying the loan back from his accounts receivable from the hooker. Nothing lost, nothing gained.
 
Yes the hooker no longer owes him money but he also does not owe the butcher so that is a wash.

He may be out the cash but the guy never rented the room.

That would be like me agreeing to buy your tractor and then changing my mind. You are not out the money because you still have the tractor to use or sell.
 
This story is often used to explain the circulation of money and how said circulation keeps people and communities afloat. The story provides an understandable explanation of what has taken place all across America in small towns and rural areas where the income has largely been spent elsewhere, large national mortgage companies instead of local banks, wal-mart instead of mom and pop, Amazon, ebay and so forth. Any where there is a large mexican workforce the same thing is happening whether the local people realize it or not, the mexicans send most of what they earn back to mexico, that money is lost to the local economies forever and that is the real root cause of why the local born children have been leaving, sustained economic expansion is not possible without local circulation of the money.
 
This just validates my friend's contention that there is only about $2,600 in the world, all the rest of the money we just owe to each other.
 
Funny in a way but in reality the gap between the actual amount of money and the amount that is 'promised' like bank deposits and things like 401(k) plans is staggering.When
some economic crisis or turmoil comes around the people trying to get their cash will be like musical chairs except there will be 50 people and one chair.Then we'll see the
real value of things like stocks and houses instead of the inflated by limitless credit prices.
 
Come up here where I live and all areas around DC you'll see where that tax money went.Thousands of high dollar gov't employee houses with BMW SUV and similar vehicles.
 
Hotel owner takes money that is not his and pays retail price for some meat. He reduces his debt by $100, no change to his accounts receivable, yet.

Butcher takes in $100 for meat he sold at retail, but only paid wholesale for (use 50%, for example). His accounts receivable goes down by $100, and accounts payable is lowered by $100 when he pays his bill to the pig farmer, but he still is owed $100 (say by the librarian) for the other $50 dollars of meat he just paid the farmer for. His lot in life is better, and will improve when the librarian pays her debt.

The pig farmer takes in $100 and pays out $100, presumedly retail price of feed supplement, but still owes for the initial cost of the piglets. We assume he has other receivables as well, like the butcher. His lot in life is better, PLUS there is the gov't program payment, etc, etc.

The Co-Op guy steals the $100 from the business to pay a personal debt, to the prostitue of all people. Yes, his debt lowers, but his soul is lost on so many levels. And, the Co-Op is out the $100 receivables, and down one employee when caught.

The prostitute sells her dignity and soul for the money. Surely, she does not pay $100 per session to the motel owner, (who, actually DOES call her Shirley) She, too has other receivables owed to her by other Johns, and has lowered her debt to the motel owner, so her lot in life has improved, but how could it have gotten any worse?

And, now back to the motel guy, who lowers his receivables by $100 (from Shirley) and gives "his" money away to a traveling stranger. Combined with the earlier reduction in his debt, he breaks even on the day financially, and restores the person from whom he stole the money, if secretly.
 
Yes, figured it out right after I posted this response, no edit kinda sucks. Read the above post.
 

This also shows how the service sector of an economy functions. No one actually produces anything, except maybe the farmer. True wealth either comes from the soil or the sea- that covers mining, farming, etc. Everything else is money trading based on a value added paradigm.
 
Not true the butcher takes a raw material (side of beef) and turns it into a marketable item (steaks,burger etc) to be consumed by the customer.Adding on value is the real key to economic prosperity.Selling raw materials like scrap steel,basic grain,logs and like things to other countries for them to process into things of marketable value
is what 3rd World countries do.USA used to be the one that added the value now we sell raw materials like a 3rd World country and then buy back the added on value items.
 
(quoted from post at 20:04:28 10/08/19) This is not economics so much as an exercise in accounting.

The accounting equation states that assets = liabilities + equity.

So if we take one of the business owners at random, and assume that individual's net worth is $100,000. Also, his assets include an accounts receivable of $100 and his only liability is an account payable of $100.

Assets = Liabilities + Equity
100,100 = 100 + 100,000

He receives the C-note, which moves $100 from accounts receivable to cash on hand. There is no change in the total assets, the asset just moves from one bucket to another:

Assets = Liabilities + Equity
100,100 = 100 + 100,000

Now he uses the $100 cash on hand to pay his $100 liability, which reduces both assets and liabilities by $100.

Assets = Liabilities + Equity
100,000 = 0 + 100,000

The important thing is that AT NO TIME did the business owner's equity change! His net worth before, during and after the series of transactions remained $100,000. The idea that his financial situation improved is simply not true.

Now you say, "well what about the hotel owner, who grabbed the C-note that wasn't his?" When he took the $100, that became both an asset (cash on hand) and a liability. And when he returned it $100 was deducted from both assets and liabilities. No change.

This is the correct answer to this question. As stated, it's not economics, it's accounting.

The first known version of this story appeared in 1683, but it probably dates from earlier than that. Versions of this question have been appearing in accounting classes for over 100 years now. Most modern versions do not include a prostitute, however.

Most people get so hung up on the $100 bill walking away after "paying" all those debts that they don't see that the only thing that changed was the accounting.

People have been trying to use this little story as an example of everything that is wrong with society/goverment/kids these days/etc/insert your complaint here since 1684.

Grouse
 
(quoted from post at 09:26:08 10/09/19) Not true the butcher takes a raw material (side of beef) and turns it into a marketable item (steaks,burger etc) to be consumed by the customer.Adding on value is the real key to economic prosperity.Selling raw materials like scrap steel,basic grain,logs and like things to other countries for them to process into things of marketable value
is what 3rd World countries do.USA used to be the one that added the value now we sell raw materials like a 3rd World country and then buy back the added on value items.

No, the butcher didn't produce the beef. He provided a service that someone else paid him to perform. That's the difference between actually creating wealth vs adding value to a raw product. The only one actually creating anything in this case is the farmer turning grass, air and sunshine into meat through an animal he raises. I understand entirely what your point is, but you are confusing adding value to something that already exists through a service vs actually producing the commodity to start with. Without the raw material there is no value added, there is nothing. It takes someone to either grow, mine, log, fish, trap or otherwise extract that raw material before anyone can add value to it. After the raw material is obtained all the rest is people trading money for a service.
 

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