For those of us who really don’t know how economics works, here is a simple illustration:
It is the month of February in the rural town of Tobuggary and it’s uncharacteristically raining.
The little town is deserted and depressed because the global financial crisis has found its way here and the tough times have descended – absolutely every townsperson is in debt, and everybody lives on credit.
All of a sudden, a well-paid travelling salesman pulls into town. He goes into the only hotel, lays a $100 note on the reception counter, and heads upstairs to inspect the rooms with a view to staying overnight.
Entrusted with the $100 note, the hotel proprietor quickly runs to the butcher to pay off his debt which had ballooned recently because he had put on a 21st birthday bash for one of the townsfolk’s sons.
The butcher takes the $100 note and runs to the nearby pig farm where he pays off his debt to the pig grower.
The pig farmer takes the $100 note, and runs to the stock feed supplier to pay his debt for feed and fuel.
The owner of the stock feed shop takes the same $100 note and runs over to the hotel proprietor to fix up the account for his son’s 21st birthday party.
The hotel proprietor then lays the $100 note back on the counter so that the travelling salesman will be none the wiser when he returns from the upstairs room inspection. Just as he does, the salesman is back in the lobby, declaring that none of the rooms were to his liking and taking his $100 note back, heads off to the next town.
The economic lesson here is this: not one person earned anything in this exchange but at the end of it, the whole town was without debt and looking forward to a bright future with a newfound burst of optimism – until next time!
(Taken from www.psnews.com.au/NoticeBoardpsn180.html)