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Andrew and Barney are shipwrecked on an island with nothing but their clothes, the cash in their wallets, and a book Andrew has. Barney pays Andrew $100 for th

Andrew and Barney are shipwrecked on an island with nothing but their clothes, the cash in their wallets, and a book Andrew has. Barney pays Andrew $100 for the book since he hasn't read it but Andrew already had. Later, after finishing it Andrew is able to buy it back for $80 because it's old to both of them but has a bit of sentimental value for Andrew. The dollar denominated wealth on the island has gone down by $20 but the same stuff and same number of dollars are there.

whatshisface 4y ago
The consumer price index on the island has gone from $100 for the basket of one book, to $80 for the same basket, causing an increase in the measured value of currency equal and opposite to the decline in the price of the good. If you made the CPI more realistic by including other goods on the island, this website would show the dollar go up as the stock market (of booksellers with an interest in book prices) went down.
- roenxi 4y ago
  The book is an asset in this example. CPI isn't relevant, because trading the book does not affect it.
  - whatshisface 4y ago
    The book doesn't represent any invested capital, so let's not say that it is an asset. Instead, let's say that there are shares in a book making company, tracked in the index, and also books, which will be in the CPI. The value of being able to make one book per day is linked to the price of a book, which means that on the island, the CPI and the stock market have to rise and fall together. That causes the stock market and currency to move inversely.
    - roenxi 4y ago
      Do you want an answer to your original question or do you want to try and argue that the stock market and currency move inversely? Because if you want an answer, you aren't making changes to the example that will help you understand. You're introducing confusing factors that are not needed. The original example gave a neat little illustration of how wealth-as-measured can drop without money disappearing. Don't bring CPI in to it (and stock prices don't drive the CPI so that is a reasonable assumption). If you want to argue that the two move inversely then go ahead and don't mind me, but you might like to add in some evidence or case studies. And you'll need to be precise about real vs nominal, and probably start modelling other effects.
      - whatshisface 4y ago
        My original question was how wealth-as-measured could disappear when dollars were included, not how demand for stocks could shift to demand for dollars. In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological) - and that is not what we see happening on the linked page. That's what my question is.
        chordalkeyboard 4y ago
        > In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological) this is incorrect
        whatshisface 4y ago
        I mean the value of the dollar as measured by the CPI.
        deleted 4y ago
        [deleted]
        roenxi 4y ago
        You do mean that, but it doesn't have a lot of bearing on the correctness of your argument. I suspect you've assumed that wealth is neither created or destroyed somewhere in your logic, because what you are saying would make sense if that was an assumption. But that would be a poor assumption if you've made it. CPI is a tool for adjusting the value of a dollar, but it doesn't have any bearing on the value of the total economy vs the value of all the dollars in existence. All the dollars in existence might buy the entire economy many times over or they might buy a tiny fraction of it. And that ratio changes continuously (both from money creation and economic activity). There is no inverse relationship mediated by the CPI.
roenxi 4y ago
I liked this explanation. Although to attach to it - in this example the price of the book is set by magic/intuition to illustrate the effect. In the real world, the prices are set by less flexible forces of supply, demand and people estimating valuation - usually in a way that means the price has to fall in some relatively narrow band. But after the dust settles on those inflexible forces, it ends up looking the same as this example.
andsoitis 4y ago
I would expect the demand for the book to go down since the entire population has read it. Of course, you could use the pages to help start a fire for warmth or cooking fish you will be catching.

whatshisface 4y ago

The consumer price index on the island has gone from $100 for the basket of one book, to $80 for the same basket, causing an increase in the measured value of currency equal and opposite to the decline in the price of the good. If you made the CPI more realistic by including other goods on the island, this website would show the dollar go up as the stock market (of booksellers with an interest in book prices) went down.

roenxi 4y ago
The book is an asset in this example. CPI isn't relevant, because trading the book does not affect it.
- whatshisface 4y ago
  The book doesn't represent any invested capital, so let's not say that it is an asset. Instead, let's say that there are shares in a book making company, tracked in the index, and also books, which will be in the CPI. The value of being able to make one book per day is linked to the price of a book, which means that on the island, the CPI and the stock market have to rise and fall together. That causes the stock market and currency to move inversely.
  - roenxi 4y ago
    Do you want an answer to your original question or do you want to try and argue that the stock market and currency move inversely? Because if you want an answer, you aren't making changes to the example that will help you understand. You're introducing confusing factors that are not needed. The original example gave a neat little illustration of how wealth-as-measured can drop without money disappearing. Don't bring CPI in to it (and stock prices don't drive the CPI so that is a reasonable assumption). If you want to argue that the two move inversely then go ahead and don't mind me, but you might like to add in some evidence or case studies. And you'll need to be precise about real vs nominal, and probably start modelling other effects.
    - whatshisface 4y ago
      My original question was how wealth-as-measured could disappear when dollars were included, not how demand for stocks could shift to demand for dollars. In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological) - and that is not what we see happening on the linked page. That's what my question is.
      - chordalkeyboard 4y ago
        > In a market with one good, the value of a dollar must move inversely with the value of the good (no examples needed, it's mathematically tautological) this is incorrect
        whatshisface 4y ago
        I mean the value of the dollar as measured by the CPI.
        deleted 4y ago
        [deleted]
        roenxi 4y ago
        You do mean that, but it doesn't have a lot of bearing on the correctness of your argument. I suspect you've assumed that wealth is neither created or destroyed somewhere in your logic, because what you are saying would make sense if that was an assumption. But that would be a poor assumption if you've made it. CPI is a tool for adjusting the value of a dollar, but it doesn't have any bearing on the value of the total economy vs the value of all the dollars in existence. All the dollars in existence might buy the entire economy many times over or they might buy a tiny fraction of it. And that ratio changes continuously (both from money creation and economic activity). There is no inverse relationship mediated by the CPI.

roenxi 4y ago

I liked this explanation. Although to attach to it - in this example the price of the book is set by magic/intuition to illustrate the effect. In the real world, the prices are set by less flexible forces of supply, demand and people estimating valuation - usually in a way that means the price has to fall in some relatively narrow band. But after the dust settles on those inflexible forces, it ends up looking the same as this example.

andsoitis 4y ago

I would expect the demand for the book to go down since the entire population has read it. Of course, you could use the pages to help start a fire for warmth or cooking fish you will be catching.