WEBVTT NOTE 3.05. Money Income and Money Expenditures 1 00:00:00.000 --> 00:00:05.000 5. Money Income and Money Expenditures 2 00:00:05.000 --> 00:00:16.000 In a money economy, each individual sells goods and services that he owns for money, and uses the money to buy desired goods. 3 00:00:16.000 --> 00:00:22.000 Each person may make a record of such monetary exchanges for any period of time. 4 00:00:22.000 --> 00:00:28.000 Such a record may be called his balance of payments for that period. 5 00:00:58.000 --> 00:01:02.500 Also, he has disposed of an old radio to Mr. Johnson. 6 00:01:02.500 --> 00:01:11.000 His account of money received, that is, money purchased for goods and services sold, is as follows. 7 00:01:11.000 --> 00:01:19.000 September 1961, James Brown, money purchased for goods and services sold. 8 00:01:19.000 --> 00:01:23.500 20 ounces of gold for labor as carpenter to Jones. 9 00:01:23.500 --> 00:01:36.500 5 ounces of gold for labor as handyman to Jones and Smith, 1 ounce of gold for old radio to Johnson, total 26 ounces of gold. 10 00:01:36.500 --> 00:01:46.500 From the account we know that by his sales of goods and services during this period, Brown has purchased 26 ounces of gold. 11 00:01:46.500 --> 00:01:52.500 This total of money purchased is his total of money income for that period. 12 00:01:52.500 --> 00:02:00.500 It is clear that the more money income a man receives during any period, the more money 13 00:02:00.500 --> 00:02:07.580 he will be able to spend on desired goods, other things being equal, an important qualification 14 00:02:07.580 --> 00:02:10.700 that will be examined in later sections. 15 00:02:10.700 --> 00:02:18.420 He will strive to earn as much money income in any prospective period as he can. 16 00:02:18.420 --> 00:02:25.460 Mr. Brown acquired his income by selling his labor services and a durable consumer's good. 17 00:02:25.460 --> 00:02:30.180 There are other ways of acquiring money income on an unhampered market. 18 00:02:30.180 --> 00:02:37.500 The owner of land may sell it for agricultural, locational, industrial, as well as other purposes. 19 00:02:37.500 --> 00:02:42.820 The owner of capital goods may sell them to those interested in using them as factors 20 00:02:42.820 --> 00:02:44.420 of production. 21 00:02:44.420 --> 00:02:58.420 The tangible land and capital goods may be sold for money outright, or the owner may retain ownership of the good while selling ownership of its services over a certain period of time. 22 00:02:58.420 --> 00:03:09.420 Since any good is bought only for the services that it can bestow, there is no reason why a certain period of service of a good may not be purchased. 23 00:03:09.420 --> 00:03:13.420 This can be done, of course, only where it is technically possible. 24 00:03:13.420 --> 00:03:20.780 Thus, the owner of a plot of land or a sewing machine or a house may rent it out for a 25 00:03:20.780 --> 00:03:24.820 certain period of time in exchange for money. 26 00:03:24.820 --> 00:03:30.620 While such hire may leave legal ownership of the good in the hands of the landlord, 27 00:03:30.620 --> 00:03:37.700 the actual owner of the goods service for that period is the renter or tenant. 28 00:03:37.700 --> 00:03:43.380 At the end of the hire period, the good is returned to the original owner, who may use 29 00:03:43.380 --> 00:03:45.380 The Theory of Money and Credit 30 00:04:13.380 --> 00:04:21.540 Mr. Green's account of money income for June to December 1961 may be as follows. 31 00:04:21.540 --> 00:04:29.540 Money income from sale of goods and services Purchased 28 ounces of gold for rent of land 32 00:04:29.540 --> 00:04:35.100 to Mr. Jones 300 ounces of gold for sale of other land 33 00:04:35.100 --> 00:04:40.020 to Mr. Forrest 15 ounces of gold for sale of threshing 34 00:04:40.020 --> 00:04:59.260 As was seen in the previous chapter, in order first to acquire the good or service that 35 00:04:59.260 --> 00:05:06.280 a man can sell for money, he must first either produce it himself, or buy it from someone 36 00:05:06.280 --> 00:05:12.400 Man who has produced it, or who in turn has bought it from the original producer. 37 00:05:12.400 --> 00:05:18.040 If he has been given money, the original owner must have acquired it through producing a 38 00:05:18.040 --> 00:05:19.040 good, etc. 39 00:05:19.040 --> 00:05:25.920 Thus, in the last analysis, the first seller of a capital good or a durable consumer's 40 00:05:25.920 --> 00:05:33.520 good is the original producer, and later purchasers must have produced some service of their own 41 00:05:33.520 --> 00:05:36.880 in order to obtain the money to acquire it. 42 00:05:36.880 --> 00:05:43.080 The seller of labor service, of course, produces the service directly at the time. 43 00:05:43.080 --> 00:05:50.000 The seller of pure land must originally have appropriated unused land, which he had found 44 00:05:50.000 --> 00:05:52.000 and transformed. 45 00:05:52.000 --> 00:05:57.900 On the unhampered market of a money economy, producers of commodities and services sell 46 00:05:57.900 --> 00:06:12.860 Money is acquired in this way by all except the producers of the original gold on the 47 00:06:12.860 --> 00:06:16.500 market, those who mined and marketed it. 48 00:06:16.500 --> 00:06:23.180 However, the production of the money commodity, as with all other valuable commodities, itself 49 00:06:23.180 --> 00:06:29.440 Both requires the use of land, labour and capital goods, and these must be paid for 50 00:06:29.440 --> 00:06:31.640 by the use of money. 51 00:06:31.640 --> 00:06:38.660 The gold miner then receives no money by gift, but must actively find and produce gold to 52 00:06:38.660 --> 00:06:41.140 acquire his money. 53 00:06:41.140 --> 00:06:47.880 With the use of money acquired in these various ways, individuals purchase desired goods. 54 00:06:47.880 --> 00:06:53.920 They do so in two capacities, as consumers and as producers. 55 00:06:53.920 --> 00:06:58.520 As consumers, they purchase consumers' goods that they desire. 56 00:06:58.520 --> 00:07:05.080 In the case of durable goods, they may purchase the entire good, or they may hire the services 57 00:07:05.080 --> 00:07:08.860 of goods for some specified period of time. 58 00:07:08.860 --> 00:07:14.960 As producers, they use money to purchase the services of factors of production needed to 59 00:07:14.960 --> 00:07:19.960 to produce consumers' goods or lower-order capital goods. 60 00:07:20.080 --> 00:07:22.840 Some factors they may purchase outright 61 00:07:22.840 --> 00:07:26.520 to use all their anticipated future services. 62 00:07:26.520 --> 00:07:29.220 Some they may hire for their services 63 00:07:29.220 --> 00:07:32.000 for a specified period of time. 64 00:07:32.000 --> 00:07:34.400 Thus, they may purchase capital goods 65 00:07:34.400 --> 00:07:36.920 that function as raw material. 66 00:07:36.920 --> 00:07:39.160 They may purchase some capital goods 67 00:07:39.160 --> 00:07:42.320 called machines and hire others. 68 00:07:42.320 --> 00:08:06.320 In general, just as consumers cannot very well hire short-lived non-durable goods, so producers cannot very well hire capital goods, dubbed raw material, or inventory, that are used up quickly in the process of production. 69 00:08:06.320 --> 00:08:12.320 On a free market they cannot purchase labor services outright, as was explained in the 70 00:08:12.320 --> 00:08:14.300 preceding chapter. 71 00:08:14.300 --> 00:08:21.460 Since man's personal will is inalienable, he cannot, in a voluntary society, be compelled 72 00:08:21.460 --> 00:08:28.160 to work for another against his present will, and therefore no contracts can be made for 73 00:08:28.160 --> 00:08:30.920 purchase of his future will. 74 00:08:30.920 --> 00:08:38.560 Number services, therefore, can only be bought for hire on a pay-as-you-go basis. 75 00:08:38.560 --> 00:08:44.560 Any individual may draw up an account of his purchases of other goods with money for any 76 00:08:44.560 --> 00:08:46.400 period of time. 77 00:08:46.400 --> 00:08:53.080 The total amount of money given up in such exchanges is his money expenditures, or money 78 00:08:53.080 --> 00:08:55.960 outlays, for that period. 79 00:08:55.960 --> 00:09:01.480 Here it must be noted that his expenditure account, as well as his income account, can 80 00:09:01.480 --> 00:09:07.400 be itemized for each transaction, or may be grouped into various classes. 81 00:09:07.400 --> 00:09:14.440 Thus, in Brown's account earlier, he might have tabulated his income as 25 ounces from 82 00:09:14.440 --> 00:09:18.720 labor in general, and 1 ounce from his radio. 83 00:09:18.720 --> 00:09:24.780 How broad or narrow the classes are depends purely on the convenience of the person drawing 84 00:09:24.780 --> 00:09:31.780 The total, of course, is always unaffected by the type of classification chosen. 85 00:09:31.780 --> 00:09:40.780 Just as money income equaled money purchased for goods and services sold, plus money received as gifts, 86 00:09:40.780 --> 00:09:50.780 so money expenditure equals money sold for goods and services bought, plus money given away as gifts. 87 00:09:50.780 --> 00:09:58.780 Thus, Mr. Brown's money expenditure account for September 1961 might be the following. 88 00:09:58.780 --> 00:10:07.780 September 1961, James Brown, money expended, money sold for goods and services bought, 89 00:10:07.780 --> 00:10:13.780 12 ounces of gold for food, 6 ounces of gold for clothing, 90 00:10:13.780 --> 00:10:19.780 3 ounces of gold for rent of house, 2 ounces of gold for entertainment, 91 00:10:19.780 --> 00:10:29.140 Account Money Given 1 oz. of gold for charity. Total 24 oz. of gold. 92 00:10:29.140 --> 00:10:36.320 In this account, Brown is spending money purely as a consumer, and his total money expenditures 93 00:10:36.320 --> 00:10:43.180 for the period are 24 oz. If he had desired it, he could have subdivided the account further 94 00:10:43.180 --> 00:10:57.180 Here it may be noted that an individual's total money income for any period may be termed 95 00:10:57.180 --> 00:11:03.540 his exports, and the goods sold may be termed the goods exported. 96 00:11:03.540 --> 00:11:10.340 On the other hand, his total money expenditure may be termed his imports, and the goods and 97 00:11:10.340 --> 00:11:17.380 and services bought are the goods imported. These terms apply to goods purchased by producers 98 00:11:17.380 --> 00:11:23.300 or consumers. Now let us observe and compare Mr. Brown's 99 00:11:23.300 --> 00:11:31.620 income and expenditure accounts for September 1961. Brown's total money income was 26 ounces 100 00:11:31.620 --> 00:11:39.900 of gold, his money expenditures 24 ounces. This must mean that 2 ounces of the 26 earned 101 00:11:39.900 --> 00:11:46.920 in this period remained unspent. These two ounces remain in the possession of Mr. Brown 102 00:11:46.920 --> 00:11:53.260 and are therefore added to whatever previous stock of gold Brown might have possessed. 103 00:11:53.260 --> 00:12:00.900 If Brown's stock of money on September 1, 1961 was 6 ounces of gold, his stock of money 104 00:12:00.900 --> 00:12:09.020 on October 1, 1961 is 8 ounces of gold. The stock of money owned by any person at any 105 00:12:09.020 --> 00:12:16.140 Any Point in Time is called his cash holding or cash balance at that time. 106 00:12:16.140 --> 00:12:23.260 The two ounces of income remaining unspent on goods and services constituted a net addition 107 00:12:23.260 --> 00:12:27.740 to Brown's cash balance over the month of September. 108 00:12:27.740 --> 00:12:34.660 For any period, therefore, a person's money income is equal to his money outlay plus his 109 00:12:34.660 --> 00:12:38.000 addition to cash balance. 110 00:12:38.000 --> 00:12:44.440 If we subdivide this income expenditure account into smaller periods of time, the picture 111 00:12:44.440 --> 00:12:51.100 of what is happening to the cash balance within the larger period is likely to be far different 112 00:12:51.100 --> 00:12:53.920 from a simple addition of two ounces. 113 00:12:53.920 --> 00:13:01.520 Thus, suppose that all of Brown's money income came in two chunks on the 1st and 15th of 114 00:13:01.520 --> 00:13:07.420 September, while his expenditures occurred every day in varying amounts. 115 00:13:07.420 --> 00:13:17.420 As a result, his cash balance rose drastically on September 1st, say to 6 plus 13 or a total of 19 ounces. 116 00:13:17.420 --> 00:13:25.420 Then the cash balance was gradually drawn down each day until it equaled 6 again on the 15th. 117 00:13:25.420 --> 00:13:33.420 Then it rose sharply again to 19, finally being reduced to 8 at the month's end. 118 00:13:33.420 --> 00:13:38.920 The pattern of Brown's supplies and demands on the market is clear. 119 00:13:38.920 --> 00:13:46.420 Brown supplied various goods and services on the market and demanded money in exchange. 120 00:13:46.420 --> 00:13:54.920 With this money income, he demanded various goods and services on the market and supplied money in exchange. 121 00:13:54.920 --> 00:14:02.920 The money must go into the cash balance before it can be spent on goods and services. 122 00:14:03.420 --> 00:14:10.060 This is also true if the income is gradual and the expenditure is in discrete sums, 123 00:14:10.060 --> 00:14:14.540 or for any other pattern of money, income and expenditures. 124 00:14:15.340 --> 00:14:21.580 Suppose, on the other hand, that Brown's expenditures for September had been 29 ounces 125 00:14:21.580 --> 00:14:28.780 instead of 24 ounces. This was accomplished by drawing down Brown's previous cash balance 126 00:14:28.780 --> 00:14:53.100 Money Income Equals Money Expenditures, Plus Net Additions to Cash Balance, Money Income 127 00:14:53.100 --> 00:15:01.100 Income equals money expenditures plus net additions to cash balance minus net subtractions 128 00:15:01.100 --> 00:15:02.940 from cash balance. 129 00:15:02.940 --> 00:15:10.580 Alternatively, the term exports can be substituted for income and imports for expenditures in 130 00:15:10.580 --> 00:15:12.580 the equation. 131 00:15:12.580 --> 00:15:18.100 Let us assume, for purposes of simplification, that the total stock of the money commodity 132 00:15:18.100 --> 00:15:22.780 in the community has remained unchanged over the period. 133 00:15:22.780 --> 00:15:29.780 This is not an unrealistic assumption, since newly mined gold is small compared to the existing 134 00:15:29.780 --> 00:15:30.780 stock. 135 00:15:30.780 --> 00:15:38.220 Now it is obvious that like all valuable property, all money must, at any point in time, be owned 136 00:15:38.220 --> 00:15:39.820 by someone. 137 00:15:39.820 --> 00:15:45.820 At any point in time, the sum of the cash holdings of all individuals is equal to the 138 00:15:45.820 --> 00:15:48.940 total stock of money in the community. 139 00:15:48.940 --> 00:15:55.580 Thus, if we consider Brown among a group of five persons living in a village, and their 140 00:15:55.580 --> 00:16:05.300 respective cash balances on September 1st were 6, 8, 3, 12 and 5 ounces, then the total 141 00:16:05.300 --> 00:16:10.940 stock of money held in the village on that date was 34 ounces. 142 00:16:10.940 --> 00:16:16.340 If the data were available, the same sort of summation could be performed for the world 143 00:16:16.340 --> 00:16:20.820 as a whole, and the total stock of money discovered. 144 00:16:20.820 --> 00:16:27.220 Now it is obvious that Brown's addition of two ounces to his cash balance for September 145 00:16:27.220 --> 00:16:33.880 must have been counterbalanced by a subtraction of two ounces from the cash balances of one 146 00:16:33.880 --> 00:16:36.900 or more other individuals. 147 00:16:36.900 --> 00:16:43.020 Since the stock of money has not changed, Brown's addition to his cash balance must 148 00:16:43.020 --> 00:16:48.580 must have been acquired by drawing down the cash balances of other individuals. 149 00:16:48.580 --> 00:16:56.420 Similarly, if Brown had drawn down his cash balance by 3 ounces, this must have been counterbalanced 150 00:16:56.420 --> 00:17:03.740 by the addition of 3 ounces to the cash balance of one or more individuals. 151 00:17:03.740 --> 00:17:10.540 It is important to recognize that the additions to or subtractions from a cash balance are 152 00:17:10.540 --> 00:17:15.660 are all voluntary acts on the part of the individuals concerned. 153 00:17:15.660 --> 00:17:22.220 In each period, some individuals decide to add to their cash balances, and others decide 154 00:17:22.220 --> 00:17:28.860 to reduce them, and each makes that decision which he believes will benefit him most. 155 00:17:28.860 --> 00:17:33.980 This section is limited to a discussion of expenditures on consumers' goods. 156 00:17:33.980 --> 00:17:39.660 A later section will discuss producers' expenditures on producers' goods. 157 00:17:39.660 --> 00:17:46.820 It will be seen, however, that even unwelcome losses from cash balances suffered by producers 158 00:17:46.820 --> 00:17:54.640 are purely the result of voluntary action that, in a later period, proved erroneous. 159 00:17:54.640 --> 00:18:00.840 For centuries, however, fallacious popular usage has asserted that one whose income is 160 00:18:00.840 --> 00:18:08.600 greater than expenditures, exports greater than imports, has a favorable balance of trade, 161 00:18:08.600 --> 00:18:14.560 While one whose expenditures have been greater than income for a period, imports greater 162 00:18:14.560 --> 00:18:20.200 than exports, has suffered an unfavorable balance of trade. 163 00:18:20.200 --> 00:18:26.520 Such a view implies that the active, important part of the balance of payments is the trade 164 00:18:26.520 --> 00:18:33.280 part, the exports and imports, and that the changes in the individual's cash balance 165 00:18:33.280 --> 00:18:38.280 Changes in cash balance are simply passive balancing factors, serving to keep the total 166 00:18:38.280 --> 00:18:41.120 payments always in balance. 167 00:18:41.120 --> 00:18:47.040 In other words, it assumes that the individual spends as much as he wants to on goods and 168 00:18:47.040 --> 00:18:54.900 services, and that the addition or subtraction from his cash balance appears as an afterthought. 169 00:18:54.900 --> 00:19:02.020 On the contrary, changes in cash balance are actively decided upon by each individual in 170 00:19:02.020 --> 00:19:18.020 Brown decided to increase his cash balance by two ounces and sold his labor services to obtain the money, foregoing purchases of consumers' goods to the extent of two ounces. 171 00:19:18.020 --> 00:19:24.380 Conversely, in the later example, when he spent three ounces more than he earned in 172 00:19:24.380 --> 00:19:30.160 the month, he decided that his cash balance had been excessive and that he would rather 173 00:19:30.160 --> 00:19:34.640 spend some of it on consumers' goods and services. 174 00:19:34.640 --> 00:19:42.500 There is therefore never a need for anyone to worry about anyone else's balance of payments. 175 00:19:42.500 --> 00:19:49.020 A person's unfavorable balance of trade will continue so long as the individual wishes 176 00:19:49.020 --> 00:19:55.400 to reduce his cash balance and others are willing to purchase his money for goods. 177 00:19:55.400 --> 00:20:02.180 His maximum limit is, of course, the point when his cash balance is reduced to zero. 178 00:20:02.180 --> 00:20:08.840 Most likely, however, he will stop reducing his cash balance long before this point. 179 00:20:08.840 --> 00:20:14.960 The assertion has also been made that a person who spends most or all of his income on food 180 00:20:14.960 --> 00:20:22.240 and clothing must also have an unfavorable balance of trade, since his money expenditures 181 00:20:22.240 --> 00:20:25.440 must be at a certain minimum amount. 182 00:20:25.440 --> 00:20:31.980 However, if the man has spent all his cash balance, he can no longer continue to have 183 00:20:31.980 --> 00:20:38.180 have an unfavorable balance, regardless of what goods he buys or what his standard of 184 00:20:38.180 --> 00:20:39.100 living is.