What’s it called if I buy something like a sandwich, then consume it, and the net worth of society has now shrunk by 1 sandwich? Versus buying something that keeps its value.

Question

Maybe a better example would be a country getting leveled in a war. All of the money is still there, but now everyone is poor and has no net worth. How does that work?

It seems kind of like losing that amount of money, even though we didn’t?

In: 3475

Answer 1

Think of unconsumed goods and services as capital. The economy is made of people who acts as producers and consumers. There is a global amount of capital which you can quantify as a USD value. Imagine the world as a giant company with a giant ledger of assets.

Naturally the global amount of capital naturally increases (e.g. trees grow) and decreases (e.g. hurricanes kill animals). There is also fixed capital like oil reserves and fertile land which can only decrease.

Production by labour is the conversion of capital. A tree with labour can be converted into timber which can be converted into a chair. The easiest way to quantify capital is the USD value of goods. The value of the “man-hours” could be their salary.

People are consumers as well as producers. If the chair is sat on enough it will eventually become useless. In this case, as you say, the net capital of the world is decreasing.

Money is an economic tool, but is not at the essence of economics; finite resources (capital) and infinite wants. Money changing hands does not directly constitute an increase or decrease of capital.