[Economy] Barter-Money-Bitcoin: Circular Flow of Income, Savings to Investment, Time Value of Money, Deferred Payments (Part 2)

Economy53 Comments

India Yearbook
  1. Prologue
  2. #5: Difficult to store Value
  3. #6: Savings don’t turn into investment
  4. What is Circular flow of income?
  5. #7: Account-keeping = mission impossible
  6. #8: Lack product specialization
  7. #9: Future contracts and deferred payments
  8. Time value of money
  9. Bitcoins and Smart Contracts
  10. Mock Questions

Prologue

In the previous article (Part I), we evaluated Barter-Money-Bitcoin systems on four parameters:

featuresbarterFiat money (Rs./$)Bitcoin
#1: trade can happen without double coincidence of wants?NoYesYes, if both parties agree.
#2: Promotes division of Labour?HardlyyesYes, but limited @the moment.
#3: Divisible?Not alwaysYes but upto 10-2Yes and more divisible than fiat money. 10-8
#4: Fungible?Not alwaysYesYes, for now.

Let’s continue further, what are the limitation of bartering system? Why did people shift to money system and how does Bitcoin fare on those parameters?

#5: Difficult to store Value

UNDER MONEY SYSTEMUNDER BARTER SYSTEM
  • You earn money for providing goods and services to others. This is the ‘value’ of your labour.
  • You can and save / invest this value (money) in bank, Fixed deposit, shares, bonds, mutual funds etc. =possible to store the value of your ‘labour’ for a long period of time and become wealthy.
  • If the value of your labour is paid in Perishable commodities like milk, butter, rice, potato, fishes etc., it cannot be stored beyond a few weeks/months/years.
  • Same for livestock wealth -cows, bullocks, buffaloes, horse, camel, elephant etc. you may also need to pay their caretaker and veterinary doctor.
  • Even for a relatively non-perishable commodity like silk-it’s difficult to store value confidently: what if someone invents synthetic fibers and the demand for silk clothes suddenly falls down?
  • Stored value generates more income e.g. interest from savings account, dividend from shares.
  • Not always. E.g. dried fish will not generate more fishes.
  • Exception1: stored wine because its quality increases with time.
  • Exception2: Gold, diamond, real estate etc. things that are non-perishable and whose demand increases with rise in population.
  • Money is the most liquid asset- you can use it for buying almost anything immediately.
  • Even if you have 1 crore rupee in savings account, you can take out a few hundreds and dine in a restaurant.
  • With gold/diamond/real-estate this is difficult. They’re relatively less-liquid assets.

So far, money system is better than barter system, for storing the ‘value’ of your labour.

But the Main problem: Inflation erodes the value stored in money. For example:

  • within 2013, the onion prices have rose from Rs.20/kg to almost Rs.100/kg= 400% price rise
  • In a fixed deposit, you’ll barely get ~9% return in a year.
  • So even if you prudently store the value of your labour (salary) in money, your purchasing power declined.

Similarly, if government overprints currency notes for the sake of financing a war, bailouts of troubled PSUs or running populist welfare schemes =that also creates inflation, and erodes the purchasing power of money. Recall Rajiv Gandhi Suitcase Yojana.

What about Bitcoins?

Bitcoins are created by a mathematical algorithm, total amount of Bitcoins is finite (~21 million Bitcoins). Nobody can overprint Bitcoins beyond that.

It is possible to store value of your labour in Bitcoins e.g. IT Professional makes new software for American businessman and gets paid in Bitcoins. But…

  • Bitcoin itself cannot buy many goods and services at the moment, because Bitcon is not a fiat currency unlike Rupee, dollar or Euro.
  • At some point, you’ll have to exchange Bitcoins for a fiat currency- when you want to buy milk, vegetables or pay electricity bill.

And there comes the problem: the exchange rate between Bitcoin vs. fiat currency

year 20131 Bitcoin = ____ $
Last week of October~190
first week of December~1200
third week of December~580
  • As you can see, Bitcoin exchange rate is way too volatile / fluctuating. Fortunes are made and lost in a matter of weeks.
  • A Botson Economics professor even predicts that by June 2014, one Bitcoin will be worth less than 10$, based on its current downfall!
  • Agreed that inflation (or overprinting) erodes the purchasing power of fiat currency such as dollars or rupees.
  • But you’ll never expect so much ‘erosion’ of value – in such a short period-like in first week of December you could buy two iphones in $1200, but in second week of December, inflation is so increased you cannot even buy one iphone!
  • In a separate article, we’ll see more about the connection between money supply vs inflation/deflation and how Bitcoin fits in that picture. but for the moment let’s just update the table
featuresbarterFiat money (Rs./$)Bitcoin
  1. trade can happen without double coincidence of wants
NoYesYes, if both parties agree.
  1. Promotes division of Labour
HardlyyesYes, but limited @the moment.
  1. Divisible?
Not alwaysYes but limitationsYes and less limitations than fiat money
  1. Fungible?
Not alwaysYesYes, for now.
  1. Possible to store value/wealth for a long time?
Not alwaysYesYes, but volatile at the moment.

Continuing with the original discussion: what were the limitations of barter system, that made people switch to money system?

#6: Savings don’t turn into investment

  • Under Barter system, there is no common storage for value (i.e. currency)=> difficult to operate banks, insurance companies and mutual funds.
  • As a result, people can save very less and often they just hide their gold, silver and jewelry under a tree or under their bed pillow.
  • This type of savings doesn’t help the entrepreneurs get loans to start new business, hire more people, produce more goods and service = not helpful for the economic growth.

Money system solves this problem through “Circular flow of Income”

What is Circular flow of income?

circular-flow-of-income

Money system creates two entities

HOUSEHOLDSFIRMS
They buy goods and services from the firms.They produce goods & services and sell it to households.
they supply the factors services to the firms

  1. land
  2. labor
  3. Capital (through their savings in banks, mutual funds etc.)
they pay for those factor services in terms of:

  1. Rent (for using land)
  2. Wages (for using labour)
  3. Interest, dividends (for using capital / loans)
  • Firm’s profit = whatever money is left after paying the rent + wages + interest (+ tax + bribes).
  • And firm can use that profit for buying additional factors (land, labour, capital) to produce even more goods and services = even more income for the households (through rent, wages and interest)….this cycle of income continues.
  • Financial intermediaries such as bank, insurance companies and mutual funds, help running this cycle by acting as a ‘middleman’ between the households and firms.
  • On one hand they accept money from households and on the other, they help firms get the necessary investment via debt (loans, bonds) or equity (IPOs, shares). For more on Debt vs Equity, click me.

Thus the money system and circular flow of income leads to more jobs, more business, and more economic growth. This is not possible under barter system.

What about Bitcoins?

In theory, Bitcoins savings can also turn into investment and thus the whole ‘circular flow of (Bitcoin) income =possible. But it is full of problem at the moment:-

  • In recent times, many people have entered in the Bitcoin game out of speculative purpose that “in December 2013, one Bitcoin=1200$ so may be in 2014 one Bitcoin=worth 2000-3000$ and I’ll become a crorepati in no time, if I somehow get hold of a few Bitcoins! “
  • So they go to online Bitcoin exchange website, and give their fiat money savings (Rs. or $) to buy Bitcoins and just wait-n-watch hoping that Bitcoin to Dollar exchange rate will rise in future. In a way, this is same like hiding gold under your pillow and hoping that its price will rise in future.
  • According to the critiques of Bitcoin, ^this is not turning savings into investment but mostly speculative gambling.
  • For the circular flow of income, you need the savings of a household becoming investments in business firms. And for that you need financial intermediaries like banks, mutual funds and insurance companies.
  • but recently People’s Bank of China (=Chinese RBI) has issued following notice:

“Bitcoin is a specific virtual merchandise, which does not have the same legal status as currency, and cannot and should not be used as currency in circulation in the market.”

  • Meaning Chinese financial intermediaries and businessmen are officially prohibited from accepting Bitcoins and thus ‘circular flow’ of Bitcoins is stopped in real life.
  • Ofcourse some entrepreneurs have started companies with crowd funded Bitcoins, but one or two Cinderella stories doesn’t mean “Circular flow of income”.
  • Besides, even if an entrepreneur manages to get ‘loan’ of Bitcoins to start a business, he’ll have to convert some Bitcoins into fiat money (Rs/$) to pay for office-rent, electricity bill, wages to laborers etc.
  • But since Bitcoin vs dollar exchange rate is so volatile, it is hard to determine a reasonable interest rate that a businessman should pay back to the household or the financial intermediary (who lent the Bitcoins.)

Recently Winklevoss Brothers (facebook fame; they claimed Mark Zukerberg stole their idea), anyways these Winklevoss Brothers have launched a Bitcoin investment Trust. To put their mechanism crudely:

  1. Junta gives dollars to Winklevosse brothers, gets shares in return.
  2. Brothers convert those dollars in Bitcoins, and invest in Bitcoin related startup companies.
  3. Those startup Companies make profit, return Bitcoins loans to Winklevosse brothers.
  4. Brothers convert those Bitcoins in real dollars, and all the junta gets dividend according to the number of shares owned by them. And if a person cannot wait for that long, he can also sell those shares to others at the stock exchange.
  • A NewYork based company SecondMarket Inc. also launched similar Bitcoin investment fund but aam-juntaa (retail investors) are not allowed. Only institutional investors (such as pension funds) can invest in their fund.

Overall, these things are yet to pick up the momentum similar to a rupee or dollar based sharemarket and mutual investment funds.

However in a futuristic society, there may be financial intermediaries owned and operated by Artificial intelligence (AI) outside the control of government and if Bitcoin is accepted as global currency, then perhaps Bitcoin savings could really turn into a decent investment.

Anyways, let’s update our table:

featuresbarterFiat money (Rs./$)Bitcoin
  1. trade can happen without double coincidence of wants?
NoYesYes, if both parties agree.
  1. Promotes division of Labour?
HardlyyesYes, but limited @the moment.
  1. Divisible?
Not alwaysYes but limitationsYes and less limitations than fiat money
  1. Fungible?
Not alwaysYesYes, for now.
  1. Possible to store value/wealth for a long time?
Not alwaysYesYes, but volatile @the moment.
  1. Circular flow of income? Can savings become investment?
Difficulteasily possiblePossible but [email protected] moment.

Continuing with our original topic: what are the limitations of barter system, why did people switch to money system and how does Bitcoin fare on those parameters?

#7: Account-keeping = mission impossible

  • In a barter economy, If there are 1,000 different goods and services in the market, then the value of each would have to be stated in terms of 999 others. = no meaningful accounting system is possible.
  • A farmer may be able to keep track of his income, expense, profit and land revenue liability (Lagaan) because he uses very few inputs and produce only one or two crops per year.
  • But imagine the plight of the Samsung company. They use so many inputs- screws of various size and shapes, precious metals, circuit boards, plastic, glass, paint and produce three dozen type of galaxy smartphones+ the cost of their marketing, transport, service-centers..….it is impossible to keep track of income, expenditure, profit and tax.
  • And account keeping is not just for tax calculation. It is essential to measure your assets, liability and revenue stream to make future business strategies accordingly.
  • Another problem: If there are “n” tradable commodities products in a barter system, the total number of MRPs will be [n(n-1)/2] (Think of  the total handshake question under permutation- combination.)
  • =difficult to run a ‘kirana’ store in a Barter village because you’ve to remember so many MRPs!

Money system solves these problems. You can express value of each and every item- no matter how big or small -in terms of rupees/dollars/euros= thus, account keeping is easy as pie.

What about Bitcoins?

Account keeping easier in Bitcoin system than in Money system because,

Money system account keepingBitcoin Account Keeping (BTC)
  • Manual records have to be kept= inefficient, prone to errors.
  • Even if you buy and sell everything using Credit card/netbanking still rickshaw fare, wages to petty laborers etc. will have to paid in paper currency=manual records need to be kept.
  • All transactions are digital / electronic in nature.
  • Bitcoins= electronic transactions= no need to manually enter any records in the paper account books.
  • And you can utilize softwares that automatically calculate income, expense, profit etc.= more efficient, less chances of mistakes, less harm to environment than paper based account keeping.
  • often you’ve to round off the figures e.g. Rs15.40=>Rs.15/-. On a macro-scale it leads to a considerable loss/gain.
  • For example, if a bank rounds off interest rate of Rs.15.40 to Rs.15= every savings account holder is paid 40 paisaa less, if bank had one lakh account holders, it could save could save Rs.40,000  by just rounding off=considerable loss to customers as a whole.
  • No need to round off any figures. You can even transfer 0.00006995 BTC.  Recall smallest unit of Bitcoin is Satoshi. 1 Satoshi=10-8 BTC
  • Thus, accurate calculation of transfer of value, profit, loss, tax liability, interest rate, depreciation etc. possible.

#8: Lack product specialization

In the barter system, buying/selling/trade can happen only when two parties want each other’s stuff. So, to increase the chances of this ‘double coincidence of wants’, people only produce goods/services that are likely to be “wanted” by a larger population.

barter-system-fmcg-mnc

UNDER MONEY SYSTEMUNDER BARTER SYSTEM
Procter & Gamble (P&G)- a FMCG (Fast moving consumer goods) type MNC.

  • They produce “Tide” detergent for lower middle class and middle class consumers.
  • They produce “Ariel” detergent for the upper middle and rich class.
  • Within Ariel: they’ve separate sub-brands for top-loading washing machines and front loading washing machines.
  • First of all, an MNC like Procter and Gamble cannot exist in barter system because account keeping is a mission impossible.
  • so, there will be many small players but all selling just one variety of washing powder and that too with average quality because they can’t afford R&D for stain removal technologies, new fragrances etc.
variety of toothpastes

  • Gel toothpastes for youth (e.g.Closeup)
  • Special toothpastes for getting your teeth whiter
  • Special toothpaste for cold sensitive teeth
  • +Variety of mouthwashes and so on.
  • Just plain white toothpaste.  because the toothpaste maker cannot risk to waste time in finding the target audience who ‘wants’ his special toothpaste and who is ready to offer something in return that toothpaste maker ‘wants’.
  • authors will produce many genres of fiction: comedy, crime, detective, mystery, fantasy, horror, romance, sci-fi etc.
  • authors will only focus on comics, astrology, sms-jokes-shaayari type of booklets.
  • Because those are more likely to be ‘wanted’ by majority of junta in exchange of rice, tomatoes and milk.

What about Bitcoins?

Bitcoin will promote product specialization to a whole new level of ‘smart’ products.

  • Imagine a futuristic laptop -if it stops working because of warranty covered defects, then its ‘blackbox’ will send automatic distress signal to Mother Company. And equivalent amount of Bitcoins can be automatically refunded to your digital wallet. =No headache of talking with service station employees.
  • Variety self-service products. Imagine a 3D printer-robot. You can email it product design image, with a pre-payment of xyz Bitcoins. It’ll automatically print the customized product for you and ship it @your home.
  • Variety of pay and use products. Imagine a futuristic shopping mall, you walk in & pickup xbox360 or playstation but instead of paying 30-40 thousand rupees upfront, you bring it home, play as much as you like and return back. Only the Bitcoins equivalent of playing hours will be cut from your digital wallet. Same for cars, bikes etc. with microchips, that’ll only function if you pay Bitcoins.

Possibilities are limitless but let’s update our table.

featuresbarterFiat money (Rs./$)Bitcoin
  1. trade can happen without double coincidence of wants?
NoYesYes, if both parties agree.
  1. Promotes division of Labour?
HardlyyesYes, but limited @the moment.
  1. Divisible?
Not alwaysYes but upto 10-2Yes and more divisible than fiat money. 1 Satoshi=10-8 BTC
  1. Fungible?
Not alwaysYesYes, for now.
  1. Possible to store value/wealth for a long time?
Not alwaysYesYes, but volatile at the moment.
  1. Circular flow of income? Can savings become investment?
Difficulteasily possiblePossible but [email protected] moment.
  1. Account keeping
difficulteasyeasier than fiat money.
  1. Product specialization
hardlyyeseven better than Fiat money

Continuing with our original topic: what are the limitations of barter system, why did people switch to money system and how does Bitcoin fare on those parameters?

#9: Future contracts and deferred payments

Deferred payment = you get the goods/ services right now, but pay for them in future. Example- Monthly bill of newspaper, electricity, telephones.

This is difficult under Barter system.

Sonu Nigam(Orders a cup of tea)
Chai-wallaHow’ll you pay?
Sonu NigamI’ll sing any song of your choice for two minutes.
Chai-wallaSounds like a fair exchange. But I’m not in a mood of music at the moment. So, How about this: I give you tea right now but you perform that two minutes song, after two years, during my daughter’s wedding!
Sonu NigamSorry, I can’t accept that contract because:

  1. during the wedding season, I can perform @some rich man’s reception  and earn gold equivalent to 1000-2000 cups of tea.
  2. After two years, my own reputation would have increased and at that time 1 cup of tea won’t even equal to ten seconds of my performance!

SECOND CASE

JK RowlingOrders a cup of tea, offers two pages from her Harry potter book.
Chai-wallawell my son likes Harry potter series but two pages are useless, I want the entire book.
JK Rowlingok, How about you serve me one cup of tea every morning for next 300 days, and then I’ll give  you the entire Harry Potter book!
Chai-wallaSorry madam, I cannot accept, because

  1. Raw material- sugar, tea, milk, and kerosene- are becoming expensive every month. Today, 1 tea=2 book pages but three months from now, 1 tea=3 pages perhaps! So, I deserve the entire book, much before 300 days.
  2. In 300 days, you might release second part of that Harry Potter book series and in the meantime, my son would have read the first part borrowing book from a friend.
  3. Ultimately first part of novel will become useless. I cannot even sell it to others because they will also want the latest part.

Similar problems when:

  • Farmer offers to give his bullock as payment, after 2 years but value of bullock declines as it grows older and weaker.
  • Quality of wine improves with time. Value of art increases after the artist’s death and so on.

Thus, it is very difficult to make deferred payments under barter system because:

  1. Contracts can happen only when both parties agree on which specific commodity to use for repayment. (double coincidence of wants)
  2. Both parties face the risk that the commodity to be repaid would increase or decrease seriously in value over the duration of the contract.
  3. Either party will dispute the method of calculating the exact increase/decrease in the value of a commodity over time.

All this makes credit / lending / borrowing / deferred payments =almost impossible in bartering economy except a few basic contracts like farmer borrows from money lender and agrees to give a part in the wheat produced.

But the advanced contracts on wages, salaries, interests, rents, and other prices extending over a period of time= again mission impossible in a barter system.

Money system makes it possible because:

  • Household savings =>investment. And household earns ‘interest’ on it (say ~4% in savings account,  ~9% in fixed deposit and ~11% in mutual funds per annum.)
  • These interest-rates or “rate of return”, help us determine the ‘time value of money’ and hence makes it easy to create future contracts and deferred payments.

Time value of money

Often you’ve seen the receptionist @coaching center say following:

  1. Entire year’s fees is 10,000 rupees, you can pay it in five installments of two thousand each.
  2. But if you want to pay entire sum right now, we’ll give you discount of Rs.500/-

So, why is she offering this ‘loss making’ proposition. Why is she ready to accept 9500 right now rather than waiting for 10000 at the end of one year? The answer is: time value of money.

  1. If they accept payment in ‘installment’, there is always ‘risk’ that you stop coming to class after 5-6 months and don’t pay the remaining fee installments.
  2. You pay them 9500 right now, they put it in a fix deposit for 1 year @9% interest rate=> get Rs.10384.29*. So even by accepting less than 10,000 right now, they’ll earn more than 10,000 in future.

*under fixed deposits, Indian banks usually give compound interest rate at each quarter i.e. 9% is paid @every 3 months.

Same concept works in following cases:

  1. In Gujarati dining halls, if you buy coupons for entire month, they’ll either give you discount or a 5-10 additional coupons for free.
  2. Magazines offer higher discounts if you subscribe for more years.
  3. In DishTV/Tata sky, if you pay 6-months or entire year’s subscription at once, they’ll give you discount / a few more channels for free.

Thus money system facilitates future contracts, deferred payments, debt obligations.

What about Bitcoins?

At present, it is difficult to estimate the time value of Bitcoin because

  1. BTC to Dollar exchange rate is volatile and unpredictable.  in First week of December 2013: 1BTC=~1200 USD but in Third week of December 1BTC=~580 USD.
  2. Real life Banks don’t accept Bitcoins in savings account or Fixed deposits. China has imposed a specific ban.
  3. Of course there are some random website claiming to give interest on Bitcoins, lending out peer-to-peer loans to small business etc. But they’re not time tested (for a period of 10-20 years). No guarantee, he’ll shut down the server and run away to Nepal/Dubai after exchanging the Bitcoins to dollars when exchange rate dramatically fluctuates.

But in a futuristic society, when more real-life trustworthy financial intermediaries accept Bitcoins as a currency, then it’ll be possible to predict the time value of Bitcoins.

Bitcoins and Smart Contracts

As such, the Bitcoin system enables more ‘smarter’ contracts because of computer programing.

You can have conditional-scripting capabilities. e.g. “IF Event “A” happens, Pay “B” number of Bitcoins to Mr.”C”’s digital wallet on “D” date at HH:MM:ss time..”.

Thus, it possible to create smart contracts and deferred payments based on Bitcoin transactions. Future applications are numerous for example:

under conventional money (currency) systemunder Bitcoin system
  • You paid Rs.300 to Tatasky, and under the contract, company is obliged to show you 150 channels for 30 days (=720 hours.)
  • But in reality, you will not be watching TV for non-stop 720 hours.
  • most families just watch few specific shows between 7PM to 10PM.
  • Imagine a Tatasky set-top box with an embedded microchip connected with your digital Bitcoin wallet account.
  • This chip will monitor: what channels did you watch- and for how many hours, minutes and seconds?
  • Then only corresponding amount of Bitcoins will be taken from your digital wallet. (and not for entire 30 days or 720 hours.)
  • The fact that you can pay any denomination –even 0.00884 Bitcoins =makes this type of conditional TV usage contract easy to implement.
  • You’re overpaying for the services.
  • You’ll be paying only for the service that you actually used.

Counter argument: what if a person hacks/tempers the set-top box so even if he watches for 100 hours, the chip will say on 10 hours watched? (Counter-counter argument: what if someone puts a gun on his head and orders him to take out all money from ATM? Just because there is a possibility of misuse doesn’t mean technology shouldn’t be used.)

under conventional money (currency) systemunder Bitcoin system
You sit in a rickshaw/taxi. Driver deliberately takes a longer route to destination. And / or he tempers the meterbox in such way that you’ve to pay more fare than what you actually travelled.
  • Imagine vehicles have GPS-Bitcoin enabled meter boxes. It’ll suggest driver the most economical route to destination (say 10kms worth 0.05 Bitcoins.).
  • Even he takes longer route, still the meterbox will only debit the 0.05 Bitcoins from your digital wallet.
Petrol pump owner gives you adulterated petrol mixed with kerosense OR he tempers with instrument so even if meter says “1 liter” while in reality only 950ml is transferred.Vehicle fuel tank has Bitcoin enabled petrol-analyzer. It’ll measure both the quantity and quality of petrol and make payment accordingly from your digital wallet. If less petrol is transferred then less payment.

Anyways let’s update our table:

featuresbarterFiat money (Rs,$)Bitcoin (BTC)
  1. Trade can happen without double coincidence of wants?
NoYesYes, if both parties agree.
  1. Promotes division of Labour?
HardlyyesYes, but limited @the moment.
  1. Divisible?
Not alwaysYes but limitations e.g. Rs14.05897Yes and more divisible than fiat money (1Satoshi= 10-8 BTC)
  1. Fungible?
Not alwaysYesYes, for now.
  1. Possible to store value/wealth for a long time?
Not alwaysYesYes, but volatile at the moment.
  1. Circular flow of income? Can savings become investment?
Difficulteasily possiblePossible but [email protected] moment.
  1. Account keeping
DifficulteasyEasier than Fiat money.
  1. Product specialization
hardlyyesMore possibilities than Fiat money.
  1. Deferred Payment, Future contracts
DifficulteasyMore possibilities than Fiat money.

In the next articles, we’ll see the functions of money, then evolution of money: from commodity money, metallic money, fiduciary money, gold backed paper currency, fiat currency, bank money; and  then we’ll see how Bitcoins system works.

Mock Questions

Assertion reasoning instructions: Each of the following questions contain a set of Assertion (A) and Reasoning (R) statements. Answer codes are as following:

  1. Both the statements are individually true and Statement R is the correct explanation of Statement A
  2. Both the statements are individually true but Statement R is not the correct explanation of Statement A
  3. Statement A is true but Statement R is false
  4. Statement A is false but Statement R is true

Question Statements:

  1. (A) Money system is conducive for deferred payments. (R) In a barter system, cost of living generally increases with time.
  2. (A) Money system facilitates the circular flow of income more than the Barter system. (R) Presence of financial intermediaries impedes the circular flow of money from households to business firms.
  3. (A) In Money system, it is possible to store the value of labour for a long period of time. (R) It is easier to maintain accounts and ledgers in a Money system than in Barter system.

Direct MCQs

  1. inflation will not erode the value of your savings, IF
    1. If You invest it in Bitcoins
    2. If You invest it in inflation indexed bonds.
    3. If You invest it in a fixed deposit.
    4. None of above.
  2. Barter system could have continued to function successfully, IF
    1. If majority of the people remained illiterate.
    2. If Computers were used for maintaining accounts and display boards for barter trades, to facilitate the meeting between parties with double coincidence of wants.
    3. If the needs of society were limited to only bare essential food, clothing and shelter.
    4. If empires were governed on communist principles.
  3. What do you understand by term “Circular flow of income”?
    1. For every flow of factor service from businessfirms to households, there is counter flow of rent, wages, interest and profit from households to businessfirms.
    2. For every flow of factor service from households to businessfirms, there is counter flow of rent, wages, interest and profit from businessfirms to households.
    3. Households provide rent, wages, interest and profit to financial intermediaries, who in turn give it to business firms.
    4. It is the theoretical mechanism that prevents the concentration of wealth in the hands of few.

Q7. IF _______, then it’d would facilitate the circular flow of income through Bitcoins.

  1. if Bitcoin became a fiat currency
  2. If more financial intermediaries accepted Bitcoins.
  3. If the mathematical algorithm was changed to release more Bitcoins in the system.

Answer choice:

  1. only 1 and 2
  2. only 2 and 3
  3. only 1 and 3
  4. All 1, 2 and 3

Q8. Which of the following, make(s) Bitcoins a superior system than Indian Rupee system

  1. Theoretically, it is possible to maintain accounts more efficiently and accurately in a Bitcoin system than in rupee system.
  2. Bitcoin to US Dollar exchange rate is more stable than Indian Rupee to Dollar exchange rate.
  3. At present, it is easier to calculate time value of money in the Bitcoin system than in Rupee system.

Answer choice:

  1. Only 1 and 2
  2. Only 2 and 3
  3. Only 1
  4. None of above

Q9. What do you understand by the term “Time Value of Money”?

  1. That inflation erodes the value of money.
  2. That money today is more valuable than the same amount of money in future.
  3. That any amount of money is worth more, the sooner it is received.

Answer choices

  1. Only 1 and 2
  2. Only 2
  3. Only 2 and 3
  4. All of them

Aptitude questions for timepass:

Assume that interest rate is 7% compounded annually, which of the following is a better deal?

  1. (A) Accept 100 rupees right now OR (B) Accept 200 after 10 years.
  2. (A) Accept Rs.50,000 per year for next 20 years OR (B) Accept Rs.40,000 right now.

For more on Economy, Visit Mrunal.org/Economy

Mrunal recommends

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  3. Indian Polity M.Laxmikanth (Hindi | English)
  4. Art & Culture by Nitin Singhania (Hindi | English)
  5. Spectrum: Modern History (Hindi | English)
  6. Bipin Chandra: Post Independence
  7. Fast-track to Arithmetic Rajesh Verma
  8. MK Pandey’s Analytical Reasoning
  9. Disha’s Topicwise Paperset (Hindi | English)
  10. School Atlas
  11. Mains: Language papers
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  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 53 Comments posted

    1. Siddhanth

      Just forgot – thanks for the article, Mrunal.

    2. Rohit

      I’m in Siddhanth,Mukul..let me know if any such plan works out..actually it’s a wonderful way to divide workload or to add quality,different dimensions to views/answers etc particularly if different people of the group have different academic backgrounds and different CSE optionals..These days GS has flavour of paper2 of all optionals..I have been thinking about it..this gave me a push..just created a facebook group https://www.facebook.com/groups/1424782397756308/
      those interested may join/respond through this group to discuss further details.

      1. rohit

        Is anyone from noida area?lets connect.

  1. omega

    sir, after this article pls help in insider trading..

  2. sruthi

    Hi viewers,
    HAPPY CHRISTMAS

  3. sruthi

    Can anybody suggest me books for philosophy paper-1?Thanks in advance.

    1. sambid

      Introduction to Indian Philosophy by Dutta and Chaterjee
       A history of Philosophy by Frank Thilly
       Political Theory by OP Gauba
       Introduction to Religion Philosophy

      1. sruthi

        thank you sambid.But didn’t found some topics in frank thilly.

  4. Chandan Kumar

    1. c
    2. c
    3. a
    4. b
    5. d
    6. b
    7. A
    8. C
    9. C

    Please correct me, if wrong.
    Thanks.

    1. harsh

      for your answer to question 5
      in a barter system if we have as much less commodities to exachange it is better, the account keeping , production will be a targetted production + market to those goods will be easier to manage.well in a communist society the main motive is against accumulation of wealth and not exachange of goods [ with diversity the viability of barter system gets eroded]

  5. RKD

    thanks, much needed article
    merry christmas.

  6. APPU

    nice n thank u sir..

  7. rohit

    beautiful article Mrunal.It helps me think wider…the barter system anaylsis is awesome..I imagine a situation where Aamir Khan wants to exchange his movie priced 500Rs for a hair cut priced 250Rs..so will the barber watch half the movie?=divisibility problem..further which half will he prefer?Isn’t the latter half more valuable=fungibility problem..and what if reverse was situation..250Rs=price of movie and 500Rs haircut?will the barber give half hair-cut?..further by attaching a bio-sensor attached to body of barber can solve the problem when they are using bitcoins..let the bio-sensor measure the body response(arousal,excitement,happineess,blood-flow etc),translate it to monetary value and thus as soon as the sensor’s meter reaches 250 in the first case,Amir khan will not allow the barber to see further movie~~maybe taking it toooo further=near to nonsense..but seriously bitcoins has huuuuge potential..the monetary of a service=ability to mine/decrypt those codes increases many-folds overnight.

    1. Sumit09b

      What if Barber is high on cheap desi liquor thus slowing his nerves response to thses feelings.So Amir’s movie might fail to satisfy its debt obligations. 😛

  8. pran

    1. B
    2. C
    3. A
    4. B
    5. C
    6. B
    7.
    8. C
    9. D

  9. Sharath babu

    impressive, your presenting style is changing my opinion about economics….thanks

  10. Ram

    Great Mrunal bhai….many thanx

    Answers
    1-c
    2-c
    3-a
    4-b
    5-c….very tricky answer choices like upsc
    6-b
    7-a
    8-c
    9-b….again very tricky

    For aptitude-1-b,2-a

    Can I request you to start answer writing practices for Mains and Pre?
    Daily or weekly few questions are given for writing practice.

    1. chakrapani

      sir can you justify the 4th question answer

      1. Ram

        simply google -inflation indexed bond

  11. samir

    Answers: 1c(in barter system time value does not decrease/increase unless any product is in short supply, so not generally), 2c(financial intermediaries facilitates, not impedes), 3a, 4b, 5c, 6b, 7a, 8c, 9d.

    Aptitude:1b(PV of case b = 200/1.07^10=101.66,can this calculation be asked?), 2a(50k/year for 20 years>40k :))

    Please correct me if I’m wrong.

    1. BB

      samir,

      i guess 3)b(Quoting Mrunal – You can and save / invest this value (money) in bank, Fixed deposit, shares, bonds, mutual funds etc. =possible to store the value of your ‘labour’ for a long period of time and become wealthy- Unquote, 2nd statement is also correct about account keeping)

      Rest are fine i believe..

  12. bhor

    But smart contract can also be carried out with electronic fiat currency…how bitcoins have edge ?

    1. Vikas

      Right Bhor!I wanted to point out the same thing. The Chip in tata sky can be connected to the credit card of the viewer and then it can deduct the amount. We don’t need bit coins for it but high end technology.

      1. MJR

        One advantage Bit Coin has over fiat currency is that BitCoins can be devided up to to 10^-8. Say you watch a channel for 10 minutes or even 40 seconds, still your subscription can be billed.

  13. Sneha

    Answers:
    1.C
    2.A
    3.B
    4.B
    5.C
    6.A
    7.1
    8.D
    9.A
    Aptitude (Rate of interest 7 Annually)
    1.B (Value of Rs.100 after 10 years = Rs.196.72)- Compound interest calculated
    2.B –
    (After 20 years value of 40k is = 154.79 K (After 20 years)- Compound interest calculated,
    50K paid in 20 year i.e Rs.2500 every year values = 109.662(After 20 years)- Recurring Deposit)

    Can use Annual recurring calculator here –
    http://prakhargoel.com/projects/calculators/annual_recurring.php

  14. anonymous kashmiri

    gr8 artcl wd lucid prsntatn.
    sir plz throw some light on “INSIDER TRADING” topic

  15. Indian87

    1.c
    2.c
    3.a
    4.b
    5.b
    6.b
    7.a
    8.c
    9.c

  16. Habil Kuvasthani

    Yes, we can

  17. ashraf

    @mrunal sir…a bit out of topic… bt ur futuristic society imagination is awesome!! 😀

  18. salim sinai

    What exactly is the second aptitude question? Doesn’t it look obscure? :/

  19. madhu

    1)a
    2)c
    3)a
    4)
    5)c
    6)d
    7)d
    8)c
    9)c
    please correct me if i am wrong

  20. coconutninja

    hi,mrunal sir.
    i would like to add a point.related to bitcoins improving the efficiency of circular flow of income.
    there is no need for banks.this might seem to be counterproductive
    but conisder scenarios like you take your cash and put it in a bank.the bank will usually charge certain fees as it needs to maintain it like paying employees,maintenance etc.
    Or you have a transaction where you need a third(trusted) party to keep a record of transaction like a loan to company or cash exchange between companies.
    bitcoins avoids these scenarios.
    each bitcoin is coded(kind of like a list of all transactions) to keep all transactions and updates it.so there would be no need of banks as instead of one trusted party you have thousands of distrusted parties which say this is the correct transactions.if you want to disprove thousands of these parties you need to have a better power computer then all these thousand parties

  21. tasha

    can anyone suggest book for ancient and medieval history

  22. MK

    Best blog for aspirants and another good article, easy to understand.
    But I have some confusions…
    1- GPS in AutoRikshaw and Chips in Fuel Tank to pay actual amount can be used in Money system (fiat money) i.e rupee, doller. so it is benifit of Technology not of bitcoins.
    2- You are saying Bitcoins are limited so what would be happened when most of bitcoin amount would be in America/ china/ Devolved country, What about South Sudan/Ethiopia/ Nigeria/ poor country.
    3- India and other many countries have less literacy rate, hence problem with uesd of Electronic Wallet.
    4-Tata sky type argument related to less channal less fees can be done by Fiat money .
    5- Returning of a car, bike and product can be done by fiat money and warrenty period related issue of a product can be solved by fiat money.
    So I don’t think it very useful….
    Article, Blog is assuming and really helpful

  23. iqbal

    sir, brilliantly you have suppoted bitcoin but
    1.we will have same and much better result if we computerize current economic system, that inculdes even fractional amount,even .75 ,.23 !!
    2. In current scenario where, banking coverage is much lower in india(92 atm/milloon, china 112 atm/milloin.

  24. iqbal

    even, your tata sky example..
    sir, no company will follow that , as it reduces there income :p also agin same is possible if we make current system computerized lol ..

  25. Anshuman Rai

    1 B
    2 C
    3 A
    4 B
    5 B
    6 B
    7 A
    8 C
    9 D
    10 D

    Sir, it would be great if you could give us correct answers 🙂

    1. shivam

      yes, please provide correct answers so that we can evaluate whether we are doing it correctly or not… 🙂

  26. neha

    Hi Guys,

    Can anyone make me understand why there is so much volatality in Bitcoin ?
    in First week of December 2013: 1BTC=~1200 USD but in Third week of December 1BTC=~580 USD.

  27. Arti Yadav

    u r really awsm sir…thnx a lot..:)

  28. hitaish

    you have given the example of Artificially intelligent Tata sky (with some sort of chip) in case of bitcoin. But same concept can be used for Currency without using bitcoin. For using advanced AI machines or devices, we don’t have to use bitcoin. For ex: If i watch only few channels, then i should have to pay money (currency and not bitcoin) for watching those channels. then what is the use of bitcoin here.

  29. Sailesh

    Hi guys,
    You say there are only limited amount of ie 21milion bitcoins all over the network and we can get bitcoins by mining.What if all the bitcoins are mined???

  30. deependra

    i m bitcoined..itni jyada info…

  31. ARJUN

    MAY I KNW THE EXPLANATION ABOUT 3RD ANSWER PLZ…STORING THE VALUE IS EASY BCOZ OF THE SAVING SCHEMES IN BANKS/SOME OTHER INVESTMENTS..BUT I THINK THAT MAINTAINING LEDGERS AND ACCOUNTS IS NOT THE REASON FOR THIS SAVINGS???PLZ EXPLAIN

  32. KAMLESH KUMAR

    Mrunal sir pls provide some information about SIDBI grade A officer paper pattern and study plan .. thanx in advance

  33. dhiman sarkar

    why this such volatility in use of bitcoins??

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