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Friday, 19 November 2010

Three economic items

Science is simply common sense at its best - that is, rigidly accurate in observation, and merciless to fallacy in logic. Thomas Huxley

The economy consists of economic entities and economic items.

Economic items have economic value. Accountants do not simply record what happened in the past. Accountants are not simply scorekeepers. Accountants value economic items every time they account them. Utility, scarcity and exchangeability are the three basic attributes of an economic item which, in combination, give it economic value.

It is generally accepted that there are only two basic, fundamentally different economic items in the economy; namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy. That is a fallacy.

The three fundamentally different basic economic items in the economy are:

a) Monetary items
b) Variable real value non-monetary items
c) Constant real value non-monetary items

The economy consequently consists of not just two – the monetary and non-monetary economies, but, three parts:

1. Monetary economy

The monetary economy within an economy or monetary union consists of functional currency bank notes and coins (which generally make up about 7% of the overall money supply) and other functional currency monetary items, e.g. bank loans, savings, credit card loans, car loans, home loans, student loans, consumer loans, commercial and government bonds and other functional currency monetary items making up the fiat money supply created in the banking system by means of fractional reserve banking.

2. Variable item non-monetary economy

The variable item economy is made up of non-monetary items with variable real values over time; for example, cars, groceries, houses, factories, property, plant, equipment, inventory, mobile phones, quoted and unquoted shares, foreign exchange, finished goods, raw material, etc.

3. Constant item non-monetary economy

The constant item economy consists of non-monetary items with constant real values over time, e.g. salaries, wages, rentals, all other income statement items, balance sheet constant items, e.g. issued share capital, share premium, share discount, capital reserves, revaluation reserve, retained profits, all other items in shareholders´ equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and all other non-monetary receivables, etc.

The variable and constant item non-monetary economies in combination make up the non-monetary or real economy. The real and monetary economies constitute the economy.

© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.

Fin24 15-3-11