What did the Wonderland citizens do in the fourth year? An interesting event took place in the beginning of the year. One morning, Econ and Wonder while taking bath in the sea noticed a boat sailing at a distance and were thrilled. They waved their colored clothes to attract the attention of the people in the boat, hoping that they would rescue Econ family to their mainland home. Fortunately, the people in the boat noticed Econ and Wonder and turned their boat towards their island. Unfortunately, a man and a women came down from the boat after anchoring it near the beach and it turned out that this couple was in the same situation as Econ family: they had also lost themselves in the sea storm and currently living in another uninhabitated land a few nughtical miles away. Both families were please to meet each other and had lunch together. The visitors mentioned that they had named their island as Greatland and they were living on daily diet of only roasted chicken as there were planty of such birds available in that land. Since they had no fruit-bearing trees in Greatland, they could not eat fruits.
They showed interest in exchangung some chicken for fruits of wonderland. Both the families entered in to an agreement to trade. W-land would supply fruits to G-land and G-land would supply chicken every month. G-land would use their boats to bring chicken and ferry back fruits. The G-land citizens calculated that they could in a year have 2000 surplus chickens that could supply to W-land. However W-land citizens calculated and said that they could not consumed more than 1000 chickens a year. The G-land said they would like to have 3000 fruits from W-land. But Econ did some calculations and said they could offer only 2000 fruits a tear. The G-land couple pointed out that since they only have a boat, the chicket and fruits can only be transported by them and in the process they would lose their productive time. Econ then proposed that they would give 400 fruits to G-land for the boat transport service (12 times a year of boat trnsport for moving chicken and fruit). They then entered in to a trade agreement valid for one year.
At the end of the year, Econ recoded the accounts of the economy for the year. Since they gathered 6500 fruits during the year, GDP=X=6500. The couple and their child consumed 4500 fruits, besides 1000 imported chickens equavent to 2000 Fruits. They also purchased 400 fruits worth of imported transportation services from G-land. So, their consumption was C=4500+2000+400 =6,900. Ekon was surprised as to how they could Consume more than their income Y? He checked the fruit stocks. The stocks had declined from 2500 to 2100. Thus, change in capital stock over the year amounted to dK= -400. This meant I= -400. This meant they had negative Saving (drawing down of past accumulated savings. So, S=-400. He also noted that there were two new items to be accounted for: Exports (X) and Imports (I)Now he checked that total income and expenditure matched. 6500= Y= C+I+X-M=6900- 400 + 2400 -2500=6500. He also noted that exports and imports exactly matched.
Now, he thought about growth. In the previous year there was a growth in GDP because their productivity of fruit collection increase due to capital investment on storage and ladder and plucking sticks. But this year their saving and Investment became negative. So, how could the GDP increase? The GDP increased because this year their labor effort increased as both the husband and wife could work for more time as they were not sick or pregnant. So he concluded that Y increases if Investments increased and productivity increased or labor effort increased. But trade increase their Y? He noted while Y increased due to exports, there was an equivalent decline in Y due to imports.
What if X was greater than M? (X-M) would be positive and hence would have increased Y. But if domestic output did not increase, Y could not have increased nor would X increase.
He started wondering about how to increae Y further. Wonder came up with an idea. She said that she could reduce some chicken consumption and use part of the imported live chicks to raise more chicks from their eggs. The next year they did just that. What happened next?
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