Its a case study written by me in context of economy and how does bubble in an Economy takes place...

1. Game of the economy…
There was a small country MIT with a small piece of land and two denomination
of currency say dell, these was the total asset of that country. A piece of land and
two units of dell. These was the centre of the economy, the only asset in the MIT
is a piece of land and two dells. In this country there were three citizens A B C.
owner of the land was Mr. A and Mr. b & Mr. c were the owner of those two
currency, one each.
How the economy of the MIT is working-
Mr. B wished to purchase that piece of land; he approached to Mr. A and bought
that piece of land for 1 dell. Now the owner of that land was Mr. B and Mr. A &
Mr. c were the owner of one-one dell. Now piece of that land was valued at 1 dell.
Now the total asset of the MIT was 3 dells, a land of 1 dell, and two coins of 1 dell.
Now Mr. C thought as there is only 1 piece of land, value of these land will
increase in the future, because everything can be produced and generated but
not the Land. Keeping these thought in the mind he borrowed 1 dell from Mr. A
and approached Mr. B to buy the land for 2 dell.
Now the situation is –
Mr. A has given loan to Mr. C so his total asset is 1 dell.
Mr. B has sold the land to Mr. C so his total asset is 2 dells.
Mr. C has the piece of the land whose value is 2 dells, but he has taken a loan of 1
dell from Mr. A so his real asset is 1 dell.
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2. But total asset of the MIT is now 4 dells. Two coins of 1-1 dell and a piece of land
whose value is 2 dells.
Now Mr. A has a regret that he is the real owner of the land which he has sold to
Mr. B. he thought that in future the price of the land will go up, so he took 2 dells
from Mr. B as a loan and went to Mr. C to buy the land, as Mr. C has taken a loan
from Mr. A he didn’t have any other option but to sell the land, so he sold the
land to Mr. A for 3 dells.
Now Mr. A again became the owner of the land by paying 3 dells, which once he
had sold to Mr. B for 1 dell, so now Mr. A has a land whose value is 3 dells, but he
has taken loan of 2 dells from Mr. B, so his real asset is 1 dell.
Mr. B has given a loan of 2 dells to Mr. A so his total asset is 2 dells.
Mr. C has two coins of dells so his asset is also 2 dells.
But total asset of the MIT has increased to 5 dells.
Now formation of bubble in the economy started, now Mr. B thought that the
price of the land is increasing day by day, and before its price increases more he
decides to buy back that land. He offered 4 dells to Mr. A for the piece of land,
Mr. A agreed, Mr. B took loan of 2 dells from Mr. C and bought that land from Mr.
A who already has to pay 2 dells to Mr. B and in these way Mr. A’s debt was paid
off.
After these deal Mr. A does have to pay anything to anyone, and he has those two
coins of 1-1 dell. Mr. B has the piece of land whose value is 4 dells, but he has to
pay 2 dells to Mr. C which he has taken from him, so his real asset is 2 dells. Mr. C
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3. has given 2 dells to Mr. B so his asset is 2 dells. But total asset of the MIT has
increased to 6 dells although still the total asset of the MIT is a piece of land and
two coins of 1-1 dell.
Everybody made money and were happy and thought that there assets has
increased. Suddenly Mr. C thought what if the price of the land stops
appreciating, if these happens than how Mr. B will repay his loan of 2 dells there
are only 2 dells in the economy, and the initial price of the land was 1 dell, Mr. A
also thought the same thing.
As a result now no one was willing to buy that piece of land.
So transactions stopped working, Mr. A has 2 dells; his total asset is 2 dells.
Mr. B has to repay his loan of 2 dells to Mr. C, he has the piece of land which was
valued 4 dells but now it is been valued at 1 dell, so his total asset is 1 dell and a
loan of 2 dells. Mr. C has given a loan of 2 dells to Mr. B which is now bad debt as
his land is been valued 1 dell.
Also the total asset of the MIT is now 3 dells, a piece of land and 2 coins of dell.
Now the question is how the total asset of the MIT which was 6 dells before few
days is now 3 dells. Who has stolen these 3 dells? Now the bubble of economy
has evaporated, before this Mr. B thought that the value of the land is 4 dells, in
reality the total asset of the country was 6 dells on paper. Mr. A’s asset is 2 dells
but still he is tensed, Mr. B has no option but to declare him as bankrupt, Mr. C
can’t do anything apart from considering it as bad debt, but he takes that piece of
land whose value is 1 dell.
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4. So Mr. A has a total asset of 2 dells, Mr. B is bankrupt and Mr. C has a piece of
land with a valuation of 1 dell. Still total asset of MIT is 3 dells, but those assets
has been transferred and Mr. A is the winner of these game, Mr. B is the looser
and Mr. C still stands with an asset of 1 dell, earlier also he had 1 dell.
What we can learn?
When bubble of economy starts every other person becomes the debtors of each
other. These happened in one country so no one was victim of foreign debt, and
valuation of the land was also in domestic currency so there was no harm to the
economy. When bubble evaporated person having the case won, those had land
or those who had given loans were in the loss. That means value of property can
be decreased and can also lead to bankruptcy.
For instance if there would have been one more citizen either with 1 dell or a
piece of land but would have not taken part in the game of economy so he would
have experienced the valuation of his asset (whatsoever) going up and down.
Everybody made money in this game when there was bubble in the economy. But
if you are smart enough and have realized that there is bubble in the economy, so
taking loan like Mr. A and participating in the game is not wrong decision but you
should know when to convert everything into cash.
Now to understand it more clearly consider piece of the land as stock, value of
the land or stock depends on the demand or rather say on the mindset of the
people. If we apply same concept into these situation than Mr. A is an investor,
Mr. B in the role of hedge fund and Mr. C can be considered as American FDI.
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