1. Suppose you live on an island that produces three primary goods that are prod

Question

1. Suppose you live on an island that produces three primary goods that are produced by three individuals as follows:

(a)Oranges                  Orange Grove Owner

(b)Bananas                  Banana Grower

(c)Chocolate                Chocolate Maker

2. In this island economy, the (a) Orange Grove Owner likes only bananas and the (b) Banana Grower only likes Chocolate. Furthermore, the (c) Chocolate Maker only likes Oranges.

1. Explain how trade between these three producers can occur.

2. Will the Orange Grove Owner be able to eat Bananas? Explain.

3. How will introducing “money” into the island economy benefit these three producers?

Explanation / Answer

1. Trade between these 3 producers can occue through Commodity to Commodity transaction, i.e. through Barter system, wherein one good can be traded with the another good.

2. Yes Orange Grove Owner will be able to eat bananas, only if all these 3 producers exist at one place. However, within barter system, such a situation doesn't exist wherein different traders meet at one place. Thus, he won't be able to eat bananas.

3. Money can help these producers since Money will play an important part of

a. Medium of Exchange

b. Measure of Value

c. Mode of Deferred Payments

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