Economic Model - 3

Back to my example of 10 farmers and 10 masseurs, each farmer produces 20 bushels of wheat. Normal consumption of food for each person is 10 bushel of wheat per year. Each person gets 10 massages during a year normally. I am going to seed this system with $0.1 of money for each person - total of $2 in the system. At the beginning of the year, each person has $0.1. The current rate is $0.1 per massage and $0.1 per bushel of wheat. The farmer will spend his $0.1 to get a massage and then the masseuse will buy 1 bushel of wheat for $0.1 from the farmer. There is no savings in this system. Everybody spends their entire money. In reality there is savings and I will expand the model later for it. Over the course of a year, each farmer would have spent $1 on 10 massages and earned $1 selling 1o bushels of wheat. At the end of the year, each farmer and masseuse will be left with $0.1 to start spending next year. The GDP would be $20 as $20 of economic transactions took place in this economy. We had $2 in the system and produced $20 worth of economic transactions - this is the money multiplier effect. The multiplier effect will be more evident when we have three entities rather than two and how an increase in savings will reduce this money multiplier effect. Now what if the farmer finds a way to produce more 30 bushels of wheat. The farmer could decide to eat 5 more bushels and doesn't have a need for another 5 bushels. He can sell it to the masseuse but the masseuse would have to give more massages for it. With the increased production of wheat, the economic transaction between a farmer and a masseuse could be 15 bushels of wheat and 15 massages. The farmer and masseuse could still trade at $0.1 for both the massage and bushels but there will be 15 transactions now instead of 10. The GDP would now become $30. Without any increase in the amount of money in the economy, we were able to increase the total economic value of transactions as we had more transactions in this case.