It may sound obvious, but historically, economics has recognised that the profits of any business are obtained after selling or transferring an asset, at a higher value than the cost of acquiring it by the transferor. This profit margin, or greater value, has always represented income and indicates that the recipient has gained something (hence “profit”).
In a simple example, if a car costs 30 tyres to buy, and then sells for 40, the profit is 10. To know if this was a good deal, we have to consider that maybe the cars now cost 40 tyres and not 30, so no one would sell them for less than that amount. So did the car go up in value, or did the tyres lose their value?
The introduction of currency as a measure of the value of things made it possible to standardise what could not be achieved with barter, that all things should have something to compare their value with. This is the origin of monetary theory. Every asset has a price and this price is the currency value of that good, which allows a fair comparison with other assets.
However, the problem arises when the currency (as a measure of value) changes its scale. In the example, by exchanging tyres for coins, the car is no longer worth 30 coins, but 40 coins, and this may be because the good is worth more, or because the coin is worth less.
In a market economy, if the car is worth more, it may be because demand for the car has increased, or because availability has decreased, or a mixture of both. The same situation applies to currencies: Read more
