Question

Long time ago, the shells of a particular snail species, which only occurs in Nakanai, New Britain, were used as money on Duke-of-York Island (present-day Atafu, Tokelau Islands, New Zealand). The distance between Duke-of-York Island and Nakanai is approximately 2600 miles. People traveled between these locations using dugout boats. There were no monetary authorities such as the central bank and legal tender laws while there was a primitive criminal justice system on Duke-of-York Island at that time. There was no fractional-reserve banking on Duke-of-York Island at that time.

The purpose of this assignment is to examine the natural mechanism for price stability that emerges in human society. The same mechanism has maintained the value of gold stable over centuries.

Do not seek read-made answers online, as encyclopedic information is not useful. This questions requires you to reason and calculate on your own.

Question #1

How much should one Nakanai shell cost (in terms of dried fish) at least in Duke of York to encourage people to set out on a long round trip between Duke-of-York and Nakanai? In other words, what is the minimum price of one Nanakai shell (in terms of dried fish) on Duke-of-York Island when a rising shell price promotes people to sail to Nakanai to acquire new shells? Calculate your answer using the following assumptions and explain your calculations.

Assumptions:

1. Daily wage on Duke of York Island is 20 dried fish. In this question fish represents goods and services people purchase on the island.

2. It takes 60 days to make a round trip between Duke-of-York and Nakanai.

3. Five people, a boat and some equipment (sails, ropes, anchors, tents, etc.) are needed to make the trip. Sailors pay for their own food during the voyage.

4. To construct a boat and equipment 5 people must work together for 20 days. A new boat and equipment need to be built every time a new trip is made.

5. One boat can carry only 20,000 shells.

6. In Nakanai 2,000 dried fish can be sold for 20,000 shells (i.e., 1 dried fish = 10 shells).

7. A few shipments of new shells from Nakanai do not perceptively change the price levels (in shells) on Duke-of-York Island.

8.

Question #2

Sometime after the British started to engage in commerce on the Duke-of-York Island, the island’s shell money suddenly went into disuse. Explain what made the shell money collapse. Assume that the British engaged in commerce with the islanders based on mutual agreements, and that they did not impose their legal tender upon the islanders by force. Consider the fact that, when people travel to foreign countries, they accept local currencies.

Q1

Opportunity cost – an important economic concept

Compare the amount of investment (in terms of fish) you need for a round trip to get new shells and the total worth of these new shells (in terms of fish) you bring back from Nakanai to Duke of York.

Don’t forget that you need to pay for new shells in Nakanai.

The value of a shell in Nakanai is different from that in Duke of York.

In order for a shell-buying trip to Nakanai to make a business sense

Investment for a trip = or < Value of 20,000 new shells

Q2

What enabled the Brits to name both Duke of York and New Britain? = Why is it said that Britania ruled the waves?

British coins are not easier to get than the shells.

Why did the shell money suddenly collapse?

Answer 1

1. Assumptions,

Daily Wage= 20 dried fish

Number of people required to make one round trip = 5

Number of days required to make one round trip= 60

Number of working days to construct a boat= 20

Therefore,

Total amount of wages lost in order to make a round trip = 5*20 = 100 dried fish

Total number of days= number of days to make a round trip + number of days required to construct the boat

= 60 + 20

= 80 days

Therefore, amount of wage earning lost in order to make the trip = 100*80 = 8000 dried fish

Given,

1 shell = 1/10 = 0.1 dried fish

20,000 shells = 20,000*0.1 = 2000 dried fish

Therefore, price of each shell in terms of dried fish = 8000/2000 = 4 times the original value of one shell

Initially, 1 shell was worth 0.1 dried fish

now 1 shell must be worth atleast 4*0.1 = 0.4 dried fish

2). When the British started engaging in trade with the locals of Duke-of-York island they traded in British currency with the locals and not shell currency, so eventually shell money in the island might have been replaced by British currency. This can be a plausible reason for the collapse of shell money in the island. Also, trading in British currency meant the locals did not have to make long voyages in order to collect shells and use them as money. It would have saved them a lot of time and effort.