Question

1) do an informative paper of 400 to 500 words about these scams better know as a 'Ponzi" scheme and a "Pyramid"

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Answer 1

A ponzi scheme refers to an investment scam which promises a high rate of return with less investment. This scheme works by generating returns for the early investors by taking the money from the later investors and thus works by the process of round tripping of money. Thus , this scheme always focus on building the new investors so that their money could be used in paying the credits for the initial investors. Thus, it can be understood that this scheme works with the help of constant flow of the new investors so that there is a constant flow of money to pay the credits of the initial investors. Once the inflow of the new investors are stopped or goes at a slower pace, then the whole scheme would fall apart which would create a lot of losses to the investors. Thus, those who reaped the benefits as the initial investors may get some profit, but the new investors would result in lossmaking and thus the scam would appear to be an unhealthy economical way of money transaction in the economy.

                                    A Pyramid scheme is similar to a ponzi scheme in that it also focus on the money supply from the new investors to provide the benefits for the initial investors. It is a pyramid model unhealthy business scheme where some top level employees would recruit some newer employees to the business who would have to invest some amount of money at the time of recruitment and this money would be supplied back to the initial investors as their profit. It is a chain like scheme and the money flows from the bottom level of employees to the top level. The multi-level marketing system is similar to this scheme of working. Here, once some fraudulent activities are being carried out in any of the chain, the chain would break and the whole business model would fall down resulting in the lossmaking for those who are hidden in the chain and the lower levels would have to bear most of the losses when compared to the higher levels in the hierarchy. Multi-level marketing pyramid scheme, chain e-mails, ponzi schemes etc are various types of pyramid schemes in which all of those focus on the flow of money from bottom to top.

                                    Thus, on the analysis of both the schemes, it can be found that the top level employees or recruits in such a scheme are always flooded with flow of money from the bottom level or the new recruits in the scheme. Once there is a fraudulent case and the whole business falls apart, the top level employees would walk away with loads of money while the bottom players would suffer a lot of losses. Thus, these are pure examples of scams in the economic market system.