Barter System Prisoner of War Essay

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What is meant by the term "arbitrage"?

Arbitrage is a term used in economics that means taking advantage of differences in price of a single item. The author references a padre who would purchase items sold for lesser amounts within one group of POWs and then re-sell it for a greater profit within another group of POWs. For example, buying coffee from the British at a small number of cigarettes and then selling it to the Russian prisoners for a much larger number of cigarettes. Generally, arbitrage should involve zero risk, because the two transactions should occur simultaneously, but this was not an option in the POW camps. According to Aswath Damodoran in Corporate Finance Theory and Practice, this form of arbitrage is classified as near arbitrage. Pure arbitrage requires that you invest no money, take no risk and walk away with sure profits. Unless the transactions can be completed simultaneously, such as with securities transfers, there is always risk. Damodoran defines near arbitrage taking advantage of as assets that have identical cash flows trading at different prices. The example that the author gives of Sam, the trader, might even be closer to speculative arbitrage if he took advantage of mispriced items by purchasing the items selling at below value and selling those going at a rate above their value.

4. What is the function of an entrepreneur in an economy?

The Federal Reserve Bank of Dallas describes the important roll that entrepreneurs play in a free market economy; they create competition and encourage economic growth. The author describes Sam as an entrepreneur. His mart encouraged trade within the camp, and it helped to regulate prices through competition. Once can imagine a situation where two prisoners engaged in an exchange of butter for cigarettes, and the buyer may say to the seller that his price is too high because he can just go to Sam's mart and get the butter for fewer cigarettes.

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By creating standards, it becomes easier for each buyer to gauge what he can purchase for his ration of cigarettes and to thus budget himself so that he can continue to engage in trade between ration deliveries. Further, Sam would advance goods to his patrons. This encouraged continued trade because people could get what they needed, engage in a series of trades in the community and make the profit necessary to clear his credit with Sam.

5. In your view, did the POW exchange system produce a just distribution of goods?

Unfortunately, this POW exchange system had two faults that led to an unfair exchange of goods. The first being that the amount of goods any individual acquired was not related to his work product (except for the introductory labor economy that developed) and that given a cigarette's intrinsic value as an addictive drug, those that were susceptible to addiction were not able to acquire the quantity of goods as those individuals who were not. In a fair economy, the more one works or produces, the more one should earn and thus the more one should be able to acquire. However, this is an ideal market- and I do not know of one that actually exists in practice.

REFERENCE LIST

Brown, P.J., (1982). "Constitution or Competition? Alternative Views on Monetary Reform." Literature of Liberty. Vol. v, no. 3, pp. 7-52. Arlington, VA: Institute for Humane Studies.

Damodoran a., (2001). Corporate Finance: Theory and Practice. NY: John Wiley & Sons. pp.12-30.

Federal Reserve Bank of Dallas. Entrepreneurs and the Economy. Retrieved from http://www.dallasfed.org/educate/everyday/ev3.html......

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