What is the flavour of your tractor: American or Brazilian?
15 Brazilian farmers all want to buy a tractor. There is a choice between buying a tractor produced in their own region (Brazilian) or a tractor imported from America. The American one costs US$ 1000 all inclusive, whilst the Brazilian one is slightly more expensive at US $1100. Purchase of a Brazilian tractor, however, leads to an extra income for the local producer of tractors. A part of this income will, in turn, be spent by the tractor producer and it employees locally when buying from the farmers (because they now have more purchasing power). Let us assume that for every Brazilian tractor that is bought, every farmer will sell additional products to the labourers at the tractor producer and their business partners to the value of US$ 40.
American or Brazilian tractor? If all 15 farmers were to buy American tractors, the farmers as a community have a net outflow of $US 15 000, without getting any of this money flow back into their business. When, however, the farmers decide to purchase the local tractors, every farmer will earn an amount of 15 x US$40 =$US 600 extra income back, thus the 100 that is lost in buying the more expensive tractor is now compensated by the additional $US 600 of income. This example illustrates how the purchasing power attracted by one member of a chain of producers can overflow towards other members.
In this example there is one catch: whenever one of the farmers decide to buy an American tractor behind the others’ back, this will lead to all of the farmers only receiving (14x $US 40=560) whilst this “free-rider” will earn this amount plus the 100 that he saved in being a traitor. In this example the farmers only have each others’ word and do not have any thing tangible to fall back on.
Local Exchange Circuit Say, for instance, that these purchases would have happened within a Local Exchange Circuit where internal claims are being used… Within this network, those who exchange 10 dollars for these claims will get 10% bonus (thus $US11) whilst those converting the claims back into money after a while get 10% less (when converting 11 claims, only 10 dollars will be received.
Brazilian tractor! Let us calculate again: When the farmer has to purchase the claims he has to pay only $US 1000, whilst getting internal claims worth 1100. In this way the Brazilian tractor and the American one have equal prices, whilst at the same time the purchasing power will return to the farmer network help with the additional advantage of stimulating the local economy and creating employment. Now all 15 farmers buy the local tractors, resulting in each farmer having the same additional sales (600), but this time in claims. If the farmer decides that he wants to convert the claims into national money, he only receives 600 – 10% = 540$. This will cause the farmers to rather spend their claims within the Circuit and thus keeping the purchasing power within the community and strengthening it.