Is it basically the average person spent £100 last month, and £105 this month so the economy grey 5%?
In: Economics
No. It’s really not about the individual and more about GDP. Google “Gross Domestic Product” and read about that.
ELI5: How does the economy “grow”? Where does the new money comes from?
byu/Wrestle4Ever inexplainlikeimfive
eli5 How do economies grow? Who grows them?
byu/Internetscraperds9 inexplainlikeimfive
ELI5:How does an economy grow?
byu/secondnameIA inexplainlikeimfive
ELI5 how does the economy grow?
byu/BobHawke1983 inexplainlikeimfive
eli5: How does an economy grow if the money supply doesnt increase in that same year? In gold standard suppose, gold reserves are not increased but economy still manages to grow. How is that possible, how is an economy growing on a stable money supply?
byu/OnlyKsw7 inexplainlikeimfive
etc.
economy grows when the workers that participate in it becomes more efficient and increases output for same labor input.
A lot of things in economics make more sense if you think not in terms of money but in terms of good and services being exchanged. So if you rephrase your statement:
> Is it basically the average person *produced goods and services worth* £100 last month, and £105 this month so the economy grew 5%?
Then the answer is yes, sorta.
We use currency to measure this is because it’s easier to calculate, but it’s the goods that matter. Because you use money you have to worry about inflation. If people produce £105 this month, and that’s just because everything got 5% more expensive then the economy did not grow.
There are three ways for an economy to grow:
1. Increase in population (which depends on high labor participation)
2. Increase in technology
3. Increase in natural resources (through discoveries or conquest)
Companies that make goods use a combination of things to make them: labor, natural resources, and capital (think machinery, computers).
In order to produce more, they must either make one input more efficient or increase the amount of input they use.
When an economy grows, that just means that total production grew. Whether it’s from increasing efficiency (productivity) or increasing input amounts, it doesn’t matter.
Effectively, an economy is measured by its total output (its total production). If that increases or decreases, then there is growth or shrinkage, respectively.
Your example is based on household consumption, which isn’t a great indicator of economic growth because it doesn’t capture non-household products, like structural goods or chemicals used in manufacturing.
An increase/decrease in the price of a good has no actual effect on the size of an economy until the quantity demanded for it shifts to compensate for the price change.
An economy grows if it makes more things than it did in the previous period(e.g last year).
If last year France made 2 guns and 10 butters(and nothing else) and this year it made 3 guns and 11 butters, it has grown. If a gun costs 10 and a butter costs 1, France made 30 units last year and 41 units this year. To calculate growth, (present -past)/past, x100 if you want a percentage. In this case, France grew 37%.
How might France have produced 1 extra gun and 1 extra butter? Lots of ways. France might have experienced population growth, meaning there are more people to make things. In that case France grew, but per capita it did not. There might have been a technological change, e.g a better butter making machine. Alternatively, foreigners might have realised that France is a great place to make guns and butter(cheaper milk and less rules than other countries for example), so invested money to make guns and butter in France. There are lots of other ways for an economy to grow. In modern economies, a small amount of growth is natural. In most countries education keeps improving a little bit and people keep learning over the course of their careers. If people leave school at 20 and retire at 60, assuming the number of people working doesn’t change, the 59 year olds learn a bit from the 60 year olds so when everyone gets a year older(and the second group retires), the new 60 year olds are better at their jobs than the old ones. Likewise, because education is constantly improving, the new 20 year olds are clever than the 21 year olds were last year.
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