How does the economy “grow”? Where does the new money comes from?
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I’ve heard it said that money is “lent” into existence. That means that more ppl willing to borrow money to start/expand business makes more money around.
Also, younger ppl with kids are more likely to have jobs to get the money to spend to raise kids, etc. This drives a country’s economy. Older ppl spend less, have higher medical bills, etc, which is a drag on the economy. So a growing economy is one with a large group of 20-40 year olds… And not so many older ppl.
A stagnant economy is one with way more older ppl than younger. Think Japan and soon to be many, many more.
Money is a tool to distribute goods. We can obtain a greater amount of goods by improving manufacturing processes, technology and efficiency. This may lead to cheaper products, superior products or entirely new products not available before.
We can often measure how well off we are as a whole by seeing how fast money is flowing through the market, since most of the time when money exchange hands, so are goods and services. For example, often times the real GDP of cities, states or countries are discussed rather than just the total sum of money (money supply) in existence. A growing economy is one that is spending money faster (higher money velocity).
New money comes from banks/lenders. Let’s say I loan you $1000, and I end up charging you $100 in interest. There is now, on the books, $1100. Where does that money come from? The future
The economy grows because we produce more outputs that people are willing to pay for. All the things people pay for are measured as GDP.
Commerce. Say you have a small settlement or commune village in the middle of nowhere that starts out with 10 settlers. You have a small farm, and orchards to sustain your little population. Your tiny local economy is basically your neighbour will give you two potatoes in exchange for one Orange. Harvest season comes and you realise you have a surplus beyond your needs of fruits. The village 20 miles away has a need for those fruits as they can’t grow as many orchards as you, but they have an abundance of wool and cotton and hundreds of sheep and will give you 10 lbs of meat, 3 barrels of cotton and 5 spools of wool in exchange for like 5 of those tasty oranges.
A trade route begins. You begin trading with this village, and form an agreement to exchange goods and be allies. The surplus in fruit allows them to eat and supports reproduction as the food supply can sustain a bigger population for them. Their wool and goods allow your population to make clothes and tasty meat stews which can then be traded and sold to someone else who needs them or grow your population. Eventually through commerce, more people flock to these two little villages that have all the necessities and comforts people need to live a quality of life. So more people means more innovative ideas and production. More production means more goods. More goods means more money or trading for different goods. The money comes from buyers and sellers of commodities. Word gets out to other villages far away, so now people from there come to your village for goods and bring their wares which are rare and exotic.
Well at some point these two original villages merge to form a city because the trade route is not too far and between the villages people settled. So now this one big city needs a government to run it. It needs rules and to establish a fair justice system so that everyone can live in harmony and peace. The citizens all agree to a small tax to support this system. So now there is an influx of money and goods. A wage system is implemented, people now don’t just trade goods, they work for a wage so they can choose which goods they wish to purchase from whomever they want. This brings in more goods, more people, and more jobs.
The villages started out with cotton and orchards, respectively. Now they have all kinds of wares and goods and money from all over the place and … an economy. Or maybe some village with a tiny population has a surplus of gold mines but they don’t have a use for gold as it isn’t valuable to them and others want their gold and are willing to give them lots of goodies they need for it. As the population gets bigger, there are more inventions. What started out as a orchard of 10 orange trees has now expanded to 1,000 and people need to be paid a wage to make sure that commodity is being cared for and flourishes.
However, the cotton no longer grows in your village and now you have to obtain it elsewhere as the original supply wasn’t expanded and it’s demand out weighed it’s production. That’s okay because now that you have an economy, you can trade other goods for some cotton from someone that has a ton of it and no oranges. If they’re not willing to trade, you sound the horns of war.
I’ve played too much Age of Empires.
It comes from time and energy spent toward refinement.
If you smelt ore into metal, a process taking time and energy, you have refined it into something more valuable. You have created wealth. (It’s also worth noting that in order to know how to even perform the smelting task, you first had to learn a whole bunch of stuff — a process that also takes time and energy.)
That metal can be tempered and worked, refining it into successively more valuable forms until it has become a tool, that can be reused many times to achieve even greater degrees of refinement elsewhere — agriculture maybe. Or whatever.
Some of the inputs are externalities — the ore for example exists in the form it does because of stellar processes billions of years ago. That refinement was already “done” a long time ago. But it too represented a process taking time and energy. So we call it a natural resource.
Similarly, the wood for the smelting fire and the food you ate to keep going come from stellar processes but much more recently, happening right now in our sun, reaching us as sunlight. The growth of plants and cultivation of crops and livestock are also processes that take time and energy. So they are sources of ever-increasing wealth.
As long as we refine more stuff than we destroy or break down, then we keep creating more and more total wealth. But of course that premise isn’t always a given.. if we pollute too much or consume too many natural resources too fast or destroy too much in wars or whatever, then the loss of people and things can really become overwhelming and wealth starts to decline.
Imagine a village of sustenance farmers and their garden is the economy. They know that each person needs 1 lb of potatoes for each person to live. If they have 10 people in the village, they will need to grow 10ths of potatoes every day.
If the village grows to 12 people, the garden (economy) will need to now grow 12lbs of potatoes per day.
If the village wants to trade potatoes for something else, like medicine, they will need to expand their garden (economy) even more.
If the village wants to have a teacher, that is one less person that will produce potatoes, so each villager now needs to produce more than 1lb of potatoes. In exchange for not producing a material product, the teacher will provide a service to the village.
The economy just represents the total output and distribution of resources. You can produce goods, or services.
Look at it this way. Your dad builds a house, and has 3 kids. Each of those 3 kids builds a house. Then the economy grew by 4 houses over 2 generations. It’s not just population growth either. Often we get more efficient, or find new resources.
When they say an economy grows they usually use many metrics such as jobs created, standing of the local currency, exports and imports and the interest rate set by your local central bank.
Your other question as to where new money comes from is banks. Interest creates new money.
work pool. innovation creates jobs. jobs generate taxes. taxes feed the government, which (if they’re doing their job right) invests in programs that encourage the development of more innovation that crates more jobs that afford people funds to infuse into economy
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