When a national economy grows and “makes” more money, does it necessarily mean other economies shrink?

Question

Hi! I don’t know much about economics and maybe didn’t know the right terms to use when searching, but I guess this wasn’t asked before 🙂 If a country produces and sells goods and services internally as well as in exports, for money, and people accumulate it/save it inside the country this money has to come from somewhere, right? But at some point, if things that can be exchanged for money keep being produced, there’s also the need to make more money to “stand in” in for the value of those things? If my currency x is worth the same as the dollar, and I make more of it, let’s say double what is currently circulating, it will be worth roughly 0,5 dollars, right? How is it that more money is put into the economy without lowering it’s value? Does it have to come from other countries?

In: Economics

Answer 1

> When a national economy grows and “makes” more money, does it necessarily mean other economies shrink?

No. This is not a zero sum game. That is what they thought 250 years ago. Mercantilism was the zero sum game, where it was thought that selling goods to other countries made you poorer. Then Adam Smith showed that wasn’t true, and modern economics understands about comparative advantage, which says that the most efficient producers should be producing those goods, regardless of national origin. With that point of view, that all free market activity enriches us, since all trades make both parties richer (theoretically, but we are talking about humans here) the trade would not occur unless both parties thought they’d be better off, that is, richer, than before the trade. That means trading with Peoria is the same as trading with Tehran is the same as trading with Beijing. All that trade is making the world a richer place.

> How is it that more money is put into the economy without lowering it’s value?

Because the value of goods and services has increased more than the amount of money put into circulation.

Let’s say that 2% more money is injected into the economy (the Fed targets inflation at 2%), but the economy grows at 3%. That gives you the spread needed to keep the economy going nicely.