It vice versa where’s it coming from when the economy is booming?
When the economy is bad, it feels like there’s not enough money to go around, but when it’s good there’s plenty.
In: Economics
Money is not as significant as the goods and services in the economy.
Money is simply how we measure goods and services.
An economy has issues when there are changes to the goods and services being produced.
There are a few things that can change the quantity of goods and services in an economy. Some of them are short term shocks to the system. Others are due to misallocations.
At a very basic level we can have an example.
The economy only has two things in it. Home builders and food producers.
They use money to pay each other. The population is growing so more food needs produced and more homes need built. Food producers pay home builders to build more homes and home builders buy food from the food producers.
But then people stop having babies. And so now over time there are fewer homes that are needed built. “We already have enough home as the population is not growing. Young adults will not take homes from those who die from old age.”
So now the home builders stop Producing. They stop building homes because they stop being paid to build them.
Now the economy contracts. There are fewer goods and services in the economy.
The dollars still exist. The same number of dollars are there. But what they are buying changes.
This happens all the time. And usually the industry that gets smaller is replaced by something that is growing. So there isn’t too much issue.
But if a lot of industries contract at the same time or expand at the same time you can have issues.
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