How does the economy “grow”? Where does the new money comes from?


How does the economy “grow”? Where does the new money comes from?

In: 398

People add value through their labor.

I can go out and find a tree branch on the ground, and carve it into a baseball bat, and sell you the baseball bat for $40. I just created $40 of value with my skills and labor.

A bigger economy doesn’t mean more money exists.

The economy is a movement of money and goods. A bigger economy means people make more and spend more, and also produce more.

It all comes down to production really. More labor, more efficient means of production, and you have a bigger economy.

When a government of a country with a sovereign currency spends more than it taxes (ie, has a deficit), the amount of money available increases.

It’s about the flow of money. Who’s spending it, who’s receiving it, and where it goes next. The more people it flows between, the healthier the economy is. The less people it flows to, the bigger the gap between the rich and the poor, the more screwed people become.

Because money is simply a medium, not actual wealth.

It represents *time.* I am willing to give 1 hour of my time, for your widget. This is reprsented by X monies.

Now, one way this can “grow” is how our time is spent.

Lets take two products, a bowl and a hammer. Both things I need. It takes me 1 hour to make a bowl, and 2 hours to make a hammer. So after 3 hours I have everything I need.

You, however, are able to make a bowl in 2 hours and a hammer in 1 hour. The opposite of me. Either due to your skill, or location and access to resources, or whatever.

In 3 hours you have everything you need.

Working alone we need 6 hours of time to make everything we both need to get along.

But we talk to eachother.. and come to a deal. I’ll work for 2 hours only, and so will you. But we’ll both have everything we need. I’ll make 2 bowls (1 per hour), you’ll make 2 hammers (1 per hour) and were’ done.

So now it only takes 4 hours for us to get everything we need. Our economy has “grown”. We have 2 extra hours of free time now.

By specializing my hour is now worth more, able to do more. I can’t do this alone, as I have to coordinate with others, but that’s how it works.

Lets throw money into the mix:

Lets say 1hr work = $1

Alone I spend $3. $1 for the bowl, $2 for the hammer.

Working with you, My $1, can actually buy a hammer.. leaving me with $1 extra that I can spend on something else entirely. I could trade that $1 for another bowl, or go to a third party and get an entirely different item.

The purchasing power of my 1 hour of labor has increased, due to trade.