How Do Economies Grow – A Simple Example

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Sometimes economics an sound incredibly complicated and difficult, but when you start to analyse the core issues it’s really not. This great little video explains one of the core concepts that drive economists in virtually every country in the world – growth. Although perhaps a little over simplified it is however a great little primer on the economics of growth.

Transcript of text is below:

What makes an economy grow? It seems most people have the notion that the inner-workings of an economy are impossibly complicated, too difficult for the average person to understand. Well, while it is true that an economy is complex in terms of how many different things are simultaneously interacting in it, the economic principles that apply to those interactions are actually pretty easy to understand. Let’s start with a simple economy. Suppose there’s a village of five people: A butcher, a cutler, a stone mason, a blacksmith, and a miner. And suppose the butcher starts with $100, and the other four are flat broke. Well, one day, as he’s trimming some meat, the butcher notices his knives are starting to dull and wear out, and he asks the cutler to make him a new set for his $100.

The cutler agrees and starts working. As the cutler’s sharpening the blades, he notices his grindstone is starting to crack, and so he asks the stone mason to make him a new one for the $100. Well, he gives the $100 to the stone mason, and the stone mason agrees and gets to work. Now as he’s chiseling away, he realizes he could use a new chisel. So, the blacksmith offers to make him one for $100. Now, before the blacksmith can get to work on the chisel, he has to refill his supply of iron ore, so he asks the miner to get him another ton, for the $100. Now the miner works all day, and in the evening he decides he could use a good meal after his long day of hard work. So, he drops the iron ore off at the blacksmith’s, and then swings by the butcher, where he buys $100 worth of steak. where he buys $100 worth of steak. Well, the blacksmith then makes the chisel for the mason, and the mason then finishes making the stone for the cutler, who finishes making the knives for the butcher.

Now, notice the $100 is back in the hands of the butcher, and everyone else again has no cash. Now on the surface, it would appear that the economy is exactly the size that it was. After all, there’s still only $100 cash in it. But the butcher has a new set of knives, the cutler a new grindstone, the mason a new chisel, the blacksmith has the remainder of the ore, and the miner has some delicious steaks. so while the total number of physical dollars has remained the same the economy is growing what u see true economic growth only comes when value is added to the economy growth does not come from simply putting more money into it suppose for example the everyone family received a big pile of money pretty soon own would want money is much because everyone has plenty of it inevitably people would have to offer more money to trade and at that point prices and wages have both the reason together only the numbers the actual value outside see the only reason we use the money is supports convenience you may not want with the other guy offers so he pays you and money and we use that money is sort of an i_o_u_ passed from person to person you’ll pass it onto the next guy whenever you find something you do want to in fact you can feasibly envision an economy where there is no actual currency or people simply trade product for product boom boom so uh…

A certain method of trading products and services is what grows an economy. The way to improve the economy is to have more avenues of trade opened up rather than to be restricted. Despite what politicians and bureaucrats believe is best for you. So remember it’s not complicated the easier it is to employ someone and trade the more likely your economy will grow.

Additional References:

Here’s a great link for any ex-pats feeling isolated from all the economic and political news in the United Kingdom. My favorite such program is actually on the Uk’s commercial channel ITV which you can access and stream abroad here. For politics try the program compared by their political correspondent – Robert Peston.

Digital Economies are Different: It’s true, any model of growth does become more complicated when you include the digital economy. Goods and services can be sold and transferred across the world much more easily, but they’re origin is more difficult to find. Using devices like rotating proxies you can actually operate in multiple countries and declare profits (if at all) in any you like potentially.

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