Do You Need More Money for Economic Growth to Occur?

The Growth Economics Blog

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

TL;DR version: No.

This is another entry to file under “notes for undergrads” and/or “explaining things to your neighbor”. A very common question I get about growth is: how does growth occur if there is not any “more money” in the economy. Another common question I get is: how is it economic growth if spending on one product just replaces spending on another?

These questions come, I think, from continued confusion about (a) nominal versus real GDP, (b) nominal GDP versus the stock of money, and (c) absolute versus relative prices. In short, things an economist might call money illusion. In the defense of students and my neighbors, it isn’t terribly easy to think in relative prices and real terms when every single transaction you undertake involves absolute dollars.

Let’s start with an…

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