C. The amazing process of creating value that did not exist before

When we talk about producing more goods and services, we are referring to an amazing process by which human beings are able to better their own economic situation by creating valuable things that did not exist before. When they do this, they add not only to their own wealth but also to the wealth of their nation. They do this not by taking something of value from someone else (which would not increase total GDP), but by creating new products or services that no one ever had because they previously did not exist.

Examples of the creation of products of value

To take a simple example, think of a woman in a poor country who has a piece of cotton cloth that cost her $3. If she sews it into a shirt that she sells for $13, then she has created a new product of value. She has made a shirt that did not exist in the world before she made it. She has made the piece of cotton cloth to be $10 more valuable than it was when she bought it.

She has also contributed something to the total value of everything that her nation will produce in that year (the GDP). If the total value of everything produced in her nation that year was $2,000,000,000 before she made the shirt, then after she made the shirt the total value of everything produced was $2,000,000,010.u She moved her nation $10 along the path toward prosperity.

This amazing process of increasing GDP by creating products of value is at the heart of the means by which nations can grow from poverty to increased prosperity. If this creative process can be expanded [1]

to thousands of people making thousands of kinds of products, then the total value of everything in the nation increases day after day. If a nation can increase the value of what it produces each year, GDP will grow, and the nation will become more prosperous each year. This is the process that brings nations from poverty to prosperity.

We can also note at this point that the $10 profit this woman earned when she sold the shirt is a measure of the value that she added to the economy. The buyer of the shirt voluntarily decided that the shirt was worth $13 to him. Therefore (in economic terms), it is worth $13. But the cloth cost the woman only $3. Her $10 profit is important because it shows that new value has been created. We discuss profits more fully below (see 179-180), but it is important to note here that her profit is not immoral, but is a measure of morally positive value that has been added to the nation.

When a baker uses $3 worth of flour and other ingredients to make a loaf of bread that he sells for $4, he has suddenly added $1 to the GDP. When a shoemaker uses pieces of leather that cost him $5 to make a pair of shoes that he sells for $30, he has added $25 to the GDP.

Another example is a farmer who grows a crop of beans worth $400. When the ground had no crops, it was producing nothing of value. By cultivating the ground, the farmer “creates” (with the help of God, who directs the weather) $400 worth of beans that did not exist in the world before he grew them and harvested them. He increases the prosperity of the nation by $400 (minus the cost of the seed). And if, with better seeds, fertilizer, and irrigation, he grows $800 worth of beans the next year, then he doubles his contribution to the nation’s GDP.

More complex processes can turn simple materials into very expensive items. Think of eyeglasses, for instance. The original value of the raw plastic in the lenses might be about 3 cents and the original value of the metal in the frame might be about 5 cents. But a pair of eyeglasses can cost $200 or more in the United States today. How can 8 cents worth of materials end up with a value of $200? It is because skillful human beings create a product of value from the resources of the earth, and so the GDP grows.

It is crucial to keep this creative process in mind in trying to solve the problem of poverty in poor nations. A nation will expand its GDP not by taking products from other nations, but by creating more goods and services within the nation itself. This is the only permanent solution to poverty in poor nations.

  • [1] After she uses the cloth to make a shirt, the $3 that she paid for the piece of cloth is no longer a “finalgood” that can be counted in the GDP, so the GDP increases by $13 - 3 = $10.
 
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