Transfers of goods from one person to another do not increase GDP

When a man who has two shirts gives a shirt worth $13 to a man who has none, this is a good deed that genuinely helps the poor man (see Luke 3:11). But it does nothing to increase the GDP. No new product was created, so no new $13 of value was added to the nation’s GDP. The shirt was just moved from one person to another.

Printing money does not increase GDP

Increasing a nation’s production of goods and services is also different from simply printing money, because money itself is not a “product of value.” People cannot eat money, or wear, ride, drive, or plant it. They cannot put it over their heads to protect them from the sun and the rain. They can use money to buy other things, of course, but this is because money is a medium of exchange. It is not a product of value in itself.[1]

To understand this difference between printing money and creating goods and services, think back to our example of the woman who sewed a $3 piece of cotton cloth into a shirt worth $13. She increased the GDP of the nation by $10, from $2,000,000,000 to $2,000,000,010.

Now imagine that the government of that poor country suddenly prints an additional 3,000,000,000 “dollars” of paper money (in the currency of that nation). Now what is the total value of all the products and services in that country? It is still only $2,000,000,010. There is more paper money in the nation, but there are no more shirts, shoes, beans, or houses, no more products of value that people can sell or buy and use for themselves. Printing money does not increase the GDP or improve the wealth of a nation. That must be done through producing more goods and services.

Here is another example. Imagine that two hundred people from a sinking ship find themselves stranded on a fertile but uninhabited island and have to support themselves. They organize themselves, and after a few days, some people are building houses, some are catching fish, some are planting vegetables, some are picking cotton to make into cloth to make clothing, and so forth. They are all producing useful goods and services, so they are increasing the total “GDP” of the island, but they are still cut off from the outside world.

Now imagine that someone salvages a copier and a generator from the crippled ship, prints $100,000 worth of “Lost Island Dollars,” then gives $500 of that money to each person so that people can buy and sell their goods and services more easily. Does printing that money make the people of the island any more prosperous? No. It does not give anyone more food, clothing, or shelter. It does not produce any more goods and services. It does not increase the island’s GDP.

Of course, the money makes commerce easier than just bartering, and that adds value to the society because it saves people’s time and enables them to become more productive, but printing money in itself does not make the island more prosperous in terms of the goods and services the people have. Money is a medium of exchange and a measure of value, but (in this over-simplified example) printing money does not increase the value of the things on the island.

How can a nation create more goods and services?

If we keep our focus on the goal of continually producing more goods and services, then the question becomes, how can a nation increase the total value of the products and services that it produces? For example, how can the woman produce more shirts per week? And how can she produce higher-quality shirts that people value more and pay more to purchase? Many factors contribute to such an increase (such as having a sewing machine, having easy access to markets, having expert training, having a microloan to buy more materials and better equipment, having confidence that she can keep and use her profits, and so forth). We will discuss these factors in detail in subsequent chapters. For now, the important point is to maintain our focus on this single goal: nations can move from poverty to prosperity only by continually creating more goods and services.

  • [1] We are oversimplifying here to make the point. In another sense, money is a “product of value”because it gives to the society a commonly recognized medium of exchange (which saves time overbartering), acts as a store of value, and provides a commonly recognized measure of value and unitof accounting.
 
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