The Crucial Role for Money and Business Firms for Short-Term Economic Growth

Abstract

Money and business firms are central to short-term nominal gross domestic product (GDP) growth (as opposed to nominal GDP as a flow). Money is defined as the activation of purchasing power of an item/items on a balance sheet, flowing from the buyer of a real, GDP-affecting, product to its seller. Starting from accounting identities such as the equation of exchange, a method is developed that connects sectoral buyers to aggregate expenditure (AE) growth and sellers to aggregate income (AI) growth. The main finding, using National Accounts data for Sweden, US, UK, Japan and Germany over the 1994–2020 period, is that business firms drive short-term nominal GDP growth. Their median contribution to the yearly nominal growth is 105–128%, leaving the remaining sectors to contribute negatively to growth in net terms. This means that business firms finance growth by borrowing or drawing down on assets whereas the remaining sectors are net savers. Tying the real economy variable of net lending (NL) (+)/net borrowing (NB) (–) to its financial counterpart, net financial investments (NFIs), makes it possible to define money explicitly, here applied to Swedish business firms. They primarily use three items on the liability side of the balance sheet to finance expenditure growth: debt securities, loans and trade credit.