02: Growth

In the third year, Econ and Wonder did not spend time collecting fruit for the first 45 days. They survived by eating the Fruits in the stock and put their hard labor in building a thatched hut with three rooms: one for storing fruits and the other two for their living and working. They also made two thin but stout long wooden sticks and two ladders made from branches of trees that would enable them to collect more fruits. The stock of apples therefore got converted into physical assets: house, working place and a storage. All these are durable assets for productive use or consumption over longer periods than one year.
Since both worked together with equal effort, they received income of F250 each during this period. Their past savings first got converted into stocks of friuts for future use and then into some physical capital assets.

With the production of capital assests, their productivity and production increased. Together they collected during the third year 6,000 fruits. Since Wonder had to deliver and look after a baby, her contribution was 2500 and Econ's F3,500. But they had also produced physical capital assets worth F500. So, what was Nation Income or GDP? Y= F6,500. What was the income distribution? Ekon earned F3750 and Wonder F2750. What did the citizens do with the income. They consumed 4,000 fruits. So, C=F4000. Therefore, Savings S= F2500.
They converted all their savings into investments by just increasing the capital stock from F500 to F3000 (Physical Capital of F500 and fruit stock of F2500). So, Investment in the third year was F2,500. This is exactly equal to the increase in capital stock from F500 to F3000. They checked their calculations and Found that GDP=Y=C+S= C+I, I=dK and S=I. In the third year, the third citizen was born: the baby was named Wonder Economist the First or WE1 for short.

How did the economy grew? Y in the first year was F4000, in the second year F3000 and in the third year F6500. So, the economy grew by a negative 25% in the second year (i.e., declined or shrinked by a fourth from the first year's level) and increased by 116.7 % in the third year. With the availabilty of capital, productivity and production increased considerably.