Is it possible for an economy to grow when there is a deflation?

My answer to this question is that in the current world economy, it will not happen, but in a close economy, such phenomenon is possible to happen.

In a closed economy, the inflation outside the economy is irrelevant. Then this closed economy is using the gold standard. When an economy is expanding, it means the scale of production expands and the cost of production lowers. In addition, due to innovation and inventions, more kinds of goods and services are developed and supplied to the market.

If we assume the gold is merely used as the medium of exchange and has a fixed total amount, then when the supply of some good or service increases, it has to value less gold. Therefore, once there is a new more advanced product appearing in the market, the price of the new product will inherit the value of the older version of this product, and the older version is devalued. Under this situation, the economy is still expanding.

Why such phenomenon does not exist in reality? Firstly, people love their numbers to increase, when some new products are released, instead of lowering the old products’ prices, firms are more likely to increase the new products and lower the old products just a little bit. Secondly, it is easier to set prices for new products than amending prices for old products, as setting prices for new products are based on the pre-existing information but amending prices for old products is dependent on the new coming information. While there is a rapid change in an industry, the firms have to frequently amend changes for all their old products, which increase the costs. Thirdly, the gold standard is not the most preferred monetary system. Fourthly, under such economic environment, there is no room for instant economic stimulus.

Therefore, an economy that is able to expand requires many strict conditions and do not have good self-correcting methods, so it can theoretically exist under a perfect condition, but is not practical in reality.