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Capital vs. consumer goods and economic growth | Microeconomics | Khan Academy - YouTube
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we've learned a little bit already about
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how a production possibilities curve can
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be used to illustrate the concept of
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economic growth let's review the
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definition of economic growth then we're
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going to go into some more depth about
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the trade-offs that society faces today
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between the production of different
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types of goods and how that can affect
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the level of economic growth in the
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future
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you'll recall that economic growth
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is defined as an increase in the ability
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of a nation to produce goods and
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services over time
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you've already learned that in the
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production possibilities curve model
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economic growth can be illustrated as a
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shift outward in the nation's ppc over
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time in the graph on our left here
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economic growth would be shown as a
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shift from the white curve
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to the pink curve this represents an
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increase in the ability of a nation to
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produce both the goods shown on its ppc
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over time the question we want to
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discuss is what are the sources of
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economic growth and how does a nation's
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decision about how to allocate its
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resources today affect its level of
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potential output in the future
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to help us answer this question we're
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going to put some different goods on our
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production possibilities curve here
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and for today's lesson we'll be looking
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at
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two types of goods
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the rubber ducky on the vertical axis
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represents what we're going to call
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consumer goods we're going to define
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these in just a moment let's look down
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at the horizontal axis first
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the tractor here it's a tool this is a
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good that is used to produce other goods
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it's used to produce agricultural
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products which could be used to produce
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all sorts of goods the society needs a
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tractor and any other tools like
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tractors are what we call capital goods
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let's define consumer goods and capital
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goods before moving on with our analysis
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a rubber ducky in our ppc is a consumer
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good this is a good intended to be sold
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to households consumer goods are used
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for consumption
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and ultimately consumer goods are
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disposed of
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how does this contrast with capital
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goods though
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capital goods are a bit different
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capital goods are any goods
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sold to firms
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capital goods unlike consumer goods are
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used
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to produce other goods
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therefore if society allocates more
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resources towards capital goods today
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society is essentially choosing to
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produce more goods and services in the
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future and the trade-off being less
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goods and services produced today
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so let's look back at our white ppc here
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let's assume that this represents
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today's production possibilities for a
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hypothetical country
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a country can choose to produce more
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consumer goods today
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by doing so it would be producing at a
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point such as point a notice that at
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point a
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countries producing more rubber duckies
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but the opportunity cost is
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the capital goods or the tools that it
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could be producing instead
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or society can choose to allocate its
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resources at a point such as point b
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allocating its resources at point b
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means society is choosing to produce
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more capital goods today
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with the opportunity cost being fewer
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consumer goods
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notice that if a country were to move
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from point a
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to point b
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it would give up
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all these rubber duckies all the toys
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all the consumer goods
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that it could have produced if it had
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chosen to produce a point a instead
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so this is the opportunity cost
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of producing a point b
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now what if society moved in the other
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direction
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and chose to produce
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more consumer goods today what if
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society went from point b
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to point a in other words well in that
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case the opportunity cost would be the
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capital goods
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that it could have enjoyed if it had
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chosen to produce a point b
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the ppc once again illustrates this very
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basic concept of opportunity cost it
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shows us what is given up in order to
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have anything
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so let's do some analysis over here of
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the consequences of this country
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choosing to produce a point a
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or
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choosing to produce at point b
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what happens if society chooses to
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allocate more resources towards consumer
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goods today
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essentially what it's choosing is
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current consumption
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of goods and services
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over
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future consumption
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what do i mean by this
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essentially by producing at point a
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society is giving up all those capital
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goods that could have been used to
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produce other goods in the future
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therefore society is choosing a higher
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standard of living today rather than a
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higher standard of living sometime in
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the future
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let's contrast that with point b
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on our production possibilities curve if
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society chooses to allocate more
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resources towards capital goods today
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society is choosing future consumption
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over
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current consumption
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what do we mean by that by allocating
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more of its scarce resources towards
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capital goods and tools and equipment
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and technology that can be used to
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produce other goods today society is
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giving up the current consumption that
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it could enjoy by producing more toys or
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consumer goods today
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the benefit though the benefit of
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producing more capital goods today
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is likely to be higher rates of economic
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growth in the future
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why is that the case because capital
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goods are those things which are used to
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produce other goods capital is a factor
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of production consumer goods are not a
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factor of production consumer goods are
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fun to consume they're fun to enjoy we
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love playing with their toys but
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ultimately they get consumed and thrown
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away capital goods aren't quickly
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disposed of they instead are used in
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factories they're used in the fields
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they're used in the mines they're used
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in all the different ways that we
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produce goods and services that society
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benefits from
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by allocating more resources towards
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capital goods today a country would be
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choosing future consumption over current
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consumption now to illustrate this
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concept we can look at some real world
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data what i'm about to show you is some
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data for two countries that shows how
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those countries are choosing to allocate
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the resources today
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we can then compare the rates of
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economic growth over the last 15 years
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to show that one of those countries has
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in fact experienced higher rates of
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economic growth
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let's look at our data first
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here we've got the
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output data of two countries china on
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the left and the united states on the
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right what can we learn from this
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information
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first let's look at china notice that in
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2016 the year for which this data
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applies china invested 43 percent of its
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entire gdp
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what does that mean it means that 43.7
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dollars out of every hundred dollars
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spent in china was spent on
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capital goods
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compare that to
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the level of consumption in china only
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37 percent
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of china's total spending went towards
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household consumption
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china is choosing to allocate more of
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its resources towards the production of
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capital goods than it is towards the
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production of consumer goods
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let's look over at the united states in
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the united states in 2016
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only 15.9 percent
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of total spending went towards capital
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goods on the other hand 68.6 percent
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of america's total spending went towards
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you guessed it household consumption
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america has essentially chosen rubber
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duckies over tractors or consumer goods
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over capital goods
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so this is one data point it's not the
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only thing that affects the rates of
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economic growth in a country but if we
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look at the actual rates of economic
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growth since the year 2000
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for china and the united states
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an interesting fact emerges
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china has enjoyed significantly higher
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rates of economic growth
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the blue line here represents china's
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economic growth rates from 2000
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to 2015
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and we can see that china has average
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rates of economic growth of between
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8
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and 14
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per year that means that every year
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china's economy has produced
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approximately 10 percent more stuff than
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it did the year before compare that to
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the united states in the united states
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growth rates have averaged between
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negative two percent
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and four percent significantly lower the
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united states has achieved economic
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growth for most of the last 15 years but
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the rate of economic growth was quite a
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bit lower than china china has of course
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a much larger population also china is
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at a lower level of economic development
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than the united states so it has more
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room to grow there are more unused
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resources in china but that aside
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china also chooses to allocate more of
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its resources towards investment in
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capital goods than it does production of
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consumer goods for households this fact
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going back to our production
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possibilities curve supports the idea
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that by choosing to produce more capital
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goods today a country is essentially
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choosing future consumption over current
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consumption economic growth has many
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causes economists have been discussing
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the source of economic growth for over
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200 years now increases in the
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population increases in the education
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level the skill level the amount of
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technology and the availability of
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resources are significant sources of
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economic growth however a country's
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decision as to how it allocates its
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resources today also impacts its rate of
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economic growth
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