Explain how the choice between investing in capital goods and producing consumer goods now affects the ability of an economy to produce in future.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This choice affects an economy's ability to produce in the future because investment in capital goods builds the economy's future production potential.

If an economy chooses to spend its money on consumer products, it will have a high standard of living in the short term.  People will enjoy the use of the consumer goods and services they produce.  However, this will not allow the economy to expand in the future.  

If the economy chooses to spend more on capital goods, it gives up some of its short term standard of living in exchange for more production in the future.  As firms, for example, buy better machinery, they become able to produce more goods and services more efficiently in the future.

Perhaps you can think of this in relation to a personal decision to attend college or to work.  If you forgo college and work now, you will make money instead of losing it by paying for tuition.  But if you go to college (analogous to investing in capital goods) you will be able to make much more money in the future because you will be qualified for higher-paying jobs.

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