Answer to Question #22688 in Microeconomics for bonnie
Question #22688
Describe how a country producing more capital goods rather than consumer goods ends up in the future with a PPF that is larger than a country that produces more consumer goods and fewer capital goods.
Expert's answer
If an economy chooses to produce more capital goods than consumer goods, then it will grow by more than if it allocated more resources to consumer goods.
There is a trade-off between the short and the long run. In the short run, the economy must use resources to produce capital rather than consumer goods. Standards of living are reduced in the short run, as resources are diverted away from private consumption. However, in the longer run the increased investment in capital goods enables more output of consumer goods to be produced. This means that standards of living can increase by more than they would have if the economy had not made the short-term sacrifice.
There is a trade-off between the short and the long run. In the short run, the economy must use resources to produce capital rather than consumer goods. Standards of living are reduced in the short run, as resources are diverted away from private consumption. However, in the longer run the increased investment in capital goods enables more output of consumer goods to be produced. This means that standards of living can increase by more than they would have if the economy had not made the short-term sacrifice.
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