SAVING AND INVESTMENT
Because capital is a produced factor of production, a society can change the amount of capital it has. If today the economy produces a large quantity of new capital goods, then tomorrow it will have a larger stock of capital and be able to produce more of all types of goods and services. Thus, one way to raise future productivity is to invest more current resources in the production of capital One of the Ten Principles of Economics presented in Chapter I is that people face trade-oil’s This principle is especially important when considering the accumulation of capital. Because resources scarce, devoting more resources to producing capital requires devoting fewer resources to producing good services for current consumption. That is, for society to invest more in capital, it must consume less and save more of its current income. The growth that arises capital accumulation is not a free lunch: It requires that society sacrifice consumption of goods and service in the present to enjoy higher consumption in the future The next chapter examines in more detail how the economy’s financial markets coordinate saving and investment It also examines how government policies influence the amount of saving and investment that takes place At this point, it is important to note that encouraging saving and investment is one way that a government can encourage growth and, in the long run, raise the economy’s standard of living.
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