In this section I want to look at the costs
associated with economic growth.
Graphically speaking, we can conclude that
economic growth has taken place if the production
possibilities frontier moves outward.
Evidently, if this happens, we can produce
more goods and services given our current
resources.
The quantity of food and clothes that we can
produce, according to this production possibilities
curve, both increase.
This signifies an increase in overall living
standards of a population.
However, this expansion of production possibilities;
this economic growth, does not by any means
overcome the basic economic problem of scarcity
or opportunity cost.
We still have a limited amount of resources
and we still have to give up one good to produce
another.
For example, if we want to produce more food
we will have to give up some amount of clothes.
This assuming, of course, that the economy
is already producing at some point on the
PPF.
Economic growth can arise as either a result
of technological change or capital accumulation.
Technological change describes the development
of new goods and better ways of production.
This means that the economy is able to take
the same amount of resources and produce more
goods with those resources, thus having become
more efficient.
Capital accumulation refers to the growth
of capital resources.
This includes the machinery used to produce
other goods for example, and human capital;
or the skills and knowledge that people possess.
Either one of these factors, or both combined,
can lead to economic growth.
Producing capital goods comes with the opportunity
cost of temporarily reducing the production
of consumption goods.
Resources are diverted away from consumption
goods to produce more capital goods.
We have now altered the axes of the PPF to
include consumption goods and capital goods,
but for the sake of simplicity I will use
a simpler diagram in this slide.
The benefit of increased capital production
is the increase in future consumption; the
capital which has been acquired can be used
to produce even more consumption goods in
the future.
Let’s think about this logically.
If we divert a lot of resources to consumption
goods and very little resources to capital
goods, then future consumption is bound to
remain the same.
The economy hasn’t become any more efficient
at producing goods, so we can’t possibly
produce any more tomorrow than we could today.
On the other hand, if we switch it around
and produce more capital goods, then we can
safely assume that we will be able to consume
more in the future.
Remember, more capital goods today means more
consumption goods tomorrow.
This is because capital goods such as machinery
make producing consumption goods more efficient,
and thus we can produce more of them.
