- [Instructor] We've learned a little bit already
about how a production possibilities curve can be used
to illustrate the concept of economic growth.
Let's review the definition of economic growth.
Then we're gonna go on to some more depth
about the tradeoffs that society faces today
between the production of different types of goods
and how that can affect the level
of economic growth in the future.
You'll recall that economic growth is defined
as an increase in the ability of a nation
to produce goods and services over time.
You've already learned that,
in a production possibilities curve model,
economic growth can be illustrated as a shift outward
in the nation's PPC over time.
In the graph on our left here,
economic growth would be shown
as a shift from the white curve
to the pink curve.
This represents an increase in the ability of a nation
to produce both the goods shown on its PPC over time.
The question we want to discuss is
what are the sources of economic growth,
and how does a nation's decision about
how to allocate its resources today
affect its level of potential output in the future?
To help us answer this question,
we're going to put some different goods
on our production possibilities curve here.
And for today's lesson,
we'll be looking at two types of goods.
The rubber ducky on the vertical axis
represents what we're going to call consumer goods.
We're gonna define these in just a moment,
but let's look down at the horizontal axis first.
The tractor here, it's a tool.
This is a good that is used to produce other goods.
It's used to produce agricultural products,
which could be used to produce all sorts
of goods a society needs.
A tractor and any other tools like tractors
are what we call capital goods.
Let's define consumer goods and capital goods
before moving on with our analysis.
Our rubber ducky in our PPC is a consumer good.
This is a good intended to be sold to households.
Consumer goods are used for consumption,
and ultimately consumer goods are disposed of.
How does this contrast with capital goods though?
Capital goods are a bit different.
Capital goods are any goods
sold to firms.
Capital goods, unlike consumer goods,
are used to produce other goods.
Therefore, if society allocates more resources
towards capital goods today,
society's essentially choosing
to produce more goods and services in the future
and the tradeoff being less goods
and services produced today.
So let's look back at our white PPC here.
Let's assume that this represents today's
production possibilities for a hypothetical country.
A country can choose to produce more consumer goods today.
By doing so, it would be producing at a point
such as point A.
Notice that at point A,
country is producing more rubber duckies,
but the opportunity cost is the capital goods
of the tools that it could be producing instead.
Or society can choose to allocate its resources
at a point such as point B.
Allocating its resources at point B means society
is choosing to produce more capital goods today
with the opportunity cost being fewer consumer goods.
Notice that if a country were to move from point A
to point B,
it would give up all these rubber duckies,
all the toys, all the consumer goods
that it could have produced if it had chosen
to produce at point A instead.
So this is the opportunity cost of producing at point B.
Now, what if society moved in the other direction
and chose to produce more consumer goods today?
What if society went from point B
to point A, in other words?
Well, in that case,
the opportunity cost would be the capital goods
that it could have enjoyed
if it had chosen to produce at point B.
The PPC, once again,
illustrates this very basic concept of opportunity cost.
It shows us what is given up in order to have anything.
So let's do some analysis over here of the consequences
of this country choosing to produce at point A or
choosing to produce at point B.
What happens if society chooses to allocate more resources
towards consumer goods today?
Essentially, what it's choosing is current consumption
of goods and services
over
future consumption.
What do I mean by this?
Essentially, by producing at point A,
society is giving up all those capital goods
that could have been used
to produce other goods in the future.
Therefore, society is choosing
a higher standard of living today,
rather than a higher standard of living
sometime in the future.
Let's contrast that with point B
on our production possibilities curve.
If society chooses to allocate more resources
towards capital goods today,
society is choosing future consumption
over
current consumption.
What do we mean by that?
By allocating more of its scarce resources
towards capital goods and tools and equipment and technology
that can be used to produce other goods today,
society is giving up the current consumption
that it could enjoy by producing more toys
or consumer goods today.
The benefit though,
the benefit of producing more capital goods today
is likely to be higher rates
of economic growth in the future.
Why is that the case?
Because capital goods are those things
which are used to produce other goods.
Capital is a factor of production.
Consumer goods are not a factor of production.
Consumer goods are fun to consume.
They're fun to enjoy.
We love playing with our toys,
but ultimately they get consumed and thrown away.
Capital goods aren't quickly disposed of.
They instead are used in factories.
They're used in the fields.
They're used in the mines.
They're used in all the different ways
that we produce goods and services
that society benefits from.
By allocating more resources towards capital goods today,
a country would be choosing future consumption
over current consumption.
Now, to illustrate this concept,
we can look at some real-world data.
What I'm about to show you is some data for two countries
that shows how those countries are choosing
to allocate their resources today.
We can then compare the rates of economic growth
over the last 15 years to show that one of those countries
has, in fact, experienced higher rates of economic growth.
Let's look at our data first.
Here we've got the output data of two countries,
China on the left and the United States on the right.
What can we learn from this information?
First, let's look at China.
Notice that, in 2016, the year for which this data applies,
China invested 43%
of its entire GDP.
What does that mean?
It means that 43.7 dollars
out of every 100 dollars spent in China
was spent on capital goods.
Compare that to the level of consumption in China.
Only 37%
of China's total spending
went towards household consumption.
China is choosing to allocate more of its resources
towards the production of capital goods
than it is towards the production of consumer goods.
Let's look over at the United States.
In the United States in 2016,
only 15.9%
of total spending went towards capital goods.
On the other hand, 68.6%
of America's total spending went towards,
you guessed it, household consumption.
America has essentially chosen rubber duckies over tractors
or consumer goods over capital goods.
So this is one data point.
It's not the only thing that affects the rates
of economic growth in a country.
But if we look at the actual rates of economic growth
since the year 2000 for China and the United States,
an interesting fact emerges.
China has enjoyed significantly higher rates
of economic growth.
The blue line here
represents China's economic growth rates from 2000
to 2015.
And we can see that China has average rates
of economic growth of between 8%
and 14% per year.
That means that every year, China's economy has produced
approximately 10% more stuff than it did the year before.
Compare that to the United States.
In the United States, growth rates have averaged between
negative 2% and 4%, significantly lower.
The United States has achieved economic growth
for most of the last 15 years,
but the rate of economic growth
was quite a bit lower than China.
China has, of course, a much larger population.
Also, China is at a lower level
of economic development than the United States,
so it has more room to grow.
There are more unused resources in China.
But that aside,
China also chooses to allocate more of its resources
towards investment in capital goods
than it does production of consumer goods for households.
This fact, going back to our production possibilities curve,
supports the idea that by choosing
to produce more capital goods today,
a country is essentially choosing future consumption
over current consumption.
Economic growth has many causes.
Economists have been discussing
the source of economic growth for over 200 years now.
Increases in the population,
increases in the education level,
the skill level, the amount of technology,
and the availability of resources
are significant sources of economic growth.
However, a country's decision
as to how it allocates its resources today
also impacts its rate of economic growth.