Answer to Question #165716 in Macroeconomics for khushit sheth

Question

Diverting major share of country's output/income to produce capital goods would help achieve higher productivity and higher standard of living

For a developing economy with lower per capita income and aspire to achieve higher productivity do you think this claim is valid ?

Answer 1

Part 1

Capital goods are very important aspects because they contribute largely to human capitalization. When a country invests its income in capital goods then the production will be high which will increase the per capita income (Laytuu, 2020). Per capita income is calculated by a division of the total income with the total population. The per capita income means that every household earns more which translates to higher standards of living. The country’s income will therefore serve as an investment because developed nations such as the United States of America have invested largely in capital goods. The formula for calculating the net income is given below

Revenue-cost of goods-expenses=Net income.

The above formula shows the relationship between revenue, goods, and income. Capital goods can be buildings, better infrastructure. They are also referred to as means of production because they have a high economic value. It would be in a country’s best interest if it invested a large amount of the income on capital goods for increased productivity.

Part 2

The claim is valid for both low-income and high-income countries. for the low-income countries, they can come up with strategies to invest in the goods without necessarily exhausting their resources. Money is used as a measure of value and people cannot eat or get sheltered in money (Alavuotunki et al., 2019). However, the best economic decision for the developing countries is investing in goods because people will have an opportunity to lead better lives, eat good food, have jobs, and live better lives. Most developing countries fail to acquire financial independence because they lose focus on investments and savings on capital equipment and instead, they want to increase their money supply and print currencies. Investing in capital goods is more like investing in a better future which in turn retains the money and improves the currency. Low-income nations would therefore find it wise to save and then employ more people so that revenue can be generated that would, in turn, lead to increased productivity.

References

Alavuotunki, K., Haapanen, M., & Pirttilä, J. (2019). The effects of the value-added tax on revenue and inequality. The Journal of Development Studies, 55(4), 490-508.

Lyatuu, H. H. (2020). The contribution of e-payment system in revenue collection at local 

government authority.