The Distribution of National Income Between Investment and Consumption
In real terms everything that is produced is either intended for direct consumption or for helping to produce what is wanted for direct consumption more efficiently. When the fruits of production satisfy a human need directly they are termed consumer goods and when their contribution is indirect they are termed capital. A tractor is a capital good because it only helps to produce bread with greater efficiency. Capital can therefore be defined as a factor of production representing produced goods which are used as factor inputs for further production. This means that the entire output of a society is the sum of all the consumer goods and capital goods produced by it. As the efficiency of production, that is productivity, greatly depends on the availability and quality of the supply of capital goods, the accumulation and improvement of capital is a crucial determinant of a society’s material affluence. But as with the given resources the production of capital can only increase at the expense of less production of consumer goods it always reflects a choice between the satisfaction of present wants and the better satisfaction of these and additional wants in the future. This can be compared to a household’s decision whether to spend the entire monthly family earnings on good living or to save part of it and invest it in an asset, say a lorry or good education for the children, to increase the family earnings at some future time.
KeywordsConsumer Good National Income Capital Good Direct Consumption Mortgage Debt
Unable to display preview. Download preview PDF.