ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If a country cannot replace capital goods as they reach the end of their useful lives, production declines. Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income. Producing more goods and services can lead to an increase in national income levels.

Detailed explanation-2: -Key Takeaways Capital goods are one of the four leading economic factors. An increase in orders and shipments of capital goods is a sign that businesses expect more demand and that the economy will grow.

Detailed explanation-3: -In the short term, an increase in business investment directly increases the current level of gross domestic product (GDP), because physical capital is itself produced and sold. Business investment is one of the more volatile components of GDP and tends to fluctuate significantly from quarter to quarter.

Detailed explanation-4: -when countries invest in capital goods, they are providing better facilities, resources, and/or materials for the people who perform the labor, which creates a more productive workforce leading to greater economic growth (higher GDP).

Detailed explanation-5: -Capital goods are important for increasing the long-term productive capacity of the economy. More capital goods reduce consumption in the short-term, but can lead to higher living standards in the economy. Therefore, economies often face a trade-off between consumer goods and capital goods.