Suppose a presidential candidate campaigns on the need to improve U.S. infrastructure, a term for capital goods like bridges, highways, and technology (much of it publicly owned). Which would lead to faster growth: government expenditure on capital goods or expenditure on consumption goods such as sports stadiums? Illustrate your answer, drawing appropriate production possibilities frontiers accompanied by an explanation.

What will be an ideal response?

Draw a production possibilities frontier (PPF) labeling one axis (say, the Y-axis) capital goods and the other axis consumption goods (Figure 3-7). Let point A depict a relatively large expenditure on capital goods. Point B represents a relatively large expenditure on consumption goods. Over time, the PPF will shift outward. However, if the economy begins at Point A, the economy will experience a higher growth rate by doing more to enhance future production (through increased capital goods production). This is shown by a new PPF that shifts outward by more than the one the economy would have attained if it began at point B.

Figure 3-7

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Economics

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