To increase the productive capacity of the economy and allow us more options, requires that we refrain from consuming all resources now and invest for the future.
Resources- land, labour, capital and enterprise – are devoted to future production – turning iron ore into machinery rather than cars, educating the innovators of tomorrow, and incentivizing the use of new technology, are some examples of ways we as a nation invest in the future.
Some decisions or allocation of budget resources may pay dividends quickly, others take time, such as grants to research facilities or revising the school curriculum to include coding in the kindergarten school syllabus!
The funds available to increase the productive capacity of the economy (investment) primarily comes from the pool of national savings contributed by both by the private sector (households) and the public sector (government).
Remember, to have more options and less scarcity we need to make the economic ‘pie’ grow or, shift the production possibility curve out to the right. (Same for us households!)
Another way of thinking about the size of the economy is via the simple circular flow of income model that looks at the injections into the economy vs the leakages.
Think of it like a large above ground swimming pool. The more water being pumped in (injections) makes the level rise and allows more people to get in and get wet. Spring a leak and the water level falls meaning some swimmers need to get out. (unemployment)
Injections are consumption expenditure(C), investment expenditure (I), government expenditure (G) and the sale of exports (X).
Leakages are saving (S), tax (T) and imports (M)
National Income (Y) or the size of the economic ‘pie’ is equal to:
Y = C + I + G + (X-M)
If leakages are > injections the economy will contract
If injections are > leakages the economy will grow
|LEAKAGES from the CIRCULAR FLOW||INJECTIONS into the CIRCULAR FLOW|
When households save, or refrain from current consumption, they provide the funds via financial institutions for firms to invest and increase their productive capacity. Provided you don’t stash your savings under the bed, (a leakage from the system) you are making it possible for firms to borrow and invest and grow the capacity of the economy.
That’s passive investment in the economy and our collective future.
You can also do the same, individually and proactively!
We can ‘invest’ in our own and our family’s future by devoting some of our resources (time, income,assets, efforts and skill) to education and training to improve our earning capacity or saving to directly and deliberately invest in order to create future wealth.