Explain how capital goods contribute to production in a modern economy and how capital is rewarded. [8]
Capital goods play a crucial role in the production process of a modern economy. They are the human-made tools, equipment, machinery, plants, and factories that aid in the production of goods and services. Capital goods enable the efficient transformation of raw materials and labor into finished products.
Capital goods enhances productivity. For example, advanced machinery and technology, improve productivity by automating tasks, increasing efficiency, and reducing human error. Furthermore, capital goods enables specialisation which allow workers to focus on specific tasks, leading to higher levels of expertise and efficiency. This specialization can result in improved product quality and increased overall production.
Capital is rewarded in the form of interest payments, which compensate capital owners for the opportunity cost of investing their resources. Interest payments serve as a reward for capital owners. When someone invests their capital in a business, they expect compensation for delaying their consumption and taking on the risk associated with the investment. Interest payments represent this compensation and act as a return on the invested capital.
