CIE AS SAMPLE ESSAYS

Explain how capital goods contribute to production in a modern economy and how capital is rewarded. [8] 

Capital goods are human-made resources such as tools, machinery, and factories that facilitate the production of goods and services.

Capital increases efficiency. Capital goods, like advanced machinery, allow for faster production processes and reduce the labor required to produce goods. For instance, a car manufacturing plant equipped with robotics can produce vehicles at a much quicker rate than manual assembly.

Capital goods also help expand the production capacity of firms. Factories equipped with modern machinery can produce larger quantities of goods, meeting higher consumer demand and increasing market competitiveness. Additionally, Investment in capital goods can drive innovation. Companies that invest in the latest technologies are often able to develop new products or improve existing ones, which can lead to market expansion and increased profitability.

In a modern economy, capital is rewarded primarily through interest payments. When businesses invest in capital goods, they often finance this through loans. The lenders charge interest on these loans, which is a direct way that capital is rewarded.

A company that uses its capital effectively can generate profits that can be distributed among investors. This profit serves as a reward for the risk taken by the investors who provided the capital.