Q. Consider the following statements:

1. More sophisticated and heavy capital goods raise the productivity of an economy.
2. More consumption and production of capital goods is an indication of shrinking of capacity in an economy.

Which of the above is / are correct?
Answer: Only 1
Notes: Only the first statement is correct. Consumption and production of capital goods indicate that the capacity of an economy is expanding. At a particular period, given a level of total output of the economy, it is true if more capital goods are produced less of consumer goods would be produced. But production of more capital goods would mean that in future the labourers would have more capital equipments to work with.