What is the primary effect of investment on productive capacity in an economy?

The primary effect of investment on productive capacity in an economy is that it increases the amount of capital available. When firms or governments invest in physical assets such as machinery, infrastructure, or technology, they enhance the productive capacity of an economy. This additional capital allows for greater output, efficiency, and productivity, as businesses can produce more goods and services using improved machinery and processes.

Investment directly contributes to the accumulation of capital, which is essential for economic growth. Capital refers not only to physical assets but also to human capital, involving improved skills and education for the workforce.

Utilizing existing resources more efficiently is indeed an important aspect of economic functioning, but that typically comes after investment has already increased the capital base. Efficient use of resources can derive from various factors, including technological advancements, better management practices, or innovation, which often follow the initial increase in capital facilitated by investment. Therefore, while using existing resources more efficiently is a valuable outcome, the direct effect of investment is a significant increase in capital available for production.