Capital is developed through investment (something purchased with the belief that it will generate income or create a future financial benefit). In order to have capital goods, a society must forgo the production of consumption goods such as food or clothing. However, as people cannot stop using consumption goods altogether and spend all of that money on capital investment, people must instead save money over time to accumulate enough money for the large up-front capital cost. Resources must be used to produce capital, some of which may not immediately increase the productive capacity of an economy. This is the reason investment is important. An investment uses resources for something that does not result in an immediate increase in economic output but will over time increase economic growth. There is an opportunity cost or trade-off for that investment: the amount of current production given up now to have more in the future. For example, a company might invest in new delivery trucks instead of increasing its production. In the short run, the company has spent money without getting more revenue. However, when the company can finally afford to increase production, it will be able to deliver the larger quantity of the product because it has the extra truck capacity.
Human capital investment can be formal or informal. Formal investments include schooling at all levels, from primary education to post-secondary study. While tuition expenses or the costs paid to run schools are often considered the most significant cost of education, the largest cost is really the value of the student's time. That time could be spent working and making money if the student were not in school, so these lost wages should be factored into the cost of education. However, more education is correlated with higher average earnings in the future, so the student's lost wages can be recouped later, justifying the cost of going to college.
Informal training can occur on the job. When workers first start at a job, they need to learn the skills necessary to perform their work. In addition, other workers may be pulled away from their own work to help the new employee develop skills. Therefore, this is again an investment in human capital: current production is being given up in order to gain more in the future.
Technological progress comes from investment, something purchased with the belief that it will generate income or create a future financial benefit. In this case, current production must be given up by shifting some resources from producing goods to researching and developing new technologies. Some of this research may pay off, and some may not. However, having new technologies makes an economy able to produce more in the future; thus, it is worthwhile to give up some production today to make that possible. The rate at which an economy's output per person grows is tied directly to finding the most efficient ways to produce goods and services.
An important incentive in the development of new technology is a patent. A patent is the exclusive right of an inventor to use (or allow others to use) their invention, which creates a temporary monopoly, typically 20 years from the time of submission for the patent. The protection given by patents makes it more worthwhile for researchers and developers to invest in creating new technology because it allows them to be the sole beneficiary of the results of their work. No one can simply copy their technology. Having patents as part of an economy encourages more research and development and leads to faster economic growth. This is a major factor in the development of pharmaceuticals, as the investment of both time and money required to develop and test a new drug can be immense. However, with the promise of being the only company to sell the new drug for a period of time, pharmaceutical companies are willing to make these investments because they trust that they will be able to recoup their costs.
Natural resources can be renewable or nonrenewable. For example, trees are a renewable resource. Once trees have been harvested, more can be planted to take their place. However, it is important to consider the amount of time it takes for trees to mature in order to properly manage forests. If managed well, forests can continue to provide lumber to an economy year after year. Developing better ways to manage renewable resources is an important way to improve an economy's rate of economic growth.
Nonrenewable resources include fossil fuels such as oil and coal because they take billions of years to redevelop. Once these resources are used, they are gone. The overuse of nonrenewable resources may cause future output to decline, leading to a slowing of economic growth. If a country's supply of fossil fuels begins to run out, it will have to either use less or buy more from another country, both of which indicate a decrease in the country's output. Because this resource is not renewable, that decrease in output can only be recouped through replacement by a new product developed through technological advances.