What does "guns and butter" refer to?

Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's economic growth.

In macroeconomics, the guns versus butter model is the classic example of the production possibility frontier. It models the relationship between a nation's investment in defense and civilian goods. In this model, a nation has to choose between two options when spending its finite resources. It can buy guns, butter, or a combination of both. This relationship represents a country's choices between defense and civilian spending in more complex economies.

The "guns or butter" model is generally used as a simplification of national spending as a part of gross domestic product (GDP). The nation must determine the ratio of guns and butter that best meets its needs; its choice is partly influenced by the military spending and military stance of potential opponents.

In state-run economies (where GDP is controlled by a central planning authority or the government), as well as nations with consistently stagnant or declining GDP, the "guns and butter" model becomes a reality.

To learn more, read Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade.

This question was answered by Vijaianand Thirnageswaram.