Question

Please discuss the important factors in explaining increases in real GDP per capita in
the long run. Which factor do you think is the most important? Why?

Answer 1

Ans : Increase in Real GDP per capita which implies incrase in output over a long period of time is translated into economic growth.In the short run changes in Aggregate demand (AD) cause a shift in the AS curve and the changes occur in the price level and employment

Only when the increase in population is less than the increase in the production of goods and services, real GDP per capita increases.

Factors that cause increase in real GDP per capita in long run:

• The quantity and quallity of human resources: Long run growth occurs only when the potential GDP is increased which happens only when human resources through their increased productivity or skills can help the economy to shift its Long run aggregate supply (LRAS) curve. Productivity is increased through better education and health levels so that an individual can produce or contribute more to the national income. Only when the potential resources are increased, Long run growth occurs.More investment in terms of health, education can increase the real GDP.
• The supply or the stock of capital goods: Capital goods like machines, tools etc.which are used to manufacture other consumer goods also determine the productive level of the economy. These goods' stock in the long run determine the LRAS curve forthe economy. If their levels increase only then LRAS shift causing the productive capacity to outgrow and increase the potential GDP level and the production possibility frontier (PPF) to shift rightward.
• Technology: Technology change describes the change in the set of feasible production possibilities. It has ability to increase the amount of output an economy can produce, even if the level of inputs remain constant. New technology or the new and efficient ways of producing more goods and services helps the firms in the market to stay competitive and the competitive advantage is provided using efficient technology. Advances in technology creates an increased level of productivity, which shifts the PPF and LRAS is shifted and long run real GDP is increased.
• Government Activity: Government policies or activiy has a direct effect on the long run growth. Examples of government activity are:

1. Investment : By investing in the infrastructure, communication, health etc. government can help to stimulate economic growth by meeting the needs of increasing population.
2. Fiscal Policy: Changing the tax structure, regulation, red tapism etc can boost the FDI which will improve the investment androductive capacity of nation will be enhanced.
3. Monetary Policy : By changing the interest rates which impact the price level in the economy in short run, these short run changes form the basis of long run expectations of interest and the price level, central bank can regulate the liquidity in the economy which further translates into long run expectation and determune the level of long run real GDP.

The most important factor according to me is the technological change which can help to maintain the long run Real GDP Per capita growth. Technological changes better explain the productivity capacity of the economy. It is the technological progress and the innovation that are responsible for the rapid growth of the economies. Empirical evidence suggest that the technological progress was responsible for the transformation of growth of developed economies in the past. Ideas, innovation, technology are responsible for the modern growth of the economies. An example is Japan; Japanese economy has been able to grow inspite of low quantity of natural resources only due to the innovation and technological progress, which is responsible for the Long run increase in the GDPgrowth of Japan.