Question

What is the relationship between i) actual and potential economic growth and ii) labor productivity and total factor productivity? (Kindly explain in details)

Answer 1

1.Actual growth rate is the realized or the current growth rate and is determined by demand side factors like consumption, investment, government spending and net exports.A rise in any of these factors increase AD and actual growth rate.

Potential growth rate is the what the economy can achieve in the long or medium term.It is determined by supply side factors like technological change.If technology improves then long run aggregate supply shifts to the right, increasing the level of potential output.

Actual output is a driver for potential output.If actual output is high,then scope of technological improvement is high and increase in potential growth can be expected.

2.

Labour productivity is a part of total factor productivity.

TFP=labor productivity+capital productivity

Thus,labor productivity and total factor productivity are directly related.If labour productivity rises,then total factor productivity rises and vice versa.