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

These are the important factors that explain increases in real GDP per capita in the long run :

• Accumulation of capital stock, Investment
• Increases in labor inputs, i,e hours worked
• Technological advancement
• Income
• Consumption
• Human Capital

Real GDP per capita measures the economic growth of a country including these factors. Economic growth accounting measures the contribution of each of these three factors to the economy. Thus, a country’s growth can be accounted for  different share of  growth comeing from capital, labor and technology.

Accumulation of capital Stock :- when there is an increase in  investment of the capital stock (adding real buildings & equipment), the activities of labor become more productive thus generating more output per worker and raising real GDP

Increase in Labor Inputs : - Labor productivity is the value that each employed person creates per unit of his or her input. when efficient of labor increases , it will lead to produce more goods in less time.

technological advancement is a combination of invention—advances in knowledge—and innovation, which is putting those advances to use in a new product or service or manufactutre other one.

Human capital is the knowledge from education, experience, skills, and expertise that the average worker or labourer in an economy possesses. Generally,the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity.

It has been shown, both theoretically and empirically, that technological progress is the main important factor of economic growth. when we hold  other input factors constant, the additional output obtained when adding one extra unit input of capital or labor will eventually decline, according to the law of diminishing returns. Therefore, a country cannot foster long-run growth by simply accumulating more capital or labor. Therefore, the driver of economic  growth has to be technological advancement.