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Country's economy - Case Study Example

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The long-run rate of economic growth measures the ability of a nation to progress its living standard. It is believed that even a small change in the long-run growth rate over a period of time will lead to a big advance in the income of an average person. …
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Countrys economy
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Country's economy

Download file to see previous pages... The Figure below shows the economic growth in eight major countries from 1870 to 1996. In 1870, Australia was the richest economy whereas Japan was the poorest economy of the sixteen major economies of that time. In the same year, Australia’s real GDP per capita was almost five times that of Japan. Over the following 126 years, Australia’s economy grew by 1.3% which allowed real GDP per capita to increase by 5 times. However, during the same time, Japan’s economy grew by 2.7% which allowed its real GDP per capita to advance by 28 times. Likewise, Figure 11 also shows the progress made by United States from 1870 to 1996. The long-run rate of economic growth of the American economy was 1.7% which allowed it to raise its living standards by 8 times in 126 years. Therefore, the long-run rate of economic growth is an important measure of the nation’s wealth. (Bernanke, 2003) Figure 1: Economic Growth in Eight Major Countries The output of the economy depends upon the quality and quantity of labor and capital and on their productivity. If the inputs are constant, there is no economic growth in the country. Therefore, one of the inputs has to change along with the productivity for a healthier growth rate. The relationship between inputs and outputs of the economy are reflected in the following equation; which also shows the important factors that affect the long-run rate of economic growth. (Bernanke, 2003) Y= AF (K, N) Where: Y = Output of the economy A = Productivity N = Labor K = Capital Requirements Labor Labor refers to the working force of the nation-be it skilled, semi skilled or unskilled. Labor is one of the most important inputs into the economy. A skilled, educated labor force makes a strong contribution to the other factors of the economy. Along with them, the economy also requires semi-skilled and unskilled labor. However, the most important thing is their constant supply to the market. Similarly, the skills acquire must match the demand of the economy. (Bernanke, 2003) Technological Progress Technological progress refers to the ability of the nation to adapt to update infrastructure and equipments. No country can expect to progress without the necessary infrastructure for specific technology. In our globalized world, the economy needs to incorporate up-to-date technology replacing the obsolete machines to match the increasing demands. The smooth flow with the technological progress allows making the necessary progress. (Bernanke, 2003) Investment Investment refers to the capital requirements of the growing economy. The country needs consistent investment to make remarkable progress and achieve long-run rate of economic growth. Therefore, the nation needs to establish an environment that allows the continuous flow of foreign direct investment into the country and a credit history that allows it to raise the debt when needed. However, there needs to be sustainable amount of debt so that it does not hamper the growth in the long run. (Bernanke, 2003) Productivity It is another important factor for consistent long-run growth rate. This component refers to increase in the efficiency and effectiveness of the same labor and capital inputs. Therefore, if the productivity of the nation increases keeping the labor and capital same, the economy will growth by a certain factor. (Bernanke, 2003) Answer 2 Gross Domestic Output (GDP) is defined as market value of all the goods and services produced by a particular nation within the domestic boundaries. (Amadea, 2011) There are four components of the GDP as shown in the following equation: Y = C + I + G + X Where Y = Total output C = Personal consumption expenditures I = Investment G = Government spending X = ...Download file to see next pagesRead More
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