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Factors to Determine Potential vs Economic Growth - Term Paper Example

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The paper "Factors to Determine Potential vs Economic Growth" focuses on the distinction between potential and economic growth and main factors to determine each term. It is through the growth in economies that nations prosper: their people have better jobs, higher income, more access to goods and the overall standard of living improves…
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Factors to Determine Potential vs Economic Growth
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Download file to see previous pages Take a look at an economy’s business cycle showing the potential and the actual growth. It can be seen that there are some discrepancies in the actual and the potential.
The Potential growth of an economy is the function of the supply-side factors which determines the number of resources in the economy. Potential growth in the short term can be increased by a different set of factors, other than supply. But in the long run, aggregate supply needs to increase. The Long Run Aggregate Supply curve can be shown as a vertical line in the graph. This figure depicts a yearly increase in the potential output of an economy, which consequently pushes the LRAS to over to the right also. It must be noted also that the progressive increase in Real GDP results in equitable increases in the rightward shift of the LRAS. So what causes the shift in the LRAS?
First of all, the labor force can be described as all the people, 16 years of age and above, who are either employed somewhere or are actively seeking employment (Labour force, 2005). Retirement age also affects the number of employable people in the market.
The size of the labor force is not simply the size of the population. Different factors affect the size and quality of the labor force.
The birth rates and the death rates in a country play a major role in determining the size of the available workforce, and also for making predictions for the future. For example, India, the second most populated nation of the world, has a steadily increasing birth rate, which predicts that the nation has and will have a surplus of available labor. Contrarily, most nations in Western Europe, for example, Switzerland, have a decreasing birth rate, displaying the nation is likely to face a labor shortage.
To match these, immigration plays a very important role. The chart displays the dependence that developed economies have on the developing world, esp. Asia, to fulfill their labor gaps. ...Download file to see next pagesRead More
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