Tuesday, 20 December 2011

Causes of Long-Run Economic Growth (Macroeconomics)

I'm fully aware that there is already about a post about economic growth, however i want to use this one to focus in specifically on economic growth in the long run. Long run economic growth isn't so dependent on aggregate demand changes, but a lot more dependent on changes to the long run aggregate supply curve. A shift the the right of the LRAS curve is a sign of long run economic growth.

Increases in LRAS on a diagram resemble an increase in the economies capacity to supply goods and services, and for this increase to happen there needs to be there needs to be either an increase in the quantity of the factors of production or an increase in the quality of them. The most important factor of production is undoubtedly the labor force, so therefore these are what i'll focus on.

There are few ways to increase the quantity of the labor force. First, increasing the size of the population. This is difficult to achieve artificially as it is influenced a lot by social and cultural factors. The second way is to increase the labor force participation rate. This is a measure of the proportion of the population able to work and either in employment or actively seeking it. Changes to the taxation and benefit system can influence this by making it more appealing for people to actually start seeking work and get into employment. The final way is to increase the flow of migrant workers, better known as immigration. Joining groups such as the EU allows free-er movement of labor among countries which can increase the population. However, immigration may only be temporary and therefore there may be no long-term increase in the productive capacity.  

It is also possible to improve the quality of the labor force. The first method is through education and training. It improves each workers productive potential allowing each worker to make more due to the better knowledge and skills gained through the education. As economic growth occurs, economies tend to move away from primary and secondary industries and onto tertiary industries. It is important to equip the population with the skills to take part in the tertiary sector so the economy can complete the transition away from primary and secondary sector industries.

There we go.. to summarize: The quantity or the quality of the factors of production are required to increase for the economies productive capacity to increase which then causes economic growth in the long run. Thanks for reading.


  1. Great article. Although this is a theoretical example, it very much makes real life sense. Although an increase in one factor shifts LRAS to the right, I feel as though all of these factors need to combined in order to cause an increase in the productivity of the country. A great example of this would be to increase the youth participation rate in the labor force. For example, instead of giving a 22 year old a 40+ hour internship, the employer should find 2 students and have them each work 20 hours.

    This should cause a long run increase of human capital between the country's workers and increase the labor force participation rate. Plus, the graduates will have more money in their pockets, which is crucial to the operations of the economy.

    I deal with these issues a lot in my research and I also tutor students on a daily basis. Check out the Errant Academy at http://www.errant.ca for more information.

    Great blog!

  2. Thanks for the comment David! I see where you're coming from, obviously all economic theories are just that: theoretical and your input here is very helpful - so thanks!

    I've had a look at your site, looks very good!