Describe how the labor force, the nation's capital stock, and the rate of technical progress contribute to potential GDP growth and labor productivity


Potential GDP growth depends on the growth in the labor force and nations capital stock, in addition to the rate of technical progress. We know that GDP depends on these three factors through a production function. The production function simply expresses how inputs (labor, capital, and technology) are transformed into output.

With respect to labor productivity, we can express growth rate of GDP as:

Growth rate of potential GDP = Growth rate of labor input Ă— Growth rate of labor productivity

Growth in the labor force is equivalent to growth in the labor inputs used to produce GDP. Growth in the capital stock and technology contribute to labor productivity growth. For example, with more machines, an individual worker can be more productive with each hour of work. Likewise, with access to a better machine (improved technology), a worker can produce more in each other of work.

Economics

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Economics

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Economics