long run economic growth

Long-term economic growth comes from increasing the quantity and quality of the factors of production in the economy. Growth is determined by the capacity of the economy to increase output and this is determined by the rate of growth of productivity of both capital and labour.

An outward shift in the long run aggregate supply curve for an economy shows an increase in potential output.

Natural Resources

Some countries grow because of rich natural resources of land. Saudi Arabia has exploited its oil reserves. The UK, too, is rich in natural resources. North Sea oil contributed up to 2-3% a year in the 1980s to national income although this has declined in the 1990s. Exploitation of natural resources is one pathway to economic growth although much depends on the market value of these finite resources.

Labour Resources

Labour is an important source of growth. An increasing population can boost growth, but that may not mean that income per head is growing. The main sources of growth per head of the population are: Increasing the quality of the workforce, through better education, training and experience, increases the value of human capital and makes workers more productive.

Making better use of workers involves moving workers into more productive industries or bringing into the workforce more women who had wanted to work, but were denied the opportunity by legal, economic and social pressures.

Capital Resources

Increasing the stock of capital and making more efficient use of it is another source of growth. Equipping workers with better machines is likely to make those workers more productive - each worker will be able to produce more in the same time. It is perhaps not surprising that Japan, has one of the highest growth rates in the post-war period, and the best capital investment records.

However the economic downturn and recession in Japan since the late 1990s has taken the shine off its growth performance. The economy is now suffering from structural excess capacity in many industries because of over-investment and a lack of effective aggregate demand.

But investment in itself is not enough to produce growth. If Britain today invested large sums in declining industries, such as shipbuilding and steel making, then that investment would be largely wasted.

Productive Potential

One of the main long-term economic objectives of the current Labour government is to raise the economy's productive potential and therefore provide a platform for faster economic growth in future years. For this to happen the economy needs to achieve a higher level of investment in new capital and new technology. And the quantity and productivity of the labour force also needs to increase over time.

New Era Economists in the United States believe that their economy is entering a period of faster long-term growth because of the dynamic effects of a significant increase in investment in information communication technology over the last ten years. Productivity growth is impressive and unemployment is low - these factors are causing an increase both in aggregate supply and demand.