Essay: Explain what can cause an increase in the long run trend rate of economic growth. (10)

The Long run trend rate of economic growth measures the average sustainable rate of economic growth over a period of time.

The Long Run trend rate will depend upon the growth of productive capacity in the economy and therefore the growth of LRAS. The below diagram shows an increase in LRAS and therefore an increase in potential growth:

Diagram: Long Run Economic Growth

The growth of potential output could increase due to 2 main factors:

• 1. An increase in resources land, labour and capital
• 2. An increase in the efficiency of these resources i.e. improved labour or capital productivity.

Firstly if there is improved technology, e.g if robots were used more effectively in factories, this will enable higher output and lower costs.
An important factor is labour productivity; if there is improved education and training then workers will be more productive and this will increase the LRAS.

If the country had an increase in Raw materials e.g. finding a new source of oil this would increase LRAS.

Also if there is an increase Capital such as investment in new factories and machines LRAS will increase.

The growth rate could increase if there was an increase in the size of the labour force. This could caused by higher population growth or an increase in the participation rate.

The Long run trend rate could be increased by successful government supply side policies. Supply side policies attempt to increase productivity in the economy through greater efficiency and productivity. For example, in the UK Supply side policies have involved privatisation and reducing the power of trades unions. Supply side policies can be either, free market, or interventionist. Privatisation is an example of a free market policy because it increases efficiency by removing the role of government in industries. It is argued the private sector are more efficient because they have a profit motive. This increased efficiency can increase long run growth.