 Nothing to do with changes in AD  All about changes in AS  Long-run AS curve (LRAS) is the relationship between total supply & the price level in the long run. LRAS curve represents the maximum possible output for the whole economy (its potential output)

 Markets clear in the long run  Output of economy in long run equals maximum potential output as all FOP will be fully employed  LRAS curve is vertical

 No mechanism guarantees maximum potential output will be supplied in the long run  Markets fail – labour market failures -> unemployment likely to persist (sticky wages)  LRAS curve has 3 sections ◦ Perfectly elastic ◦ Upward sloping ◦ Perfectly inelastic

 Labour force  Capital stock

 Increase size of labour force ◦ Increase population size ◦ Increase labour force participation rate ◦ Increase immigration  Increase quality of labour force ◦ Even more important in the long run than size ◦ Education & training – raises human capital ◦ Functional & occupational flexibility ◦ BUT who should provide measures to increase quality of labour force – time lag may cause under- investment

 Capital stock = plant, equipment & machinery used to produce output  Productivity of investment is measured by the economy’s capital output ratio ◦ The amount of capital needed to generate each unit of output  Technological advance increases the productivity of investment as less capital is required to produce each unit of output

 Model of economic growth  ∆Y = s Y k Y = national income s= savings k = capital output ratio

 In order to increase economic growth in the long run, there must be either more savings (s) to fund higher levels of investment or technological advance to increase the productivity of investment and lower the capital output ratio (k)  Low level of domestic savings constrains economic growth in the long run

 Economies can ‘plug’ the savings gap through foreign multinational investment  In increasingly global economy, firms can access capital required for investment from outside their own economy  Link between savings and economic growth in the long run may not be as strong as the Harrod-Domar model predicts

 Also called Endogenous growth theory  Stresses importance of second determinant of growth in H-D model  Knowledge & innovation = key drivers of technological change  How can policies increase the growth of knowledge & innovation?

 What might they be?

 Government subsidy of research & development by firms e.g. nano-technology in the USA  Promoting, supporting & funding science education in schools, etc.  Increasing supply of highly skilled workers through immigration  Tax incentives to encourage innovation

 Inflation  Employment  Balance of Payments

 Rate of economic growth consistent with balance of payments equilibrium is equal to: the rate of growth of exports YED for imports See page 226 for worked example