Question

What factors are needed to realize the potential economy of a large products system?

Answer 1

There are three main factors that drive economic growth:

• Accumulation of capital stock
• Increases in labor inputs, such as workers or hours worked
• Technological advancement

Growth accounting measures the contribution of each of these three factors to the economy. Thus, a country’s growth can be broken down by accounting for what percentage of economic growth comes from capital, labor and technology.

It has been shown, both theoretically and empirically, that technological progress is the main driver of long-run growth. The explanation is actually quite straightforward. Holding other input factors constant, the additional output obtained when adding one extra unit input of capital or labor will eventually decline, according to the law of diminishing returns. As a result, a country cannot maintain its long-run growth by simply accumulating more capital or labor