Question

Q. Which of the following factors improves the potential GDP of the country?

Select the correct answer using the code below:

• A. 1 and 2 only
• B. 2 and 3 only
• C. 3 only
• D. 1, 2 and 3

Answer 1

The correct option is D 1, 2 and 3

Explanation:

• Potential GDP, according to OECD, represents the level of output that an economy can produce at a constant inflation rate.
• The further increase can be achieved only at the cost of inflation.
• It is important in this regard to measure the output gap, which is the discrepancy between the actual output and the potential output. It indicates the presence of inefficiencies in the economy
• Potential GDP growth can improve if more people enter the labor force, more capital is injected into the economy, or the existing labor force and the capital stock become more productive.
• An increase in R&D and effective capacity utilization will aid productivity improvements. Formalization of the economy will help the effective participation of the labor force.
• Hence all of the above factors are correct.