Question

Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?

a) Implement policies to encourage higher levels of immigration.
b) Invest in technology to enhance production efficiency.
c) Reduce working hours to create additional labor capacity.
d) Implement tariffs to limit import competition.

Answer 1

Meet increased export demand at potential GDP and full employment, investing in technology to enhance production efficiency (option b) is the best option. While other methods like immigration policies, reducing working hours, or implementing tariffs might help, they also have downsides such as delay, reduced productivity, or trade conflicts.

Step-by-step explanation:

If the economy is operating at potential GDP and there is an increase in export demand but the economy is at full employment, the ability to increase production of exports is limited by existing resources.


To increase production, the economy can:

• Implement policies to encourage higher levels of immigration, thereby increasing the labor supply.
  
  
• Invest in technology to enhance production efficiency and get more out of existing resources.
  
  
• Reduce working hours to redistribute the available labor more effectively, or create additional shifts.
  
  
• Implement tariffs to limit import competition (though this may lead to retaliation and harm other sectors).
  
  

However, investing in technology seems the most viable solution to enhance production efficiency without altering the labor market conditions.



Immigration policies can take time to have an effect, reducing working hours may decrease overall productivity, and tariffs can be problematic in terms of international trade relations.