Answers may include:

Definition

• Production costs: The expenses incurred by firms in the process of producing goods and services (e.g., wages, raw materials, rent).
• Aggregate supply (AS): The total output of goods and services that firms are willing and able to produce in an economy at different price levels, over a given time period.
• Real output (Real GDP): The total value of all goods and services produced in an economy over a period of time, adjusted for changes in the price level.

---

Explanation/Economic Theory

• A fall in production costs reduces the cost of producing goods and services.
• In the short run, lower costs encourage firms to increase their production because it becomes more profitable to supply additional units at every price level.
• This is represented by a rightward shift of the short-run aggregate supply (SRAS) curve on the AD/AS diagram.
• At the initial equilibrium, the economy is at an output level $Y_1$ and a price level $P_1$.
• With the fall in production costs, SRAS shifts right from $SRAS_1$ to $SRAS_2$.
• The new equilibrium occurs at a higher level of real output ($Y_2$ > $Y_1$) and a lower price level ($P_2$ < $P_1$).
• The increase in real output reflects economic growth in the short run, as more goods and services are produced and made available in the economy.
• The fall in the price level can also contribute to a higher level of real aggregate demand over time, because consumers’ purchasing power might increase (though the immediate effect is seen on the supply side).
• If lower production costs persist, they may lead to improvements in competitiveness of domestic firms in international markets, possibly boosting exports and hence output further.
• Therefore overall, the economy experiences a boost in real GDP due to the lower cost of production, enabling firms to supply more at lower prices.

---

Diagram

1. Vertical axis: General price level (P).
2. Horizontal axis: Real output/Real GDP (Y).
3. AD: Aggregate demand curve (downward sloping).
4. SRAS: Short-run aggregate supply curve, shifting right from $SRAS_1$ to $SRAS_2$.
5. Equilibrium:
   • Initial equilibrium at $E_1$ with output $Y_1$ and price level $P_1$.
   • New equilibrium at $E_2$ with higher output $Y_2$ and lower price level $P_2$.

---

Answers may include: Definition

• Economic growth: An increase in a country’s real output (real GDP) over time, indicating a rise in the value of goods and services produced.
• Technology: Advancements in knowledge, methods, or processes that enhance the efficiency and productivity of labor and capital.

---

Explanation/Economic Theory

• Improvements in technology increase long-run aggregate supply (LRAS), as firms can produce more output with existing resources.
• A rightward shift of the LRAS curve indicates an expansion of the economy’s productive capacity, leading to non-inflationary economic growth.
• Research and development (R&D), investments in human capital, and innovation are channels through which technology progresses, raising the potential output of the economy.
• Greater productivity allows firms to produce goods at lower average costs, potentially lowering price levels and increasing aggregate demand (AD) in the long run through higher global competitiveness.
• Higher economic growth, fueled by technology, can spur positive externalities such as knowledge spillovers, which further increase efficiency across multiple sectors.

---

Diagram

• A commonly used diagram is the AD/AS model, showing a rightward shift of the LRAS curve (from LRAS₁ to LRAS₂) due to technological improvements.
• The new equilibrium with an outward shift of LRAS demonstrates higher potential output (from Y₁ to Y₂) at a stable or reduced price level (from P₁ to P₂).

---

Evaluation

• Short-run and long-run impacts:

  • In the short run, widespread technological adoption can lead to structural unemployment if workers do not adapt quickly to new skill requirements. It can also entail significant initial investment costs for firms.
  • In the long run, improved technology typically increases productivity, lowers average costs of production, and generates sustained economic growth, resulting in higher incomes and potentially higher tax revenues for the government.

• Real-world examples

  • South Korea has invested approximately 4.5% of its GDP in R&D (2019 data), contributing to high-tech industries and stable GDP growth rates above 2% in most years after 2000.
  • China allocated around 2.4% of GDP to R&D in 2020, focusing on technology-driven manufacturing, which helped maintain growth rates exceeding 6% in the decade before the pandemic.
  • Countries with high technological investment (such as Sweden at around 3.3% of GDP in 2021) often report sustained productivity gains, indicating the importance of technology in driving economic growth.
  • However, nations like Nigeria, despite a growing population and rising resource extraction, experience lower growth rates due to limited technological infusion and underinvestment in infrastructure.

---

Conclusion

• Technology is a critical driver of economic growth by expanding an economy’s productive capacity and boosting productivity.
• However, achieving growth solely through technology may be constrained by insufficient investments in human capital, infrastructure, and institutional frameworks. Combining technological advancements with supportive policies can lead to more sustainable and inclusive long-term growth.