Question

Explain for each event whether it changes the quantity of real GDP supplied, short-run aggregate supply, long-run aggregate supply, or a combination of them. Hong Kong firms switch to lower-cost \(3 \mathrm{D}\) printing technology. An ageing population is expected to shrink Hong Kong's labor force. Foreign students in Hong Kong universities get temporary work permits. Firms from mainland China open offices in Hong Kong. The Hong Kong price level rises.

Short answer

3D printing and foreign students' permits increase both SRAS and LRAS. An ageing population reduces both SRAS and LRAS. Offices from mainland China boost both SRAS and LRAS. A higher price level decreases only SRAS.

Step-by-step solution

- Analyze the effect of 3D printing technology

Evaluate how the switch to lower-cost 3D printing technology by firms in Hong Kong influences real GDP supply. Since this technology improvement enhances productivity, it likely shifts both short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) to the right.

- Analyze the impact of an ageing population

Consider the impact of an ageing population on Hong Kong's labor force. A reduced labor force shrinks the productive capacity of the economy, which affects both SRAS and LRAS negatively, shifting them to the left.

- Analyze the effect of foreign students receiving work permits

Examine how granting temporary work permits to foreign students affects the economy. This increases the labor force, thereby enhancing production capacity and shifting both SRAS and LRAS to the right.

- Analyze the impact of firms from mainland China opening offices in Hong Kong

Evaluate how firms from mainland China opening offices in Hong Kong influences the economy. This inflow of businesses boosts production capacity by potentially increasing both capital and labor supply. Thus both SRAS and LRAS shift to the right.

- Analyze the effect of a rise in the Hong Kong price level

Consider how an increase in the price level affects the economy. Typically, a higher price level might shift the SRAS leftwards as production costs increase, making it less profitable to supply the same quantity of goods temporarily. LRAS remains unaffected by price level changes.

Key concepts

short-run aggregate supply (SRAS)

Short-run aggregate supply (SRAS) is the total output that producers in an economy are willing and able to supply at a given overall price level in the short term. The SRAS curve varies with the price level as it reflects the relationship between the price level and the quantity of goods and services firms are willing to produce.
Several factors can cause shifts in the SRAS curve:

• Technology improvements, like the adoption of lower-cost 3D printing technology, can increase productivity and shift the SRAS curve to the right.
• Changes in the availability or cost of labor, such as an ageing population shrinking the workforce, can decrease productivity, shifting the SRAS curve to the left.
• Adjustments in production costs, including changes in wages or input prices. For example, a rise in the Hong Kong price level might increase production costs and shift SRAS to the left in the short run.

The SRAS curve is crucial for understanding how the economy reacts to price level changes and temporary shocks.

long-run aggregate supply (LRAS)

Long-run aggregate supply (LRAS) represents the total output an economy can produce when using all resources efficiently in the long term. Unlike SRAS, the LRAS is not influenced by the price level because, in the long run, prices and wages adjust fully to achieve equilibrium.
Factors that shift the LRAS curve include:

• Technological advancements, like 3D printing, which can enhance the overall productive capacity and shift LRAS to the right.
• Changes in the labor force, such as an ageing population that reduces workforce size, can shift LRAS to the left. Conversely, granting work permits to foreign students can increase the labor force, shifting LRAS to the right.
• Incorporating more physical capital, for example, firms from mainland China opening offices in Hong Kong, which adds to the economy’s productive capacity and shifts LRAS to the right.

The LRAS curve is vertical, showing that in the long run, an economy's productive capacity is independent of price levels. It's pivotal in determining the economy's potential output and long-term growth.

real GDP

Real GDP measures the total value of all goods and services produced in an economy adjusted for inflation, providing a clearer picture of an economy's true growth. Changes in real GDP reflect changes in the economy's productive capacity. Factors influencing real GDP include:

• Technological changes: Increased efficiency and productivity from innovations like 3D printing can boost real GDP by enabling higher output levels.
• Labor force changes: For instance, an ageing population might reduce the labor supply, potentially decreasing real GDP. Meanwhile, allowing foreign students to work temporarily can increase the labor force and real GDP.
• Capital investments: Establishing new businesses or offices, as seen with mainland Chinese firms moving to Hong Kong, can enhance capital and boost real GDP.
• Price level changes: In the short run, a rise in the price level may temporarily reduce real GDP by increasing production costs, but it does not affect long-term productive capacity.

Understanding real GDP is essential for assessing economic performance and designing policies to stimulate growth.