Explain how investment in research and development (R&D) can help to increase the long-run growth rate of an economy

AQA A-Level Economics Paper 2 June 2021

Extract E (line 14) states: ‘Investment in R&D has been an important driver of economic growth and industrial progress.’

With the help of a diagram, explain how investment in research and development (R&D) can help to increase the long-run growth rate of an economy. (9 marks)

1. Economic growth refers to an increase in real GDP.
2. Long-run economic growth refers to the rate of increase in the productive potential of an economy.

1. The government might subsidise firms' investment in research and development (R&D).
2. As firms invest in R&D, they will be able to find ways to innovate.
3. Innovation means that firms will find new ways of producing goods and services.
4. As the newer methods will be more productive, more output can be produced per hour with a given input (factors of production).
5. As productivity increases, the productive potential of the economy increases, as shown by an increase in the long-run aggregate supply curve.
6. This means that the long-run growth rate of the economy increases.

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