Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which factors are key to determining potential output in the economy?

1. Total spending by consumers

2. The availability and productivity of resources

3. Government intervention policies

4. Trends in global markets

The correct answer is: The availability and productivity of resources

The key factor in determining potential output in the economy is the availability and productivity of resources. Potential output refers to the maximum level of economic activity that an economy can sustain over the long term without increasing inflation. This concept is fundamentally tied to the quantity and quality of the inputs that contribute to production, which are labor, capital, land, and entrepreneurial ability. Availability relates to how many resources—including human labor, machinery, and natural resources—are accessible for production. If an economy has abundant resources, it can potentially produce more goods and services. Productivity, on the other hand, refers to how efficiently those resources are used. Higher productivity means that an economy can produce more output from the same amount of inputs, thus enhancing its potential output. While total spending by consumers, government intervention policies, and trends in global markets can influence the actual output and economic performance, they do not directly affect the economy's capacity to produce goods and services over the long run. Therefore, it is the factors of resource availability and productivity that are central to determining what the economy can potentially produce.