In the long run, the level of national income in an economy is determined by its:

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To analyze the statement, we need to consider what determines the long-run level of national income in an economy.
Option 1: 'factors of production and production function.' This option aligns with classical and growth theories: the long-run output (national income) is determined by the available factors of production (labor, capital, technology) and how effectively they are combined in the production function. In the long run, prices adjust and the economy operates at its potential output, which is derived from resources and technology, not from temporary policies or price distortions.
Option 2: 'government budget surplus or deficit.' While fiscal policy can influence aggregate demand in the short to medium term, in the long run the level of national income is determined more by supply-side factors (resources, tech, efficiency) than by the government’s budget balance. Persistent deficits can affect debt and investment, but they do not set the sustainable long-run output level by themselves.
Option 3: 'real and nominal interest rate.' Interest rates influence investment and consumption in the short run, but in the long run, once prices and wages have fully adjusted, the overall level of output is governed by productive capacity and technology rather than by interest rates alone.
Option 4: 'rate of economic and accounting profit.' Profit rates affect investment and business decisions in the short to medium term, but the long-run equilibrium level of national income is not determined by profit rates per se; it hinges on the economy’s productive resources and how efficiently they’re used within the production function.
Overall, the long-run determinant is the capacity side: the factors of production and how they translate through the production function into output. This makes option 1 the correct interpretation of long-run national income determination.

ECN 101 B01-B04 FQ 2025 Homework 1 due October 10

In the long run, the level of national income in an economy is determined by its:

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