Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?

In order to analyze the given situation, it is important to first understand the constraints the economy is facing. Potential GDP refers to the level of output an economy can produce when all its resources (such as labor, capital, and materials) are being used efficiently and fully. Full employment means that all able and willing participants in the labor market have jobs and there is no cyclical unemployment.

When export demand increases, it implies that the foreign demand for domestic goods and services has risen. In other words, residents of other countries are now seeking to buy more of the domestic production. This creates an opportunity for the economy to expand its exports.

Given that the economy is already at full employment and potential GDP, the increase in output cannot be achieved by simply increasing the utilization of existing resources, which are already being fully used. There are a few possible ways to increase export production: 1. Increase productivity: The economy may invest in new technologies or techniques that enhance the productivity of its resources (such as labor and capital). By increasing productivity, the output per unit of input can be increased, thereby allowing the economy to meet the increased export demand. 2. Reallocate resources: The economy can redirect resources from less productive sectors to more productive sectors or areas that have a relative advantage in producing the desired exports. It would involve a change in the composition of the output, favoring the production of goods with higher export demand while reducing the output of other goods. 3. Increase the supply of resources: In the long run, the economy could invest in expanding its resources, such as attracting more investment in capital goods or stimulating labor force participation, which would allow it to increase output beyond its current potential GDP level. 4. Importing intermediate goods: To boost export production, the economy may rely on the importation of intermediate goods (such as raw materials, semi-finished products) and value-added services, which could be incorporated into the production process and, in turn, increase its exports.

In conclusion, the economy can increase its production of exports despite being at potential GDP and full employment, by focusing on ways to enhance productivity, reallocating resources, expanding the supply of resources, or importing intermediate goods to increase export production. Each of these options has its own implications on the economy's growth, distribution of income, and trade balance, which would need to be carefully considered by policymakers.