5 A Model of Production Flashcards
What does a production function tell us?
Standard production function
Define marginal product of capital
Marginal Product of Capital (MPK) is the extra amount of output produced when one unit of capital is added, holding all other inputs constant.
Define marginal product of labour
The extra amount of output produced when one unit of labour is added, holding all other inputs constant.
When can we say an equilibrium is a general equilibrium?
In macroeconomics when we have a capital market, a labour market and a model of the entire economy, we can say the equilibrium we find is a general equilibrium, as opposed to a partial one.
Production function: 5 equations, 5 unkowns
What do the diagrams for supply and demand in capital and labour markets look like?
Table for solutions to the production model
What is the relationship between factor shares of income and the production function? How do we know this?
Derive the output per capita equation
What does the output per capita equation tell us?
Output per capita tends to be higher when productivity is higher.
Output per capita tends to be higher when capital per capita is higher.
What does this output per capita model predict when there is no difference in productivity?
The expected differences in the output per capita between nations are smaller than what is observed.
This is its limitation.
How can we improve this reductive model?
Reject the assumption that productivity is the same across all countries and is equal to 1.
What is the productivity parameter also known as?
Total Factor Productivity or TFP
- Human capital
- The stock skills individuals accumulate to make them more productive, e.g., education and technical training.
- returns to education
- Technologies and technological systems
- Digitisation
- Production techniques
- Transport networks, ports and airways
- Institutions
- Those with more democratic and established legal and social institutions allowed for greater and more secure investment, effective education programmes and stability, allowing production and planning to be long-term and consistent. Olsen (1996).
- Misallocation of capital and labour to inefficient production
“Big bang” vs Gradualism
After the fall of the Berlin wall, economists from the West rush into Russia to drastically reform their institutional systems.
This caused a decline in GDP per capita of 40% over the next decade.
Eventually it slopes back up until its minor dip during the 2008 crash.
China gradually increased its per capita GDP, merely affected by the 2008 crash.
