5 A Model of Production

Question 1

What does a production function tell us?

Question 2

Standard production function

Answer 2

Question 3

Define marginal product of capital

Answer 3

Marginal Product of Capital (MPK) is the extra amount of output produced when one unit of capital is added, holding all other inputs constant.

Question 4

Define marginal product of labour

Answer 4

The extra amount of output produced when one unit of labour is added, holding all other inputs constant.

Question 5

Answer 5

Question 6

Answer 6

Question 7

When can we say an equilibrium is a general equilibrium?

Answer 7

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.

Question 8

Production function: 5 equations, 5 unkowns

Answer 8

Question 9

What do the diagrams for supply and demand in capital and labour markets look like?

Answer 9

Question 10

Table for solutions to the production model

Answer 10

Question 11

What is the relationship between factor shares of income and the production function? How do we know this?

Answer 11

Question 12

Derive the output per capita equation

Answer 12

Question 13

What does the output per capita equation tell us?

Answer 13

Output per capita tends to be higher when productivity is higher.

Output per capita tends to be higher when capital per capita is higher.

Question 14

What does this output per capita model predict when there is no difference in productivity?

Answer 14

The expected differences in the output per capita between nations are smaller than what is observed.

This is its limitation.

Question 15

How can we improve this reductive model?

Answer 15

Reject the assumption that productivity is the same across all countries and is equal to 1.

Question 16

What is the productivity parameter also known as?

Answer 16

Total Factor Productivity or TFP

Question 17

Answer 17

• 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

Question 18

“Big bang” vs Gradualism

Answer 18

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.