C.7 The Standard of Living over Time and across Countries

Question 1

Aggregate production function

Answer 1

An equation that shows the relationship between the inputs employed by firms and the max firms can produce with those outputs

Question 2

Capital-labour ratio

Answer 2

The dollar value of capital goods per unit of labour; measured as the dollar value of capital divided by the total number of workers

Question 3

Cobb-Douglas production function

Answer 3

A widely used macro production f’n that takes the form
Y = AK^(α)L^(1-α)
where,
Y = Real GDP
A = Efficiency index
K = quantity of capital goods available to firms (aka capital stock)
L = quantity of labour

Question 4

Constant returns to scale

Answer 4

A property of production f’n such that if all inputs increase by the same %, z, real GDP increases by the same %

Question 5

Diminishing marginal product

Answer 5

Each additional unit of input (capital or labour) raises output be less than the previous unit

Question 6

Efficiency index

Answer 6

Measures how efficiently the economy transforms capital and labour into real GDP

Question 7

Human capital

Answer 7

The accumulated knowledge and skills that workers acquire from education and training or from life experiences

Question 8

Marginal product of capital (MRK)

Answer 8

The extra output a firm receives from adding one more unit of capital, holding all other inputs and efficiency constant.
MPK = ΔY/ΔK

Question 9

Total factor productivity (TFP)

Answer 9

An index of the overall level of efficiency of transforming capital and labour into real GDP

Question 10

Equations for MPL

Answer 10

MPL = ΔY/ΔL = (1-alpha)*(Y/L)

Question 11

Per worker production function

Answer 11

y = Af(k)
where,
y = Y/L = output per worker
k = K/L = capital-labour ratio

Question 12

Real GDP per capita

Answer 12

Real GDP per worker * proportion of pop that works