Chapter 20- Aggregate Incomes Flashcards
GDP per capita
GDP/total population
What does exchange rate show?
-compare how much money the average citizen of different countries make
-purchasing power parity
-constructs the cost of a representative basket of commodities in each country and uses these relative costs for comparing income across countries. The resulting measure is a country’s GDP in PPP adjusted dollars.
GDP per worker
GDP per woker= GDP/nb of people in employment
-better picture of how much each worker produces on average excluding those who do not work
productivity
value of GS that a worker generates for each hour of work
one dollar a day per person povertly line
-measure of absolute poverty used by economists to compare the extent of poverty across countries
what can poor GDP denote?
- poverty often brigs poor health
- there is a srong association between poverty and life expectancy at birth
Alterative to GDP
-UN Human development Index (GDP capita, life expectancy, and measures of eductaion)
3 main reasons for productivity differences across countries
3 main reasons for productivity differences across countries
1) Human capital: workers differ in terms of human capital, which is their stock of skills to produce output or economic value.
2) Physical capital is any good including machines (equipment) and buildings (structures) used for production. Though these inputs are all different, we can aggregate them into a single measure and obtain the physical capital stock of an economy (is the value f equipment, structures and other non-labor inputs used in production) using their dollar value. Workers will be more productive when the economy has a bigger physical capital stock, enabling each worker to work with more (or better) equipment and structures.
3) Technology refers to a set of devices and practices that determine how efficiently an economy uses its labor and capital. In particular, an economy with better technology uses its labor and capital more efficently and thus achieves higher productivity. A country has better technology whe is uses superior knowledge in production (ex: new manufacturing techniques and equipment not available to other econmies) or bacuse it organizes production more efficiently.
factors of production
inputs to the production process
aggregate production function
describrd the relationship between the aggregate GDP of a nation and its factors of production.
-useful for understanding not only how GDP is determined but why productivity varies across countries.
Y=A x F(K,H)
h=efficiency units of labour that the economy uses in production
F=signifies that there is a relationship between K and H and GDP (f is a function of K and H).
A=index of technology. As A increases the economy produces more GDP with the same level of physical capital stock and total efficiency units of labour.
- with more H/K only we will be able to produce more GDP
- subject to law of diminishing marginal product
total efficiency units of labor
the product of the total number of workers in the economy and the average human capital of workers.
H=L x h
L=total number of workers
h=human capital
The equation implies that the total efficiency units of labour in the economy can be increased either if more workers take part in the production process or if each worker becomes more productive.
physical capital
-a greater physical capital stock provides better equipment and structures=produce more GDP
technology
-in the aggregate production function it summarises the relationship between the factors of production of GDP. A better technology means that the economy can generate more output from the same set of inputs and thus increases its productivity for given total efficiency units of labour and capital.
- determines how efficiently an economy’s inputs are utilised
- When technology improves the relationship between GDP and the physical capital stock shifts up. Therefore, for every level of the efficiency units of labour, a better technology implies that the economy will produce more GDP.
- 2 components: knowledge and efficiency of production
- does not correspond to an input that the producer can purchase in the market place.
law of diminishing marginal product
It states that the marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production (holding all factors constant).
