Lecture 16 Flashcards
GDP per capita and cobb douglas production function, and what do the expoenents represtn
GDP per Capita: GDP/ Labor (population)
Cobb Douglas production function: Y=AK^aL^b
The expoenents alpha and beta repersent the ouput elasticity
The Cobb-Douglas production function is a mathematical representation used in economics to describe the relationship between inputs (usually labor and capital) and output in a production process
Sustained economic growth occurs only
Sustained economic growth occurs only when the amount of output produced by the average worker increases steadily.
Saving rate
Saving rate = income – consumption
What is the key souce of economic growthand how to calcualte
Productivityz: is a key source of econonmoic growth:
Labor productivity
- Labor Producvitity (often referred to as produvitiy): is the ouptuer per worker
labor productivity, you would divide the total output by the total number of labor hours.
What explains productivtiy growth
The goveremnt can influence 1 and 2 but not 3 so much
1) Icreases in physical capital
- Physical capital: Human – made resources, such as building and machines
2) Increases in human capital (You give them skills)
- Human capital: the improvement in labor created by the education and knowledge embodied in the workforce
3) Technological process: an advance in technical means of production or goods
What is ouput per worker = to?
Remmebr y = AKL
So when we are tryign to find L, we have to divide everything by L
so Y/L = A/L * K/L
Is detemined by capital / labor + etc
Diminsihing returns ot physical capital
Diminishing returns to physicla capital: holidng the amount of human capital per woker and technogligy fixed, each amoutn of increase to physical capital per woekrs leads to a smaller icnrease in productivity
Human capital per worker
- Human capital per worker : refers to level of education and skills
How can diminsihing returns disappear
- Diminishing returns may disappear if we increase the amount of human capital per worker or improve the technology, or both,
Growth accoutning
estimaines of the contriubtion of each major factor in the aggregate production function to economic growth
it estaimes how much of each major factor in the y=klt contriubte to eocnomic growth
Total factor rpodcuvitiy:
Total factor productivity: the amount of output that can be produced with a given amount of factor inputs
The role of goverment in promoting economic growth
Subsidieis to eduction
subsidies to inffrassutruce
Subsidies to (R&D)
Mainting a relai ble financial system
Government policies (Ex. subsisiudes to edcuation, infrasiujre protection of property rights etc.)
saving and investing spending
education
Research and devleopemtn
Convergence hypothesis:
Convergence hypothesis: international differences in real GDP per capita tend to narrow over time. When your poor you grow fast but when your rich you grow slow
Example of cobb Douglas what doesthis mean:
Y=50(K^0.7)L^0.5
Phyical capital:
This means that our elasticity of phsyical capital is 0.7
so this means ouput will increase 0.7% for a 1% increase in physical capital
Labor:
Ouput elastictity will increase 0.5% for every 1% increase in labor
Measure of Returns for COBB douglas production function
Illustration of dimsing returns
and scale of returns
what if a = 07 and b=0.5
and what does it tell us on the grapgh?
They indicate change in ouput resutling from a change in labor or capital. Example a=0.6, a 1% increas ein lbaor, holding capital constant would lead to a 0.6% icnrease in output
Illustratinion of diminsihing returns:
if alpha and beta independently are less than one it indicates diminsihg returns to thier factor . SO the fact that we have 0.7 tells us we have diminsihg returns to capital and diminsihing returns to labor to labor which is 0.5
This tells us that if we were to draw our grapgh, its going to increase less and less every time if we draw for labor or capital
Scale of returns: The sum of a and b indicate returns to scale
if thier sum is equal to 1: the production funtion has constant returns to scale
greater than 1: increasing returns to scale
Less than one: decreasing returns t scale
