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
Aggregate demand is the same as
How to draw aggregate supply/demand graph
Real gdp
In the Y axis its the price elvels and in the x axis its the ouput (real gdp)
LRAS why is it veritcal
in the long-run, the potential output an economy can produce isn’t related to the price level. There are only two things that matter for potential output: 1) the quantity and the quality of a country’s resources, and 2) how it can combine those resources to produce aggregate output.
Where is current gdp located in the Aggregate demand and supply graph
where is long run
The GDP is where the SRAS and AD intersect
it is the potienal gdp
What happnes to aggregate supply during a reccsion/expansion and what bsout long run
what about aggregate demand
it will shift to the right because input prices decrease, wages stay the same (due to high unemloemynt)
recsionaary gap: people lose job, high unmeloemyn and the cost of business falls whcih mean profit increases and therefore SRAS shifts to teh right
during inflationary gap, more peple get hired, lower unempleomynt so busineses increase wage and cost of business increses therfore profit decreases and SRAS decrease s to teh right
it iwll shift to the left for expaion due to higher costs and higher wages
in the long run it is not impacted by recession and expansinos its just chaing shifts due to signifcatn impact to technology and capacity
Aggregate demand
during a recession aggregate demand shifts to the left
During an expasion aggregate demand shifts to the right
What is output gap and how to calculate
The output gap is the percentage difference between actual aggregate output and potential output.
Output Gap = ((actual aggregate output-poteitnal)/ potienal ) *100
What is self correcting economy
An economy can fix itself in the long run wihtout government intervention
self-correcting, or self-stabilizing, economic system will return to equilibrium without any assistance from the monetary or fiscal authorities
The economy is self-correcting when shocks to aggregate demand affect aggregate output in the short run, but not the long run.
Drawing lableed grapgh when there is an inflationary gap
also imagine now your in a recessionary gap and the government wont do anything
Since you are in a recessary gap what happens?
during an inflainary gap we have to shift left SRAS back to make i tmatch with AD and LRAS
during a recessionary gap:
we have to shift AD left to make it match with SRAS and LRAS
First you would shift Aggregate demand to what itis now, then since aggregate demand shifted eft and the government wont do anything tos hift aggerate demand
the aggregate supply would increase because wage are lower and input costs are lower threofre increasing profits and icnreasing supply
