Lecture Notes: 3 Production Model of GDP

Question 1

National Income Accounting

Answer 1

measurement of GDP using the product approach, expenditure approach, or income approach

Question 2

Y = A F (K, N)

Answer 2

Y = national output K = capital stock N = total employment F = economy’s production function transforming labor and capital to output

Question 3

Total Factor Productivity

Answer 3

A = improvements in tech or econ. conditions in the economy that allows capital and labor to be utilized more effectively Examples: climate, health, education, soil quality, transit infrastructure, social capital and institutions, state of technologies

Question 4

Cobb-Douglass / Work-Horse Model

Answer 4

Y = K^α x N^1−α with α ∈ (0,1) and A > 0

Question 5

α

Answer 5

describes relative importance of capital to labor. the greater α the more effective is capital in comparison to labor and vice versa

Question 6

marginal product of input

Answer 6

describes how output changes when one additional unit of input is used

Question 7

MPk (marginal product of capital)

Answer 7

extra amount of output produced when capital is slightly increased, ceteris paribus if MPk +, then the first deriv of the production fxn WRT capital is +

Question 8

Cobb Douglas FXN properties

Answer 8

1. CRTS 2. output is increasing in inputs and total factor productivity (A). MPk > 0 and MPn > 0 and MPa > 0 3. Diminishing Returns to Input. MPkk < 0 and MPnn < 0. 4. Total factor productivity increases input productivities. Increase in A means increase in MPk and MPn. If overall A increases, then both capital and labor are more productive. MPka > 0 and MPna > 0. 5. Inputs increase other input productivites. An additional worker is more productive combined with capital than without capital. MPnk > 0 and MPkn > 0.

Question 9

Exogenous/explaining variables

Answer 9

N, A, K

Question 10

Endogenous/explained variables

Answer 10

Y

Question 11

Cobb Douglass fxn is represented in 2d by holding ___ and __ constant

Answer 11

Cobb Douglass fxn is represented in 2d by holding K and A constant

Question 12

Movements are caused by changes in ___ variables. Shifts are caused by changes in ____ variables.

Answer 12

Movements are caused by changes in exogenous variables. Shifts are caused by changes in endogenous variables – by variables NOT illustrated on one of the axes

Question 13

the firm will hire both labor and capital until their marginal products are equal to the rental rate and the real wage. WHY?

Answer 13

the firm will hire both labor and capital until their marginal products are equal to the rental rate and the real wage BECAUSE if MPn > MPw, the firm produces more real output than it has to pay for the additional unit of labor In eq, MPn = w and MPk = r

Question 14

If inputs can move freely, then in equilibrium real wages are _____ and all rental rates are _____.

Answer 14

If inputs can move freely, then in equilibrium real wages are IDENTICAL and all rental rates are EQUALIZED. If not, then inputs would move where rental rates or real wages are higher

Question 15

an increase in the supply of an input decreases the equilibrium price but _______ the _____ & ______ of other inputs. An increase in TFP increases demand and equilbrium price of ____ inputs.

Answer 15

an increase in the supply of an input decreases the equilibrium price but INCREASES the DEMAND and EQ. PRICE of other inputs. An increase in TFP increases demand and equilbrium price of ALL inputs.

Question 16

If real w increases, there’s two effects (income and substit) that have _______ effects on __________.

Answer 16

If real w increases, there’s two effects (income and substit) that have OPPOSITE effects on LABOR SUPPLIED.

Question 17

INCOME EFFECT. When real wage w increases….

Answer 17

INCOME EFFECT. When real wage w increases - income effect increases leisure and reduces the Labor supplied.

Question 18

SUBSTITUTION EFFECT. When real wage w increases,

Answer 18

SUBSTITUTION EFFECT. When real wage w increases, the household OC of leisure (not working) increases. Leisure becomes more expensive. So, Sub Effect increases Labor Supplied when w increases.

Question 19

Increase in A or K has what effect?

Answer 19

A↑ or K↑ ⇒ w*↑, N*↑, Y*↑ A↓ or K↓ ⇒ w*↓, N*↓, Y*↓ .

Question 20

National income =

Answer 20

National income = Labor income and capital income GDP = labor income + capital income Y = wN + rK (assuming simple model with no taxes)

Question 21

equilibrium employment and output

Answer 21

Question 22

factor income

Answer 22

Question 23

increase in A

Answer 23

Question 24

increase in amount of capital

Answer 24

Question 25

increase in labor

Answer 25

Question 26

labor demand and labor capital

Answer 26

Question 27

log formulae

Answer 27

Question 28

production fxn: movement vs shift

Answer 28

Question 29

production fxn: prop 2 & 3

Answer 29

Question 30

rental rate

Answer 30

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