Midterm Topic 3 Flashcards
Total Factor Productivity
A, or the variable that expresses any improvements in technologies or economic conditions in the economy that allows capital and labor to be utilized more effectively. (how well labor and capital are utilized to produce greater amounts of output).
Potential factors of TFP
- Geography (climate, land/soil quality, health, coastal access)
- Institutions (civil liberties and social capital, openness to trade, education)
- Other (state of technologies, infrastructure (transportation), terms of trade/commodity prices.
the exponent in Cobb-Douglas
relative importance of capital to labor.
marginal product of an input
how output changes when one additional unit of input is used
Property 1
constant returns to scale. Doubling all inputs results in doubling output. property is also referred to as “replication property”
Property 2
Output is increasing in inputs and total factor productivity. [MPK> 0, MPN >0, MPA>0]
Property 3
diminishing returns to an output.
adding one input increases output (prop 2) but at a diminishing rate (prop 3)– illustrates effects of “crowding”
mathematically, first derivative of the marginal product of labor / capital (also second derivative of production function) is negative. MPkk<0 MPNN<0
Property 4
total factor productivity increases input productivities–increase in total factor productivity increases both the marginal product of capital (MPK) and the marginal product of labor (MPN).
MP KA>0 MP NA>0
Property 5
inputs increase other input productivities.
MP NK >0 MP KN>0
exogenous variables in production function
A, N, K
endogenous variables in production functoin
Y
movements in the production curve
caused by changes in exogenous variables that are illustrated on one of the axes.
shifts in production curve
caused by changes in exogenous variables that are not illustrated on one of the two axes.
real wage, w
expresses worker’s compensation per unit of labor in terms of real goods and services
w = W/P
(W is nominal wage, or monetary compensation per unit of labor and P is price level of goods and services)
equilibrium, profit maximizing conditions
MP N = w and MP K = r.
household labor supply
tradeoff between leisure (f) and consumption for which the household requires labor income.
constraints of household labor supply
- consumption constraint: expenditures of consumption are equal to labor income
- time constraint of 24 hours
budget constraint: x=24w - wf
income effect
change in opportunities. illustrated by the change in the area under the budget line.
substitution effect
change in opportunity cost. illustrated by the change in the slope of the budget line.
Country B enjoys greater GDP per capita than country C if…
- A B > A C
2. k B > k C
GDP per capita
Y / N
fundamental measure to assess the standard of living across different countries in monetary terms–with respect to the production of goods and services and income. not a universal perfect measure.
(Other measures of standard of living: health and life expectancy, opportunities in life/access to institutions, distribution of income)
labor demand
follows firms’ profit maximization problem in perfectly competitive markets taking output and input prices as given
labor supply
derived from households’ utility maximization problem.
causes of GDP growth
input growth or factor productivity growth
causes of GDP per capita growth
differences in total factor productivity and capital per capita
