Topic 6 Flashcards
Long run economic growth- how does it happen
BECAUSEE rising productivity increases the avg standard of living
increasing prodcution of goods and services faster than population frows- increases standard of living of the avg person
what is the best measure of standard of living
REAL gdp per person (real gdp per capita)
What is real gdp per captia
the amount of prodcution in teh economy per person adjusted for changes in the price levelover timee
what can long run econ growth be measured throuh
increases in real gdp per capita
higeher rate of economic growth means?
higher standards of living
What is an economic growth model
explains growth rates in real gdp per capita over the long run
focuses on the causes of long run increase in labour productivity
what determines long run growth
LABOUR PRODCUTIVITY (QUANITTY OF G/S that can be prodcued by 1 worker or by 1 hour of work)
what determines labour productivtiy
1 physical capital: stock of equipment and structures that are used in production
2 human capital: knowledge and skills workers acquire
3 nat res: inoutes into prod from nature
4 tech change: change inn q output a firm can produce given q inputs
Production Function MEANING
Methods for transorming inputs into output
ingredients for a cake, and water, and human skills, and oven to A CAKE
Productino function formula
this function is a fraph or an equation sowing relation bw outputs and inputs
Y=AF(L,K,H,N)
A (level of tech)
F THIS IS THE F(x) part
L abour
K apital (physical capital)
H uman
N at res
break up the production function [A]
Y= AF(L,K,H,N)
THE A (level of tech) directly effects output a LOT
increase in the level of technology directly increases output
break up the production function L K H N
Y= AF(L,K,H,N)
The function F(x) is a function f of l k h n shows how all inputs are combined to prodcue output
if you hold level of technology (A) fixed, the production function will have constant returns to scale
IFYOU CHANGE ALL INPUTS BY SAME % THIS WILL CAUSE OUTPUT TO CHANG EBY THAT %
The production function
2Y = AF(?L,?K,?H?N)
2 TO EVERYTHING
How to use the production function to showcase production/output per worker
DIVIDE THE UFNCTION BY L
Y/L = AF(L/L,K/L,H/L,N/L)
Y/L IS LABOUR PER ONE WORKER
SO accoridng to production function, what determines prodcutivity and growth rate?
Increases in
K/L = more physical capital more productive
H/L = more knwoledge and skill more prod
N/L = more nat res per worker more product
A = more tech more productivity
production function visual
like a radical graph
capital per worker on x axis
output per worker on y axis
per-worker prodcution function (Y/L)
describes the relationship between real gdp per worker (or real gdp per hour worked) and capital per worker or capital per hour worked
AND IT ALSO HOLDS OTHES FACTORS OF PRODCUTION CONSTANT
per owrkers production function (Y/L) _ LAW OF DIMINSHING RETURNS
When you increase one factor of prodcution while keepign others constant, output increases by smaller additional amounts [BECAUSE if you increase machinery per worker but not knowledge or ksill, its pointless]
increase in capital per hour worked leads to diminishing increases in output per hour!!!
what causes per worker production funciton to shift up
ONLY TECH CHANGE!!!
this is the only way eocnomy can produce more rela gdp per hour with same quantity of capital per hour
How is dimishing returns visualized of production function
visually
mathematically
the curve rises steeply but bows down and flattens
mathematically: same increases in x axis (capital per hour worked) lead to smaller and smaller increase in y axis (otput)
since there is diminishing reutnrs to capital, continually increasing real gdp per hour worked can only be sustained when
when there is tech change
when WILL AN ECONOMY EXPERIENCE INCREASES IN SOL
ONLYYYYYYYYYYYYYYYY IF REAL GDP PER HOUR WORKED INCREASES
IN LONG RUN WHEN WILL ECONOMY EXPIERINCE INCREASNIG SOL
ONLYYYYYY WHEN IT EXPERIENCES CONTINUING TECH CHANGE!!!!!!
When economy has a low elvel of capital, an extra unit of capital leads to what
when the economy has a high level of capital, the extra unit of capital leads to what
a large output
a small output
law of idminising returns
