Chapternotes.docVIP

Immediate Macroeconomics Chapter 3: Productivity, Output and Employment Production function (1) Y = AF (K, N) Y: The real output produced in a given period A: Total factor productivity based on technological advancement/ management (Solow residual) ? Allows resources to be utilized more effectively ? Can be measured in long term as it may vary substantially from year to year ? Grew rapidly in the second half of 1990s but grew slowly in the 2000s (Sharp movements due to the change in phrases of business cycles/ measurement error) K: Capital/ utilized capital stock N: Labour (Labour should be discrete but labour is also a measure of time/ working hour) H: Human capital I.e. Total no. of years of formal education received by working age (2) Y = A K0.3 N0.7 Cobb-Douglas production function works well for US economy Interpretations Describe how effectively capital and labour are used Marginal product of capital/ labour can be shown graphically by production function The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing/ decreasing/ constant returns to scale: If we double the tangible and intangible capital then real GDP will double too Diminishing marginal returns/ marginal productivity of capital/ labour differs from diminishing returns: Diminishing returns occur when the marginal product of the variable input is negative MPK is always positive: When K is low it is beneficial to increase capital further Marginal profit per capital/ labour: MπN (Marginal profit per unit of labour) = MRPN ? MCN A firm maximizes profits where MπL = 0 (3) log Y = log A + ? log K+ ? log N Y* = F(λK, λL) = λF(K, L) = λY Hicks-neutral: Technical progress is purely output-augmenting A change is considered to be Hicks neutral if it X affect the labour-to-capital ratio in the products production function but only changes A (4) Y = F (AK, N) Solow-neutral: Technical progress is purely capital and h