L1.3R - Econ 102 Fall 2006 Lecture 1.3 Production functions...

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1 1 Econ 102 Fall 2006 Lecture 1.3 Production functions and TFP 2 Things to learn in this lecture z How the classical model explains growth z How the classical model explains business cycles z Production functions z What is TFP? z How to measure TFP 3 Growth and Cycles z Growth is the underlying trend increase in GDP per person z Business cycles are persistent correlated movements around trend found in almost all economic time series
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2 4 TFP z TFP means total factor productivity z Increases in TFP over time are responsible for economic growth z Fluctuations in TFP are responsible for most of the fluctuations in GDP over business cycles 5 Economic growth z Economic growth is a relatively recent phenomenon: it is responsible for huge increases in the standard of living of those who live in developed countries z Growth is caused by increases in TFP z Economic theory tries to understand the causes of increases in TFP 6 S. Korea is one example of a recent “growth miracle” 10 20 30 40 50 0 10 20 30 40 50 1955 1960 1965 1970 1975 1980 1985 1990 1995 Korea Philippines GDP per person as percentage of U.S. Investment as a percentage of GDP How did S. Korea manage to grow so much faster than the Philippines?
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3 7 Business cycles z Economic growth occurs in spurts z From quarter to quarter, economic variables like GDP and unemployment move up and down in irregular ways z Even though these movements are irregular, the movements between economic time series
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L1.3R - Econ 102 Fall 2006 Lecture 1.3 Production functions...

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