Lecture_5

Lecture_5 - Lecture 5 Principles of Macroeconomics Econ 2...

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Lecture 5 Principles of Macroeconomics Econ 2 Winter, 2009
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Tracking the Economy Show housing starts and then existing sales, explain why it is so difficult to track the economy
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Tracking the Economy Tomorrow, (Wednesday): Morris Davis: • 4:30-6:00 • Corwin Pavilion Will discuss Housing, the Financial Mess and the Macroeconomy • More importantly, FREE FOOD.
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Now, back to the program…
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Economic Growth We saw that countries have experienced very different growth We also know that small differences in growth rates matter
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Economic Growth How does growth happen? What prevents growth?
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Economic Growth Average labor productivity is key To understand the role labor productivity plays, Y: output (real GDP) POP: population N: Employment
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Productivity Take output, Y , and divide by population: Y POP This is GDP per capita
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Productivity Take output, Y , and divide by population: Y POP Multiply top and bottom by N, the number of employed workers:
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Productivity Y POP = Y N x N POP Labor productivity Share of population employed
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Labor Productivity and Real GDP per capita
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Employment Share
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Productivity Since the share of the population with jobs is bounded above, The main mechanism for economic growth comes through labor productivity
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Economic Growth Production function: Y = f ( K , L , A ) Y = output (real GDP) K = amount of physical capital L = amount of labor A = the state of technology f ( ) = a function relating inputs to output
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Production Function with Fixed Capital Output, Y Labor, L
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Production Function The shape of the previous production function reveals: A) Decreasing returns to scale B) Increasing returns to scale C) Diminishing marginal product of labor D) Diminishing marginal product of capital E) Constant opportunity cost of labor
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Production Function The shape of the previous production function reveals: C) Diminishing marginal product of labor
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Production Function Y = f ( K , L , A ) Assumptions Diminishing returns (marginal product) to labor, L : Holding fixed other inputs, a unit increase in L produces less output than the previous unit
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Production Function with Fixed Capital Output, Y Labor, L The shape shows diminishing returns to labor
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Production Function with Fixed Capital Output, Y Labor, L The shape shows diminishing returns to labor 1 Unit 1 Unit
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Production Function with Fixed Capital Output, Y Labor, L Slope: shallow Slope: steep
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Production Function Y = f ( K , L , A ) Assumptions Diminishing returns (marginal product) to capital, K : Holding fixed other inputs, an increase in K produces less output than the previous unit
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with Fixed Labor Output, Y Capital, K The shape shows diminishing returns to capital
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Lecture_5 - Lecture 5 Principles of Macroeconomics Econ 2...

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