Lecture6_spring09 - Econ100B:MacroeconomicAnalysis 2/5/09...

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Econ 100B: Macroeconomic Analysis 2/5/09 © 2009 Arnav Sheth. All rights reserved. 1 The Theory of Economic Growth continued… Chapter 4 The Cobb-Douglas Production Function ` α measures how fast diminishing marginal returns measures how fast diminishing marginal returns set in ` α ֜ diminishing returns set in earlier ` α ֜ diminishing returns set in later 2 © 2009 Arnav Sheth. All rights reserved. 2/5/09 The Cobb-Douglas Production Function Figure 4.2 - The Cobb-Douglas Production Function for Different Values of α 3 © 2009 Arnav Sheth. All rights reserved. 2/5/09
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Econ 100B: Macroeconomic Analysis 2/5/09 © 2009 Arnav Sheth. All rights reserved. 2 The Production Function ` Labor efficiency (E) measures how high the production function rises ` E ֜ output per worker is produced for each possible value of the capital stock per worker ` for a given level of α 4 © 2009 Arnav Sheth. All rights reserved. 2/5/09 The Cobb-Douglas Production Function Figure 4.3 - The Cobb-Douglas Production Function for Different Values of E 5 © 2009 Arnav Sheth. All rights reserved. 2/5/09 Solow Growth Model ` Now that we have understood the production function ` let’s review a little ` We have this economy ` Has two inputs Labor is augmented by efficiency ` ` The economy is in full-employment ` so “per capita” is equivalent to “per worker” ` Now we start thinking about equilibrium ` let’s rehash an old slide… 2/5/09 6 © 2009 Arnav Sheth. All rights reserved.
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Econ 100B: Macroeconomic Analysis 2/5/09 © 2009 Arnav Sheth. All rights reserved. 3 Solow Growth Model ` Balanced-growth equilibrium ` the capital intensity of the economy is stable ` the economy’s capital-output ratio (K/Y) is constant ` the economy’s capital stock and level of real GDP are growing at the same rate 2/5/09 7 © 2009 Arnav Sheth. All rights reserved. Equilibrium ` To start thinking about equilibrium, understand that: 1. Factor values change each period (K, L, E) 2. Each production function is a snapshot in time ` Conceptually, equilibrium is when… ` …K/L and Y/L are growing at the same rate ` Equivalently, we can say that equilibrium is when… ` …K/Y is constant 2/5/09 8 © 2009 Arnav Sheth. All rights reserved.
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Lecture6_spring09 - Econ100B:MacroeconomicAnalysis 2/5/09...

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