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chapter 3

# chapter 3 - Chapter 3 Productivity Output and Employment...

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Unformatted text preview: Chapter 3 Productivity, Output, and Employment Learning Objectives I. Goals of Part 2: The Macroeconomics of Full Employment A) Analyze factors that affect the longer-term performance of the economy B) Develop a theoretical model of the macroeconomy 1. Three markets a. Labor market (this chapter) b. Goods market (Ch. 4) c. Asset market (Ch. 7) II. Goals of Chapter 3 A) Introduce the production function as the main determinant of output 1. Discuss the marginal productivity of labor and capital 2. Analyze supply shocks B) Discuss the determinants of labor demand and supply C) Equilibrium in the classical model of the labor market 1. Full-employment output 2. Factors that change equilibrium D) Unemployment 1. Definitions of employment status 2. Frictional, structural, cyclical unemployment 3. Okun’s Law III. Notes to Fourth Edition Users A) Data and numerical examples were updated B) In Section 3.6, the coefficient on Okun’s Law was reduced from 2.5 to 2, based on recent empirical results Teaching Notes I. How Much Does the Economy Produce? The Production Function (Sec. 3.1) A) Factors of production 1. Capital 2. Labor 3. Others (raw materials, land, energy) 4. Productivity of factors depends on technology and management 26 Abel/Bernanke • Macroeconomics, Fifth Edition B) The production function 1. Y = AF ( K , N ) 2. Parameter A is “total factor productivity” C) Application: The production function of the U.S. economy and U.S. productivity growth 1. Cobb-Douglas production function works well for U.S. economy: Y = A K 0.3 N 0.7 2. Data for U.S. economy—Table 3.1 Numerical Problem 1 gives students practice working with a production function. 3. Productivity growth calculated using production function a. Productivity moves sharply from year to year Data Application An example of the sharp movements in productivity that are possible can be seen by comparing data on productivity for 1995 to data for 1996. Employment grew about the same amount in both years, but in 1995 productivity grew 0.4%, while in 1996 it grew 1.5%. Economists generally believe that it is measurement error, rather than true changes in productivity, that is responsible for these swings during a given phase of the business cycle. As the business cycle changes phases, for example from recession to expansion, there may be large, true swings in productivity. For example, in 1989, productivity grew 1.2%, in 1990 it fell 1.2%, and in 1991 it fell 0.7%. Roy H. Webb addresses the pitfalls in using productivity statistics in his article “National Productivity Statistics,” Federal Reserve Bank of Richmond Economic Quarterly, Winter 1998, pp. 45–64. b. Productivity grew slowly in the 1980s and the first half of the 1990s, but increased in the second half of the 1990s Policy Application Perhaps the greatest source of uncertainty facing policymakers today is trying to figure out the underlying trend in productivity. For a discussion of this issue, see the article “How Fast Can the underlying trend in productivity....
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chapter 3 - Chapter 3 Productivity Output and Employment...

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