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03+Aggregate+Production+and+Productivity

# 03+Aggregate+Production+and+Productivity - Agenda...

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1 3-1 Aggregate Production and Productivity 3-2 Agenda • Determinants of Aggregate Production • Determination of Factor Prices • Distribution of National Income 3-3 Determinants of Aggregate Production Real GDP is determined by: 1. The amount of the factors of production 2. The production function which translates the factors of production into output 3-4 Determinants of Aggregate Production For the aggregate economy, the factors of production are: 1. Labor ( L ), the number of worker hours, and 2. Capital ( K ), the stock of productive assets.

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2 3-5 Determinants of Aggregate Production For now, assume that L and K are fixed, i.e., L = L –a n d K = K 3-6 Determinants of Aggregate Production • The economy’s production function is: Y = F ( K , L ) – where F represents the function that translates given quantities of K and L into Y. 3-7 Determinants of Aggregate Production • A specific production function that works well in macroeconomics is the Cobb-Douglas production function . Y = AK α L (1- α ) • For the U.S. economy it would be: Y = AK 0.3 L 0.7 3-8 Determinants of Aggregate Production • The A variable is total factor productivity : A = K 0.3 L 0.7 Y Total factor productivity indicates how productive capital and labor are together. Labor productivity indicates how productive labor is for a given quantity of K and equals Y/L.
3 3-9 Determinants of Aggregate Production • Why are some countries rich and others poor? – The production function helps explain differences in national income.

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03+Aggregate+Production+and+Productivity - Agenda...

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