notes_macro_ch3

notes_macro_ch3 - MACROECONOMICS Macro Notes G.Karras 2011...

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Macro Notes © G.Karras 2011 MACROECONOMICS Georgios Karras* University of Illinois at Chicago * Professor of Economics; Mailing Address: Department of Economics, University of Illinois at Chicago, 601 S. Morgan St., Chicago, IL 60607-7121; e-mail: [email protected] . Lecture Draft Do not cite without permission
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Macro Notes © G.Karras 2011, p.2 ││ 3 ││ THE PRODUCTION FUNCTION & THE LABOR MARKET 3.1. The Production Function Algebraically, a production function is: ) , ( labor capital ty productivi r multifacto GDP real N K F A Y Production Process GDP Output Labor ( N ) Capital ( K ) Other Inputs
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Macro Notes © G.Karras 2011, p.3 Example: A Cobb-Douglas Production Function 7 . 0 3 . 0 N K A Y     growth labor growth capital growth MFP growth real N K A Y % 7 . 0 % 3 . 0 % % Interpretation: 0.3: labor elasticity; 0.7: capital elasticity % 10 % 10 by Y by A fixed N and K % 3 % 10 by Y by K fixed N and A % 7 % 10 by Y by N fixed K and A
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Macro Notes © G.Karras 2011, p.4 Implication: 7 . 0 income total income labor share labor Y N w 3 . 0 income total income capital share capital Y K r Labor and capital shares independent of K/Y ratio Evidence?
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Macro Notes © G.Karras 2011, p.5
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Macro Notes © G.Karras 2011, p.6
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Macro Notes © G.Karras 2011, p.7
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Macro Notes © G.Karras 2011, p.8 3.2. The Production Function with Respect to Labor Marginal Product of Labor ( MPN ): N Y MPN MPN : how much Y goes up when N increases by one unit The Production Function with respect to labor: Assume A and K are held constant only N is allowed to vary:   7 . 0 3 . 0 7 . 0 3 . 0 N AK Y N K A Y Two properties: (1) positive slope MPN > 0, and (2) curve flattens out MPN is diminishing
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Macro Notes © G.Karras 2011, p.9 0 Y = ( AK 0.3 ) N 0.7 N (number of workers) Y (real GDP) 50m 100m 150m $5tr $8tr $10tr A B C
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Macro Notes © G.Karras 2011, p.10 Property #1: N Y positive slope MPN > 0 ♦ Property #2: curve is concave diminishing
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This note was uploaded on 10/07/2011 for the course ECON 221 taught by Professor Georgioskarras during the Fall '10 term at Ill. Chicago.

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notes_macro_ch3 - MACROECONOMICS Macro Notes G.Karras 2011...

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