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Unformatted text preview: 1 3-1 Aggregate Production and Productivity, Part 1 3-2 Agenda 1. Aggregate Production 2. Production Functions 3. Supply Shocks 4. Distribution of National Income 3-3 Determinants of Aggregate Production • Real GDP is determined by: 1. The amount of the factors of production , and 2. The production function which shows how firms transform factors of production into output of goods and services through the application of technology (or productivity). 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. • Technology ( A) determines the productivity of the factors of production. 2 3-5 Determinants of Aggregate Production • The economy’s production function is: Y = A * F ( K , L ) – This shows how much output ( Y ) can be produced from given amounts of capital ( K ) and labor ( L ) and from a given level of technology ( A ). – The parameter A is a scalar and represents total factor productivity or the effectiveness with which the factors of production are used. 3-6 Determinants of Aggregate Production • Total factor productivity is calculated as: A = Y K α L (1- α ) – Total factor productivity is like a recipe that indicates how to use capital and labor together to produce economic output. 3-7 Determinants of Aggregate Production • A more 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 Cobb-Douglas production function has: 1. Constant returns to scale ....
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This note was uploaded on 10/18/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.
- Fall '08