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Unformatted text preview: 1 31 Aggregate Production and Productivity, Part 1 32 Agenda 1. Aggregate Production 2. Production Functions 3. Supply Shocks 4. Distribution of National Income 33 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). 34 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 35 Determinants of Aggregate Production The economys 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. 36 Determinants of Aggregate Production Total factor productivity is calculated as: A = Y K L (1 ) Total factor productivity is like a recipe that indicates how to use capital and labor together to produce economic output. 37 Determinants of Aggregate Production A more specific production function that works well in macroeconomics is the Cobb Douglas production function : Y = AK L (1 ) For the U.S. economy it would be: Y = AK 0.3 L 0.7 38 Determinants of Aggregate Production The CobbDouglas production function has: 1. Constant returns to scale ....
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 Fall '08
 Wood

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