Lec4 - Finance 101: Monetary Economics & the...

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Unformatted text preview: Finance 101: Monetary Economics & the Global Economy Lecture 4 Productivity and Output Prof. Hnatkovska Fall 2011 FNCE 101 - Hnatkovska - Lecture 4 2 Outline Determinants of production Capital and labor productivity Cobb-Douglas production function Growth accounting FNCE 101 - Hnatkovska - Lecture 4 3 Readings ABC, chapters 3.1 and 6.1 ABC, Appendix A Practice problems ABC chapter 3 Review questions 2, 3 Numerical questions 2, 3a Analytical questions 1 ABC chapter 6 Numerical questions 2, 3, 4 FNCE 101 - Hnatkovska - Lecture 4 4 FNCE 101 - Hnatkovska - Lecture 4 5 Determinants of production Factor inputs economy's physical capacity to produce Labor or human capital Physical capital (factories, machines, etc.) Others: land, materials, energy Technology how effectively factor inputs are used Blueprints (how to make goods) Managerial knowledge / organizational capital Education/skills not included above Weather, FNCE 101 - Hnatkovska - Lecture 4 6 Determinants of production Business cycle fluctuations Capital stocks are difficult to adjust in short-run Most changes in production over the business cycle come from changes in labor input and changes in total factor productivity (TFP) Long-run growth Increases in labor input are limited by demographics (and participation) Capital stocks increase over time but capital is subject to diminishing marginal returns (next slides) Total factor productivity is the main source of long-run growth FNCE 101 - Hnatkovska - Lecture 4 7 Output and employment over the business cycle FNCE 101 - Hnatkovska - Lecture 4 8 The production function Aggregate production function: how much can the economy produce given inputs and technology Y = F(A,N,K) K = Capital N = Labor A = Other factors (including technology) We will use a multiplicative form: Y = A * F(N,K) A = Total Factor Productivity (TFP) measure of the overall effectiveness with which K and N are utilized Y/N = Labor productivity FNCE 101 - Hnatkovska - Lecture 4 9 The Cobb-Douglas production function We often use the Cobb-Douglas production function in macroeconomics Y = AK a N 1-a with 0 < a < 1 Properties Diminishing marginal returns; e.g. for capital Constant-returns-to-scale: A(cK) a (cN) 1-a = cAK a N 1-a = cY Complements : 2 Y/ K N = a(1-a) K a-1 N-a > 0 ) 1 ( ) 1 ( , 2 1 2 2 1 1 <- =- = = = ---- K Y a a N AK a a K K Y K Y a N aAK K Y a a a a Production function: Shape US production function 2007 Fix A = 21.103 Fix N = 146.05 mln workers Prod function slopes upward The slope of prod function becomes flatter as K increases Y = 691.03K 0.3...
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Lec4 - Finance 101: Monetary Economics & the...

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