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

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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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This note was uploaded on 10/26/2011 for the course ASDF 2342 taught by Professor 2adga during the Spring '11 term at Mansfield University of Pennsylvania.

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

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