lecture3 Aggregate Production and Productivity

lecture3 Aggregate Production and Productivity - 1 3-1...

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Unformatted text preview: 1 3-1 Aggregate Production and Productivity 3-2 Agenda 1. Determinants of Aggregate Production 2. The Production Function and the Return to the Factors of Production 3. Full-Employment Output 4. Supply Shocks 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 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. 3-6 Determinants of Aggregate Production Total factor productivity is calculated as: A = Y F(K, L ) Total factor productivity is like a recipe that indicates how to use capital and labor together to produce economic output. 3-7 The Production Function: Output & Capital The production function, Y = A*F(K, L), can be drawn as either: 1. Output and capital , or 2. Output and labor. 3-8 The Production Function: Output & Capital The production function between output and capital shows how: Economic output, Y , depends on the size of the capital stock, K , for a given labor force, L , and for a given level of technology, A . 3 3-9 The Production Function: Output & Capital 3-10 The Production Function: Output & Capital Marginal product of capital , MPK = Y...
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This note was uploaded on 03/18/2012 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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lecture3 Aggregate Production and Productivity - 1 3-1...

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