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Unformatted text preview: 1 31 Aggregate Production and Productivity 32 Agenda 1. Determinants of Aggregate Production 2. The Production Function and the Return to the Factors of Production 3. FullEmployment Output 4. Supply Shocks 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 F(K, L ) Total factor productivity is like a recipe that indicates how to use capital and labor together to produce economic output. 37 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. 38 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 39 The Production Function: Output & Capital 310 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.
 Spring '08
 Wood
 Macroeconomics

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