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UO / Economics / EC 202 / What are the features of the aggregate production function?

What are the features of the aggregate production function?

What are the features of the aggregate production function?

Description

School: University of Oregon
Department: Economics
Course: Introduction to Economic Analysis: Macroeconomics
Professor: Urbancic m
Term: Spring 2015
Tags:
Cost: 25
Name: EC202 Week 3 Notes
Description: Here are the notes for the third week of class.
Uploaded: 04/07/2016
5 Pages 174 Views 1 Unlocks
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Day 5 (4/11):


What are the theories of growth?



Reminder: Quiz #1 on Friday­not multiple choice

*Outline on canvas of some key points

Economic Growth

● U.S. Economic Growth

○ Over the last 100 years, the growth rate of U.S. GDP per person was about 2%. ○ Obviously this fluctuated over specific periods in the 100 years

● World Economic Growth

○ Some of the richer countries are like the U.S.: about 2%

○ Poorer Regions (South & Central America and Africa)

■ Smaller growth rate

○ Even though most countries have had a positive growth rate, because of the difference in growth rate, their standard of living relative to the U.S. has fallen. ● Recall: Real GDP can increase for two reasons


When does labor productivity changes?



○ Business cycle expansions

○ Increase in potential GDP

■ Only increases in potential GDP are termed “economic growth”

● Potential GDP: the sustainable level of output an economy can produce, and is influenced by many things: Don't forget about the age old question of What are the types of fossilization that we covered and how do they work?

○ Natural resources (land)*

○ The level of capital (factories, education, etc)*

○ “Entrepreneurship” (hard to define)*

■ *all fixed in short run

○ Labor

● Potential GDP is defined to be the level of real GDP that is achieved when the economy is operating at full employment 

○ Look at:

■ An aggregate production function (how much produced)

■ An aggregate labor market (what’s available)


When does labor supply change?



● Economic Model:

○ Attempts to formally describe some aspect of the real world

○ Simplifies as much as possible, while still capturing the most important features of reality

○ Often this means that we will not want to describe all features of reality in order to have a simpler model

● Aggregate Production Function:

○ A description of the relationship between real GDP and quantity of hours worked. For simplicity, we ignore the fact that there are many different types of work.Don't forget about the age old question of What is a nuclear family and how common is it today?
If you want to learn more check out What is a fossil record?

■ Features:

● If there is no labor, there is no production

● Adding more labor always increases real GDP

● There are decreasing returns to scale in labor: each additional hour of hour of work increases real GDP less than the previous hour did ● Starting at 0 and increases in a diminishing marginal return rate ○ Aggregate Labor Market: describes the supply and demand for labor in the economy

■ Firms demand labor

■ Individuals supply labor

■ The real wage individuals receive the price of labor

● Nominal: the wage you are paid in terms of dollars

● Real: the wage you are paid in terms of purchasing power

● Real Wage=nominal wage* (CPI base year/CPI current year) ○ Want to use Real wage!

○ Supply of Labor:

■ The relationship between the total number of hours individuals want to work and the real wage rate

● It matters what the real wage rate is

● Law of Supply: as the real wage increases, people are willing to work more hours

○ Demand for Labor:

■ The relationship between the total number of hours firms want to hire individuals to work and the real wage rate

● Firms are willing to pay workers according to their productivity level Don't forget about the age old question of A band issued on 12/1/1996 will mature on 12/1/2096. today is 12/1/2003, what is the band's time to maturity?

● Law of Demand: as the real wage decreases, firms want to hire more workers

○ Equilibrium in the Labor Market

■ At the intersection of supply and demand

■ There’s no pressure for the real wage to change

○ Labor Surplus:

■ Equilibrium real wages is too high

● There will be a surplus of labor

● There is pressure for the real wage to fall

● Will bring it back to equilibrium

○ Labor Shortage:

■ Equilibrium real wage is too low

● There will be a shortage of labor

● There is pressure for the real wage to rise

● Will bring it back to equilibrium

● Full Employment

○ Growth of labor supply

■ Probable causes:

● Individuals want to work more

● Larger population joins the labor force

● The population increases

○ Shift the labor supply curve outwards

○ Movement along the production function Don't forget about the age old question of Who is one of the 1st hired and the 1st hired in the fsa?

● Labor Productivity

○ Amount of additional output created by an additional hour of work

○ Labor Productivity = real GDP/aggregate labor hours

○ Growth:

■ Increase in capital

■ Increase in education

■ Increase in technology

● If worker productivity increases, then firms will want to hire more

workers at any wage

● This causes a shift right in the labor demand function

○ Effect of an increase in labor productivity on potential GDP

■ There is a shift in the production function upwards

■ This directly increases potential GDP

■ Because productivity is higher, the labor demand curve shifts to the right ■ The shift in labor demand increases equilibrium real wage and the full employment level of hours worked

■ The increase in labor further increases potential GDP

Day 6 (4/12):

Growth Cont.

● Theories of Growth:

○ Classical: the view that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level.

Prediction: growth will eventually stop, and individual standards of living will eventually fall back to subsistence.

● Overpopulation

● Global warming/climate changeWe also discuss several other topics like Why is journalism special?

○ Neoclassical (Solo model): the view that real GDP per person grows because of increases physical capital per person

● Because there are diminishing returns to capital, eventually capital

per person stops growing.

● At that point the economy no longer grows, but it also does not fall

back to subsistence.

Prediction: growth will eventually stop, individual standards of living will not fall ○ New: holds that real GDP per person grows because:

● People continually innovate produce new technologies and

increases profits

● Technological improvements are a public good (can be enjoyed by

everyone)

● Knowledge is not subject to diminishing returns

Prediction: growth can potentially continue forever, and individual standards of living will continue to rise

Review of Chapter 6:

○ Aggregate production function

○ Aggregate labor market

○ Examples (quiz hint):

What happens to potential

GDP if there is an increase in

the labor supply?

What happens to potential

GDP if there is a decrease in

the labor supply?

What happens to potential

GDP if there is an increase in

labor productivity?

What happens to potential

GDP if there is a decrease in

labor productivity?

● When labor supply changes:

○ There is a plague that wipes out have the US population. Draw the affect this has on the labor supply and label the new equilibrium.

■ A shift left in the labor supply curve.

■ Because the labor supply curve shifted to the left, it is a shortage.

■ MAKE SURE TO LABEL CORRECTLY!

○ Steps for the shift in the graphs:

■ Start at equilibrium (part A)

■ Plague reduces population, so labor force decreases; this shifts the labor supply curve to the left.

■ New equilibrium in labor market (part B) with decreased equilibrium hours worked

■ With reduced hours worked, production falls and so does potential GDP. ● When labor productivity changes:

○ Steps for the shift in the graphs:

■ Start at equilibrium (part A)

■ Productivity increases, shifting the production function up; this increases potential GDP

■ The increase in productivity makes firms want to hire more workers, so labor demand shifts right

■ The new labor market equilibrium is at point B, with higher equilibrium hours worked.

■ The increase in hours worked increases production, further increasing potential GDP.

Finance, Saving, and Investment

● Income: the quantity of wage and other income that people receive per unit time ● Wealth: the value of all the things that people own at a given time

● Saving: the amount of income that is not paid in taxes or spent on consumption goods and services, per unit time

● Interest: price of borrowing money

○ Interest rate: the interest received expressed as a percentage of the loan amount= (interest/loan amount) *100

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