Chapter 6 Study Guide
Chapter 6 Study Guide Econ 2-01
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This 5 page Study Guide was uploaded by Nolan Shapiro on Tuesday October 13, 2015. The Study Guide belongs to Econ 2-01 at University of California - Santa Cruz taught by Aaron Meininger in Summer 2015. Since its upload, it has received 63 views. For similar materials see Intro to Macroeconomic in Economcs at University of California - Santa Cruz.
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Date Created: 10/13/15
Chapter 6 Lecture Notes from chapter 6 Chapter 6 Key Ideas 1 There are very large differences across countries in income or GDP per capita 2 We can compare income differences across countries using GDP per capita at current exchange rates or adjusted for purchasing power parity differences 3 The aggregate production function links a country39s GDP to its capital stock its total efficiency units of labor and its technology 4 Crosscountry differences in GDP per capita partly result from differences in physical capital per worker and the human capital of workers but differences in technology and the efficiency of production are even more important Income per capitaGDP per capita gdp total population How can we compare GDP per capita between two different countries Method 1 Convert GDP into US dollars using exchange rates Two problems with using exchange rates 1 Prices of goods and services can vary across economies 2 Exchange rates fluctuate throughout the year due to reasons beyond price changes Method 2 Convert peru GDP by using the prices of goods and services in Peru relative to the prices of the same goods and services in the United States purchasing power parity GDP per capita GDP per capita in local currency times PPP adjustment Even though PPP adjustments raise the income levels of the developing countries there are still very large disparities in income per capita across countries The age structure and labor participation rates vary across countries These variations impact income per capita Therefore we may want to consider income per worker gdp of people employed Ultimately it is productivity differences that drive income per capita and income per worker differences across counties Productivity The value of goods and services that a worker generates for each hour of work There is a positive relationship between income per capita and income per worker and various measures of standard of living The next three slides present evidence of this relationship using absolute poverty rates life expectancy and the Human Development Index to measure the standard of living Productivity differences are the ultimate drivers of income per capita and income per worker differences across countries These are three reasons productivity differs across countries 1 Human capital 2 Physical capital 3 Technology Human capital The stock of skills embodied in labor to produce output This stock of skills or total efficiency of units of labor is written H l x h where I total number of workers h average human capital or efficiency Physical capital The stock of business structures plants and equipment machines used for production Technology Superior knowledge in production of more efficient production processes so that ore output can be produced with the same amount of human and physical capital Aggregate production function is Y AxF KH where YGDP Kphysical capital stock Htotal efficiency units of labor F function A index of technology Aggregate production function has the same two properties as the production function of an individual firm 1 more is better 1 An increase in either physical capital or total efficiency units of labor holding the other factor constant leads to an increase in GDP b Law of diminishing marginal product 1 The marginal contribution of either physical capital or total efficiency units of labor to GDP diminishes when we increase the quantity used of that factor holding all other factors of production constant With more advanced technology more output can be produced with the same amount of physical capital and total efficiency units of labor Therefore tech will shift the production function upward Tech can be embodied or contained in H andor K Workers today possess 1 knowledge of how to produce new goods such as smartphones and also 2 knowledge how to perform certain tasks more efficiently Book notes from chapter 6 61 Inequality around the world 0 Exchange rates allow us to compare GDP across using the same units but we favor a tool that providerides even better comparison of income per capita across countries purchasing power parity PPP The purchasing power parity constructs the cost of a representative bundle of commodities in each country and uses these relative costs for comparing income across countries 0 The gap the US economy and poorer economies generally being smaller when we use PPPbased measures 0 Income or GDP per worker is defined as GDP divided by the number of people in employment 0 Productivity refers to the value of goods and services that worker generates for each hour of work 0 Income per worker is particularly informative when we would like to understand why some economies are more productive than others because it focuses directly on differences in GDP relative to those in employment 0 The one dollar a day per person poverty line is a measure of absolute poverty used by economists and other social scientists to compare the extent of poverty across countries 62 Productivity and the Aggregate Production Function 0 Human capital is each person s stock of skills to produce output or economic value 0 a worker with a university degree in computer science will be much more productive in computer programming than a regular high schooler Physical capital is any good including machines and buildings used for production 0 aggregate production will depend on agricultural machinery the equipment used for transporting inputs and outputs and the buildings in which the output is stored 0 physical capital stock of an economy is the value of equipment structures and other nonlabor input used in production An economy with better technology uses its labor and capital more efficiently and achieves higher productivity 0 new manufacturing techniques not available to other economies The advantage of looking at GDP in this way is that once we start thinking of the world in terms of a single commodity we can study the aggregate production function of the economy which describes the relationship between GDP and inputs An aggregate production function describes the relationship between the aggregate GDP of a nation and the factors of production 0 The aggregate production function is useful for understanding not only how GDP is determined but also why productivity varies across countries A nation can increase output by employing workers but some will have greater human capital than others and will be able to produce more economic value Total efficiency units of labor is the product of the total number of workers in the economy and the average human capital of each worker o a computer science graduate can perform the same job as high school graduates o labor is denoted by Hproduct of the total number of workers in the economy 0 L the average efficiency or human capital workers 0 haverage efficiency or human capital of workers o H L x h 0 Total efficiency units of labor in the economy can be increased if more workers take part in the production process or if each worker becomes more productive Physical capital K when an economy has more physical capital or equivalently greater physical capital stock its workers can work with more and better equipment and structures and thus the economy will produce more GDP Third factor landwe focus only on physical capital and labor but when we do the value of land and natural resources can be included in the physical capital stock 0 Aggregate Function Y A x FKH O ygdp k physical capital stock of the nation hefficiency units of labor that economy uses in production Function F signifies that there is a relationship between physical capital labor and GDP A index of technology implies that the economy produces more GDP with the same level of physical capital stock and total efficiency units of labor IF either physical capital of stock or labor increases while the other is constant it will result in higher GDP subject to Law of Diminishing Marginal Product the marginal contribution of a factor of production to GDP diminishes when we increase the quantity used of that factor of production When there is less physical capital in the economy the corresponding increase in output is large when we have the same unit increase farther to the right the resulting increase in output is smaller 0 Technology is divided into two components 0 Knowledge we know how to produce many new goods such as smartphones and tablets which were not previously available Also able to complete tasks more efficiently Research and Development refers to the activities directed at improving scientific knowledge generating new innovations or implementing existing knowledge in production in order to improve the technology of a firm or an economy Efficiency of production refers to the ability of an economy to produce the maximal amount of output from a given amount of factors of production and knowledge
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