ECON1010 Lecture Notes - Lecture 5: Foreign Portfolio Investment, Diminishing Returns, Production Function
Lecture 5
PRODUCTION AND GROWTH
- A outrys stadard of liig depeds o its aility to produe goods ad series.
- Within a country there are large changes in production/standard of living over time.
- The same is true across countries
- When talking about economic growth we mean growth of real GDP... (Why not nominal GDP?)
ECONOMIC GROWTH AND COMPOUNDING
- Annual growth rates that seem small become large when compounded for many years.
- Compounding refers to the accumulation of a growth rate over a period of time.
THE PRODUCTION FUNCTION
- Economists often use a production function to describe the relationship between the quantity of
inputs used in production and the quantity of output from production.
- The inputs used to produce goods and services are called the factors of production
Y = F(L, K, H, N, A)
Y = quantity of output
F( ) is a function that shows how the inputs are combined - available production technology
L = quantity of labour
K = quantity of physical capital
H = quantity of (intangible) human capital
N = quantity of natural resources
A = (intangible) technological knowledge
***LOOK IN TEXTBOOK TO INTERPRET THE VARIABLES***
- We are ore iterested i the alues per orker per apita.
- We want to divide everything by L.
- L can have different effects on the production function – we distinguish between constant, increasing,
and decreasing returns to scale
- A production function has constant returns to scale if, for any positive number x,
- xY = F(xL, xK, xN, H, A)
- That is, a doubling of all inputs causes the amount of output to double as well
PRODUCTIVITY
The quantity of goods and services produced from each hours of a workers time
- depends on endowments
- output is the measure of living standards
- improved living standards require improved productivity
- The factors of production directly determine productivity.
- natural resources, N
- physical capital, K
- human capital, H
- technological knowledge, A
- Which of these have a permanent (long-run) effect and which only have a temporary (short run)
effect?
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Document Summary
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