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Lecture 12

Macroeconomics Lecture 12

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Bridget O' Shaughnessy

ECON 1BB3- LECTURE 12 (Chapter 7) Why are Norwegians better off than Ethiopians? -economic growth -per capita GDP is a good measure of economic well being  Countries with high GDP have infant mortality is lower, illiteracy and life expectancy is higher -Productivity - gives a country a high GDP -Productivity: the quantity of goods and services that a worker can produce for each hour of work -determinants of productivity 1. Physical capital: how much capital does each worker have to use 2. Human capital: what we invest in when we become educated  Learning how to do things and accumulating knowledge 3. Natural resources: things we dig out of the ground or in the ocean or climate which allows us to grow food and crops 4. Technical knowledge: our knowledge of how to combine input and produce output  The difference between human capital and technical knowledge books represent technical knowledge and human capital represents the time it takes you to read it -Production function: shows how we combine inputs to produce output  Y=a .f (K,L,H,N)  Y= output  A= techonology  F() is a function of  K= physical capital  L=labour  H= human capital  N=natural resources  Assumptions 1) Constant returns to scale  If a production exhibits constant returns to scale, then doubling all inputs leads to a doubling of output  We can draw our production function in per capita terms  2Y= A.F(2K, 2L,2H, 2N)  100Y=A.F(100K,100L,100H,100N)  xY= A.f(xK, xL, xH, xN)  Y/L=A.F(K/L,1,H/L,N/L)  Production function can be written into per capita terms  This says that output per worker depends on capital per worker human capital per worker and natural resources per worker 2) Diminishing Marginal product  Marginal product: the extra product produced by increasing an input by 1 unity th  Diminishing marginal product: the extra output produced by adding the 19 unit of labour is smaller than the extra output produced by
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