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Econ 1BB3 - Chapter 7.docx

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McMaster University
Bridget O' Shaughnessy

Richard Damra Tuesday, January 29, 2013 Econ 1BB3 – Chapter 7  Why are Norwegians better off than Ethiopians? Productivity  Productivity: the quantity of goods and services that a worker can produce for each hour of work.  Determinants of productivity: o Physical Capital – Things that we can use to produce other goods and services (Buildings, computers, etc.) o Human Capital o Natural resources – things that we take from nature, renewable and non renewable. o Technological Knowledge – Our knowledge of how to combine inputs to produce output in a more efficient manner. While human capital we gain from spending time learning how to do things. Analogy: Technological knowledge is like all the books in the library and Human Capital is the time we spend reading. Once knowledge becomes public it exists and we can use it. Physical = time spent learning technological knowledge Production Function  Production function: Shows how we combine inputs to produce output.  Equation: Y (output) = A (technology) * F (K, L, H, N)  K = Physical Capital  L = Labor  H = Human Capital  N = Natural Resources  If a production function exhibits constant returns to scale, then doubling all inputs leads to doubling of output.  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)  What matters for economic growth is productivity. Diminishing Marginal Product  Product: output  Marginal
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