Richard Damra Tuesday, January 29, 2013
Econ 1BB3 – Chapter 7
Why are Norwegians better off than Ethiopians?
Productivity: the quantity of goods and services that a worker can produce for each hour of
Determinants of productivity:
o Physical Capital – Things that we can use to produce other goods and services (Buildings,
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: 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)
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