GROWTH RATE PRODUCTION FUNCTION

Rate of change that a nations GDP goes Expresses the relationship between
through from one year to another. inputs (factors of production and the
amount of output produced
g = annual growth rate
X = economic quantity It has constant returns to scale =
t = first year output scales exactly the same as input
t + 1 = second year It has diminishing marginal product
n = number of years marginal product = the
change in output resulting from
Annual growth rate employing one more unit of a
particular input
-dim. mar. prod. = as more and
more of variable input (labor) is
employed, marginal product
Average growth rate over several starts to fall
years
Y = quantity of output produced
K = quantity of capital used as input for
production
L = quantity of labor used as input for
production
F() = is a function of ()

Rule of 72
Calculates the amount of time it takes
something growing at a given rate to
double.
F(K, L) = Y
Per-worker production function
y = output per-worker = Y/L = income
per capita
k = capital per-worker = K/L

F(k,l) = y
f(k) = y

Marginal product of capital

MPK = f(k + 1) - f(k)


COBB-DOUGLAS PRODUCTION
FUNCTION
Used to represent the technological
relationship between the amounts of two
or more inputs, particularly physical
capital and labor, and the amount of
output that can be produced by those
inputs.
A = total factor productivity (TFP) =
measure of productivity
= capitals share of national income
(constant between 0 and 1) = the
fraction of national income that is paid
out as rent of capital
Per-worker Cobb-Douglas production
function
Cobb-Douglas marginal product of
capital
Capitals share of income
Y = national income = output
THE SOLOW MODEL
Attempts to explain long-run economic
growth by looking at capital
accumulation, labor or population
growth and increases in productivity
(technological progress).
Assumptions:
2 factors of production: L & K
Quantity of L is constant over time
Production function doesn't change
over time (no changes in A or .
Constant returns to scale
Diminishing marginal productivity of
inputs.
Closed economy: no international
capital movements (savings =
investments)
All of the action comes from the
accumulation of capital, which is
governed by investment and
depreciation.
I = quantity of investment = building of
new capital
D = quantity of depreciation = wearing
out old capital
= change between two time periods (t
and t+1
Change in capital stock
The difference between the amount of
investment and the amount of
depreciation.
 THE SOLOW MODEL WITH
Accumulation of capital per worker HUMAN CAPITAL

i = quantity of investment per worker h = amount of labor input per worker

d = quantity depreciation per worker
= investment rate = savings rate
= depreciation rate
proxied by the average years of
schooling of a countrys work force
h_n = amount of labor input per worker
proxied by the average years of
schooling (n) of a countrys work force

Per worker Solow model production

function with human capital

Steady State

When investment exactly equals

depreciation economy finds itself in a
steady state (ss).

No change in k (per-worker capital

stock)
No change in y (output = income)
GPD growth is zero

THE SOLOW MODEL WITH

POPULATION GROWTH

Capital dilution = >L & zK <k

n = growth rate of the labor force

Steady State with population growth

MEASURING PRODUCTIVITY
DIFFERENCES AMONG
COUNTRIES

Factors of production = physical &

human capital as inputs =

output = productivity * factors of

production

Comparing two countrys

productivity