Macro Aggregate Production Function Inputs K capital L labor Intermediate goods Entrepreneurship Technology Output Y real GDP part of Y back as inputs I or new K Per Worker Production Function Why per worker Corresponds to per capita income All workers and capital averaged together key inputs K L and technology result labor productivity Y L or real GDP worker U S 111 050 Y L As a result the U S is a large real per capita GDP of 52 800 Q We ll graph this function next and it is built upon the idea of production we saw in the Panini shop It will have on the vertical axis on the horizontal axis and its slope will as you move to the right A Y K decline B K Y grow C L Y be constant D K L Y L grow E Y L K L decline U S Per Worker Production Function 2011 Y L 2 837 K L 0 3 more generally Y L A K L 0 3 A Total Factor Productivity TFP TFP measure technology human capital better capital better organized firms Per Worker Production function Q How many of the following does the per worker production function explain If it is not explained it is taken as a given in this graph Y L K L A Y L Y L A K L 0 3 K L A only 1 variable can move is B any of 3 variables move is not C only 1 variable can move is not D any of 3 variables move is Q Changes in you along the horizontal axis of the per worker production function Also Y L known as real per capita GDP Q Let s compare Haiti and the U S with the per worker production function Haiti would be to the compared to the U S and the Haitian the curve would be left higher A B right higher C left the same D right lower E left lower Role of Capital in Growth Q If a country wanted to grow quickly for many years it should have a large percent of GDP in which of the following Hint the per worker production function is used here investment I A consumption C B C government purchases G D net exports NX Ex China I GDP 44 Ex U S I GDP 15 K due to investment is one key factor to economic growth Per Worker Production Function U S History From 1959 to 2011 how much of the change in Y L comes from technology captured by A and how much from K L Year 1959 2011 Y L 45 100 111 050 A 1 515 2 837 K L 81 700 203 700 Y L A K L 0 3 only change A K L constant Y L 2 837 81 700 0 3 Y L 84 435 Y L 76 of today s value just from A 84 435 111 050 3 4 of growth due to technological change due to diminishing returns to capital U S Per Worker Production Function Q For how many of the following reasons does the curve shift up Human capital grew Business became more efficient More of existing type of capital are added Quality of capital increased Y L 111 050 Y L 2 837 K L 0 3 K L 203 700 Key Factors for Growth Sustained economic growth depends on sustained technological changes due to diminishing returns for K L More human capital Ex U S in most of the 20th century Better K Ex Boeing 787 spill proof soft drink dispenser Apple II smartphone Better organized production Per Worker Production Function Concerns Concern for the U S little increase in human capital in recent decades High school graduation rate stagnant at 80 High school graduates abilities below other countries Ex estimated that U S GDP would be 1 trillion higher 6 if our high schools taught math as well as Canadian ones U S college graduation rate no longer leading 19th of 28 rich countries Concern about abilities of grads Natural Resources Q Are natural resources part of the per worker production function A NO Some places with and without natural resources Hong Kong per capita GDP of 52 700 Dem Rep of the Congo Per capita GDP 400 In today s domestic natural resources don t aid growth Curse of resources End of Part C The Role of Capital K and Technology Q Why does Y L vary so much What can a poor country do A 1 High real per capita GDP from high Y L Y L A K L 0 3 2 high Y L from high K L and A measure technology Total Factor Productivity 3 TFP A more important than K L due to diminishing returns to capital Part D The Role of Markets Q To be rich a country needs a lot of technology A and capital per worker K L To grow these need to increase How Before then life expectancy never exceeded 40 often much less Recap Have been 20 human civilizations Only 1 experienced economic growth Max literacy rate 30 Max real per capita GDP 1 000 Y L A K L 0 3 Tiny A and K L Haiti Today Life expectancy 63 years Literacy 49 Markets people and firms freely buying and selling North Korea vs South Korea One country in 1950 with same culture and resources Current real per capita GDP o N Korea 1 800 o S Korea 33 200 Q Might markets be critical for growth Q Of the prices of goods and services that you buy about what percent are set or controlled by the government A 0 20 B 21 40 C 41 60 A 0 5 B 5 14 C 15 24 Q About what percent of U S workers earn the minimum wage 7 25 hour Median price of a home 294 300 1 250 month U S per capita GDP 52 800 Markets set the wage of just about everyone at rates far above the minimum More broadly almost all nominal wages and prices set in markets and are flexible free to move up and down Q On average new Penn State grads earn 50 000 year Would you be here if it was 15 000 50 000 signal and incentive to college Prices and wages provide signals and incentives Y L A K L 0 3 Paul Romer the price ceiling on electricity harmed this country Illustrates the importance of flexible prices harmful impact a government imposed price ceiling Q Some argue that the world has or soon will reach peak oil That is oil production won t rise as it has for decades Yet demand will surely rise as world income rises If this is true then Markets and Growth there would be a shortage of oil there will be a surplus of oil A B C neither of the above Higher price incentive and signal Markets Creative destruction as one industry or business replaces another Markets respond to consumer interests promote innovation Y L A K L 0 …