economic growth production model

Question 1

what will the model of production explore?

Answer 1

• understanding the relationship between income, productivity, capital stock and labour
• application of the model: development accpunting

Question 2

What is the main research question regarding economic growth? - the model

Answer 2

What explains differences in economic performance across countries?

Question 3

What is the production function in economics?

Answer 3

How much output (Y) can be produced given any number of inputs.

Question 4

what are the main assumptions of the economy?

Answer 4

• single, closed economy
• one consumption good
• two households are exogenous
• two inputs in the production process: Labour L, Capital K
• production function

Question 5

What is the Cobb-Douglas production function formula?

Answer 5

Question 6

What three ways can achieve economic growth (increase in Y)?

Answer 6

• Capital accumulation (increase in K) * Labour force increases (increase in L) * Technological change (increase in A¯)

Question 7

What are the properties of the Cobb-Douglas production function?

Answer 7

1) ∂F/∂K > 0 and ∂F/∂L > 0 striclty increasing
2) decreasing marginal products: ∂²F/∂K² < 0 and ∂²F/∂L² < 0
3) constant returns to scale: F(λK, λL) = λF(K, L) for any λ > 0

Question 8

What does the replication argument imply about CRS?

Answer 8

Duplicating all factors leads to doubling the output.

Question 9

What is the profit function of a representative firm?

Answer 9

Π = total revenue - total cost = pY - rK - wL

Question 10

Under perfect competition, what is the rental rate + wage rate?

Answer 10

• exogenous
• p = 1for simplicity

Question 11

what is the profit max problem?

Answer 11

Profit Π: max F(K, L) - rK - wL

• A firm maximises its profit by choosing capital and labour levels ⇒ K and L are the decision variables
• To maximise firm’s profit, we look for the first order conditions of the profit function with respect to K and L

Question 12

What are the first order conditions for a firm’s demand for capital and labor?

Answer 12

MPK = r and MPL = w

Question 13

What are the assumptions about the supplies of labor and capital and what do they imply?
what are the assumptions of demand?

Answer 13

Supplies of labor (L) and capital (K) are exogenously given.

• implies the supply curves of each input is inelastic vertical

Demand: houeholds will demand entire production Yd => all quantities produced will be boughr by the households

Question 14

What is the equilibrium condition in general equilibrium?

Answer 14

Value of all endogenous quantities and prices such that all markets clear.

Question 15

What is the equilibrium condition in general equilibrium?

Answer 15

Value of all endogenous quantities and prices such that all markets clear.

Question 16

How many endogenous variables and equations are needed to solve the model?

Answer 16

Five endogenous variables and five equations.

Production function, firm’s rules for hiring capital and labour, supply equals demand for
capital and labour

Question 17

What does the model solution indicate about firms in equilibrium?

Answer 17

Firms employ all the supplied capital and labor in the economy.
-the equilibrium wage is proportional to output per worker
- the equilibrium rental rate is proportional to the output to capital ratio
- firms make zero profits ← perfect competition

Question 18

In the context of the model, what does development accounting aim to explain?

Answer 18

Cross-country differences in GDP per capita.

Question 19

How can α, the capital share of income, be calibrated?

Answer 19

Using the Cobb-Douglas production function and competitive factor markets.

Question 20

What is calibration in the context of economic models?

Answer 20

Calibration is setting model parameters to match empirical facts.

3 - This process helps in aligning theoretical models with real-world data.

Question 21

What does TFP stand for?

Answer 21

TFP stands for Total Factor Productivity.

5 - TFP measures the efficiency of all inputs in the production process.

Question 22

How is TFP represented in the model?

Answer 22

TFP is represented by the parameter Ā, technological parameter

6 - This parameter is crucial for understanding productivity in the model.

Question 23

What does TFP measure?

Answer 23

TFP measures residual growth in total output that cannot be explained by traditional inputs such as labour and capital
- it is the proportion of output not explained by the amount of inputs used in the production
- the efficiencu with which inputs are transformed into output

7 - It indicates how effectively inputs are converted into outputs.

Question 24

What explains about one-third of the output differences between the richest and poorest countries?

Answer 24

Differences in capital per person explain about one-third of the output differences.

8 - This highlights the role of capital accumulation in economic disparities.

Question 25

What explains the remaining two-thirds of the output differences between countries?

Answer 25

TFP explains the remaining two-thirds of the output differences. ## Footnote 9 - This underscores the importance of productivity in economic performance.

Question 26

Why are some countries richer than others?

Answer 26

Countries are richer due to more capital per person and more efficient use of labour and capital. ## Footnote 10 - Efficiency in resource utilization is a key determinant of wealth.

Question 27

What are some possible explanations for differences in TFP across countries?

Answer 27

Possible explanations include: * Technology * Human capital * Institutions * Cultures * Misallocation of human and physical capital ## Footnote 11 - These factors contribute to variations in productivity and economic growth.

Question 28

What is the labour share of income?

Answer 28

The share of income received by employees in return for their part in producing output ## Footnote 12 - This is important for analyzing income distribution in economies.