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Subject 3. Production Function and Growth Accounting PDF Download
Y = A F(K,L) F(K,L) = Kα L1-α
where 0 < α < 1.
The quantity of real GDP supplied, Y, depends on the quantity of labor, L, the quantity of capital, K, and A which is referred to as total factor productivity (TFP).
- More inputs mean more output. That is, the marginal product of labor and the marginal production of capital are both positive.
- The higher of the level of technology, the more output is produced for a given level of inputs. Both the function F() and A reflect technology.
The Cobb-Douglas production function is widely used to represent the relationship of output and inputs of capital and labor.
Two important properties:
- Constant returns to scale.
- Diminishing marginal productivity.
The productivity curve is the relationship between real GDP per hour of labor and the amount of capital per hour of labor, with technology held constant.
Productivity can grow for two reasons.
- Capital Deepening: An increase in the capital-to-labor ratio brings a movement along productivity curve.
- Technology Progress: Technological change shifts the productivity curve.
Growth accounting explains what part of growth in total output is due to growth in different factors of production (i.e., capital, labor, technology). It is also known as "sources of growth analysis".
The equation is essentially the same as the production function written in the form of growth rates.
User Contributed Comments 2
|Oksanata||"alpha" determines the shares of output paid by companies to Capital and Labor.|
|CFAJ||thank you santa :P|
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