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Lecture notes

Lecture Notes for Aggregate Production and Productivity
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This document provides an overview of the lecture notes for "Aggregate Production and Productivity", a topic in the Introduction to Macroeconomics course taught in Kings College London by Agnes Kovacs. It gives an extensive description and explanation for aspects linked to the Cobb-Douglas Producti...

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  • April 13, 2023
  • 7
  • 2022/2023
  • Lecture notes
  • Agnes kovacs
  • Aggregate production and productivity

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01.02.2023 Lecture Notes

Determinants of Aggregate Production:

Factors of Production (inputs):

Labour (L)

Capital (K)

Both factors are assumed to be exogenous and fixed over time.



K = K (autonomous)
L = L (autonomous)



Production Function

the aggregate production function - a description of how much output (Y) is
produced for any amount of factor inputs



Y = F(K, L)

where F is the function that translates K and L into Y



An efficient, developed economy generally produces more with the same
quantity of capital and labour than an inefficient, primitive economy.

The shares of labour and capital income in the US economy have remained
relatively constant over time at about 70% labour and 30% capital.



Cobb-Douglas Production Function

This function incorporates the two ideas:


Y = F(K, L) = AK^(0.3) L^(0.7)

where A describes productivity (total factor productivity)


01.02.2023 Lecture Notes 1

, From the perspective of workers, labour productivity is the amount of output
produced per unit of labour.

Unlike labour productivity, total factor productivity takes into account how
productive labour and capital are together.



A = Y / (K^0.3 L^0.7)


Example: Y = $10 trillion, K = $10 trillion, L = 100 million workers


A = 10 / ((10^0.3) (100^0.7)) = -0.20



Why are some countries rich and others poor?

Assuming every citizen works, so that per capita income is the same as average
income (output) per worker, Y/L.

Income per worker becomes:




where k is capital per worker.



The shortfall of per capita income in other countries relative to the US is due
more to lower productivity than it is to lower amounts of capital per person.



Two particularly attractive characteristics of the function:

1. constant returns to scale

2. diminishing marginal product



01.02.2023 Lecture Notes 2

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