ECON10003 Chapter Notes - Chapter 12: Real Interest Rate, Marginal Revenue Productivity Theory Of Wages, Production Function

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orangemole587

25 May 2018

School

University of Melbourne

Department

Economics

Course

ECON10003

Professor

Nahid Khan, Lawrence Uren

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Economists and economic growth

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The production function is an important theoretical concept that provides a unifying framework for

economists' ideas concerning economic growth

Average productivity depends on the available capital stock, the plan and equipment used

The larger the capital stock, the more output a given supply of labour can produce

Primary factors of products = labour and capital

Secondary factors of production = level of technological advancement, managerial expertise, skills

possessed by the workforce, access to infrastructure, political stability

The production function is based on the schematic representation of the production process

Firms bring in combinations of labour and capital to produce output

How much output can be produced from given combinations of labour and capital depends on

secondary factors

The production process:

Capital:

Firms have to finance the purchase of capital equipment without having access to the future stream

of revenue that will be forthcoming when the output produced by that equipment is sold

By purchasing the capital equipment instead of depositing the amount into the bank, the firm

gives up the opportunity of earning the real interest rate

Firms borrow money to purchase capital equipment, so the opportunity cost of capital is the real

interest rate on the loan

Marginal product of capital (MP

) is the amount of extra output that is obtained if capital stock is

increase by one unit

MRP

= P x MP

Marginal revenue product of capital (MRP

) is a measure of the extra revenue received by the firm if

it increases its capital stock by one unit

Diminishing marginal productivity of capital means that the amount of extra output that is obtained

diminishes as the size of the capital stock increases

Optimal capital stock is the point at which any further increase in the capital stock would push the

benefit below the cost

The real interest rate

Some other element of the cost of acquiring capital equipment

The marginal revenue product of capital

Factors that change optimal capital stock

Labour:

How much labour an individual is willing to supply depends on costs and benefits of allocating time

to paid employment

The benefit is the real wage that is received

The factors that affect a firm's demand for labour are the benefits of extra revenue received from

employing additional labour and the costs of wages

Marginal product of labour (MP

) is the extra output that the firm is able to produce from employing

an additional unit of labour

MRP

= P x MP

Marginal revenue product of labour (MRP

) is the extra revenue the firms receives from selling the

product produced by an additional hour of labour

= W/P

Firms adjust their demand for labour until the nominal wage matches the marginal revenue product

of labour

Assumptions for the production function:

The production function

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Document Summary

The p(cid:396)odu(cid:272)tio(cid:374) fu(cid:374)(cid:272)tio(cid:374) is a(cid:374) i(cid:373)po(cid:396)ta(cid:374)t theo(cid:396)eti(cid:272)al (cid:272)o(cid:374)(cid:272)ept that p(cid:396)o(cid:448)ides a u(cid:374)if(cid:455)i(cid:374)g f(cid:396)a(cid:373)e(cid:449)o(cid:396)k fo(cid:396) e(cid:272)o(cid:374)o(cid:373)ists" ideas (cid:272)o(cid:374)(cid:272)e(cid:396)(cid:374)i(cid:374)g e(cid:272)o(cid:374)o(cid:373)i(cid:272) g(cid:396)o(cid:449)th. P(cid:396)i(cid:373)a(cid:396)(cid:455) fa(cid:272)to(cid:396)s of p(cid:396)odu(cid:272)ts = la(cid:271)ou(cid:396) a(cid:374)d (cid:272)apital. A(cid:448)e(cid:396)age p(cid:396)odu(cid:272)ti(cid:448)it(cid:455) depe(cid:374)ds o(cid:374) the a(cid:448)aila(cid:271)le (cid:272)apital sto(cid:272)k, the pla(cid:374) a(cid:374)d e(cid:395)uip(cid:373)e(cid:374)t used. The la(cid:396)ge(cid:396) the (cid:272)apital sto(cid:272)k, the (cid:373)o(cid:396)e output a gi(cid:448)e(cid:374) suppl(cid:455) of la(cid:271)ou(cid:396) (cid:272)a(cid:374) p(cid:396)odu(cid:272)e. Se(cid:272)o(cid:374)da(cid:396)(cid:455) fa(cid:272)to(cid:396)s of p(cid:396)odu(cid:272)tio(cid:374) = le(cid:448)el of te(cid:272)h(cid:374)ologi(cid:272)al ad(cid:448)a(cid:374)(cid:272)e(cid:373)e(cid:374)t, (cid:373)a(cid:374)age(cid:396)ial e(cid:454)pe(cid:396)tise, skills possessed (cid:271)(cid:455) the (cid:449)o(cid:396)kfo(cid:396)(cid:272)e, a(cid:272)(cid:272)ess to i(cid:374)f(cid:396)ast(cid:396)u(cid:272)tu(cid:396)e, politi(cid:272)al sta(cid:271)ilit(cid:455) The p(cid:396)odu(cid:272)tio(cid:374) fu(cid:374)(cid:272)tio(cid:374) is (cid:271)ased o(cid:374) the s(cid:272)he(cid:373)ati(cid:272) (cid:396)ep(cid:396)ese(cid:374)tatio(cid:374) of the p(cid:396)odu(cid:272)tio(cid:374) p(cid:396)o(cid:272)ess. Fi(cid:396)(cid:373)s (cid:271)(cid:396)i(cid:374)g i(cid:374) (cid:272)o(cid:373)(cid:271)i(cid:374)atio(cid:374)s of la(cid:271)ou(cid:396) a(cid:374)d (cid:272)apital to p(cid:396)odu(cid:272)e output. Ho(cid:449) (cid:373)u(cid:272)h output (cid:272)a(cid:374) (cid:271)e p(cid:396)odu(cid:272)ed f(cid:396)o(cid:373) gi(cid:448)e(cid:374) (cid:272)o(cid:373)(cid:271)i(cid:374)atio(cid:374)s of la(cid:271)ou(cid:396) a(cid:374)d (cid:272)apital depe(cid:374)ds o(cid:374) se(cid:272)o(cid:374)da(cid:396)(cid:455) fa(cid:272)to(cid:396)s. Fi(cid:396)(cid:373)s ha(cid:448)e to fi(cid:374)a(cid:374)(cid:272)e the pu(cid:396)(cid:272)hase of (cid:272)apital e(cid:395)uip(cid:373)e(cid:374)t (cid:449)ithout ha(cid:448)i(cid:374)g a(cid:272)(cid:272)ess to the futu(cid:396)e st(cid:396)ea(cid:373) of (cid:396)e(cid:448)e(cid:374)ue that (cid:449)ill (cid:271)e fo(cid:396)th(cid:272)o(cid:373)i(cid:374)g (cid:449)he(cid:374) the output p(cid:396)odu(cid:272)ed (cid:271)(cid:455) that e(cid:395)uip(cid:373)e(cid:374)t is sold.

Related Questions

1. According to economists today, economic growth depends on:

1) resources.

2) technology.

3) institutions.

4) resources and technology.

5) resources, technology, and institutions.

2. Which of the following is FALSE?

1) Real-world observations shape economic theory.

2) Economic theory shapes policy decisions.

3) Policies affect real-world events.

4) Economic theory has no impact on real-world events.

5) None of these statements is false.

3. After the Great Depression, the main focus of macroeconomics was:

1) growth theory.

2) the study of business cycles.

3) the study of stock markets.

4) the study of why businesses fail.

4. The Solow Growth Model serves as a foundation of:

1) macroeconomic theory.

2) microeconomic theory.

3) growth theory.

4) all economic theory.

5. According to the Solow Growth Model, which of the following is/are the primary source(s) of economic growth?

A - Natural resources

B - Human capital

C - Physical capital

D - A and B

E - A and C

F- B and C

G- A, B, and C

6. According to the Solow Growth Model, the marginal product of capital is:

1) zero and increases as the quantity of capital increases

2) zero and decreases as the quantity of capital increases.

3) negative and increases as the quantity of capital increases.

4) negative and decreases as the quantity of capital increases.

5) positive and increases as the quantity of capital increases.

6) positive and decreases as the quantity of capital increases.

7. If building new capital is costless and the capital depreciation rate is zero, then an economy will reach a steady state in which the marginal product of capital is:

1) equal to zero.

2) greater than zero.

3) less than zero.

8. Which of the following is true for an economy before it reaches the steady-state?

1) Investment and net investment are both positive.

2) Investment is positive but net investment is zero.

3) Investment is zero but net investment is positive.

4) Investment and net investment are both zero.

9. The idea of convergence suggests that when underdeveloped nations begin to develop, they typically have _____________ growth rates as they catch up to the developed nations.

1) higher

2) lower

3) similar

4) very low

10. Which of the following is true after allowing for sustained technological advance in the Solow Growth Model?

I. The steady-state situation is avoidable.

II. The marginal product of each unit of capital will increase.

III. A diminishing marginal product is avoidable.

Only I only II

Only III

I and II

I and III

II and III

I, II, and III

11. What is the primary difference between the basic Solow model and the second Solow model?

1) The models are theoretically similar. The second Solow model is only more mathematically complex than the basic model.

2) The second Solow model allows for technological change, while the basic model doesn't.

3) The basic Solow model features diminishing returns, in contrast to the second model.

4) The marginal product eventually becomes zero in the basic model, while such a situation is avoidable in the second Solow model.

12. All of the following can result in economic growth except:

1) improved schools and colleges.

2) a boost in population growth.

3) a favorable climate.

4) an improved health care system.

13. Which of the following will result in a movement along with the aggregate production function?

I. a technological advancement

II. training of the workforce

III. an increase in the country's capital stock

I and II

I and III

II and III

I, II, and III

14. Which of the following is NOT true about technological change in the Solow model?

1) Technological change is random.

2) Technological change occurs exogenously.

3) Technological change is driven by the incentives of the innovators.

4) Technological change is not due to any inherent characteristics of the economy.

15. What is the key difference between the new growth theory and the growth theory as envisioned by Solow?

1) There is no difference; technological change is endogenous in both these theories.

2) There is no difference; technological change is exogenous in both these theories.

3) Technological change is endogenous in the new growth theory and exogenous in the Solow theory.

4) Technological change is exogenous in the new growth theory and endogenous in the Solow theory.

16. Which of the following was proposed by the new growth theory?

I. Capital resources cannot grow indefinitely.

II. Technological change is caused by factors inside the economy.

III. Technological changes are entirely unpredictable events.

IV. Institutions matter.

I and II

I and IV

II and IV

III and IV

I, II, III, and IV

17. All of the following except _____________ are barriers to natural growth.

1) corruption

2) political instability

3) high tax rates

4) free markets

5) All of these are barriers to natural growth.

18. Which of the following is supported by the modern growth theory?

A - Population growth is an obstacle to economic growth.

B - Competition encourages the discovery of new goods and services, which leads to economic growth.

C - A country can grow faster if it disengages itself from international trade with foreign nations.

D - Taxes should be abolished, as they hurt incentives necessary for economic growth.

All of these. A and B

A, B, and D

19. According to the new growth theory, the low living standards in many developing countries can be explained by a lack of:

A - natural resources.

B - free markets.

C - sound institutions.

D - strong military resources.

all of these.

B and C.

A and D.

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ECON10003 Chapter Notes - Chapter 12: Real Interest Rate, Marginal Revenue Productivity Theory Of Wages, Production Function

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