GDP measures the total output of goods and services produced in an economy in a given period of time
Y = C + I + G + (X – M)
GDP as Y, Consumption by households (C), Investment made by firms (I), Government Expenditure (G), Exports (X) minus Imports (M).
Y-T=C+S (T = Taxes, S= Household Savings
The aggregate production function combines an economy’s physical capital stock, labor hours, human capital, knowledge, natural resources, and social infrastructure to produce output (real GDP).
Physical capital refers to goods—such as factory buildings etc. capital goods are used in the production of other goods. Capital stock of an economy is the total amount of physical capital in the economy
Labor hours are the total number of hours worked in an economy. This depends on the size of the workforce and on how many hours are worked by each individual.
Human capital is the term that economists use for the skills and training of an economy’s workforce
Knowledge is the information that is contained in books, software, or blueprints
Natural resources include land; oil and coal reserves; and other valuable resources, such as precious metals.
Social infrastructure refers to the legal, political, social, and cultural frameworks that exist in an economy
The more physical capital we have, the less additional output we obtain from additional physical capital. As we have more and more capital, other things being equal, additions to our capital stock contribute less and less to output. Economists call this idea diminishing marginal product of capital.
The model builds from the national accounting framework that we saw in Topic 1, and assumes that the aggregate level of demand in the economy depends on private consumption, government spending, investment, and net exports. That is
AD = C + I + G + NX
If anything on the right hand side in the equation for AD changes at a given level of inflation, then the aggregate demand curve shifts. If a worldwide recession causes exports to fall, then AD will be lower at each level of inflation – the AD curve shifts to the left. If households decide to save more, then C falls, and AD shifts to the left. Policy decisions of the government will also affect aggregate demand – an increase in government spending or a cut in taxes should increase AD
Aggregate Supply - One might expect that if inflation rises, for the average firm the implication will be that the prices of their output will be higher and they will attempt to sell more output. This will mean that the aggregate level of supply in the economy will be positively related to inflation.
Why wages may differ in different countries
Part (a) compares two countries that are identical except that less labor is supplied to the market in country A. In country A, the real wage is higher, and the equilibrium number of hours is lower. In part (b), the two countries have identical labor supplies, but one or more of the other inputs (physical capital, human capital, knowledge, social infrastructure, or natural resources) is higher in country A. This means that the labor demand curve in country A is further to the right, so the real wage is higher, and the equilibrium number of hours is also higher.
The production function can be written as Y = AKa(HL)1−a
Y is GDP, K is capital, L is labour and A represents the technological capability, or productivity of the economy. K is a physical capital, H Human Capital and L is Labour. A is usually around 1/3 for developed countries, simply a parameter.
To calculate the Growth of GDP - gY= agK +(1− a)gH +(1− a)gL + gA
We cannot measure the growth rate for Technology, but we can infer it from the equation above gA= gY − agK −(1− a)gH −(1− a)gL
TOPIC 4 - Externalities
Taxation – used for
1. Macroeconomic stabilisation
2. Raising revenue to cover government spending
3. Redistributing income
4. Altering incentives