Gross Domestic Product, Economic Growth, and Business Cycles
• Gross Domestic Product (GDP): the quantity of goods and services produced within a country’s borders over a particular period of time.
• The time series of GDP can be separated into trend and business cycle components.
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The Firm’s Production Function
• z: total factor productivity (Productivity)• K: the quantity of capital input (Capital)• N: the quantity of labor input (Labor)
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The Cobb-Douglas Production Function
10
1
<<
= −
α
αα
where
NzKY
( ) ( )),(
),(
******),(
111
1
1
NKaFNaKNaKaaNaKaNaKF
CRSNKNKF
a ===
=
=
−−−
−
−
ααααα
αα
αα
1-9
Marginal Product of Capital
• Marginal Product of Capital
),( NKzFKYMPK K=∂∂
=
• Cobb-Douglas Production Functionα
αα αα−
−−
==
∂∂
=1
11
KNzNzK
KYMPK
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Marginal Product of Labor
• Marginal Product of Labor
),( NKzFNYMPN N=∂∂
=
• Cobb-Douglas Production Function
( ) ( )α
αα αα
−=−=
∂∂
= −
NKzNzK
NYMPN 11
1-11
Figure 4.12Production Function, Fixing the Quantity of Capital and Varying the Quantity of Labor
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Figure 4.13Production Function, Fixing the Quantity of Labor and Varying the Quantity of Capital
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