Question

Aggregate production function:

Y*/POP= N*/POP (Y*/N*)

=N*/POP (f(K*/N*,T)

where Y is real GDP, POP is population, N is employment, K is capital, and T is technology, and where a “*” denotes the normal value of the variable. Explain what the various terms mean. Use the aggregate production function to explain how an increase in the supply of inventive activity will likely affect long-run economic growth.

Answer 1

The variables are explaned below.

Y* is the potential output.

POP is the population

N* is normal employment

Y/N= Normal average labour productivity.

Y/N can also be written as f(K/N, T)

K/N= Normal capital/ worker

T= technology , the types of technology that vary across the countries is mostly not known but the culture.

N*/POP= normal employement to population ration, depends on things like the age composition of population, taste and preference.

The below graoh shows the production function graph which will shift to left ward.....were more GDP can be produced ....which will affect the long run economic growth.