Question

For the following questions: provide TRUE or FALSE statement and elborate on answer.

1. The equation, Y = C+I+G+NX, implies that increasing government purchases of goods and services (G) and increasing net exports (NX) are two clear long-term strategy for raising national income (Y).

2. The equation, Y = AK^0.5L^0.5, implies that in a competitive economy, the national income (Y) gets equally divided between the workers (L) and the owners of capital (K), leaving the suppliers of TFP (A) uncompensated.

Answer 1

1. The equation, Y = C+I+G+NX, implies that increasing government purchases of goods and services (G) and increasing net exports (NX) are two clear long-term strategy for raising national income (Y).

False

The equation represents the expenditure approach to GDP. The long term strategy for raising national income is by focusing on Investments first. A rise in I, will lead to a rise in Y. This will lead to a rise in C. More production will mean more exports. G is only used as a tool to balance the economy, not for long term growth.

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The equation, Y = AK^0.5L^0.5, implies that in a competitive economy, the national income (Y) gets equally divided between the workers (L) and the owners of capital (K), leaving the suppliers of TFP (A) uncompensated.

False

The equation represents the production function. This is a Cobb-Douglas type function. It doesn't show now Y gets divided between K and L, but rather shows the contribution of K and L to the output. It shows that using a given technology, how two inputs can be used to produce output. In this example, the contribution of inputs is equal. There are no "suppliers" of TFP, it is a part of the process used for production. The firm uses a combination of L and K.