Macroeconomics

‭Any‬ ‭money‬ ‭spent‬ ‭on‬ ‭resources‬ ‭to‬ ‭discover‬ ‭new‬ ‭knowledge,‬ ‭improve‬ ‭something,‬ ‭or‬ ‭develop‬ ‭a‬ ‭new‬ ‭product is an investment in R&D.‬ ‭For‬ ‭example,‬ ‭pharmaceutical‬ ‭companies‬ ‭spend‬ ‭money‬ ‭on‬ ‭producing‬‭and‬‭testing‬‭a‬‭new‬‭drug.‬‭This‬‭is‬‭an‬ ‭investment in R&D aimed towards new discoveries that would increase output.‬ ‭Higher‬ ‭investment‬ ‭in‬ ‭R&D‬ ‭paves‬ ‭the‬ ‭way‬ ‭for‬ ‭technological‬ ‭innovations‬ ‭that‬ ‭boost‬ ‭productivity‬ ‭and‬ ‭stimulate economic growth.‬ ‭F. The Aggregate Production Function‬ ‭Economists‬ ‭use‬ ‭the‬ ‭aggregate‬ ‭production‬ ‭function‬ ‭to‬ ‭calculate‬ ‭the‬ ‭amount‬ ‭of‬ ‭output‬ ‭that‬ ‭can‬ ‭be‬ ‭produced‬ ‭using‬ ‭a‬ ‭given‬ ‭set‬ ‭of‬‭inputs,‬‭specifcally‬‭labor‬‭and‬‭capital,‬‭while‬‭taking‬‭into‬‭consideration‬‭the‬ ‭economy’s‬‭level‬‭of‬‭technology.‬‭In‬‭other‬‭words,‬‭they‬‭measure‬‭the‬‭output-to-input‬‭ratio‬‭which‬‭is‬‭basically‬ ‭a measure of productivity.‬ ‭●‬ ‭Y‬‭represents the aggregate output or real GDP.‬ ‭●‬ ‭A‬ ‭represents‬ ‭the‬ ‭technology‬ ‭factor‬ ‭in‬ ‭an‬ ‭economy‬ ‭referred‬ ‭to‬ ‭as‬‭“total‬‭factor‬‭productivity.”‬‭It‬ ‭reflects‬‭the‬ ‭overall‬‭effciency‬‭or‬‭quality‬‭of‬‭the‬‭production‬‭process‬ ‭.‬‭As‬‭the‬‭education,‬‭training,‬ ‭and‬‭health‬‭conditions‬‭of‬‭labor‬‭increase,‬‭frms‬‭will‬‭be‬‭able‬‭to‬‭convert‬‭capital‬‭and‬‭labor‬‭inputs‬‭into‬ ‭output more‬ ‭effciently‬ ‭indicating an increase in‬‭A.‬ ‭●‬ ‭K‬‭represents‬‭the‬ ‭monetary‬‭value‬ ‭of‬‭all‬‭non-human‬‭and‬‭physical‬‭capital‬‭in‬‭an‬‭economy,‬‭such‬‭as‬ ‭buildings,‬‭machinery,‬‭tools,‬‭and‬‭so‬‭on.‬‭This‬‭increases‬‭with‬‭an‬‭increase‬‭in‬‭savings‬‭and‬‭investment‬ ‭in capital stock.‬ ‭●‬ ‭L‬‭represents the labor force or the human capital.‬ ‭○‬ ‭F(K, L)‬‭is a function of the combination of labor‬‭and capital inputs.‬ ‭An‬‭economy’s‬‭level‬‭of‬‭technology‬‭“A”‬‭is‬‭diffcult‬‭to‬‭measure.‬‭In‬‭the‬‭aggregate‬‭production‬‭function,‬‭“A”‬‭is‬ ‭usually‬ ‭used‬ ‭as‬ ‭an‬ ‭adjustment‬ ‭to‬ ‭explain‬ ‭cases‬ ‭where‬ ‭labor‬ ‭and‬ ‭capital‬ ‭do‬ ‭not‬ ‭justify‬ ‭output.‬ ‭For‬ ‭example,‬ ‭when‬ ‭the‬ ‭“K”‬ ‭and‬ ‭“L”‬ ‭render‬ ‭a‬ ‭higher‬ ‭output‬ ‭than‬ ‭expected,‬ ‭“A”‬ ‭must‬ ‭be‬ ‭high.‬ ‭Alternatively,‬ ‭When “K” and “L” render a lower output than expected, “A” must be low.‬ ‭The aggregate production function is represented as follows:‬ ‭Y = A × F(K, L)‬ ‭Whereby:‬

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