Macroeconomics
The aggregate production function is illustrated as follows:
Breakdown of the Aggregate Production Function Diagram: ● The horizontal axisrepresentsthephysicalcapitalperworker,whichistheamountofphysical capital (e.g., tools, machinery, etc.) available per worker in an economy (total physical capital/number of workers). ● The vertical axis represents the real GDP per worker, which is the output per worker in an economy. ● Thecurverepresentsproductivity,whichisthecombinationofthetechnologylevelperworker, the physical capital per worker, and the human capital per worker. Implications: ● Aggregateemploymentandaggregateoutputaredirectlyrelated:Toproducemoreoutput,more workers need to be employed. The aggregate production function shows that GDP percapita (GDP/Population) is positively related to physical and human capital. As both types ofcapital increase, GDP per capita increases too. ● However,ifhumancapitalandtheleveloftechnologyremainedunchanged,eachadditionalunit ofphysicalcapitalperworkerwouldleadtosmallerincreasesinproductivity. Forexample,when physicalcapitalperworkerincreasedby$3,000frompointXtoY,realGDPperworkerincreased by $2,000. However,whenphysicalcapitalkeptonincreasingfrompointYtoZalsoby$3,000, productivity only increased by $1,000 (from $5,000 to $6,000). This reflects the diminishing returns of physical capital explained in Section D.
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