Macroeconomics
● This means that without improvements in technology and the quality of human capital, diminishing returns will set in, reducing the productivity of each additional unit of physical capital. ● SinceeconomicgrowthismeasuredusingGDPpercapita(GDP/population), increasesinreal GDP per worker caused by higher productivity lead to economic growth. Changes in the Aggregate Production Function: ● To achieve productivity in all aspects of an economy, technological advances are a must. Therefore, an increase in the total factor productivity “A”, which represents the state of technologyinaneconomy,allowstheeconomytoproducemoreoutputusingthesamequantity of physical capital, human capital, and labor. ● Anincreaseinproductivityisillustratedbyanupwardshiftoftheaggregateproductionfunction and vice versa. Study Tip When describing shifts of the aggregate production function, always use the terms “up”or“down” instead of “right” or “left”.
Whentheaggregateproductionfunctionshiftsupbecauseofanincreaseinproductivitystemmingfrom advances in technology, more output per worker can be produced using the same capital and labor inputs. For example, at $,5000 physical capital per worker before technology improved, real GDP per workerwas$5,000(pointY).Whentechnologyimprovedandproductivityincreased,realGDPperworker increased to $6,600 using the same amount of $5,000 in physical capital per worker (point U).
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