by Yulius Suprianto Macroeconomics | 02 Maret 2019 Chapter-5: The Standard of Living Over Time and A Cross Countries Source: http//

Who is Number One…? GDP  United States  China  India  Japan  Germany Countries having a population of at least 1 milion (Data in 2011) GDP per capita  Qatar  Singapore  Norway  Hong Kong  United Arab Macroeconomics |2

CountryGDPGDP per capita United States$ 15.0 trilion$ 48,100 China $ 11.3 trilion$ 8,400 India$ 4.5 trilion$ 3,700

Why are some countries rich and others poor…? Microeconomics |4 We begin building a model that can help answer that question

Macroeconomics |5  The Aggregate Production Function ‒ The aggregate production function is an equation that shows the relationship between the inputs emloyed by firms and the maximum output firms can produce with those inputs. ‒ We can write a genaral version of the aggregate production function as : Y = A X F (K,L) or Y = AF (K,L). ‒ A production function has constant returns to scale if increasing all inputs by the same percentage increases real GDP by that percentage.

Diminishing Marginal Returns The amount by which output increases as a result of a one – unit increase in capital is the marginal product of capital (MPK). MPK = ∆Y ∕ ∆K Similarly, the amount by which output increases as a result of a one-unit increase in labor is the marginal product of labor (MPL). MPL = ∆Y ∕ ∆L

Macroeconomics |7  A Model of Real GDP in the Long Run The level of real GDP results from the profit maximizing decisions, we make these four assumptions : 1.firms purchase capital and hire labor only if doing so maximizes profits. 2.firms operate in perfectly competitive markets, so each firm is a price taker 3.firms take the prices of capital goods and labor as given. 4.firm decide how much capital and labor to hire and how much output to produce using the available technology, based on the prices of output and inputs.

Profits are therefore : Profits = Revenue – Cost Profits = PY – (WL + RK) Profits = PY – WL - RK Macroeconomics |8

Macroeconomics |9 Combining the Factor Markets with the Aggregate Production Function We can combine the equilibrium quantities of capital and labor with the aggregate production function to determine the equilibrium level of real GDP.  Total labor income = MPL × L,  Total capital income = MPK × K  MPL = (I – α) (Y/L)  MPK = α (Y/K)¹. The Division of Total Income

Macroeconomics |10  Real GDP per Worker Varies Among Countries  The per worker production function shows the relationship between real GDP per worker and capital per worker.  Labor productivity and the labor inputs (the fraction of the population working) affect real GDP per capita, but labor productivity is the more important determinant.  As long as labor productivity increases, real GDP per capita will also increase, and standard of living will rise.

Macroeconomics |11  Total Factor Productivity and Labor Productivity  Total factor productivity growth and capital accumulation are the two sources of increases in labor productivity.  The key to a high standard of living is not the number of workers a country has but how productive those workers are. ( example China and United State )  Workers become more productive as they acquire human capital, which is the accumulated knowledge and skills that workers acquire from aducation and training or from life experiences.

THANK YOU Yulius Suprianto