Video Transcript: Lesson 10

Hello, everyone. Welcome back to the Principles of Macroeconomics course.  We're beginning Unit Four with the aggregate production function. So let's kind  of review what the production function is. Economic organizations transform  inputs, factories, office buildings, machines, labor with a variety of skills,  intermediate inputs, and so on into outputs or products. So, organizations,  companies, firms that manufacture things or put products out into the market for  sale-you know-use the inputs, raw materials, labor, etc. to create these outputs,  these final products that will be put on sale at the market price. For example,  Boeing owns factories. They hire workers. They buy electricity and avionics, and they use them to produce aircraft. American Express is a credit card business  that uses computers, buildings, labor, and small amounts of plastic to produce  payment services. For another example, Pfizer, a pharmaceutical company,  hires scientists as well as MBAs and other scientists or people related to that  industry to develop, produce, and then market their products. So you can see  that there is multiple things that are used inside the production function, these  inputs are used inside the production function to create the outputs, and you can see that by the examples. For an economy as a whole, we might think of all the  labor and capital used in the economy as producing GDP or gross domestic  product, which is the total value of goods and services. A production function is  a mathematical relation between inputs and outputs that makes the idea  concrete. Here, in the example of the equation y equals af times k and L, right?  Where Y is output. That's the real GDP. K is the quantity of physical capital,  which is plant property and equipment, also known as PPE, used in production.  L is the quantity of labor, and A is the measure of productivity of the economy,  and as those move, particularly the physical capital used and the labor used,  your productivity will increase or decrease based on the mix of labor and  Physical capital from the simple production function y equals f, which is standard per function l and k labor and capital resources. Again, we can identify three  sources of growth: one, an increase in labor, an increase in capital assets and a  change in the function, the first two represent growth of the factors of  production. So, labor may increase if the population grows, if we have more  individuals in the workforce, or if unemployment falls, then labor will increase or  decrease accordingly as production or capital assets increase in investment.  Those are typically large, but as the capital assets that you provide in your initial kind of development phase, then you will have a larger savings. So if you have  larger raw material already in inventory, and you start the production of some  product, your savings will be greater because you won't have to make as big of  an investment in initial raw materials, so you'll have a savings that'll be rather  large if you can start with a large quantity of raw materials or inputs. So the  function or the need may not be the same function over time. It is possible that y increases even though l and k are fixed. So when the function changes or the  variable f changes, so that the same amount of the factors of production will 

produce more output, we say we have technological progress or productivity  growth. So you can see that productivity increases when labor and capital  assets remain the same, but productivity grows up, increases. Then you can say say maybe that is correlated to technological progress, right? So that is going to  equate to greater productivity growth with technological process or progress.  MPL and MPK will typically increase for given values of L and K. That is, though  productivity of the factors increase. Now let's look at education and growth in  human capital. These are important aspects of the growth in GDP. Human  capital is treated in different ways in the literature that you'll find in the text. You  can think of human capital as being included in K. This is the view in which we  make an investment into education. You'll see that a lot of companies, a lot of  firms are providing tuition assistance for their employees that go back and  maybe receive an associate's degree, bachelor's degree, or master's degree. A  lot of companies want their employees to further their education, so they'll be a  more valuable asset to that organization over time. So you can see that the  investment into education will potentially increase the productivity of the labor  force, so we'll view that as a production function as well. You can add another  variable into the production function, where this is h. H is the amount of human  capital, and k amount of physical capital. The amount of human capital may  affect the function. The more human capital we have, the more we that can be  produced from the same amount of labor and capital. So, the more that we  invest into these things, the more productivity we'll have. With this view,  increasing the amount of human capital will lead again to greater productivity  growth.