State whether the question is True or False and Explain your answer. A diagram or equation...

State whether the question is True or False and Explain your answer. A diagram or equation may be helpful to explain your answer.

a. Constant Returns To Scale implies that doubling the inputs (e.g. capital and labor) of the production function will double output.

b. Development accounting, which is the empirical analysis that uses the production function to explain differences in GDP p.c. across countries, finds that differences in capital per capital across countries can explain MOST of the differences in GDP pc.

c. Total Factor Productivity (TFP) is usually measured empirically as an implied residual from the production function.

Expert Solution

Answer 1 True. Before moving to the discussion, it is important to distinguish between Returns to factor and Returns to scale. The change in output as a result of variation in factor proportions (fixed factors like capital is same while variable factor like labour is changed) is studied under Returns to factor. The relationship between change in output as a result of a change in all inputs(both capital and labor) is studied under Returns to scale.

Returns to scale may be constant, increasing or decreasing. Constant returns to scale occurs when a change in inputs (both capital and labour) in a certain proportion results in change of output in the same proportion. For instance, when input is doubled output is also doubled, constant returns to scale operate. Suppose 9 employees by using 3 machines produce 27 toys. If the input is doubled that is 18 employees work with 6 machines, 54 toys are produced. This is the stage of constant returns to scale.

Answer 2 Accounting of the extent of per capita GDP, is referred to as development accounting. Results achieved through development accounting only describe a minor part of the cross-country variation in income. Total-factor productivity (TFP) which is the "residual and unexplained" part of development accounting, is the main driver behind per capita GDP differences

Answer 3 True. Before measurement, it is important to discuss the concept of Total Factor Productivity (TFP).

Total-factor productivity (TFP), is the fraction of output that is not explained by traditionally measured inputs of labour and capital used in production.
How TFP is calculated?
The rate of TFP growth is achieved by subtracting growth rates of labor and capital inputs from the growth rate of output.It is calculated by using Solo residual. It tells you whether an economy is growing because of increases in capital or labor, or because those inputs are being used more efficiently.

The Cobb–Douglas equation indicates total output (Y) which is a function of total factor productivity, labor input, capital input and the two inputs' respective shares of output

Rahul Sunny answered 1 year ago

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