tag:blogger.com,1999:blog-6837159629100463303.post7320841151585766540..comments2021-07-22T00:29:53.205-07:00Comments on Information Transfer Economics: Solow production function and nominal valuesJason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-6837159629100463303.post-29854197475385406312015-05-22T14:17:37.736-07:002015-05-22T14:17:37.736-07:00Thanks for the description -- that seems to make s...Thanks for the description -- that seems to make sense mathmatically.<br /><br />I also realized that I make a mistake; since the equation follows from<br /><br />$$<br />\frac{\partial Y}{\partial K} = \alpha \; \frac{Y}{K}<br />$$<br /><br />any transformation of the form $Y \rightarrow c(t) Y$, $K \rightarrow c(t) K$ will leave the result unchanged (homogeneity of degree zero). That is that there shouldn't be a factor left over -- I'm really looking at the equation:<br /><br />$$<br />\frac{Y}{Y_{0}} = \lambda \left( \frac{K}{K_{0}}\right)^{\alpha} \left( \frac{L}{L_{0}}\right)^{\beta}<br />$$<br /><br />and so have to change the $K_{0}$ too. No need to absorb it into $L$.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-21779506533103936852015-05-21T15:51:31.976-07:002015-05-21T15:51:31.976-07:00The extra factor can be absorbed by labor, or at l...The extra factor can be absorbed by labor, or at least it can be absorbed with no interpretative problems. The Cobb-Douglas production function is mostly used because it spits out expressions like " w L = (1 - a) Y ", i.e. labor's real share of real GDP is constant. "Reflating" real product by multiplying it by P changes that equation to " P w L = (1 - a) P Y ", i.e. labor's nominal share of nominal GDP is constant, which is the same thing as before, but multiplied by a price index. That real demand for labor doesn't change with prices is a good thing (in economics).<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-61596661281341078572015-05-13T16:05:39.066-07:002015-05-13T16:05:39.066-07:00Hi John, thanks for the pointers ... the issue I&#...Hi John, thanks for the pointers ... the issue I'm having is more general than a specific model -- the Solow production function just illustrates it pretty well.<br /><br />If you use nominal values there is no mystery, 'TFP' is just a constant, and the model is pretty empirically accurate. If you use real values, there is the mathematical weirdness above (being unable to convert from real to nominal values in the formula), the model isn't very accurate, and TFP is this major factor accounts for most of economic growth. As I said in the closing it seems to be a no-brainer ... Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-23707816302876693512015-05-13T15:25:29.061-07:002015-05-13T15:25:29.061-07:00If you're concerned with the majority of "...If you're concerned with the majority of "real" economic growth being caused by changes in TFP, I suggest you look into endogenous growth theory: https://en.wikipedia.org/wiki/Endogenous_growth_theory<br /><br />Also, I believe FRED's measure of Canada's TFP has been pretty stagnant since 1950, so that may be worth looking into.John Handleyhttps://www.blogger.com/profile/16057855086740377031noreply@blogger.com