Wednesday, August 26, 2009

A study of Economics

I started up a post about the difference in thinking between economists who advocate a Keynesian or modified Keynesian response to a recession and those who propose to do little to interfere with an economy as a government response would be inefficient and lead to loss of freedom. However, it wasn't too far into the post that I realized my thinking was not as clear as it should be. Thus, over the past few days I have been reviewing my macroeconomics textbook and will place my notes and examples up here. It is a fairly lengthy section of the book almost 300 pages, so this may take more than a few posts.

In the beginning... there was Jin. He resides on an island in the South Pacific; and for this example is completely alone. Thus, he is the sole source of GDP, he makes all the income and consumes all the goods and services. Adam Smith would hope that Jin could recruit people to join him, dividing up labor and creating more than one person could do alone, but this is not to be the case.

So how much can he consume, what is the nation of Jin's GDP? It all depends on his productvity. You can see that he is only one person and thus labor will be held constant in this economy. So whether, he gets to eat like a king or pick through barnacles all depends on how well Jin can hunt, fish, gather or grow. If Jin fishes with a wooden spear he carved, he may catch a fish a day and subsist. However, if he can tie tree vines together to create a cast net he might be able to catch 3 fish a day. Then he could either eat a more kingly meal or only fish every third day; hopefully the latter so that he might be able to create a distress signal for his rescue.

There are 4 basics determinants of productivity in Jin's case, there is his capital, his labor, his natural resources and his knowledge or technology. So capital would be his spear or his net. His labor includes any skills or knowledge he has acquired up to this point; if he had participated in Outward Bound he would be more productivity than if he had not. Natural resources are the fish stock, the tree limbs and vines, and the beach or cove that he fishes from. Finally there is the technology or knowledge. This is very closely related to labor, but with one slight difference. Knowledge would be akin to the quality of the instruction, the books, the programs that Jin learned. Whereas his labor knowledge is putting that experience to work.

Finally, there has to be a diminishing return to the inputs put into the economy and there is. This graph is complex but we need only focus on a few points for this next idea.

So if we look where Y1 is relative to Y0 you can see a very large leap in the Y value by adding one unit of K or capital. However, if you look at Y2 versus Y0 you can see that adding an additional amount of capital does not garner the same amount of productivity, that is the difference between Y2 and Y0 is far less than Y0 and Y1.

In Jin's case giving him another net to cast does not help his productivity because he can only throw one cast net at a time.

Till next time, Cheers!

No comments:

Post a Comment