Cobb-Douglas: Capital and Labour

CFA Level II Economics
#1

Hi can someone shed some light regarding this question on the cobb-douglas production function

It has capital (K) and labour (L) variables. “Capital deepening” is said to be a movement along the productivity curve.

My question is: does capital deepening refer solely to capital (K) or does it also include labour (L)? There does not seem to be elaboration on what is the effect on the productivity curve from “deepening labour”

Thanks in advance!

#2

Capital deepening is an increase in the capital-to-labor (K) ratio, whatever that means…

#3

…and is more characteristic of developing emerging economies than developed ones in 90 % of correct answers.

#4

You can’t “deep” labour :slight_smile: It is given by the quantity of people that can work. However, you can complement laborers with capital to make them more productive. That is the core of the neoclassic theory of economic growth.

Also it says that once capital-to-labor ratio is optimized (the point where an increase in capital won’t increase labor productivity anymore), the only way to achieve economic growth is from increase in improvements in technology. A more advanced technology makes the TFP curve (total factor productivity) to shift upwards, hence with the same K/L ratio you can generate more output.

Hope this helps.

#5

Are you sure? Wait until Yankees improve cloning… wink It is time to flash new econ theories, not these from 18 th century.

#6

How about this 22th century economic theory: Aliens come to earth and make us all slaves, great labour deepening for them hahaha cheeky

#7

Capital deepening is just the increase in productivity from tools.

  • 100 farm workers pick corn by hand. Carry it back to the village in a bag. Slow.
  • The wheelbarrow and knife are invented. 100 farm workers pick corn 3x faster.
  • The tractor is invented. 100 tractor drivers pick corn 20x faster.
  • The AI tractor is invented. 100 machine learning dudes oversee corn production 10,000x faster.

Das Kapital.

#8

^ you’ve described TFP, not capital deepening. Capital deepening is movement along a current production function of capital to labour. Let’s take a look at your second example of the wheelbarrow. If you have 10 workers on a farm with no wheelbarrows, then you would experience growth through capital deepening until the point where each worker has a wheelbarrow. Having more wheelbarrows than workers does not promote further growth.

TFP, on the other hand, would be the movement from the wheelbarrow to the tractor (ie, technological innovation). This would move your production function to a new level of output per worker. You now have each unit of labor outputting more per unit of capital.

Continuous improvement in TFP will allow an economy to achieve continuous growth as opposed to capital deepening where growth will plateau as you reach the marginal productivity per worker. There’s a chart that compares capital deepening to TFP which illustrates this very well.

#9

TFP is movement from hunting and fishing to space exploration. In the long term the only factor which impacts sustainable growth.

#10

****. Thank you, cheese guy. You’re totally right.

#11

Helpful thread