How does the equation of the production function apply to Michael Spence's article "Why China Grows So Fast?"Mainly, how that equation of production function is applied or viewed on Micheal...

How does the equation of the production function apply to Michael Spence's article "Why China Grows So Fast?"

Mainly, how that equation of production function is applied or viewed on Micheal Spence's article:  "Why China Grows so fast"

Y=AF(L, K, H, N)

There is something I don't quite understand.  if in the case of China, then the PF has constant returns to scale, then it doubles?  Very confused here

2Y=AF(2L, 2K, 2H, 2N)

Or Y/L= A F (1, K/L, H/L, N/L)

Thank you!!

Asked on by lolaaqui

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I assume that you are looking at the production function in which Y is the economy's output, A is the level of technology available, L is labour, K is the quantity of physical capital, H the quantity of human capital and N the amount of natural resources.

Spence's article implies that China has grown rapidly largely because of its saving and investment rates.  All of the other factors that he says lead to rapid growth are not peculiar to China.  Many countries have open market economies with resource mobility, so why is China growing so fast?

In terms of this function, what is going on is that China has plenty of L and N and is growing in terms of H, A, and K.  A and K, in particular, are influenced by the amount of savings in the economy.  If people are saving, then Chinese firms have much more money to use in order to buy more and better capital goods.  This increases K and can also increase A as the available technology gets better.

As to your confusion, all Mankiw is saying (I assume you're using his book) is that if there are constant returns to scale, then Y would double if all of L, K, H and N double.  Spence is not saying anything about whether China has constatnt returns to scale or about putting any actual value to the variables.  He is simply saying that some of these variables have increased in value and China is, therefore, experiencing growth.

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