8. The labor share and Cobb-Douglas production (a FRED question): Using the FRED

Question

8. The labor share and Cobb-Douglas production (a FRED question): Using the FRED database, download a graph of the share of income paid to labor for the nonfarm business sector of the U.S. economy, back to 1947. (For an intro- duction to FRED, see the case study "The FRED Database" in Chapter 2 on page 34.) (a) Display this graph. (b) The graph most likely shows an index (e.g., normalized so the value in some year is 100) rather than the share itself. Assuming the labor share in 1965 to 1980 averaged 2/3, approximately what value is the labor share for your most recent data point? (c) What does this graph suggest about the validity of our assumption that the production function is Cobb-Douglas?14

Explanation / Answer

These graphs are showing increase in Gross domestic product values. It is assumed according to the Cobb Douglas function that production is a function of labour and capital

X=b0 * Lb1 *Kb2

Where X=Output, b0= Coeffiecient of efficiency.

L=Labour, K=Capital

b1= Coefficient of labour and b2=Coefficient of capital.

c) The graphs show that production function is the Cobb-Douglas function as labours are substituted by technlogy with time. Labour percentage is going down and capital is building up.

b)The labor share has almost become insignificant. less than 10%.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.