• Cobb Douglas Production Function • Elasticity of Labor and Capital • Methodology to Calculate Elasticity • İnvestment and Capital Stock
• In the 1920s the economist Paul Douglas was working on the problem of relating inputs and output at the national aggregate level.• During the decade1909 - 1918, the share of output payed to labor was fairly constant at about74%, despite the fact the capital/labor ratio was not constant.• Mathematically the problem is this: Assume that the formula Y =F(K;L) governs relationship between output Y , capital K, and labor L.
• In its most standard form for production of a single good with two factors, the function is where: Q= AKα Lß• Q = total production (the monetary value of all goods produced in a year)• L = labor input• K = capital input• A = total factor productivity α and β are the output elasticities of labor and capital, respectively.
Elasticity of Labor and CapitalThis Quantity Measures:• the extent to which firms can substitute capital for labor as the relative productivityOR• the relative cost of the two factors changes.When this number is large, it means that firms can easily substitutebetween capital and labor.In general, the elasticity of substitution depends on theAmount Of Capital And Labor Employed.
Methodology to Calculate Elasticity• Total outlay or Expenditure Method• Proportionate or Percentage Method• Point Elastic Method• Arc Elasticity of Method• Revenue Method
İnvestment and Capital Stock• Capital stock are normally listed on a companys balance sheet.• In financial statement analysis,an increasing capital stock account tends to be a sign of economic health• Since the company can use the additional proceeds to invest in projects or machinery that will increase corporate profits and / or efficiency.
This Correlation İndicate Us With The Line, Capital Stock AndValue Added Average Values. And The Points Are Actual Values.
Dependent Variable: VAMethod: LeastSquaresDate: 10/27/11 Time: 10:44Sample: 1973 2000Includedobservations: 28 Coefficient Std. Error t-Statistic Prob.C -125147.1 16945.98 -7.385.060 0.0000EMP -0.008122 0.023321 -0.348252 0.7306CS 0.271526 0.039113 6.942.135 0.0000R-squared 0.940860 Meandependent var 16125.43Adjusted R-squared 0.936129 S.D. dependent var 7.776.565S.E. of regression 1.965.354 Akaikeinfocriterion 1.810.569Sumsquaredresid 96565449 Schwarzcriterion 1.824.843Loglikelihood -2.504.797 Hannan-Quinncriter. 1.814.933F-statistic 1.988.624 Durbin-Watson stat 1.535.835Prob(F-statistic) 0.000000 If The R- Square İs Near To 1 That Is Mean We Can Trust This Equation. We İnvest On The Capital Stock.