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January 13, 2011 / passiveprogressive

Economics Class: Cobbling Together a Production Function

The Cobb-Douglas production function is a staple source of torture for many people taking economics. The function is deceiving from the start: Charles Cobb and Paul Douglas didn’t even invent it, but rather tested it using available data.

It was invented by Knut Wicksell to relate the output of the economy with its inputs. Simple enough, right? Well, sort of…

In this post I will discuss the uses of the  Cobb-Douglas production function as well as some of its shortcomings.

The Equation:

YALαKβ

Output is equal to Total Factor Productivity X Labor (raised to the elasticity of labor) X Capital (raised to the elasticity of capital).

Basically, output depends on three things: productivity, labor, and capital.

The Variables

 


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