9 terms economists use that you don't know--but should

January 15, 2015 12:19 PM

1. The Cobb-Douglas Production Function

Source: Wikimedia Creative Commons

A “production function” is just like a recipe -- it’s a way of describing how inputs get turned into outputs. For example, you can have a production function that describes how much pizza you can make out of a certain amount of pepperoni, cheese, crust and sauce. The Cobb-Douglas production function is no different: it tells you how much gross domestic product you can get if you put in a certain amount of labor and capital, such as buildings, trucks and computers.

The Cobb-Douglas function has a nice property, which is that it predicts that a country will spend constant percentages of its national income on capital and labor. In other words, if labor’s share of national income is two-thirds, then two-thirds of all money earned in the U.S. in a given year will go to wages, salaries and bonuses. Recently, labor has been taking home a smaller percentage of national income, which has caused a lot of worry.

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