Our objective is to describe the (short-run) technical relationship between real output (GDP) and total employment

+ In the context of the theory of the firm, the short-run means a situation in which there is at least one fixed productive factor. + In the macroeconomic context, the short-run means that period in which productive capacity is taken as given within narrows--that is, a period not sufficient to allow for a substantial augmentation of the capital stock, meaningful technical change, or the discovery of new natural resources.

•Q = Potential output (GDP) •Y = Actual output (GDP) •N’ = The economy’s labor force •N = Actual employment •H’ = Standard hours worked per year •R’ = Economy’s stock of know and useful natural resources •K’ = Economy’s capital stock •T’ = Technological state-of-the-art •P a = Average output per worker per hour •P R = Average output per worker per year

Thus in the short-run N’, H’, K’, R’, and T do not change

Deriving the function Q = f(N’, H’,K’, R’;T) [1] We can also say that : Q = (N’  H’  P a ) [2] Let: P R = H’  P a [3] Substituting [3] into [2] to obtain: Q = N’  P R [4] Thus, in the short-run: Y = f(N, R’, K’; T) [5] Labor is the “variable” input in the short-run

Actual output (Y) is given by actual employment (N) times ave. productivity (P R ) Y = N  P R N Y 0 YaYa N1N1 N2N2 Y1Y1 Y2Y2   3 Notice the function exhibits diminishing returns. 3 In the short- run we move ALONG the function

Y = N  P R N Y 0 YaYa N1N1 N2N2 Y1Y1 Y2Y2   3 Augmentation of the capital stock. 3 Discovery of hitherto unknown resources. 3 Improvements in the quality of human resources. 3 Technical change YbYb 