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A simple model of GDP determinationUIUC Econ303 ZhaoGrowth A Simple Model of GDP DeterminationSpecification of an economy•Technology: Y=F(K,L)–F(K,L)=10K0.3L0.7•Many identical firms demands labor and capital–Representative firm–Aggregate demand are Kdand Ld•Firms behave competitively in both labor and capital markets–The action of a single firm does not affect prices–Take wage rate and rental rate of capital as given•The supply of labor and capital is fixed–Ks=1–Ls=1LwDemand for laborSupply of laborEquilibrium wageEquilibrium laborHow to compute an equilibrium
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A simple model of GDP determinationUIUC Econ303 ZhaoAn exampleExample continuedWhat could lead to a higher wage? LwLwHigher labor productivityLabor scarcityForce of demand and supplyln(college/highschool)Goldin and Katz NBER 12984