Growth_lect3_handout

Growth_lect3_handout - A simple model of GDP determination...

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A simple model of GDP determination UIUC Econ303 Zhao Growth A Simple Model of GDP Determination Specification of an economy Technology: Y=F(K,L) – F(K,L)=10K 0.3 L 0.7 Many identical firms demands labor and capital – Representative firm – Aggregate demand are K d and L d 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 –K s =1 –L s =1 L w Demand for labor Supply of labor Equilibrium wage Equilibrium labor How to compute an equilibrium
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A simple model of GDP determination UIUC Econ303 Zhao An example Example continued What could lead to a higher wage? L w L w Higher labor productivity Labor scarcity Force of demand and supply ln(college/highschool) Goldin and Katz NBER 12984
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A simple model of GDP determination UIUC Econ303 Zhao Mean years of schooling by birth cohorts US native born: 1876 to 1980 Comparative static analysis : Change a part of an economy that is exogenously given, then compare equilibriums before and after the change. Example: Increase of labor supply through immigration by 10% Before Capital = 1 Labor = 1 Output = 10 Wage = 7 Rental rate = 3 After Capital = 1 Labor = 1.1 Output = 10*1 0.3 *1.1 0.7 =10.69 6.9% Wage = 0.7*10*1 0.3 *1.1 -0.3 =6.80 2.86% Rental rate =0.3*10*1 -0.7 *1.1 0.7 =3.21 6.9% Effect of an increase of labor supply On the labor market New equilibrium wage Labor Wage Increase the supply of labor Old equilibrium wage Old supply New supply Demand for labor Effect of an increase of labor supply On the capital market New equilibrium rental rate Capital Rental rate Increase of the supply of labor leads to an upward shift of the demand curve of capital Old equilibrium rental rate Supply of capital Demand for capital
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A simple model of GDP determination UIUC Econ303 Zhao Predict the impact on the wage rate and the rental rate of capital A big epidemic that wiped out a significant portion of population. (AIDS epidemic in South Africa, Black death in Europe) A war that destroyed some of the capital stock. (Western Europe after World War II) A large inflow of poor immigrants. (US during 1860-1900) An inflow of foreign investment. (Asian’s four dragons, China after
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This note was uploaded on 12/06/2010 for the course ECON 3020 taught by Professor Williamson during the Spring '10 term at FSU.

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Growth_lect3_handout - A simple model of GDP determination...

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