2012SpringW3213Lecture3LaborLeisure

2012SpringW3213Lecture3LaborLeisure - Intermediate...

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Intermediate Macroeconomics Economics W3213 Professor: Jón Steinsson Lecture 3 1
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Announcements Reading: Today: Barro ch. 2, Keynes, Marx Thurs: Stiglitz ch 3. Problem Set 1: Due Thurs Feb 2 nd At the beginning of class 2
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Review: First General Equilibrium Model 3 markets (labor, capital, goods) Firms maximize profits: Yields labor demand and capital demand curves Households supply labor and capital inelastically Abstract from choices made by households Yields simply labor supply and capital supply curves Walras’ law: No need to solve goods market Output found using production function Price of goods numeraire 3
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Review: Production Function Technology used to produce goods described by a production function : ଵି௔ This is a simple example of a production function called the Cobb Douglas production function 4
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Review: Firm’s Problem Solution to firm’s problem: 1. Choose optimal level of capital Set MPK equal to rental price of capital Maximize profits with respect to K treating L as fixed ଵି௔ ௔ିଵ ଵି௔ 1. Choose optimal level of labor Set MPL equal to rental price of labor (wage) Maximize profits with respect to L treating K as fixed ଵି௔ ି௔ 5
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Review: Solving a Model An “Equilibrium”: The solution to an economic model “Solving” a model: Rewriting the equations of the model so that the endogenous variables are on one side of the equations and only exogenous variables and parameters on the other side. 6
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Output per person? Define y=Y/L and k = K/L: Determined by two factors: Productivity Capital per person (Diminishing returns to capital per person) 9 3 / 1 3 / 2 3 / 1 * * * k A L L K A L Y y 3 / 1 * k A y
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Taking the Model to the Data This is an empirical implication of the model Using this equation to try to account for differences in output across countries is called development accounting What data do we need check this implication? Output, Capital, Labor Technology 3 / 1 * k A y 10
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Taking the Model to the Data We can measure output, capital and population (This is hard but we can try) Harder to measure 3 / 1 * k A y A 11
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Let’s assume that all countries have the same level of technology: ௎ௌ Then drops out when we take ratios of two countries: How do we evaluate this equation using data? 12
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2012SpringW3213Lecture3LaborLeisure - Intermediate...

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