Chapter 7 Growth Effects & Factor Market Integration

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Presentation transcript:

Chapter 7 Growth Effects & Factor Market Integration

Growth Effects European leaders have long emphasised a different the pro-growth aspects of European integration. These operate in a way that is fundamentally different from the way allocation effects operate. They operate by changing the rate at which new factors of production – mainly capital – are accumulated, i.e. the name ‘accumulation effects’.

Verbal Logic of Growth Growth in income per worker requires more output per worker. Nation’s labour force can produce more goods and services year after year only if they have more/better ‘tools’ year after year: ‘tools’ means capital broadly defined: physical capital (machines, etc.) human capital (skills, training, experience, etc.) knowledge capital (technology).

Verbal Logic of Growth ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation. Most capital accumulation is intentional and it is called investment: thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.

Verbal Logic of Growth: Summary European integration (or any other policy) → Allocation effect → Improved efficiency → Better investment climate → More investment in machines, skills and/or technology → Higher output per person. Medium run effects eventually peter out Growth returns to its long-run rate. Long-run effects raise long-run rate forever.

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Some Facts GDP per capita & rankings, 1950 and 1973 (1990 international dollars) – full list, cont.

Solow Diagram Show medium run growth effects in simple diagram. To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere.

Solow Diagram

Induced Capital Formation

Integration Induced Investment Rate Rise

Integration-induced investment in Spain and Portugal

Integration-induced investment in Ireland

Integration-induced investment in Greece

Long-Term Growth in Solow-Like Diagram