Growth effects and factor market integration

Question 1

Two categories of growth effects

Answer 1

• medium term, (induced physical capital formation)

- long term (permanent change in the rate of accumulation -> permanent change in the rate of growth)

Question 2

Schematic logic of growth

Answer 2

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 growth effect: rise in output per person stops at new, higher level
• long-run growth effect: growth rate is forever higher

Question 3

Situation of economic growth before Industrial Revolution

Answer 3

• for about 1500 years stagnation of incomes

Question 4

Productivity Slowdown

Answer 4

• most wealthy nations experienced slower income growth rates from the early 1970s
• each decade since the 1960s has seen slower per capita income rises
• Robert Gordon argues growth and innovation didn’t slow down from the 1970s, but rather that it returned to its historical norm (after new inventions from 1870s on)

Question 5

Evidence of growth in European context

Answer 5

• Statistical evidence shows sizeable medium-run effect of integration

Question 6

Investment and output per worker

Answer 6

• diminishing returns: output does not proportionally rise with investment/equipment per worker
• equilibrium K/L ratio = inflow and outflow of K/L are identical (inflow is investment, outflow is depreciation)
• Solow’s assumption: constant savings (=investments) from income -> GDP/L

Question 7

Implications of Solow Growth Model

Answer 7

Convergence: countries with low levels of income per capita should grow faster than countries with high levels of income per capita and catch up with them

Question 8

Schematic effects of integration

Answer 8

integration → improved efficiency → higher GDP/L → higher investment-per-worker → economy’s K/L ratio starts to rise towards new, higher equilibrium value → faster growth of output per worker during the transition from the old to the new K/L ratio (‘medium-term growth bonus’)

Question 9

Determinants of long-run growth

Answer 9

• continuous technical progress
• new production techniques through technology
• knowledge capital = technology

Question 10

Diminishing effect of knowledge capital?

Answer 10

No, even as the knowledge stock rises, there seems to be no tendency for the usefulness of more knowledge to diminish.

Question 11

Endogenous growth - lessons learned

Answer 11

• the economy may grow forever
• convergence is not automatic
• growth depends on savings rates