Lecture 8 - Integration and growth

Question 1

What does GDP measure?

Answer 1

GDP measures output of goods and services valued at market prices

Question 2

What does economic growth involve in terms of GDP?

Answer 2

Economic growth involves increasing GDP per person

Question 3

What happens if the labour force is fixed and more K is added?

Answer 3

• If the labour force is fixed, adding more K increases output but at a declining rate (diminishing returns to K)
• K wears out and has to be replaced
• The bigger the K stock, the more depreciation in direct proportion

Question 4

What happens as the stock of K gets higher in an economy?

Answer 4

As the stock of K gets higher:
- the more of the savings are used for replacing worn out K
- the less savings can be invested to increase the total K stock
- eventually all savings are used for replacement so there is no increase in the stock of K anymore

Question 5

How does integration stimulate economic growth in relation to technology as given by the Solow model

Answer 5

Integration raises technology:
- Trade is an important method of improving technology, especially imports of machinery and services
- So if integration stimulates trade it may also raise technological progress which causes growth per the Solow model

Question 6

How does integration stimulate economic growth outside of technology

Answer 6

• Bigger markets give greater stimulus to R&D
• Free movement allows greater circulation of people and ideas
• Multinational companies play a central role in developing and spreading technology