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E.I. (Subject) / Dynamic effects of integration (Lesson)
- Verbal logic of growth Opperate by changing the rate at which new factors of production are accumulated ("accumulation effect") capital and labour movement can look like an allocation effect from EU perspective, accumulation effect for nation rate of output growth linked with rate of physical, human and capital accumulation (e.g. Investment)
- Growth Effect and European Integration allocation effect -> improved efficiency -> new profitable investment opportunities -> higher output per person
- Growth effect in medium- and long-run In neo classical model medium-run effects peter out (rise in output/person eventually stops at new higher level -> growth rate returns to its long-run rate long-run effect; rate of growth is forever high (technological progress)
- Key assumption of Solow diagram saving rate is constant depreciation rate is constant exogenous technological progress constant return to scale
- Curves and axes of Solow Diagram Horizontal: K/L Vertikal: €/L (Output/L) GDP/L: increases with increasing capital endowment, but marginal returns to capital decline s(GDP/L): is constant such that savings are constant share of GDP per worker = investment/worker δ(K/L): constant fraction of capital stock depreciates (amount of depreciation per woker increases with amount of capital per worker) "Steady State" (Schnittpunkt δ(K/L)=outflow & s(GDP/L)=inflow; K*/L): economy grows here at the rate of technological progress
- How does integration affect growth? allocation effect via trade ->capital accumulation effect as consequence of higher allocative efficiency -> knowledge accumulation, i.e. higher rate of technological process, through higher allocative efficiency and market size
- How does integration affect Solow diagram? S.11. Efficiency shifts up GDP/L and s(GDP/L) [allocation effect: K*/L bei GDP/Lalt & GDP/Lneu] ⇒ €/L steigt Induced capital formation effect is the medium-rum growth bonus (improved efficiency will tend to stimulate investment
- Long term growth effect =Knowledge accumulation Knowledge capital does not face diminishing returns -> GDP/L and s(GDP/L) are straight Knowledge capital becomes obsolete -> δ(K/L) is straight inflow of new knowledge exceeds outflow, the knowledge capital stock rises (if s rises the nation will accumulate knowlege capital faster -> income will rise faster) Integration improves efficiency -> improves investment climate -> higher investment rate (s(GDP/L) shifts up)
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