Transcript Baldwin & Wyplosz The Economics of Euroepan Integration

Chapter 7: Growth Effects & Factor Market
Integration
© Baldwin&Wyplosz The Economics of European Integration
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Growth Effects
• European leaders have long emphasised a 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,
– hence the name ‘accumulation effects’.
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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.) and
• knowledge capital (technology).
• ERGO, rate of output growth is 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.
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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 fade out
– Growth returns to its long-run rate
• Long run effects raise long-run rate forever
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Some facts
Table 7-1: European Growth Phases, 1890-1992
Period
Real GDP
2.6
Real GDP
per capita
1.7
Real GDP per
hour
1.6
1890-1913
Belle epoque
1913-1950
2nd 30 yr war
1950-1973
Golden era
1973-1992
1.4
1.0
1.9
4.6
3.8
4.7
2.0
1.7
2.7
2.5
1.9
2.6
Prod’ity slowdown
Whole Period
1890-1992
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Some facts
Table 7-2: Growth in the WWII Reconstruction Phase.
The Set-Back: (Prewar year when GDP
equalled that of 1945)
Back-on-Track Year
(Year GDP attained
highest pre-war level)
Reconstruction
Growth (rate 1945 to
col. 2 year)
Austria
1886
1951
15.2%
Belgium
1924
1948
6.0%
Denmark
1936
1946
13.5%
Finland
1938
1945
n.a.
France
1891
1949
19.0%
Germany
1908
1951
13.5%
Italy
1909
1950
11.2%
Netherlands
1912
1947
39.8%
Norway
1937
1946
9.7%
Sweden
These nations grew during WWII
Switzerland
UK
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Some facts
Table 7 3: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars).
EEC
average
EFTA
average
France
Germany
Italy
UK
1950 GDP
(1990 $)
European
Rank 1950
Change in GDP
Rank 1950- Growth
1973
Rate
4,825
8.0
+ 1.2
4.2
6,835
3.6
-1.4
3.0
5,221
4,281
3,425
6,847
7
9
13
2
+2
+5
+2
-5
4.0
5.0
4.9
2.4
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Some facts
Complete table
1950 GDP (1990 $)
European Rank 1950
Change in Rank 1950-1973
GDP Growth Rate
EEC average
4,825
8.0
+ 1.2
4.2
Netherlands
5,850
5
-1
3.4
Belgium
5,346
6
-2
3.5
France
5,221
7
+2
4.0
Germany
4,281
9
+5
5.0
Italy
3,425
13
+2
4.9
EFTA average
6,835
3.6
-1.4
3.0
Switzerland
8,939
1
0
3.1
UK
6,847
2
-5
2.4
Sweden
6,738
3
+1
3.1
Denmark
6,683
4
+1
3.1
Norway
4,969
8
-4
3.2
Finland
4,131
10
0
4.2
Austria
3,731
11
+2
4.9
Others average
2,401
14.3
-0.3
5.2
Ireland
3,518
12
-3
3.1
Spain
2,397
14
+1
5.8
Portugal
2,132
15
+1
5.6
Greece
1,558
16
0
6.2
For Comparison USA
9,573
Japan
1,873
2.4
8.0
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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.
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Solow diagram
euros/L
The inflow of new capital and
how it varies with K/L
Outflow of capital per
L, constant
depreciation rate,
delta
Y/L*
GDP/L
B
d(K/L)
s(GDP/L)
A
Assume fixed investment rate, s
Io
Do
K/Lo
K/L*
K/L
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Induced capital formation
euros/L
Y/L’
Y/Lc
Y/L*
Induced capital formation effect,
i.e. medium-run growth bonus
E
C
GDP/L’
GDP/L
Allocation effect
d(K/L)
B
D
s(GDP/L)’
s(GDP/L)
A
K/L* K/L’
K/L
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Maths – neoclassical I
•
•
•
•
•
•
•
Solow model’s constant savings rate
S/L=s*Y/L, but Deprec/L=d*(K/L)
Y/L=A*(K/L)a; define K/L as k
Equilibrium: K/L s.t. s*A*(k)a=d*(k)
dA/A+adk/k=dk/k => (dk/k)/(dA/A)=1/(1-a)
So d(Y/L)/(dA/A)=1+ a/(1-a)
The ‘1’ is the allocation effect, the ‘a/(1-a)’ is the
medium-run growth bonus, i.e. accumulation effect.
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Maths – neoclassical II
• Allow intertemporal optimisation
• Steady state condition is:
rho + delta = aA*(k)a-1
So (dk/k)/(dA/A)=1/(1-a)
• So we get same result as with the Solow Model .
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Integration induced investment rate rise
euros/L
Medium-run growth bonus
D
Y/L’
Y/L*
GDP/L
d(K/L)
B
C
s’(GDP/L)
s(GDP/L)
A
K/L* K/L’© Baldwin&Wyplosz The Economics of EuropeanK/L
Integration
14
OtherExperience
MR growthofeffects:
investment
Spain &
Portugal rate
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Other MRExperience
growth effects:
investment rate
of Ireland
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Other MRExperience
growth effects:
investment rate
of Greece
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Long-term growth in Solow-like diagram
euros/L
GDP/L
Y/L*
s(GDP/L)
A
d(K/L)
B
K/L*
K/L =Knowledge/L
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Maths - New growth theory
• Endogenous product innovation; drives growth as Prices fall
with n.
• Basic setup explained.
– Costs aI units of labour to develop a new variety which lasts
forever.
– Discounting at ‘r’
– Euler equation says: growth rate of E = r – r
– r is the subjective discount rate of infinately lived consumer.
• dn=LI/aI,;
• Knowledge spillovers, so aI=1/n, i.e. amt of labour to invent
a new variety rises as cumulative experience in innovation
rises.
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Maths - New growth theory
• Endogenous product innovation; what’s the MC and
MB of introducing a new variety? CLOSED
ECONOMY TO START WITH.
• Flow benefit = operating profit; with Dixit-Stiglitz
• p=(1/s)E(market share).
– E is expenditure, sigma is CES elasticity
– In a closed economy, market share =1/n.
• Present value of flow of operating profits is:
– Integral of E/(sn) from t=0 to infinity discounted at ‘r’
when n is growing at constant endogenous rate ‘g’.
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Maths - New growth theory
• Take LI as the state variable and labour as numeraire so
w=1.
• Since L=LI+LE, we know in steady state that the amount of
labour devoted to consumption goods must be time
invariant in steady state, so dE/E must stop evolving, thus r
= rho in steady state.
• PDV of operating profits equals.
• MB=(E/(sno))(1/(rho+g))
– dn/n defined as ‘g’ growth rate of varieties
• MC=w/no but w=1,
• NB: E = income-investment = wL+np-wLI = wL+E/s-wLI
=> E=(L-LI)/(1-1/s)
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Maths - New growth theory
•
•
•
•
MB=MC
(((L-LI)/(1-1/s))/(s)) (1/(rho+g))=1
(L-g)/(s-1)=r+g
Solve for g:
– g = (L-(s-1)r)/s
• Freer trade from no trade with identical nations; L
doubles so g rises and thus growth rate rises
• This is a long-run growth effect.
© Baldwin&Wyplosz The Economics of European Integration
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Long-term growth impact of integration
euros/L
Integration improves efficiency → improves investment climate → higher
investment rate (s rises to s’) → faster growth (knowledge capital accumulates
more rapidly)
GDP/L
s’(GDP/L)
Y/L*
s(GDP/L)
C
A
d(K/L)
B
K/L*
K/L =Knowledge/L
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