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akeup
http://www.ejpau.media.pl/volume9/issue2/art-34.html
capital
MPK
payment to home labour
K0
r0
payment to home
capital
• MPK = marginal productivity of capital• Total output = area underneath MPK curve
• Capital owner get r × K
• Labour gets the rest
r
capital
MPK
payment to home labour
K0
r0
payment to home
capital
• MPK = marginal productivity of capital• Total output = area underneath MPK curve
• Capital owner get r × K
• Labour gets the rest
r MPK(K=1)
K=1
Microeconomics of Capital Market Integration
r’
r0*
r0
r’
K0 K0* K0+K0*
K’
MPK
MPK* MPK
MPK*
1 2 3 4 5 6 7 8 9 10 11
Microeconomics of Capital Market Integration
r’
r0*
r0
r’
K0 K0* K0+K0*
K’
MPK
MPK* MPK
MPK*
1 2 3 4 5 6 7 8 9 10 11 10 9 8 7 6 5 4 3 2 1
Microeconomics of Capital Market Integration
r’
r0*
r0
r’
K0 K0* K0+K0*
K’
MPK
MPK* MPK
MPK*
10 9 8 7 6 5 4 3 2 1
Welfare Effects of Capital ‘Migration’
• Capital owners in home country (the one on the left): initially they had A+G, but now G+C+D+E.
• Laborers in home country: initially had J, but now have J+A+B.
• Effect on home: ((G+C+D+E)-(A+G))+((J+A+B)-(J)) = C+D+E-A+A+B=C+D+B+E
• Analogously, effect on foreign country = ((F+H)-(E+H))+((I)-(I+D+F))=F-E-D-F=-E-D
• Total effect = C+B.
Growth Effects
• European leaders have long emphasised the pro-growth aspects of European integration.
• These operate in a way that is fundamentally different from the way allocation effects operate (these refer to the effects we considered last week).
• 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.)
Verbal Logic of Growth
• Therefore, 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.
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.
Long-Term Growth Impact of Integration
K/L =Knowledge/L
euros/L
GDP/L
s(GDP/L)
δ(K/L)
Y/L*
K/L*
B
A
s’(GDP/L)
Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)
C