Factor Market IntegrationGrowth

Lecture 6

Last Week

Costs & BenefitsOCA Theory

Capital Market Integration

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

rMPK(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 10 9 8 7 6 5 4 3 2 1

C D FMPK

MPK*

MPK*

MPK

MPK

r0

r’

r0*r’

BA

p p’

K’

K0 K0* K0+K0*

Total Gains = B + C

G H

IJ

Welfare Effects of Capital ‘Migration’

Labour Market Integration: Simplest Framework

Labour market integration

The same analysis applies as before: welfare increases by B+C.

6

Washington DC

May 15, 2006

Rainer Muenz

Migration from and to Europe

Net migration rates of European countries,1950-1960per 1,000 inhabitants

Europe: emigration and immigration

1950--1960

Net migration rates of European countries

8

Washington DC

May 15, 2006

Rainer Muenz

Migration from and to Europe

Net migration rates of European countries,1990-2000per 1,000 inhabitants

.

unter -75 (4)

-75 bis 0 (13)

0 bis +75 (24)

über +75 (1)

Europe: emigration and immigration

1960--1990

Net migration rates of European countries

8

Washington DC

May 15, 2006

Rainer Muenz

Migration from and to Europe

Net migration rates of European countries,1990-2000per 1,000 inhabitants

.

unter -75 (4)

-75 bis 0 (13)

0 bis +75 (24)

über +75 (1)

Europe: emigration and immigration

1990--2000

Net migration rates of European countries

Idea

Logic of Growth Effects

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.

European Growth Phases, 1890-1992

Period Real GDP Real GDP/Capita

Real GDP/Hour1890-1913 2.6 1.7 1.6

1913-1950 1.4 1.0 1.9

1950-73 4.6 3.8 4.7

1973-1992 2.0 1.7 2.7

Whole Period

1890-1199

2.5 1.9 2.6

Solow Model

Solow Diagram

Induced Capital Formation

Integration Induced Investment Rate Rise

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

Summary

Markets ever more integrated

Growth Effects Matter

Next Week

The Common Agricultural and Fisheries Policies, history,

theory, and analysis.

El-Agraa, A.M., The European Union: Economics and Policies, 6th ed., pgs. 232–261, 337.142

AGR.