Growth Effects of economic integration (L8)

Question 1

What does the SOLOW MODEL show?

Answer 1

The limits to growth

Question 2

What does economic growth mean?

Answer 2

Increasing GDP/capita

Question 3

What caused 2% growth for annuum over the last century in europe?

Answer 3

1. Increased capital per person - raised productivity
2. Better technology & knowledge

Question 4

If labour force is fixed, adding more capital does what to output?

Answer 4

decreases output, diminishing returns to capital.

Question 5

What happens if capital stock increases?

Answer 5

1. More of your savings are used for replacing worn out K
2. Depreciation goes up so less savings can be saved over time.
3. Eventaully, all savings are used for replacement.
4. No more savings to invest into the economy anymore.

Question 6

So can a country grow forever if it is driven by capital?

Answer 6

No. Because savings will be exhausted + no new investment will be in place to increase GDP/capita any furhter.

Question 7

What do we need for longer-term growth?

Answer 7

Capital + technology

Question 8

draw the solow growth model

Question 9

why is the depreciation curve a straight line?

Answer 9

It is linear because depreciation is constant at the rate of capital. Same amount of depreciation each year.

Question 10

What is a steady state limit to growth?

Answer 10

where economy stops growing and where depreciation = savings

Question 11

what happens as you go up the model?

Answer 11

investments become smaller and smaller. less savings invested into increasing capital.

Question 12

Where is investment on the diagram?

Answer 12

s1-d1

Question 13

Economy becomes stag____ at steady state

Answer 13

stagnant

Question 14

What do we mean by new investmnet?

Answer 14

Buy new machineries, which add to capital K

Question 15

How does integration affect growth?

Answer 15

1. Baldwin medium term growth bonus
2. Trade leads to bigger markets
3. free movement of people and ideas
4. multinational firms play a bigger role

Question 16

What is Baldwin medoim term growth bonus?

Answer 16

We thought that integration only makes a one-off effect by increasing trade but due to to increased productivity, we actually see a further effect + increased growth.

Question 17

What does increase in productivity from the baldwin medium term growth bonus mean?

Answer 17

Increase in output, increase in incomes and savings.

It increases investment and raises the steady state level of GDP.

Question 18

How does integration raise technology?

Answer 18

Trade improves technology because as you import machineery, this machinery has the latest technology imported and you can learn from your imported machinery.

Question 19

How does trade lead to bigger markets?

Answer 19

Due to free trade, you can export to other countries and stimulate R+D.

market size is the main driver of R+D, making return more worthwhile

Question 20

Why do we have a jump in productivity/output due to integration in the solow model?

Answer 20

with integration, resources used more efficiently in the economy and can produce more for a given input

Question 21

What is it called, having growth instead of having a one-off jump?

Answer 21

solow model’s capital accumulation effect

Question 22

what is integration’s effect on growth through studies?

Answer 22

empirical literature is divided, some studies find no effect, some find 5% and newer studies find 12% because it is difficult to measure