Lecture 6
Factor Market Integration
Growth

Last Week
Costs & Benefits
OCA Theory

Capital Market
Integration

r
MPK(K=1)
payment to home labour
payment to home
r0 capital
MPK
capital
K=1 K0
• MPK = marginal productivity of capital
• Total output = area underneath MPK curve
• Capital owner get r × K
• Labour gets the rest

Microeconomics of Capital Market Integration
MPK
MPK*
K’
r0
r’
r’
MPK
*
MPK* r0
1 2 3 4 5 6 7 8 9 10 11 10 9 8 7 6 5 4 3 2 1
K0 K0* K0+K0*

Total Gains = B + C
MPK
MPK*
K’
J
I
p
p’
r0
A B r’
r’ MPK F
C D
G
*
H
MPK* r0
K0 K0* K0+K0*

Welfare Effects of Capital ‘Migration’

Labour Market Integration: Simplest Framework

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

Europe: emigration and immigration
Net migration rates of European countries
Net migration rates of European countries,1950-1960
1950--1960
per 1,000 inhabitants

Net migration rates of European countries
Europe: emigration and immigration
Net migration rates of European countries,1990-2000
1960--1990
per 1,000 inhabitants
.
unter -75 (4)
-75 bis 0 (13)
0 bis +75 (24)
über +75 (1)

Net migration rates of European countries
migration rates of European countries,1990-2000
per 1,000 inhabitants
1990--2000
.
unter -75 (4)
-75 bis 0 (13)
0 bis +75 (24)
über +75 (1)

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
Real Real
Period Real GDP
GDP/ GDP/
Capita Hour
1890-1913 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
2.5 1.9 2.6
Period

Solow Model

Solow Diagram

Induced Capital Formation

Integration Induced Investment Rate Rise

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
δ(K/L)
B
K/L* K/L =Knowledge/L

Markets ever more integrated
Growth Effects Matter
Summary

Next Week
he 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.