Lecture 5

• continual technical progress introduces products that encourage further investment in equipment and skills
• new production techniques allow the same value fo equipment and skills to produce more output, and create long run growth
• new technology and production techniques boost the reward for investment, and cause further investment and long-run growth
• technical progress raises the incremental gain in value of output per worker for any increase in value of equipment and skills per worker
• the direct effect of technical progress is that for the current level of equipment and skills per worker, the value of output increases
• the indirect effect of technical progress comes from further investment occuring as a result of the initial progress
• GDP per hour worked is a proxy for productivity
• Germany, the USA and France have similar productivity but different GDP per Capita because of differences in labour Force Participation, Efficiency and number of hours worked
• ICT capital is technology
• non-ICT capital is physical capital
• the USA and Germany can innovate much better, and have higher Multifactor Productivity than other countries
• using a long term perspective, Europeans today are much better off than their grandparents were 50 years ago
• economic growth means producing more goods and services every year
• continuous economic growth is a relatively recent phenomenon, as before the Industrial Revolution, income had been stagnated for over 1500 years
• the 'Golden Age of Growth' coincides with the European Integration with the European Steel and Coal Community of 1950, but happened worldwide
• the golden age of growth was between 1950 and 1973
• growth rates are measured using real GDP
• convergence involves poor countries catching up with rich nations, using the technology developed by the rich nations
• the slowing of growth rates after 1973 is argued by Gordon to be a return to normal
• is is argued that the golden age of growth was due to clusters of new inventions, that accelerated innovation but not forever
• because income convergence occurred worldwide, not just within Europe, it cannot be just due to increased European Integration
• growth is based on 'capital', which can be split into Physical, Human and Knowledge capital
• physical capital involves machines
• human capital involves skills, training and experience
• knowledge capital involves new technology
• European Integration will affect growth by stimulating investment in capital
• medium-run growth effects of European Integration show that the rise in output per person eventually stops at a higher level (diminishing returns)
• long-run growth effects of European Integration show that the rate of growth is forever higher due to technological progress
• evidence from countries joining the EU supports the idea that integration boosts a countries capital stock
• better investment from abroad as a result of EU integration shows rising stock prices, investment to GDP ratios, and increasing net Foreign Direct Investment
• when countries enter serious talks about joining the EU, levels of Foreign Direct investment and overall investment will rise, even before official integration has occured
• expectations about a country joining the EU can have significant impacts on a countries stock market index
• when Spain and Portugal joined the EU, their stock markets grew significantly
• when Greece joined the EU in 1981, there was less impact on their investment and stock market, as the Greek government was still intervening heavily, and their policies reduced their level of integration
• when more and better equipment is supplied, output per worker increases
• output per worker does not increase in proportion with equipment per worker due to diminishing returns
• Investment should stop when the cost of increasing the value of capital (equipment) per worker causes a lower increase in the value of output per worker
• technical progress will cause a change in productivity, so at each level of capital per worker, output increases
• net output is calculated by the total output minus the depreciation of old capital
• investment and output per worker is modelled using the solow model