CFA Level 2 - Economics Session 4 - Reading 14 Economic Growth - LOS b

CFA Level 2 - Economics Session 4 - Reading 14 Economic Growth - LOS b (Notes, Practice Questions, Sample Questions) 1. Assume that real GDP per labor hour grew by 6 percent over the past 5 years while capital per labor hour grew by 5.25 percent. Based on the one third rule, the amount of real GDP growth attributable to the increase in capital per labor hour and the amount attributable to technological change are closest to: Increase in Capital Technological Change A) 2.00% 4.00% B) 0.75% 5.25% C) 1.75% 4.25% {Explanation: According to the one third rule, capital has contributed one third of 5.25% toward the increase in real GDP per labor hour. So, the capital growth contribution to the increase in GDP is 1/3 × 5.25% = 1.75%. The remaining 4.25% (= 6% – 1.75%) growth in real GDP per labor hour is attributable to technological change} 2. Which of the following is the most accurate description of the one third rule? A) A 1% increase in capital per labor hour results in a one third of 1% increase in real GDP per labor hour, holding technology constant. {Explanation: The one third rule states that at a given level of technology, on average, a 1% increase in capital per labor hour results in a one third of 1% increase in real GDP per labor hour} B) One third of real GDP per labor hour is attributable to the level of new capital per labor, holding technology constant. C) A 1% increase in technology results in a one third of 1% increase in real GDP per labor hour, holding capital per labor hour constant 3. Over a 10 year period, labor productivity increased from $10 per labor hour to $10.60 per labor hour. Over the same period, the investment in new capital increased from $25 per labor hour to $25.50 per labor hour. The contribution of technological advancement to economic growth over this period is closest to: A) 4.11%. B) 3.00%. C) 5.33% {Explanation: According to the one third rule, at a given level of technology, a 1% increase in capital per labor hour results in a 1/3% increase in real GDP per labor hour. The percent change in capital per labor hour is 2% = (25.50/25) – 1. The increase in productivity due to the increase in capital per labor hour is 1/3 x 2.0% = 0.67%. The change in economic growth (GDP per labor hour) is 6% = (10.6/10) – 1. The remainder of the increase in GDP per labor hour, 6% – 0.67% = 5.33%, is due to technology change} 4. Which of the following is NOT a typical property of productivity curves? A) The shape of productivity curves is affected by changes in population growth. {Explanation: Productivity curves are a plot of labor productivity (y-axis) against capital per labor hour (x-axis) at a given state of technology. Properties of productivity curves include: Productivity increases as capital per labor hour increases, at a given state of technology. Growth in capital per labor hour causes movements along a productivity curve. Productivity increases as the state of technology increases at any given level of capital per labor hour. Technological growth causes the productivity curve to shift upward. Productivity curves exhibit the law of diminishing returns} B) Growth in capital per labor hour causes an upward movement along productivity curves. C) Technological growth causes productivity curves to shift upward.