- CFA Exams
- 2023 Level II
- Topic 2. Economics
- Learning Module 9. Economic Growth
- Subject 4. Other Inputs of the Production Function
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Subject 4. Other Inputs of the Production Function PDF Download
Natural resources are important but not necessary for growth. One of the surprising features of economic life is "resource curse" - resource-poor economies often vastly outperform resource-rich economies in economic growth. This is because commodity exporters face a decline over time in the relative prices of their products and also because of the "Dutch disease", whereby the resource sector drives up the value of the local currency, hurting the competitiveness of manufacturing exports.
Does depletion of essential non-renewable resources impose a drag on growth? This is an on-going debate between optimists and pessimists. According to the growth theory, economic growth is not limited by non-renewable resources due to three factors: technical change, substation of non-renewable resources by capital, and returns to scale.
Labor supply is the quantity of work force. It is determined by population growth, labor force participation rate, net migration, and average hours worked.
Human capital is the quality of labor force. Human capital acquired through education, on-the-job training, and learning-by-doing is the most fundamental source of economic growth. It is the source of increased labor productivity and technological advance.
Capital: ICT and Non-ICT
Physical capital growth results from saving and investment decisions. The accumulation of new capital increases capital per worker and labor productivity. Although long-term sustainable growth cannot rely on pure capital deepening, there is a high correlation between economic growth and capital growth, especially in developing countries.
The composition of investment spending and the stock of physical capital does matter for productivity and growth. ICT (Information, computers and telecommunications equipment) investment has grown rapidly over the last decade. Through its network externality impacts such investment has made a significant contribution to increasing the rate of economic and productivity growth. High-levels of non-ICT capital spending should eventually lead to capital deepening.
Technological progress makes it possible to produce more or higher quality goods and services with the same resources or inputs. Technology is a major factor determining TFP. TFP is the main factor affecting long-term, sustainable economic growth rates in developed countries and also includes the cumulative effects of scientific advances, applied research and development, improvements in management methods, and ways of organizing production that raise the productive capacity of factories and offices.
Learning Outcome Statementsexplain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth;
explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth;
explain how investment in physical capital, human capital, and technological development affects economic growth;
CFA® 2023 Level II Curriculum, Volume 1, Module 9
User Contributed Comments 3
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