Cobb-Douglas projection of GDP growth

CFA Level III
#1

Action: issue new regulations to reduce environmental pollution by manufactures.

Determine the initial effect the action would most likely have on the country’s GDP growth trend.

I think because developments such as the depletion and degradation of natural resources would detract from growth in TFP. Hence issue regulation to reduce environmental pollution will increase TFP growth. Also, reducing environmental pollution can encourage manufactures to innovative which increase TFP growth. Therefore, GDP growth increases.

But the answer is “decrease”.

#2

Regulation is intrusive to the economy. Why do you think Trump is all about “de-regulation”.

Decrease is correct.

#3

You mean this new regulation will cut production and lower GDP growth?

#4

Not necessarily but it could. If you’re building an awesome car that costs you $10K and you can sell it for $45K, and the government puts on regulation and says you need to make the car safer and also more environmentally friendly… that car now costs you $30K to make but you can still only sell it for $45K… what did regulation do to your profits? Maybe you’re forced to push the cost to the consumer and they now buy less cars?

#5

Again. You need to pay attention to the question and the passage. The question asks what is the “initial” effect. Not the long term effect to GDP.

#6

also, general testing advice, don’t “reach” for 2nd order effects etc