I think the question had to do with what contributed to long-term GDP growth. i. Higher Taxes ii. Some sort of Rebate iii. Trend toward information technology I put: i. no effect ii. no effect iii. increase My reasoning: In forecasting a country’s long-term economic growth trend, the trend growth rate can be decomposed into two main components: change in employment level and changes in productivity. Changes in employment can be broken down to population growth and labor force participation. Changes in productivity can be broken down into spending on new capital and total factor productivity growth. Any thoughts?
Think Obama and do the opposite.
Wasn’t there also fourth action by the government to increase the retirement age. This would change the employment level and hence lead to long-term GDP growth.
Now that you mention it, I do recall a “retirement age” response. Can anyone verify? And yes, I do agree that it will increase.
i thought higher taxes hurt long run
I stated that higher taxes make people work less
Decrease (disincentive from ROE and disposable income perspective) / No Effect (permanent income hypothesis) / Increase (no brainer)
I thought CFAI’s argument is always private sector is more efficient than public. So higher tax to help low-income family (that was what in the question) is not any useful …
First post, so hopefully it is not a worthless one. I also recall the Boosting the retirement age from I think 60 to 65. My thoughts were the same as above, that this would be a permanent increas ei nthe labor force, leading to increased GDP. Other answers I used. The Information Technology, would shift the curve upward for a LT increase , due to increased labor productivity. One TIme Tax rebate, no effect in LT, as a one time move does not shift anything on the LT curve. I wrote more, but my mind is still not sure what. =) And then the fourth one- I really do not recall at all.
here is my answer, not sure though… i. Higher Taxes ----- decrease ii. Some sort of Rebate ---- no effect iii. Trend toward information technology ---- increase iv. retirement age --------- increase
This can all be related to one equation: i. Higher taxes - decrease - reduce investment in capital ii. Some sort of rebate - one time stimulus doesn’t increase consumption nor investment on a continual basis iii. information technology - TFP growth - positive iv. retirement age - Growth in labor force (holding labor force participation constant) Bighead - your answers are correct.
Wouldn’t increasing the retirement age also be a one time stimulus? It would not impact growth.
Well no - if the retirement age increases permanently that increase in labor force is also permanent.
Agreed, but increasing the labour force even permanently, is not an increase in growth. To increase GCP growth you need a catalyst (such as tech investment) to produce knock-on effects for the economy? I realise %change in the labour force is a contributing factor to the long term GDP trend but trend is not growth. Just a thought. I couldn’t decide which way to go on this in the exam and in the end went for no impact.
this is Macroecon 101, LT growth = F(K, L, Technology Development) ** only capital, labor, techonology improvement have positive effects on LT GDP growth ** - higher retirement age-> increase in labor force -> increase in LT GDP - Tech development -> increase in LT GDP any changes in taxes don’t have any LT effects, only in the short run
jayhan, I’m sure you’re correct as I never did eco 101. But can you explain where I am going wrong in my reasoning. If a person works 8 hours a day and produces 100 things. Then he decides to work 9 hours a day and is able to produce 110 things. His GDP has increased and he has 10% GDP growth. Next period, he is still working 9 hours a day and producing 110. So his GDP growth is zero. He needs to start working 10 hours to increase his GDP. Hence, increasing retirement age may increase GDP but not GDP growth. Also, I remember something about this from level2 saying that incrreasing retirement age was not a good option as old folks save more or somthing like that. Or spend it on bingo.
As per the Solow Model, Let “n” represent growth in the labor force. As this growth occurs, k = K/L declines (due to the increase in L) and y = Y/L also decines (also due to the increase in L). Thus, as L grows, the change in k is now: Dk = s*f(k) – d*k – n*k, where n*k represents the decrease in the capital stock per unit of labor from having more labor. The steady state condition is now that s*f(k) = (d+n) * k: In the steady state, there’s no change in k so there’s no change in y. That means that output per worker and capital per worker are both constant. Since, however, the labor force is growing at the rate n (i.e., L increases at the rate “n”), Y (not y, ST growth) is also INCREASING at the rate “n”. Similarly, K (not k) is increasing at the rate n. here, increase in retirement age -> increase in labour force (similar to the population growth) -> Y (LT GDP) increasing at the rate “n” -> since the growth is a second derivative, as long as “n” is positive, LT GDP is growing. I’m not sure tho if the Q was “increase in LT GDP” or “increase in LT GDP GROWTH”
i had the same answers as bighead
^ EXACTLY the same. hope we are right :S
Younger people, more productivity and growth. Per CFA book.