# Cap expectation Q

which statement about neoclassical approach to growth accounting is correct:

A. The growth in total factor productivity is not directly observable

B. The growth factors must be stated in nominal (ie not inflation-adjusted) term.

C . The total output may not growth at a rate faster than predicted by the growth in capital stock and labor force.

A…you may use Solow residual to observe TFP changes…

CFAI also says A…however…why is it not C

We know out put = G productivity + @ * G capital + (1-@)* G labor.

Now if G productivity = 0 -> out put = cap + lab…Is it not means “not growth at a rate faster…”??? or it comes from my english ?

constant returns to scale (change in TFP - A= 0)…it says chane in output Y will increase at the same % change in K & L irrespective of value of alpha & beta…

so…C is also correct ???

the question come from CFAI text book

Solow residual only tells us the growth rate would be the same.

To conclude that it can not grow faster than that would be inappropriate…hence choose A i guess…

What if there is a decrease in labor input (think Japan) or capital input (think Syria)?

What if there is a negative total factor productivity (think Greece)?

C may be incorrect if the variables may be negative.

C. The total output may not growth at a rate faster than predicted by the growth in capital stock and labor force.

This is incorrect since the total output MAY grow at a rate faster than predicted by the growth in capital stock and labor force. This is the case when TFP is high enough.

The true is that:

(G) output = A + aK + bL (b=1-a)

Curr do not say that A may be negative but may be 0 (contant …scale)

if A=0 -> Output = aK+bL

C say: The total output may not growth at a rate faster than…–> it is correct when out put grow at rate equal to…

It is incorrect when say: …may not grow faster than or equal to…

that is what i want to say about the question.

Ref: Question 11 Page 181 Reading 19 - Equity market valuation book 3

Look at it as ak + bL is the MAXIMUM possible value for Growth is Solow Residual is 0.

So they are right when they say it cannot grow FASTER than …

Hey guy, it is maximun or minimum ?

because A >=0 ???

deleted.

Sorry all guys,

It is actually come from my English…I did not understand correctly what MAY NOT mean…

got it