CFAI mock (with spoiler): Growth accounting equation

In 2014 CFAI Mock morning session, question Daltonia case question 1

In the growth accounting equation, there is a labor factor which is (share of income paid to labor)*labor growth

The question provided two numbers:

Growth in labor productivity: 1.7%; and Population growth: 3.4%

Why do we use 3.4% instead of 1.7% (or even, why not 1.7%*103.4%)? what is the exact definition of “Labor growth” please?

potential GDP growth = growth of labor productivity + growth of labor force

or alternatively

potential GDP growth = (share of capital in GDP) * Capital growth rate + (share of labor)* labor growth rate + growth of technology (aka TFP).

The CFAI uses the first formula to calculate the growth of potential GDP.

If they use the first formula, it will be that they should consider both 1.7% and 3.4% (according to the formula, GDP growth is 5.1%?) but in the mock exam, they considered only the population growth 3.4%

If they use the second formula, im still confused of what is “labor growth rate” (if you are given productivity growth and population growth at the same time)

The exact question:

Sorry somehow the picture doesn’t show up…

lol, sorry I skimmed your question and didnt read it correctly. I also have the same problem with what is the definition of labor growth. I’ve encountered some question in Schweser Qbank, and mock exam, some they give the labor growth as the growth of the population in working age, or the growth in the working hours. Now, I realized that CFAI also uses the population growth.

Then, maybe other people could help to define the labor growth. :smiley:

Thanks for your input Massimo, at least it is reassuring to hear that in Schweser they take population (or working hours) growth. Maybe I should just memorize it …

Appreciate if someone could help to solve the mystery

I will answer for the definition of Labor growth by refering sections of CFA curriculum:

There are two definition of labor growth:

  1. Total hours worked ( As per page-631, exhibit 11 in the curriculum, this is the preferred measure of labor growth)

  2. The other way to measure this is the ‘population growth + net change in immigration’ - BB #7 & #8 - There is a reason why you go with this second method- If you will work thru these examples, you will see that using total hours as a measure for labor growth between 2005 & 2009 distorts the growth nos. because of the recesion etc…, so they have switched to the the population growth method.