# eco question about labor force

Why Population growth does not impact the rate of increase in per capita GDP but increase in labor force participation could, however, raise the growth of per capita GDP.

from q.14 in reading 15 of economics

thanks.

If GDP increases by 4% and population increases by 4%, then per capita GDP is unchanged. If labor force participation increases, then instead of 6 workers providing GDP to 10 people, 7 workers are providing GDP for 10 people; GDP per person should increase.

Magic sir please explain taylor rule .

oh, I see. Thanks a lot.

Isn’t that a Level III topic, not Level II?

It’s L2 topic…

Apparently it’s included in both Levels (and, perhaps, Level I as well).

The Taylor rule says that we start with a neutral short-term interest rate: if everything’s going according to plan, that’s our target short-term rate.

If the expected growth rate of GDP is different from what we would like, we adjust our target short-term rate: we raise our target if we expect GDP growth will be too high, and lower it if we expect that GDP growth will be too low. The amount by which we adjust it will depend on the difference between expected GDP growth and target (trend) GDP growth; the most common approach is to increase our target short-term rate by 50% of that difference.

If expected inflation is different from what we would like, we adjust our target short-term rate: we raise our target if we expect inflation will be too high, and lower it if we expect that inflation will be too low. The amount by which we adjust it will depend on the difference between expected inflation and target inflation; the most common approach is to increase our target short-term rate by 50% of that difference.

Thus, the Taylor rule:

target r = neutral r + 0.5 × (expected GDP growth – trend GDP growth) + 0.5 × (expected infl – target infl)

There are no analytical results to tell us that 0.5 and 0.5 are the proper coefficients – Taylor’s original paper had them simply as constants – but those are the most common values used in practice, and the values that the CFA curriculum says to use.