Page 24 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 12.g: Explain how demographics, immigration, and READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
labor force participation affect the rate and sustainability of
economic growth.
MODULE 12.2: GROWTH ACCOUNTING AND INFLUENCING FACTORS

An increase in the quantity of labor will increase output, but not necessarily per capita output:
• Quantity of labor = size of the labor force * average hours worked;
• Labor force = number of working age (ages 16–64) people available to work, both employed and unemployed.

LABOR SUPPLY FACTORS

1. Demographics: As population ages and individuals live beyond working age, the labor force declines. Conversely, younger
populations means higher potential growth. Furthermore, countries with low or declining fertility rates will likely face growth challenges
from labor force declines.

3. Immigration: Since developed countries tend to have lower fertility rates than less developed countries, immigration represents a
potential source of continued economic growth in developed countries.

4. Average hours worked: Legislation limiting the number of hours worked, the “wealth effect” which induces individuals to take more
leisure time, high tax rates on labor income, and an increase in part-time and temporary workers.
EXAMPLE: Impact of demographics on economic growth: Data for Cangoria, a country in Asia, is shown below. Based upon this data, comment on
the likely impact of Cangoria’s demographic changes on its economic growth. Assume average world population growth rate is 1.2% per year.

Cangoria’s population grew at an CAGR of 1.8% per year over the last ten years.

Combined with the increase in labor force participation, labor supply growth should be above average in the
future for Cangoria if those trends continue.

The young median age of the population also indicates an expected increase in the labor pool in the future.
Changes in per capita GDP are difficult to predict. Output is expected to be higher due an increasing labor
pool, but the larger population may mean there is no impact on per capita GDP.