Page 25 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 12.h: Explain how investment in physical capital, READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
human capital, and technological development affects
economic growth.
MODULE 12.2: GROWTH ACCOUNTING AND INFLUENCING FACTORS

Human capital: Unlike quantitative labor metrics, such as hours worked, human capital is a qualitative measure of the labor
force. Increasing education or work experience increases productivity and economic growth. Furthermore, it may have external
spillover effects as knowledgeable workers innovate (creating greater efficiencies economy wide).

Physical capital: Includes infrastructure, computers, and telecommunications capital (ICT) and non-ICT capital (i.e., machinery,
transportation, and non-residential construction). There IS strong + correlation between investment in and GDP growth rates.

Contradict idea of bout capital deepening and diminishing marginal returns to capital?

1. First, many countries (e.g., developing economies) have relatively low capital to labor ratios, so increases in capital may still have significant impact on
economic growth.
2. Second, Some capital investment actually influences technological progress, thereby increasing economic growth. For example, acceleration of
spending in the IT sector has created what are termed network externalities. Investment in IT networks may have multiplicative effects on productivity
since IT network investment actually becomes more valuable as more people are connected to the network.

Technological development: Technological innovation can manifest itself in processes, knowledge, information, machinery, and
software, among other things:
• Developed countries tend to spend the most on R&D since they rely on technological progress for growth given their high
existing capital stock and slower population growth (hence more increases in productivity as measured by GDP per worker).
• In contrast, less developed countries often copy the technological innovations of developed countries and thus invest less in
R&D as a percentage of GDP.

Public infrastructure: Includes the construction of public roads, bridges, and municipal facilities, provide additional benefits to
private investment. For example, an investment in distribution facilities by a private company would do little good without an
interstate highway grid. The highway system, therefore, enhances total productivity for the economy by complementing the private
investment and increasing total factor productivity.