Page 21 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 12.f: Explain how natural resources affect economic growth READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
and evaluate the argument that limited availability of natural
resources constrains economic growth.
MODULE 12.2: GROWTH ACCOUNTING AND INFLUENCING FACTORS

Some countries with abundant natural resources (e.g., Brazil) have grown rapidly, but others have not . Conversely, some resource-poor countries have
managed impressive growth. Why?

• Access to natural resources does not require ownership of resources (Japan)
• Ownership of natural resources may actually inhibit growth, because the economic energy deviates from diversification.
• Currency may appreciate due to these and damage other exports (“Dutch disease”).

LOS 12.g: Explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth.

1. Demographics: As population ages and individuals live beyond working age, the labor force declines and vice versa. 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.