{"id":1154,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1154"},"modified":"2026-03-18T11:21:12","modified_gmt":"2026-03-18T11:21:12","slug":"economic-growth-sources-measurement","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/economic-growth-sources-measurement\/","title":{"rendered":"Sources, Measurement and Sustainability of Economic Growth"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Aggregate Output, Prices, And Economic Growth (2022 Level I CFA\u00ae Exam \u2013 Reading 10)\",\n  \"description\": \"This lesson explores macroeconomic concepts like GDP, aggregate demand and supply, and economic growth. It explains two methods for calculating GDP\u2014expenditure and income approaches\u2014and distinguishes between nominal and real GDP. It also compares national income, personal income, and disposable income, and outlines their relationships. The video covers how savings, investment, fiscal balance, and trade balance interact, and introduces the IS-LM model to show equilibrium in goods and money markets. It explains shifts in aggregate demand and supply, short- and long-run macroeconomic equilibrium, and the causes of economic fluctuations like recessions, inflation, and stagflation. Finally, it describes the sources and sustainability of economic growth, highlighting the role of capital, labor, human capital, natural resources, and technology, and introduces the production function and total factor productivity.\",\n  \"uploadDate\": \"2018-11-06T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/cRMasYNNsVA\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=cRMasYNNsVA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/cRMasYNNsVA\",\n  \"duration\": \"PT34M44S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which parameter can be directly measured from observed data?\",\n    \"text\": \"Which of the following parameters can most likely be measured directly from observed data?\\n\\nA. Labor productivity\\n\\nB. Potential GDP\\n\\nC. Total-factor productivity\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nLabor productivity can be directly calculated as output per hour worked using observed data.\\n\\nB is incorrect. Potential GDP is not directly observable and must be estimated.\\n\\nC is incorrect. Total-factor productivity is also estimated rather than directly measured.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/cRMasYNNsVA?si=wBjzNlvyWPWXR5X5\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>The sustainability of economic growth is measured by the rate of increase in productive capacity and\/or by the potential gross domestic product of the economy.<\/p>\n<h2><strong>Sources of Economic Growth<\/strong><\/h2>\n<p>The growth accounting equation emphasizes the main factors that determine growth. These include such factors as technology, capital, and labor. As a result, this neglects other important factors such as natural resources and human capital inputs, which also play a major role in economic growth. Therefore, we can list the main sources of economic growth as discussed below.<\/p>\n<h4>Physical Capital Stock<\/h4>\n<p>This refers to the accumulated amount of equipment, machinery, and buildings used to produce goods and services. Physical capital increases annually for as long as net investments increase.<\/p>\n<h4>Labor Supply<\/h4>\n<p>The growth in the number of people available to work is an important source of economic growth.\u00a0 Note that the size of the labor input can be measured by the number of hours available for work. This is calculated as:<\/p>\n<p>$$ \\text{Total hours worked} = \\text{Labor force} \u00d7 \\text{Average hours worked per worker}$$<\/p>\n<h4>Human Capital<\/h4>\n<p>This refers to the accumulated skills and knowledge that workers acquire through training, education, and experience. It gauges the quality of the workforce. For instance, an educated and skilled workforce produces more and can easily adapt to new technologies that emerge over time. Consequently, this factor is improved by investing more in education and on-the-job training.<\/p>\n<h4>Natural Resources<\/h4>\n<p>Divided into renewable (replenished after use, e.g., a forest) and non-renewable (depleted upon usage, e.g., oil and coal) energy sources.<\/p>\n<h4>Technology<\/h4>\n<p>This refers to the process employed by companies in the transformation of inputs into goods and services. Technological advancements refer to the discoveries that play a role in producing more and higher quality goods and services. Technological advancements give an economy the capacity to overcome the limits imposed by the effects of diminishing marginal returns.<\/p>\n<h2>Measures and Sustainability of Economic Growth<\/h2>\n<p>The growth rate of an economy depends on the rate at which technological advancements, labor forces, physical and human capital, and natural resources grow. Therefore, these forces can be summarized to the GDP equation as follows:<\/p>\n<p>$$ \\text{Growth in Potential GDP} = \\text{Growth in technology} + W_L\u00a0 + W_C$$<\/p>\n<p>Where:<\/p>\n<p>\\(W_L\\) = Growth in labor<\/p>\n<p>\\(W_C\\) = Growth in Capital<\/p>\n<h3>Example of Measures and Sustainability of Economic Growth<\/h3>\n<p>Assume that the labor percentage share in national income is 75% for a specific country. The growth in technology, labor, and capital are 4%, 5%, and 6%, respectively. Calculate the growth in potential GDP.<\/p>\n<p><strong>\u00a0Solution<\/strong><\/p>\n<p>Using the equation:<\/p>\n<p>$$ \\text{Growth in Potential GDP} = \\text{Growth in technology} + W_L\u00a0 + W_C$$<\/p>\n<p>Then,<\/p>\n<p>$$ \\text{Growth in potential GDP} = 1\\% + (0.75\\times2\\%) + (0.35\\times3\\%) = 3.25\\%$$<\/p>\n<h3>Productivity Brought by the Labor Force<\/h3>\n<p>There is no observable data on potential GDP or total-factor productivity (TFP). We, therefore need estimated data for both potential GDP and total-factor productivity (TFP). Therefore, we can alternatively focus on the productivity brought by the labor force since there exists data on labor, calculated as:<\/p>\n<p>$$ \\text{Labor productivity} = \\frac{\\text{Real GDP}}{\\text{Aggregate hours}}$$<\/p>\n<p>From the above formula, it is easy to see that labor productivity can be defined as the number of goods and services, that is, the real GDP, that the workers can produce in one hour.<\/p>\n<p>With the same number of workers, the economy will produce more goods and services if labor productivity increases. Also, with rapid growth in productivity levels, more goods and services get produced by the same number of workers. Hence, labor productivity can be used to approximate the rate of sustainable growth in the economy. Potential GDP can be calculated as:<\/p>\n<p>$$\\text{Potential\u00a0 GDP} = \\text{Aggregate hours worked} \\times \\text{Labor productivity}$$<\/p>\n<p>The above equation can be transformed into growth rates as follows:<\/p>\n<p>$$\\text{Potential growth rate} = \\text{Long-term growth rate of labor force} + \\text{Long-term labor productivity growth rate}$$<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following parameters\u00a0can <em>most likely<\/em> be measured directly from observed data?<\/p>\n<p>A. Labor productivity<\/p>\n<p>B. Potential GDP<\/p>\n<p>C. Total-factor productivity<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is A.<\/p>\n<p>Labor productivity can be calculated directly as output\/hour, whereas potential GDP and total-factor productivity need to be estimated.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr \/>\n<p><em><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\">Economics &#8211; Learning Sessions<\/a><\/em><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>The sustainability of economic growth is measured by the rate of increase in productive capacity and\/or by the potential gross domestic product of the economy. Sources of Economic Growth The growth accounting equation emphasizes the main factors that determine growth&#8230;.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1154","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Economic Growth: Sources &amp; Measurement | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Explore the sources, measurement, and sustainability of economic growth, including key formulas and factors affecting GDP.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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