The Solow Growth Model Suggests That Countries with Identical Saving

question 49

Essay

The Solow growth model suggests that countries with identical saving rates and
population growth rates should converge to the same per capita income level.This result
has been extended to include investment in human capital (education)as well as
investment in physical capital.This hypothesis is referred to as the "conditional
convergence hypothesis," since the convergence is dependent on countries obtaining the
same values in the driving variables.To test the hypothesis, you collect data from the
Penn World Tables on the average annual growth rate of GDP per worker (g6090)for the
1960-1990 sample period, and regress it on the (i)initial starting level of GDP per worker
relative to the United States in 1960 (RelProd60), (ii)average population growth rate of
the country (n), (iii)average investment share of GDP from 1960 to1990 (sK - remember
investment equals savings), and (iv)educational attainment in years for 1985 (Educ).The
results for close to 100 countries is as follows: $$\begin{array} { l } \widehat { g 6090 } = 0.004 - 0.172 \times n + 0.133 \times s _ { K } + 0.002 \times E d u c - 0.044 \times \operatorname { RelProd } _ { 60 } , \\R ^ { 2 } = 0.537 , S E R = 0.011\end{array}$$ (a)Interpret the results.Do the coefficients have the expected signs? Why does a negative
coefficient on the initial level of per capita income indicate conditional convergence
("beta-convergence")?

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Definitions:

Regression Line

A line of best fit through a dataset in regression analysis, showing the relationship between the independent and dependent variables.

Sum Of Squares

The total of the squared differences between each observation and the overall mean.

Data Points

Individual pieces of factual information recorded and used for the purpose of analysis.

First-Order Linear Model

A statistical model that describes a linear relationship between two variables using a straight line, which is the first degree of the model.