The Neoclassical Growth Model Predicts That for Identical Savings Rates

question 5

Essay

The neoclassical growth model predicts that for identical savings rates and population
growth rates, countries should converge to the per capita income level.This is referred to
as the convergence hypothesis.One way to test for the presence of convergence is to
compare the growth rates over time to the initial starting level.
(a)If you regressed the average growth rate over a time period (1960-1990)on the initial
level of per capita income, what would the sign of the slope have to be to indicate this
type of convergence? Explain.Would this result confirm or reject the prediction of the
neoclassical growth model?

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Definitions:

Capital Flight

The large-scale exodus of financial assets and capital from a country due to economic instability, political unrest, or unfavorable policies.

Capital Mobility

The ease with which capital or financial assets can move between countries or markets.

Arbitrage

The practice of buying and selling assets to profit from price differences in different markets.

Trade Policies

Laws and regulations enacted by governments to manage international trade, designed to protect domestic industries, control exports and imports, and foster economic growth.