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:

Inflation

The tempo of growth in global prices for products and services, diluting consumer spending ability.

World Price of Oil

The universally recognized current price at which a barrel of oil can be bought or sold for immediate delivery across global markets.

Aggregate-supply Curve

A curve showing the total quantity of goods and services that producers in an economy are willing to supply at various price levels.

Phillips Curve

A concept in economics that demonstrates an inverse relationship between the rate of unemployment and the rate of inflation.