One of the Central Predictions of Neo-Classical Macroeconomic Growth Theory

question 19

Essay

One of the central predictions of neo-classical macroeconomic growth theory is that an
increase in the growth rate of the population causes at first a decline the growth rate of
real output per capita, but that subsequently the growth rate returns to its natural level,
itself determined by the rate of technological innovation.The intuition is that, if the
growth rate of the workforce increases, then more has to be saved to provide the new
workers with physical capital.However, accumulating capital takes time, so that output
per capita falls in the short run.
Under the assumption that population growth is exogenous, a number of regressions of
the growth rate of output per capita on current and lagged population growth were
performed, as reported below.(A constant was included in the regressions but is not
reported.HAC standard errors are in brackets.BIC is listed at the bottom of the table). Regression of Growth Rate of Real Per-Capita GDP on Lags of Population Growth, United States, 1825-2000.
$\begin{array}{|c|c|c|c|c|c|}\hline \begin{array}{c}\text { Lag } \\\text { number }\end{array} & \begin{array}{c}\text { Dynamic } \\\text { multipliers }\end{array} & \begin{array}{c}\text { Dynamic } \\\text { multipliers }\end{array} & \begin{array}{c}\text { Dynamic } \\\text { multipliers }\end{array} & \begin{array}{c}\text { (1) } \\\text { Dynamic } \\\text { multipliers }\end{array} & \begin{array}{c}\text { Dynamic } \\\text { multipliers }\end{array} \\\hline 0 & -0.9 & -1.1 & -1.3 & -0.2 & -2.0 \\& (1.3) & (1.3) & (1.7) & (1.7) & (1.5) \\\hline 1 & 3.5 & 3.2 & 1.8 & 0.8 & - \\\hline 2 & (1.6) & (1.6) & (1.6) & (1.5) & - \\\hline 3 & -1.3 & -3.0 & -2.2 & - & - \\\hline 4 & (1.7) & 1.6) & (1.4) & - & - \\\hline \text { BIC } & -234.4 & -236.1 & -238.5 & -240.0 & -241.8 \\\hline\end{array}$ (a)Which of these models is favored by the information criterion?

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Definitions:

High-Income

Earning a substantial amount of money, typically above the median income level in a given region or country.

Low-Income

Referring to individuals or families whose earnings are significantly lower than the average, often quantified by government standards.

Regressive Tax

A tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.

Proportional Tax

A tax system where the tax rate remains constant regardless of the amount subject to tax, meaning everyone pays the same percentage of their income.