The Neoclassical Growth Model Predicts That for Identical Savings Rates $\widehat { g 6090 }$

question 57

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?
(b)The results of the regression for 104 countries were as follows: $\widehat { g 6090 }$ = 0.019 - 0.0006 × RelProd₆₀ , R² = 0.00007, SER = 0.016,
where g6090 is the average annual growth rate of GDP per worker for the 1960-1990 sample period, and RelProd₆₀ is GDP per worker relative to the United States in 1960.
Interpret the results. Is there any evidence of unconditional convergence between the countries of the world? Is this result surprising? What other concept could you think about to test for convergence between countries?
(c)You decide to restrict yourself to the 24 OECD countries in the sample. This changes your regression output as follows: $\widehat { g 6090 }$ = 0.048 - 0.0404 RelProd₆₀ , R² = 0.82 , SER = 0.0046
How does this result affect your conclusions from above?

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