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

question 14

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, i.e., to run the regression $\widehat { g 6090 }$ = $\widehat { \beta 0 }$ + $\widehat { \beta 1 }$ × RelProd₆₀ , 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. Under the null hypothesis of no convergence, ?₁ = 0; H₁ : ?₁ < 0, implying ("beta")convergence. Using a standard regression package, you get the following output:
Dependent Variable: G6090
Method: Least Squares
Date: 07/11/06 Time: 05:46
Sample: 1 104
Included observations: 104
White Heteroskedasticity-Consistent Standard Errors & Covariance $$\begin{array} { c c c c l } \text { Variable } & \text { Coefficient } & \text { Std. Error } & \text { t-Statistic } & \text { Prob. } \\\hline \text { C } & 0.018989 & 0.002392 & 7.939864 & 0.0000 \\\text { YL60 } & - 0.000566 & 0.005056 & - 0.111948 & 0.9111 \\\hline\end{array}$$ $$\begin{array} { l l l l } \text { R-squared } & 0.000068 & \text { Mean dependent var } & 0.018846 \\\text { Adjusted R-squared } & - 0.009735 & \text { S.D. dependent var } & 0.015915 \\\text { S.E. of regression } & 0.015992 & \text { Akaike info criterion } & - 5.414418 \\\text { Sum squared resid } & 0.026086 & \text { Schwarz criterion } & - 5.363565 \\\text { Log likelihood } & 283.5498 & \text { F-statistic } & 0.006986 \\\text { Durbin-Watson stat } & 1.367534 & \text { Prob(F-statistic) } & 0.933550\end{array}$$
You are delighted to see that this program has already calculated p-values for you. However, a peer of yours points out that the correct p-value should be 0.4562. Who is right?

---

Definitions:

ROI

Return on Investment is a measure used to evaluate the efficiency or profitability of an investment, calculated by dividing net profit by the cost of the investment.

Operating Assets

Assets used by a business in its daily operations to generate income, including cash, inventory, and equipment.

Fixed Costs

Refers to costs that do not change in total regardless of the level of production or sales activity, like rent, salaries, and insurance.

Balanced Scorecard

A strategic planning and management system used to align business activities with the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.