You Have Collected Data for 104 Countries to Address the Difficult

question 24

Essay

You have collected data for 104 countries to address the difficult questions of the determinants for differences in the standard of living among the countries of the world. You recall from your macroeconomics lectures that the neoclassical growth model suggests that output per worker (per capita income)levels are determined by, among others, the saving rate and population growth rate. To test the predictions of this growth model, you run the following regression: $\widehat { \text { RelPersinc } }$ = 0.339 - 12.894 × n + 1.397 × S_K, $R ^ { 2 }$ =0.621, SER = 0.177
where RelPersInc is GDP per worker relative to the United States, n is the average population growth rate, 1980-1990, and S_K is the average investment share of GDP from 1960 to 1990 (remember investment equals saving).
(a)Interpret the results. Do the signs correspond to what you expected them to be? Explain.
(b)You remember that human capital in addition to physical capital also plays a role in determining the standard of living of a country. You therefore collect additional data on the average educational attainment in years for 1985, and add this variable (Educ)to the above regression. This results in the modified regression output: $\widehat { \text { RelPersinc } }$ = 0.046 - 5.869 × n + 0.738 × S_K + 0.055 × Educ, $R ^ { 2 }$ =0.775, SER = 0.1377
How has the inclusion of Educ affected your previous results?
(c)Upon checking the regression output, you realize that there are only 86 observations, since data for Educ is not available for all 104 countries in your sample. Do you have to modify some of your statements in (d)?
(d)Brazil has the following values in your sample: RelPersInc = 0.30, n = 0.021, S_K = 0.169, Educ = 3.5. Does your equation overpredict or underpredict the relative GDP per worker? What would happen to this result if Brazil managed to double the average educational attainment?

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Definitions:

Social Support

Assistance or comfort provided by others, such as family, friends, and the community, which contributes to an individual's well-being.

Self-Esteem

A person's personal subjective assessment of their own value based on their emotions.

Physical Appearance

The observable characteristics or features of an individual's body, including shape, size, and complexion.

Sense of Self-Worth

An individual's subjective evaluation of their own value and importance.