You Have Collected Data for a Cross-Section of Countries in Two

question 37

Essay

You have collected data for a cross-section of countries in two time periods,1960 and 1997,say.Your task is to find the determinants for the Wealth of a Nation (per capita income)and you believe that there are three major determinants: investment in physical capital in both time periods (X1,T and X1,0),investment in human capital or education (X2,T and X2,0),and per capita income in the initial period
(Y0).You run the following regression:
ln(YT)= β0 + β1X1,T + β2X1,0 + β3X2,T + β4X1,0 + ln(Y0)+ uT
One of your peers suggests that instead,you should run the growth rate in per capita income over the two periods on the change in physical and human capital.For those results to be a parsimonious presentation of your initial regression,what three restrictions would have to hold? How would you test for these? The same person also points out to you that the intercept vanishes in equations where the data is differenced.Is that correct?

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Definitions:

Interest Rates

The percentage at which interest is paid by borrowers for the use of money that they borrow from lenders.

Public Policy

The principles, often unwritten, on which social laws are based, or the set of policies (laws, plans, actions, behaviors) that governments adopt or enforce to address public issues.

Sanction

Sanction is an action taken by a country or international body to enforce compliance with laws or regulations, often involving trade restrictions or the imposition of penalties.

New Deal

A series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States during the 1930s.