Week 4 - Testing Solow Swan; convergence

Question 1

What are proximate determinants of growth?

Answer 1

There is a direct link from these variables to the growth of income per capita

Question 2

True or false: Solow Swan’s basic predictions are seen in the data?

Answer 2

True

Question 3

What is the steady state output per worker along the balanced growth path in the solow-swan model?

Answer 3

y*= A (s/n+g+δ)^a/1-a

Question 4

How do you take the steady state equation and turn it to something testifiable (a regression equation)? Whats the outcome?

Answer 4

Take logs to make it linear:
lny = lnA + (a/1-a)lns - (a/1-a)ln(n+g+δ)
Add subscript i’s to the variables which are the specific country in the regression.

Question 5

Which variables are constant for all the countries in the regression equation?

Answer 5

lnA, g, δ

Question 6

What do you have to remember to add to the end of a regression model?

Answer 6

An error term - everything that affects lny that is not in our model

Question 7

Putting it all together, what regression does the SS model suggest to run?

Answer 7

lny = B0 + B1lnsi + B2ln(ni+0.05) + ei
assuming g + δ = 0.05

Question 8

In the regression, why might i estimate b1 = 0.5 and b2 = -0.5?

Answer 8

because a is estimated to be 1/3rd

Question 9

What are Mankir, Romar and Weil’s esimates of alpha when they carry out their regression

Answer 9

a = 2/3rds not 1/3rd

Question 10

What does Mankiw, Romer and Weil (1992) conclude about the ss model?

Answer 10

An augmented ss model that incorporates human capital does a very goof job in explaining differences in output per worker.

Question 11

Do most economists agree or disagree with MR and W?

Answer 11

disagree

Question 12

What is the consensus about the variations in income per capita?

Answer 12

differences in physical and human capital do not explain most of the variation in income per capita, so there is a large role for TFP

Question 13

What is the steady state income per capita with skilled human capital H in the cobb douglas PF instead of L?

Answer 13

y = hA(s/n+g+δ)^(a/1-a)

Question 14

How can we get the gap of income per capita between 2 countries?

Answer 14

Take the ratio: Y(Zambia)/Y(US)

Question 15

How do I carry out a simple level/development accounting exercise?

Answer 15

Take the ratio: Y(Z)/Y(US)=…
rearrange for A(Z)/A(US)=…

*Try and put everything that we can measure on the RHS

Question 16

What do we calculate A as?

Answer 16

A residual for TFP

Question 17

Human capital per capita can’t be measured directly, what can we do?

Answer 17

measure average years of education in each country

Question 18

What is the equation for human capital Ht? Change into ht

Answer 18

Ht=e^φu(L)T
Divide both sides by L
ht = e^φu

Question 19

What is u?

Answer 19

average years of education in a country

Question 20

What is φ?

Answer 20

100 x φ tells us: if u increases by 1 unit, by what percentage does Ht rise:

dlnHt/du = φ

Question 21

How can we estimate φ?

Answer 21

Assuming that a persons increase in productivity is reflected in higher wages, we can estimate φ from so-called mincerian earnings function

Question 22

What is the intuition behind this assumption?

Answer 22

A more educated person is more skilled/productive and will produce more output and get paid more as a result

Question 23

What is the regression for this mincerian earnings function?

Answer 23

lnwage = b0 +b1edu + ei

Question 24

What is b1 in that function? What can we use this to estimate?

Answer 24

How much more productive is a person with an extra year of education i.e. how much more human capital does this person have. So we can use this as an estimate for φ

Question 25

How do you get the empirical model for the regression-based approached i.e. MRW with human capital?

Answer 25

Recall the human capital augmented ss steady state for y. Take the logs

Question 26

In this empirical model, what is lnh and the coefficient for lnh

Answer 26

lnh = φu, therefore lnh = u and the coefficient = φ

Question 27

Since MRW didn't have data on ui, what did they do?

Answer 27

used a proxy for the investment in human capital (not the level of human capital)

Question 28

What does this do to the human capital variable in the empirical model

Answer 28

changes the variable to b4lnschooli - schooli is something akin to the secondary school enrolment ratio

Question 29

What does this change do to our empirical model?

Answer 29

Changes the predictions for all the coefficients

Question 30

What does this do to the coeffcients for population growth and investment?

Answer 30

Now the coefficient for investment will be bigger than 0.5 and the coefficient for pop growth will be smaller than 0.5

Question 31

What is the main problem with this regression

Answer 31

lns and lnschool are likely to be endogenous i.e. correlated with the error term. This means we get biased OLS estimtators for the coefficients of interest. May lead to MRW to overstate the explanatory power of physical and especially human capital.

Question 32

What are some other problems with this regression? (3)

Answer 32

1. Reverse causality: richer countries investment more in human capital 2. Omitted variables that affect both school and y 3. Our large and significant coefficients could just be picking up the effect of some other omitted variables that happen to be correlated with the investment in physical and human capital.

Question 33

What is the broad methodology of the level accounting approach with respect to regression accounting

Answer 33

regression accounting attempts to pin down the contribution of physical and human capital/education, and in particular parameters a and φ, from some additional information

Question 34

Whats an advantage of this level accounting approach

Answer 34

less chance of endogeneity exaggerating the contribution of physical and human capital

Question 35

What is a disadvantage?

Answer 35

Need to make extra assumptions to pin down these parameters

Question 36

What assumption do you have to make for the equation for lny in the ss model without human capital?

Answer 36

Assume that each country is in equilibrium (in its steady state)

Question 37

True or false: It is likely most countries have reached their balanced growth path?

Answer 37

False

Question 38

What is the end resulting difference between regression (MRW) and level accounting?

Answer 38

Development accounting suggests MRW overstates the contribution of human capital

Question 39

How can we measure out of steady state behaviour (conditional convergence)?

Answer 39

Change the dependant variable to growth of income per capita.

Question 40

Compare growth when your close to the steady state compared to if your further away from it

Answer 40

The growth rate of y is faster when you're further away from your steady state. This is a condition of convergence

Question 41

How can you show this convergence with the empirical growth model?

Answer 41

you add another x variable: lnyt-1

Question 42

Using the empirical growth model, if 2 countries are starting at the same initial income and 1 has a higher investment, which one will grow faster?

Answer 42

The one with the high investment level because they will have a higher steady state.

Question 43

Baumol found that if you have a higher GDP per capita, you have a lower growth rate, supporting convergence. What 2 problems of this paper are there?

Answer 43

1.Selection bias - only included countries that ended up rich post 1980 due to data availability and purposeful choice. 2. measurement error for income per capita, leading to a spurious negative correlation between the initial income and subsequent growth.

Question 44

What did we see when De long dropped japan and added 7 richer countries?

Answer 44

Still get a negative correlation between growth and GDP, but the correlation was much weaker

Question 45

How could we solve this selection bias?

Answer 45

Choose a sample of countries that at the start of the had the necessary 'social capability' to industrialise and catch up with world leader.

Question 46

Further work shows convergence clubs. What are these?

Answer 46

Groups of countries with similar features (same level and growth of tech, same pop growth, same investment etc) that start out at different points and then converge.

Question 47

What happens when we take the measurement error into account?

Answer 47

Convergence disappears completely

Question 48

What type of convergence does the ss model predict

Answer 48

Countries converge only if they share the same steady state (conditional convergence)