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) = ?0 + ?1X1,T + ?2X1,0 + ?3X2,T + ?4X1,0 + 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 true?
What will be an ideal response?
Answer: The regression using growth rates is as follows:
[ln(YT) - ln(Y0)] = β0 + β1(X1,T - X1,0 )+ β3(X2,T - X1,0)+ ( β5- 1) ln(Y0) + uT
For this to be a parsimonious presentation of the initial regression, the following two restrictions must hold: β1 = -β2, and β3 = -β4.The use of an F-test is required here to test the restrictions simultaneously. The intercept is still present in the equation, and the assertion therefore cannot be true.
You might also like to view...
In the figure above, if the firm is regulated using a marginal cost pricing rule, the deadweight loss created is equal to the area of
A) ABG. B) BEFG. C) BCFG. D) BCE. E) None of the above because there is no deadweight loss created.
Corrective taxes are often difficult to implement because _____
a. those affected by the externality are often loathe to use political means to implement the tax b. those creating the externality threaten to shut down c. those who suffer from the externality refuse to talk about it d. the creator of an externality will use political means to try to prevent the tax
Who believes that marginal analysis provides the best model of a firm's behavior?
a. William Baumol b. John K. Galbraith c. Milton Friedman d. Richard Lester e. Lester Thurow
The long-run aggregate supply curve would shift right if the government were to
a. reduce the minimum-wage. b. make unemployment benefits more generous. c. raise taxes on investment spending. d. All of the above are correct.