The Solow Growth model predicts a positive relationship between savings and inco

Question

The Solow Growth model predicts a positive relationship between savings and income per capita. Can this relationship be verified by the data? To answer this question you need to run a regression of log of income per capita in the year 2014 on log of savings and check whether the sign of the coefficient is the same as the theory predicts. Show and comment your results. (In excel)

Country GDP 2014 Investment Average GDP per capita growth (1995-2014) GDP per capita 1995 Australia 46,630.73 26.748 0.038350889 22,805.85 Austria 45,411.31 22.758 0.034392324 24,632.30 Belgium 41,740.72 21.967 0.031686915 23,935.36 Canada 44,518.65 24.021 0.035107979 23,426.67 Czech Republic 28,446.04 25.25 0.042245319 13,840.59 Estonia 26,555.48 27.965 0.070210781 8,008.02 France 40,445.40 22.157 0.030067467 23,161.49 Germany 44,741.03 19.311 0.033512183 24,857.62 Greece 25,752.55 10.575 0.027776533 15,723.81 Hong Kong 55,166.81 24.001 0.047846837 23,001.59 Ireland 46,769.54 20.321 0.054338305 19,109.31 Israel 33,351.77 19.933 0.037313889 16,612.79 Italy 34,455.32 16.533 0.02086071 23,874.62 Japan 37,683.05 21.851 0.026955784 22,762.96 Netherlands 47,365.32 18.097 0.034158577 25,479.22 New Zealand 34,975.19 23.263 0.036646366 17,865.13 Norway 65,895.67 28.426 0.032309469 36,863.70 Portugal 26,306.50 14.871 0.028962824 15,817.27 Singapore 81,345.67 27.638 0.051366286 32,724.75 South Korea 35,485.07 29.161 0.058831271 12,078.58 Spain 32,975.38 19.466 0.032200636 18,638.27 Sweden 44,695.17 23.478 0.03856053 22,693.13 Switzerland 55,237.34 23.706 0.031271523 32,528.50 Taiwan 43,600.00 21.92 0.059299171 15,535.18 United States 54,678.17 19.921 0.034273057 28,762.68

Explanation / Answer

GDP per capita in 2014 = GDP per capita in 1995 * (1 + average per capita GDP growth ).

We then take log of GDP per capita in 2014, and log of investment(savings).

The regression equation is: ln y = a + b ln s

Where ln y is log of GDP per capita in 2014, ln s is log of investment(savings), a and b are constants.

The estimated equation is ln y = 9.884 + 0.007 ln s

The coefficient is 0.007. It is positive as the theory suggests.

Country GDP 2014 Investment (savings) Average GDP per capita growth (1995-2014) GDP per capita 1995 GDP per capita 2014 log savings log GDP percapita 2014 Australia 46,630.73 26.748 0.038350889 22,805.85 23680.47462 3.28646 10.0724061 Austria 45,411.31 22.758 0.034392324 24,632.30 25479.46204 3.124917 10.145628 Belgium 41,740.72 21.967 0.031686915 23,935.36 24693.79772 3.089541 10.1143074 Canada 44,518.65 24.021 0.035107979 23,426.67 24249.13304 3.178928 10.0961361 Czech Republic 28,446.04 25.25 0.042245319 13,840.59 14425.29014 3.228826 9.5767382 Estonia 26,555.48 27.965 0.070210781 8,008.02 8570.269338 3.330954 9.05605444 France 40,445.40 22.157 0.030067467 23,161.49 23857.89734 3.098153 10.0798706 Germany 44,741.03 19.311 0.033512183 24,857.62 25690.65311 2.960675 10.1538825 Greece 25,752.55 10.575 0.027776533 15,723.81 16160.56293 2.358493 9.69032917 Hong Kong 55,166.81 24.001 0.047846837 23,001.59 24102.14333 3.178095 10.0900561 Ireland 46,769.54 20.321 0.054338305 19,109.31 20147.67752 3.011655 9.9108443 Israel 33,351.77 19.933 0.037313889 16,612.79 17232.6778 2.992377 9.75456273 Italy 34,455.32 16.533 0.02086071 23,874.62 24372.66152 2.805358 10.1012174 Japan 37,683.05 21.851 0.026955784 22,762.96 23376.55343 3.084247 10.0594888 Netherlands 47,365.32 18.097 0.034158577 25,479.22 26349.5539 2.895746 10.1792066 New Zealand 34,975.19 23.263 0.036646366 17,865.13 18519.82209 3.146864 9.8265969 Norway 65,895.67 28.426 0.032309469 36,863.70 38054.74657 3.347304 10.5467811 Portugal 26,306.50 14.871 0.028962824 15,817.27 16275.38281 2.699413 9.69740899 Singapore 81,345.67 27.638 0.051366286 32,724.75 34405.69887 3.319192 10.4459775 South Korea 35,485.07 29.161 0.058831271 12,078.58 12789.17821 3.372832 9.45635464 Spain 32,975.38 19.466 0.032200636 18,638.27 19238.43415 2.968669 9.86466534 Sweden 44,695.17 23.478 0.03856053 22,693.13 23568.18912 3.156064 10.0676532 Switzerland 55,237.34 23.706 0.031271523 32,528.50 33545.71574 3.165728 10.4206644 Taiwan 43,600.00 21.92 0.059299171 15,535.18 16456.4033 3.087399 9.70846994 United States 54,678.17 19.921 0.034273057 28,762.68 29748.46497 2.991774 10.3005328

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.