Evaluate the prediction of absolute convergence

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Reference no: EM132198879

Question: In this question you will need to evaluate the various predictions of convergence in the Solow model using data from the Penn World Tables.

(i) GDP in millions of PPP $ for 1980 and 2014.

(ii) Persons engaged in millions for the same two years.

(iii) The investment rate (s in our model) averaged over the 30 year period.

(a) Evaluate the prediction of absolute convergence in GDP per person. Does it hold when using this data. Make sure you explain your method and include the relevant graph.

(b) What is the prediction of conditional convergence? Consider the following crude test of conditional convergence. Rank all the countries based on their investment rate. Now divide them into four roughly equal sized groups based on their investment rate (ie the first group have the lowest investment rates and the fourth group will have the highest investment rate). For each group, repeat (a). What do you find? Do your plots support the Solow Model? Why or Why not? Make sure you include the plots when you submit your homework.

Reference no: EM132198879

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