ln(Y)=β0+β1ln(L)+β2ln(K)
The data given is taken from the Penn World Table 9.1 and includes the following variables for Turkey from 1970 to 2017:
Income (Y) is taken as rgdpna (Real GDP at constant 2011 national prices (in mil. 2011US$))
Labor (L) is taken as emp (Number of persons engaged (in millions))
Capital (K) is taken as rnna (Capital stock at constant 2011 national prices (in mil. 2011US$))
Estimate and report the parameters of the production function model
(β0 ) ̂=-2.852e+04 (β1 ) ̂=1.144e+04 (β2 ) ̂=2.746e-01
My finding:
summary(model)
Call:
lm(formula = Y ~ K + L, data = TableTR)
Residuals:
Min 1Q Median 3Q Max
-77352 -24079 1796 17203 80133
Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -2.852e+04 9.089e+04 -0.314 0.755
K 2.746e-01 1.953e-02 14.062 <2e-16 ***
L 1.144e+04 8.103e+03 1.412 0.165
Signif. codes: 0 ‘’ 0.001 ‘’ 0.01 ‘’ 0.05 ‘.’ 0.1 ‘ ’ 1
Residual standard error: 34240 on 45 degrees of freedom
Multiple R-squared: 0.9954, Adjusted R-squared: 0.9952
F-statistic: 4830 on 2 and 45 DF, p-value: < 2.2e-16
The question I couldn't solve is the following:
Test whether there are constant returns to scale or not.
Hint: One of the models is false. You need to estimate the correct one that abides the restriction β1+β2=1
(ln(Y/L) ) ̂=β0+β1ln(K/L) | (ln(Y/K) ) ̂= β0+β1ln(K/L)