Obviously, the per capita income of a country depends on many things, and any statistical test that does not take account of all important determinants is misspecified, and thus must be used only for descriptive and heuristic purposes. It is nonetheless interesting--and for many people surprising--to find that there is a positive and even a statistically significant relationship between these two variables: the greater the number of people per square kilometer the higher the per capita income. The law of diminishing returns is not invariably true. It would be absurd to suppose that a larger endowment of land ipso facto makes a country poorer. This consideration by itself would, of course, call for a negative sign on population density. Thus, it is interesting to ask what might account for the 'wrong' sign and think of what statistical tests should ultimately be done. Clearly there is a simultaneous two-way relationship between population density and per capita income the level of per capita income affects population growth just as population, by increasing the labor force, affects per capita income. The argument offered here suggests that perhaps countries with better economic policies and institutions come to have higher per capita incomes than countries with inferior policies and institutions, and that these higher incomes bring about a higher population growth through more immigration and lower death raters. In this way, the effects of better institutions and policies in raising per capita income swamps the tendency of diminishing returns to labor to reduce it. This hypothesis may also explain why many empirical studies have not been able to show a negative association between the rate of population growth and increases in per capita income. One reason why the ratio of natural resources to population does not account for variations in per capita income is that most economic activity can now readily be separated from deposits of raw material and arable land. Over time, transportation technologies have certainly improved, and products that have a high value in relation to their weight, such as most services and manufactured goods like computers and airplanes, may have become more important. The Silicon Valley is not important for the manufacturing of computers because of the deposits of silicon, and London and Zurich are not great banking centers because of fertile land. Even casual observation suggests that most modem manufacturing and service exports are not closely related to natural resources. Western Europe does not now have a high ratio of natural resources to population, but it is very important in the export of manufactures and services. In a parallel way, the striking success of Japan, Hong Kong, and Singapore, with relatively few natural resources per capita, cannot be explained by reliance thereon. In paragraph 1, three words are in italics ______.