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Figure 1.1 The Parade of World Income Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-1 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-2 Growth and Development: The Questions Cross-Country Income Di¤erences Cross-Country Income Di¤erences Daron Acemoglu (MIT) Economic Growth Lecture 1 October 25, 2012. 2 / 15 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-3 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-4 Introduction to Modern Economic Growth 10 USA LUX log consumption per capita 2000 6 7 8 9 ISL AUS GBR HKG DNK AUT NOR GER CHE IRL NLD BRB CAN JPN FRA FIN ITA NZL BEL ESP SWE GRC MUS ISR PRT TTO CZE MAC SVN KOR ARG URY SYC HUN KNA MEX POL CHLSVK ATG EST GAB TUN LTU HRV RUS LVA ZAF BLZ TUR LCA BRA KAZ BLR LBN MKD BGR GRD VENDMA SLV PAN ROM IRN EGY GEO COL DOM CRI THA VCT GTMPRY SWZ PER CPV MAR ALB MYS DZA UKR ARM GINLKA GNQ PHL JOR SYR IDN BOL MDA AZE ECU KGZ JAM CHN NICCMRZWE PAK HND CIV SEN COM BGD IND GMB GHA COG MOZBEN KEN NPL TJK STP LSO UGA MDG RWA TCD MLI MWI BFA NER ZMB TGO BDI GNB ETH YEM TZA 5 NGA 6 7 8 9 log gdp per capita 2000 10 11 Figure 1.5. The association between income per capita and consumption per capita in 2000. 1.2. Income and Welfare Should we care about cross-country income differences? The answer is undoubtedly yes. High income levels reflect high standards of living. Economic growth might, at least over some range, increase pollution or raise individual aspirations, so that the same bundle of consumption may no longer make an individual as happy. But at the end of the day, when one compares an advanced, rich country with a less-developed one, there are striking differences in the quality of life, standards of living and health. Figures 1.5 and 1.6 give a glimpse of these differences and depict the relationship between income per capita in 2000 and consumption per capita and life expectancy at birth in the same year. Consumption data also come from the Penn World 8 Figure 1.6 The Distribution of Growth Rates, 1970–2005 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-5 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-6 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-7 12 Introduction to Modern Economic Growth LUX 11 IRL USA NOR NLD ITA BEL CAN AUS AUT FINFRA DNK SWE CHE ISL GBR ESP ISR NZL JPN KOR GRC PRT BRB MUS MYS TTO ARG CHLMEX SYC ZAF URY BRA IRN VEN GAB DOMPAN JOR SYR TUR CRI EGY GTM SLV MAR ECU COL PRY PER PHL JAM BOL HND GIN NIC log gdp per worker 2000 8 9 10 HKG THA ROM IDN PAK IND CHN CPV LKA BGD ZWE CIV COG LSO NPL MWI 7 GNB BFA UGA ETH CMR COM SEN GHA GMB ZMB TCD BEN KEN TGO MOZ MLI MDG NER RWA NGA TZA BDI 6 7 8 9 log gdp per worker 1960 10 Figure 1.9. Log GDP per worker in 2000 versus log GDP per worker in 1960, together with the 45◦ line. observations for all countries going back to 1820. Finally, while these data do include a correction for PPP, this is far less reliable than the careful price comparisons used to construct the price indices in the Penn World tables. Nevertheless, these are the best available estimates for differences in prosperity across a large number of nations going back to the 19th century. Figures 1.10 shows the estimates of the distribution of countries by GDP per capita in 1820, 1913 (right before World War I) and 2000. To facilitate comparison, the same set of countries are used to construct the distribution of income in each date. The distribution of income per capita in 1820 is relatively equal, with a very small left tail and a somewhat larger but still small right tail. In contrast, by 1913, there is considerably more weight in the tails of the distribution. By 2000, there are much larger differences. 15 10 Introduction to Modern Economic Growth UK South Korea Spain Brazil Singapore Guatemala Botswana India 7 log gdp per capita 8 9 USA 6 Nigeria 1960 1970 1980 year 1990 2000 Figure 1.8. The evolution of income per capita in the United States, United Kingdom, Spain, Singapore, Brazil, Guatemala, South Korea, Botswana, Nigeria and India, 1960-2000. we will see that there is a lot of truth to this simple calculation; see Figures 1.8, 1.11 and 1.13). In fact, even in the historically-brief postwar era, we see tremendous differences in growth rates across countries. This is shown in Figure 1.7 for the postwar era, which plots the density of growth rates across countries in 1960, 1980 and 2000. The growth rate in 1960 refers to the (geometric) average of the growth rate between 1950 and 1969, the growth rate in 1980 refers to the average growth rate between 1970 and 1989 and 2000 refers to the average between 1990 and 2000 (in all cases subject to data availability; all data from Penn World tables). Figure 1.7 shows that in each time interval, there is considerable variability in growth rates; the cross-country distribution stretches from negative growth rates to average growth rates as high as 10% a year. 12 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-8 Introduction to Modern Economic Growth as ln yt ' (1 + β) ln yt−1 + εt . Figure 1.9 showed that the relationship between log GDP per worker in 2000 and log GDP per worker in 1960 can be approximated by the 45◦ line, so that in terms of this equation, β should be approximately equal to 0. This is confirmed by Figure 1.14, which depicts the relationship between the (geometric) average growth rate between 1960 and 2000 and log GDP per worker in 1960. This figure reiterates that there is no “unconditional” convergence for the entire world over the postwar .06 period. HKG KOR .04 THA annual growth rate 1960-2000 0 .02 CHN JPN MUS MYS ROM PAK IND COG NPL GNB UGA BFA TZA ETH CPV LKA BGD PAN IRN CHL TTO MEX ECU GTMJOR CIV PHL GMB ZAF URY PRY KEN GHA COL SLV CRI BEN GIN HND CMR TGO JAM RWA PER BOL COM SEN TCD MOZ MDG ZMB MLI NER NGA NIC ZWE LUX ISL GBRDNK USA NLD SWE AUS CAN CHE ARG NZL VEN -.02 BDI PRT BRB ESP GRC AUT ITA SYR FIN GAB TUR ISR BEL FRA EGYDOM BRA NOR MAR SYC IDN LSO MWI IRL 6 7 8 9 log gdp per worker 1960 10 Figure 1.14. Annual growth rate of GDP per worker between 1960 and 2000 versus log GDP per worker in 1960 for the entire world. While there is no convergence for the entire world, when we look among the (original) OECD nations, we see a different pattern. Figure 1.15 shows that there is a strong negative relationship between log GDP per worker in 1960 and the annual 21 Introduction to Modern Economic Growth growth rate between 1960 and 2000 among the OECD countries. What distinguishes this sample from the entire world sample is the relative homogeneity of the OECD countries, which have much more similar institutions, policies and initial conditions than the entire world. This suggests that there might be a type of conditional convergence when we control for certain country characteristics potentially affecting economic growth. JPN .04 IRL PRT LUX ESP GRC annual growth rate 1960-2000 .01 .02 .03 AUT ITA FIN FRA BEL NOR ISL GBR USA DNK SWE NLD AUS CAN CHE NZL 9 9.5 log gdp per worker 1960 10 10.5 Figure 1.15. Annual growth rate of GDP per worker between 1960 and 2000 versus log GDP per worker in 1960 for core OECD countries. This is what the vector Xt−1 captures in equation (1.1). In particular, when this vector includes human capital-related variables such as years of schooling or life expectancy, Barro and Sala-i-Martin estimate β to be approximately -0.02, indicating that the income gap between countries that have the same human capital endowment has been narrowing over the postwar period on average at about 2 percent a year. 22 Figure 4.1 Relationship Between Income per Capita and Population Growth Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-9 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-10 Figure 5.4 Income per Capita versus Total Fertility Rate Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-11 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-12 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-13 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-14 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-15 Figure 5.6a Changes in the Age Structure of the Population, 1950– 2050 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-16 Figure 5.6b Changes in the Age Structure of the Population, 1950– 2050 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-17 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-18 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-19 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-20 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-21 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-22 Figure 11.1 Growth of World Trade, 1870–2005 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-23 Figure 11.2 Relationship Between Economic Openness and GDP per Capita Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-24 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-25 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-26 Figure 1 – Artificial versus Organic boundaries – Sudan and France France Fractal dimension of political boundary = 1.0429 Figure 1a – France, with political boundaries highlighted at left Sudan Fractal dimension of political boundary = 1.0245 Figure 1b – Sudan, with political boundaries highlighted at left 23 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-27 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-28 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-29 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-30 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 1-31