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1 Figure 1.1 The Parade of World Income Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-1

2 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-2

3 Growth and Development: The Questions Cross-Country Income Differences Cross-Country Income Differences Daron Acemoglu (MIT) Economic Growth Lecture 1 October 25, / 15

4 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-3

5 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-4

6 log consumption per capita 2000 Introduction to Modern Economic Growth USA GBR ISL AUS AUT DNK HKG NOR BRB FRA GER FIN NLD JPN IRL CHE CAN ESP NZLITABEL MUS GRC SWE ISR TTO CZEPRT SVN MAC ARG KOR URY SYC HUN KNA GAB MEXCHL POL EST SVK ATG TUN LTU LCA BLZKAZ ZAF LVAHRV TUR RUS BRA MKD LBN BLR EGY ROM SLV BGR GEO COL IRN PAN GRD VENDMA GTMPRY SWZ DOM CRITHA VCT MAR PER ALB CPV ARM GIN GNQ UKR DZA MYS LKA PHL IDN JOR SYR BOL MDA AZE ECU KGZ JAM NICCMRZWE CHN SEN CIV PAK HND COM BGD IND BEN GMB GHA MOZ COG KENNPL TJK STP LSO UGA MDG RWA MWI ZMB TCD TGO NER BFA MLI GNB BDI ETH YEM TZA LUX NGA log gdp per capita 2000 Figure 1.5. The association between income per capita and consumption per capita in 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

7 Figure 1.6 The Distribution of Growth Rates, Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-5

8 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-6

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10 log gdp per worker 2000 Introduction to Modern Economic Growth LUX MWI GNB IRL USA BEL HKG ITA NOR AUT DNK NLD AUS CAN FINFRA CHE ESP ISR ISL GBR SWE JPN NZL KOR BRB PRTGRC MUS MYS TTO CHL ARG SYC MEX ZAF URY BRA IRN GAB VEN SYR TUR DOMPAN JOR CRI EGY THA GTM SLV MAR ECU COL CPV PRY PER CHN ROM IDN PHL LKA PAK JAM BGD BOL IND HND GIN ZWE NIC CIV CMR COG LSO NPL SEN COM GMBGHA KEN BEN TCD ZMB UGA BFA TGO MOZ MDG MLI RWA NER ETH NGA TZA BDI log gdp per worker 1960 Figure 1.9. LogGDPperworkerin2000versuslogGDPperworker in 1960, together with the 45 line. observations for all countries going back to 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 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

11 log gdp per capita Introduction to Modern Economic Growth USA UK Spain Brazil South Korea Singapore Guatemala Botswana India Nigeria year 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, 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 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 ratesashighas10%ayear. 12

12 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-8

13 annual growth rate Introduction to Modern Economic Growth as ln y t ' (1 + β)lny t 1 + ε t. 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 This figure reiterates that there is no unconditional convergencefortheentireworldoverthepostwar period. KOR HKG MWI GNB TZA BDI CHN ROM THA JPN MYS MUS SYC BRB PRT IDN ESP LUX COG PAK CPV GRC IND AUT ITA SYR TURGAB FIN DOM ISR BEL LSO EGY FRA BRA MAR NOR LKA NPL PAN BGD IRN CHL ISL TTO GBRDNK USA SWE NLD AUS ZWE CAN ECU GTM JOR MEX UGA BFA GMB CIV PHL ZAF CHE KENGHA PRY URY ETH COL ARG BEN GIN SLVCRI NZL CMR HND TGO RWA JAM BOL PER SEN COM MDG MOZTCD ZMB MLI VEN NER NGA NIC IRL log gdp per worker 1960 Figure 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

14 annual growth rate 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 IRL PRT GRC ESP AUT ITA LUX FIN FRA BEL NOR ISL GBR SWE DNK NLD AUS CAN USA CHE log gdp per worker 1960 NZL Figure 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 X t 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

15 Figure 4.1 Relationship Between Income per Capita and Population Growth Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-9

16 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-10

17 Figure 5.4 Income per Capita versus Total Fertility Rate Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-11

18 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-12

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20 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-14

21 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-15

22 Figure 5.6a Changes in the Age Structure of the Population, Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-16

23 Figure 5.6b Changes in the Age Structure of the Population, Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-17

24 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-18

25 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-19

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27 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-21

28 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-22

29 Figure 11.1 Growth of World Trade, Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-23

30 Figure 11.2 Relationship Between Economic Openness and GDP per Capita Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-24

31 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-25

32 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-26

33 Figure 1 Artificial versus Organic boundaries Sudan and France France Fractal dimension of political boundary = Figure 1a France, with political boundaries highlighted at left Sudan Fractal dimension of political boundary = Figure 1b Sudan, with political boundaries highlighted at left 23

34 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-27

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38 Copyright 2005 Pearson Addison-Wesley. All rights reserved. 1-31

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