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Growth Institutions And Business
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Growth Institutions And Business
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Chapter 1THE FACTS TO BE EXPLAINED
Why countries differ in their standards of living and why countries grow richer or fail to grow
richer over time. The rest of this chapter lays out in greater detail the scope of the facts to be
explained. We first look at differences among countries in their levels of income and then
examine national differences in the growth rate of income. As we will see, there is a close link
between these two measures: Countries that are rich today are precisely those that have grown
quickly and for a longer period of time in the past.
1.1 DIFFERENCES IN THE LEVEL OF INCOME AMONG COUNTRIES
Gross domestic product (GDP) (output or national income) - measure of the value of all of the
goods and services produced in a country in a year. GDP can be calculated as either the value of
the output produced in a country or equivalently as the total income, in the form of wages, rents,
interest, and profits, earned in a country.
In comparing income among countries, one issue we face is how to deal with their different
currencies. Similarly, in examining income within a single country over time we face the issue of
fluctuations in the price level. To convert amounts from other years and countries, we use a set of
artificially constructed factors called purchasing power parity (PPP) exchange rates.
Certainly most of us would rather live in a country that was “rich” in per capita terms but “poor”
in its level of total output than in a country that was “rich” in the sense of having many people,
each with a low income.
the relationship between income per capita and the size of the population is complex
,1.2 DIFFERENCES IN THE RATE OF INCOME GROWTH AMONG COUNTRIES
Figure 1.1 examined the level of income in different countries. These data raise the question:
Why are some countries so much richer than others? A second sort of measure that we will want
to examine is countries’ growth rates of income (i.e., how quickly their income per capita is
rising). Growth is important because a country that grows faster will move to a higher level of
income over time.
Growth’s Effect on the Level of Income
Figure 1.2 shows the level of income per capita in the United States going back to 1870. The most
striking message of this graph is just how much better off people are today!
When we look at data on income over long periods of time, it is often useful to use a ratio scale
(see “Working with Growth Rates”). Figure 1.4 uses a ratio scale to examine the same data as we
examined in Figure 1.2: GDP per capita in the United States.
,Growth during Recent Decades
Figure 1.6 demonstrates how large the variation in growth rates has been. At the top of the chart
are the well-known “growth miracles.” At the bottom are “growth disasters,” among them
Nicaragua, Somalia, and Zimbabwe, where income per capita actually fell over this period.
Growth, in the distinction drawn by economists, is defined to be a long-run phenomenon. The
state of the economy fluctuates on an annual or even monthly basis. Yet we find it useful to
separate these short-run fluctuations, which are called business cycles, from longerterm trends
that span decades.
Growth since 1820
, As the figure shows, the pace of growth worldwide has accelerated. Between 1820 and 1870,
average GDP per capita in the world grew at a rate of 0.5% per year. Between 1870 and 1950, the
pace was 1.1% per year, and between 1950 and 2008, the pace was 2.2% per year. Figure 1.7 also
shows that over this 188-year period, the gap has widened between the rich and the poor.
Growth before 1820
Before 1820 the data are even sparser. Forming an estimate of the standard of living and
comparing it among countries requires combining historical records, reports from travelers such
as Marco Polo and the Spanish conquistadors. We can make several conclusions:
First, growth was glacially slow.
A second aspect of this period is that income differences among countries were very small by
modern standards; there was even less inequality among countries than in 1820.
Finally, just as in the period after 1820, there were significant changes before 1820 in
countries’ ranking in the distribution of income. An observer looking over the earth in the 15th
century would have been more impressed with the vast colonial empires of the Ottomans, Incas,
and Aztecs than with the achievements of Western Europeans.
The most dramatic story of relative economic decline is that of China. Between the 8th and 12th
centuries. China had also started out on the same path of world exploration that Europe was to
follow in later centuries. In the early 15th century the Chinese admiral Zheng He undertook
voyages of exploration as far as the east coast of Africa. Despite this impressive beginning, the
Chinese economy stagnated. While Europe industrialized and spread its influence over the rest of
the world.
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