Lecture_0-1.ppt

# Lecture_0-1 - • Hypothetical GDP Paths 7 8 9 10 11 12 1870 1890 1910 1930 1950 1970 1990 2010 year log(GDP per capita Growth 2 Growth 1 Growth 3

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The Importance of Growth Xavier Sala-i-Martin

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In 2007, Richest Country in the World: USA per capita income \$43,000 Poorestcountry : Liberia with \$385 per capita income thus Liberia was 111 times poorer than US!!! The question arises: Why? 1870 : USA per capita income was \$2,244 i.e. it multiplied by 19 in 137 years the Growth rate (γ) was close to 2.2% per year. If instead γ had been 1.2 per capita income (y) would have been 10,900\$ in 2007!!! (like Mexico or about one fourth of its current level). If if γ had been 3.2 percent then income per capita in 2007 would be 168,000\$. No country in history has had this income yet. Thus we see that growth is really important and one percentage point difference in growth rate can make a lot of difference in the long term outcome. Fig 1.1 shows how GDP per capita would evolve for different growth rates γ.

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Unformatted text preview: • Hypothetical GDP Paths 7 8 9 10 11 12 1870 1890 1910 1930 1950 1970 1990 2010 year log (GDP per capita) Growth 2% Growth 1% Growth 3% Doubling Income Every X years • If g is the growth rate, income doubles every 72/g years – If g=1.2, income doubles every 72/1.2= 60 years – If g=2.2, income doubles every 72/2.2= 32.7 years – If g=3.2, income doubles every 72/3.2= 22 years Doubling Income • Old Chinese philosopher – Put one penny in first square of chessboard and double it for every square. At the end we have 92,233,720,368,547,800 dollars (92 million billions) (=2^63) – If double it only for white squares, then we have “only” 21,474,836 dollars (21 million) (=2^31) Lesson: doubling income every decade, or every two decades or every six decades has ENORMOUS CONSEQUENCES FOR INCOME IN THE LONG RUN. Hence GROWTH MATTERS A LOT...
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## This note was uploaded on 09/28/2010 for the course ECON ECON W3213 taught by Professor Jonsteinsson during the Spring '10 term at Columbia.

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Lecture_0-1 - • Hypothetical GDP Paths 7 8 9 10 11 12 1870 1890 1910 1930 1950 1970 1990 2010 year log(GDP per capita Growth 2 Growth 1 Growth 3

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