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6 macroeconomics by yao li cont c suppose that 1

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Unformatted text preview: Macroeconomics by Yao Li (CONT.) c. Suppose that 1 dollar is worth 10 pesos. Compute Mexico’s consumption per capita in dollars. d. Using the purchasing power parity method and U.S. prices, compute Mexican consumption per capita in dollars. e. Under each method, how much lower is the standard of living in Mexico than in the U.S.? Does the choice of method make a difference? 7 Macroeconomics by Yao Li The Construction of PPP Numbers These average prices across countries are called international dollar prices. Many of the estimates we use in this chapter are the result of “Penn World Tables.” (Penn stands for the University of Pennsylvania, where the project is taking place.) Led by three economists—Irving Kravis, Robert Summers, and Alan Heston— have constructed PPP series not only for consumption (as we just did in our example) but, more generally, for GDP and its components, going back to 1950, for most countries in the world. 8 Macroeconomics by Yao Li 10.1 MEASURING THE STANDARD OF LIVING Let me end this section with three remarks before we move on and look at growth: What matters for people’s welfare is their consumption rather than their income. Thinking about the production side, one may be interested in differences in productivity rather than in differences in the standard of living across countries. The reason we ultimately care about the standard of living is presumably that we care about happiness. 9 FOCUS: DOES MONEY LEAD TO HAPPINESS? Figure 1 Life Satisfaction and Income per Person Macroeconomics by Yao Li 10.2 GROWTH IN RICH COUNTRIES SINCE 1950 Table 10-1 The Evolution of Output per Person in Four Rich Countries since 1950 Table 10-1 yields two main conclusions: There has been a large increase in output per person. There has been convergence of output per person across countries. 11 Macroeconomics by Yao Li 10.2 GROWTH IN RICH COUNTRIES SINCE 1950 The Large Increase in the Standard of Living since 1950 Real output per capita has increased by a factor of 3.2 since 1950 in the United St...
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