Are we rich?

One of the stories of economic growth is that we are much richer today than we were in the past. That is based on measure of GDP and GDP per capita. How do you measure GDP and GDP per capita, and what does growth in those terms actually mean? Is GDP per capita related to actual welfare, or is it a poor proxy? Can we compare how rich one country is to another, or compare how rich we are to the past? Should we care about economic growth at all?

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Academic References

  1. Clark, G. (2005) “The Condition of the Working Class in England, 1209–2004,” Journal of Political Economy. The University of Chicago Press, 113(6), pp. 1307–1340. Available at: Link.
    • Abstract

      I use building workers’ wages for 1209–2004 and the skill premium to consider the causes and consequences of the Industrial Revolution. Real wages were trendless before 1800, as would be predicted for the Malthusian era. Comparing wages with population, however, suggests that the break from the technological stagnation of the Malthusian era came around 1640, long before the classic Industrial Revolution, and even before the arrival of modern democracy in 1689. Building wages also conflict with human capital interpretations of the Industrial Revolution, as modeled by Gary Becker, Kevin Murphy, and Robert Tamura; Oded Galor and David Weil; and Robert Lucas. Human capital accumulation began when the rewards for skills were unchanged and when fertility was increasing.

  2. Deaton, A. and Heston, A. (2010) “Understanding PPPs and PPP-based National Accounts,” American Economic Journal: Macroeconomics, 2(4), pp. 1–35.
    • Abstract

      We provide an overview of the theory and practice of constructing PPPs. We focus on four practical areas: how to handle international differences in quality; the treatment of urban and rural areas of large countries; how to estimate prices for government services, health, and education; and the effects of the regional structure of the latest International Comparison Program for 2005. We discuss revisions of the Penn World Table, and their effects on econometric analysis, and include health warnings. Some international comparisons are close to impossible, even in theory, and in others, the practical difficulties make comparison exceedingly hazardous.

  3. Feenstra, R. C., Inklaar, R. and Timmer, M. P. (2015) “The Next Generation of the Penn World Table,” American Economic Review, 105(10), pp. 3150–82. Available at: Link.
    • Abstract

      We describe the theory and practice of real GDP comparisons across countries and over time. Version 8 of the Penn World Table expands on previous versions in three respects. First, in addition to comparisons of living standards using components of real GDP on the expenditure side, we provide a measure of productive capacity, called real GDP on the output side. Second, growth rates are benchmarked to multiple years of cross-country price data so they are less sensitive to new benchmark data. Third, data on capital stocks and productivity are (re)introduced. Applications including the Balassa-Samuelson effect and development accounting are discussed. (JEL C43, C82, E01, E23, I31, O47)

  4. Pritchett, L. (1997) “Divergence, Big Time,” Journal of Economic Perspectives, 11(3), pp. 3–17. Available at: Link.
    • Abstract

      Historical data are unnecessary to demonstrate that perhaps the basic fact of modern economic history is massive absolute divergence in per capita income across countries. A plausible lower bound on per capita income can be combined with estimates of its current level in the poorer countries to place an upper bound on long-run income growth. Between 1870 and 1990, the ratio of richest to poorest countries’ income increased from roughly 9 to 1 to 45 to 1, the standard deviation of (natural log) per capita income doubled, and the average income gap between the richest and all other countries grew nearly tenfold from 1,286 to 12,000.

  5. Sala-i-Martin, X. (2006) “The World Distribution of Income: Falling Poverty and... Convergence, Period,” The Quarterly Journal of Economics. Oxford University Press, 121(2), pp. 351–397. Available at: Link.
    • Abstract

      We estimate the World Distribution of Income by integrating individual income distributions for 138 countries between 1970 and 2000. Country distributions are constructed by combining national accounts GDP per capita to anchor the mean with survey data to pin down the dispersion. Poverty rates and head counts are reported for four specific poverty lines. Rates in 2000 were between one-third and one-half of what they were in 1970 for all four lines. There were between 250 and 500 million fewer poor in 2000 than in 1970. We estimate eight indexes of income inequality implied by our world distribution of income. All of them show reductions in global inequality during the 1980s and 1990s.

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