13. How can we measure growth over the very long run? The poorest countries in t
ID: 1189212 • Letter: 1
Question
13. How can we measure growth over the very long run? The poorest countries
in the world have a per capita income of about $600 today. We can reasonably
assume that it is nearly impossible to live on an income below half this
level (below $300). Per capita income in the United States in 2010 was about
$43,000. With this information in mind, consider the following questions.
(a) For how long is it possible that per capita income in the United States has
been growing at an average annual rate of 2% per year?
(b) Some economists have argued that growth rates are mismeasured. For
example, it may be difficult to compare per capita income today with per
capita income a century ago when so many of the goods we can buy today
were not available at any price then. Suppose the true growth rate in the
past century was 3% per year rather than 2%. What would the level of per
capita income in 1800 have been in this case? Is this answer plausible?
Explanation / Answer
The per capita income of the United States have been growing at a constant rate of 2% for 216 years, starting from the per capita income of $600. Calculate the period in which the future value of $600 will be $43000 at an annual rate of 2%.
The level of per capita income in the 1800 would at around 4.5%. As the growth rate in the past century is 50% more than today.
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