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Chapter 8: Endogenous Economic Growth

Endogenous Economic Growth
Endogenous economic growth

Economic growth is highly valued; understanding why is easy. Consider two economies, A and B, that each have a starting GDP per capita of $1,000. If A grows at 1% per year and B at 3% per year, B's standard of living after ten years is 21.6% higher; after fifteen years, it is 34.2% higher; and after 20 years, it is 48% higher. That is, “only” a 2% difference in growth rates over twenty years results in an almost 50% differential in the two nations' standard of living. As a concrete example, both Pakistan and Taiwan had GDPs per capita of less than$450 (in 1980 dollars) in 1900; both were desperately poor. Yet, because Taiwan grew at 2.8% per ...