The objective of lung development is to generate an organ of gas exchange that provides both a thin gas diffusion barrier and a large gas diffusion surface area, which concomitantly generates a steep gas-diffusion concentration gradient. As such, the lung is perfectly structured to undertake the function of gas exchange: a large number of small alveoli provide extensive surface area within the limited volume of the lung, and a delicate alveolo-capillary barrier brings circulating blood into close proximity to the inspired air. Efficient movement of inspired air and circulating blood through the conducting airways and conducting vessels, respectively, generates steep oxygen and carbon dioxide concentration gradients across the alveolo-capillary barrier, providing ideal conditions for effective diffusion of both gases during breathing. The development of the gas exchange apparatus of the lung occurs during the second phase of lung development - namely, late lung development - which includes the canalicular, saccular and alveolar stages of lung development. It is during these stages of lung development that preterm-born infants are delivered, when the lung is not yet competent for effective gas exchange. These infants may develop bronchopulmonary dysplasia (BPD), a syndrome complicated by disturbances to the development of the alveoli and the pulmonary vasculature. It is the objective of this Perspective article to update the reader about recent developments that further our understanding of the mechanisms of lung alveolarization and vascularization, and the pathogenesis of BPD and other neonatal lung diseases that feature lung hypoplasia.