Abby Ghail C.
Cinco - BSA 2-3 and a purely materialistic, individualistic, self-interested
Chapter 1: Introducing Economic Development: A
Global Perspective
Economic Development - one of the newest, most
exciting, and most challenging branches of the broader
disciplines of economics and political economy
Absolute Poverty - a situation of being unable to meet
the minimum levels of income, food, clothing, health
care, shelter, and other essentials.
Noneconomic Costs - what is present against these
economic benefits
Favela - squatters' slum
Subsistence Economy - An economy in which
production is mainly for personal consumption and the
standard of living yields little more than basic necessities
of life—food, shelter, and clothing
Development - The process of improving the quality of
all human lives and capabilities by raising people’s
levels of living, self-esteem, and freedom.
Zhuangs - rural areas
Sustainable Development Goals - successor of MDG
Developing Countries - Countries of Asia, Africa, the
Middle East, Latin America, eastern Europe, and the
former Soviet Union that are presently characterized by
low levels of living and other development deficits. Used
in the development literature as a synonym for less
developed countries
Adam Smith - first development economists
Wealth of the Nations (1776) - first treatise on
economic development
Traditional Economics - An approach to economics
that emphasizes utility, profit maximization, market
efficiency, and determination of equilibrium
- concerned primarily with the efficient, least-
cost allocation of scarce productive resources
and with the optimal growth of these resources
over time so as to produce an ever-expanding
range of goods and service
Traditional Neoclassical Economics - deals with an
advanced capitalist world of perfect markets; consumer
sovereignty; automatic price adjustments; decisions
made on the basis of marginal, private-profit, and utility
calculations; and equilibrium outcomes in all product
and resource markets. It assumes economic “rationality”
orientation toward economic decision making.
Political Economy - The attempt to merge economic
analysis with practical politics— to view economic
activity in its political context.
- goes beyond traditional economics to study,
among other things, the social and institutional
processes through which certain groups of
economic and political elites influence
- concerned with the relationship between
politics and economics, with a special emphasis
on the role of power in economic decision
making
Development Economics - the study of how economies
are transformed from stagnation to growth and from
lowincome to high-income status, and overcome
problems of absolute poverty
- must also deal with the economic, social,
political , and institutional mechanisms, both
public and private
- must be concerned with the economic, cultural,
and political requirements for effecting rapid
structural and institutional transformations of
entire societies
- must be eclectic, attempting to combine relevant
concepts and theories from traditional economic
analysis with new models and broader
multidisciplinary approaches .
- a field on the crest of a breaking wave, with new
theories and new data constantly emerging
- purpose is to help us understand developing
economies in order to help improve the material
lives of the majority of the global population
- a distinct yet very important extension of both
traditional economics and political economy
More Developed Countries (MDCs) - The now
economically advanced capitalist countries of western
Europe, North America, Australia, New Zealand, and
Japan.
Less Developed Countries - A synonym for developing
countries
Economics - a social science concerned with human
beings and the social systems by which they organize
their activities to satisfy basic material needs
 - cannot be value-free in the same sense as, say,
physics or chemistry.
"Realization Of The Human Potential.” - by Mahatma
Gandhi
Social System - The organizational and institutional
structure of a society, including its values, attitudes,
power structure and traditions.
- interdependent relationships between economic
and noneconomic factors
Values - Principles, standards, or qualities that a society
or groups within it considers worthwhile or desirable.
Attitudes - The states of mind or feelings of an
individual, group, or society regarding issues such as
material gain, hard work, saving for the future, and
sharing wealth.
Institutions - Norms, rules of conduct, and generally
accepted ways of doing things. Economic institutions are
humanly devised constraints that shape human
interactions, including both informal and formal “rules
of the game” of economic life in the widely used
framework of Douglass North.
Income Per Capita - Total gross national income of a
country divided by its total population.
Gross National Income (G N I) - The total domestic
and foreign output claimed by residents of a country. It
comprises gross domestic product (GDP) plus factor
incomes accruing to residents from abroad, less the
income earned in the domestic economy accruing to
persons abroad
Development - (Economics) traditionally meant
achieving sustained rates of growth of income per capita
to enable a nation to expand its output at a rate faster
than the growth rate of its population.
- economic phenomenon in which rapid gains in
overall and per capita GNI growth.
- must therefore be conceived of as a
multidimensional process involving major
changes in social structures, popular attitudes, and
national institutions, as well as the acceleration of
economic growth, the reduction of inequality, and
the eradication of poverty
- must represent the whole gamut of change by
which an entire social system
Gross Domestic Product (GDP) - The total final output
of goods and services produced by the country’s
economy, within the country’s territory, by residents and
nonresidents, regardless of its allocation between
domestic and foreign claims.
Amartya Sen - leading thinker on the meaning of
development
- the 1998 Nobel laureate in economics, argues
that the “capability to function” is what really
matters for status as a poor or nonpoor person.
- "the expansion of commodity productions...are
valued, ultimately, not for their own sake, but as
means to human welfare and freedom.”
- argues that poverty cannot be properly measured
by income or even by utility as conventionally
understood; what matters fundamentally is not the
things a person has—or the feelings these
provide—but what a person is, or can be, and
does, or can do.
Functionings - What people do or can do with the
commodities of given characteristics that they come to
possess or control
- a valued “being or doing,”
Sen's five sources of disparity between (measured) real
incomes and actual advantages:
1. Personal heterogeneities-such as those
connected with disability, illness, age, or gender
2. Environmental diversities-such as heating and
clothing requirements in the cold or infectious
diseases in the tropics, or the impact of pollution
3. Variations in social climate-such as the
prevalence of crime and violence, and “social
capital”
4. Distribution within the family—economic
statistics measure incomes received in a family
because it is the basic unit of shared consumption
5. Differences in relational perspectives-
meaning that some goods are essential because of
local customs and conventions.
External Capabilities - (James Foster and Christopher
Handy) abilities to function that are conferred by direct
connection or relationship with another person
The Idea of Justice - Sen's acclaimed 2009 book
Capabilities - the freedom that people have, given their
personal features and their command over commodities
- the freedom that a person has in terms of the
choice of functionings, given his personal features
 (conversion of characteristics into functionings)
and his command over commodities
Human “well-being” - means being well, in the basic
sense of being healthy, well nourished, well clothed,
literate, and long-lived, and more broadly, being able to
take part in the life of the community, being mobile, and
having freedom of choice in what one can become and
can do.
Richard Layard identifies seven factors that surveys
show affect average national happiness:
1. Family relationships
2. financial situation
3. work
4. community and friends
5. health
6.personal freedom
7. personal values
Social Capital - traditional strengths such as moral
values and trust in others
3 Core Values of Development
1. Sustenance: The ability to Meet Basic needs -
The basic goods and services, such as food,
clothing, and shelter, that are necessary to sustain
an average human being at the bare minimum
level of living
Absolute underdevelopment - exists when
sustenance is absent
2. Self- esteem: To Be a Person - The feeling of
worthiness that a society enjoys when its social,
political, and economic systems and institutions
promote human values such as respect, dignity,
integrity, and self-determination
Denis Goulet - “Development is legitimized as a
goal because it is an important, perhaps even an
indispensable, way of gaining esteem.”
3. Freedom from Servitude: To Be able to
Choose - a situation in which a society has at its
disposal a variety of alternatives from which to
satisfy its wants and individuals enjoy real choices
according to their preferences
Women - playing the central role in the development
drama
3 Objectives of Development
1. To increase the availability and widen the
distribution of basic life-sustaining goods
2. To raise levels of living
3. To expand the range of economic and social
choices
Millennium Development Goals (MDGs) - a set of
eight goals adopted by the United Nations (189
countires) in 2000. The goals are assigned specific
targets to be achieved by 2015.
Millenium Development Goals
1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other
diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development
Sector - A subset (part) of an economy, with four
usages in economic development: technology (modern
and traditional sectors); activity (industry or product
sectors); trade (export sector); and sphere (prvate and
public sectors)
Chapter 2: Comparative Economic Development
10 Important Features that Developing Countries Have
in Common
1. Lower levels of living and productivity
2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social frationalization
6. Larger rural populations but rapid rural-to-
urban migration
7. Lower levels of industrialization
8. Adverse geography
 9. Underdeveloped financial and other markets
10. Lingering colonial impacts such as poor
institutions and often external dependence.
World Bank/ IBRD - International Bank for
Reconstruction and Development; organization known
as "financial institution that provides development funds
to developing countries in the form of interest-bearing
loans, grants and technical assistance.
Low-Income Countries (LICs) - GNI per capita of
$1,025 in 2011
Lower-Middle-Income Countries (LMCs) - $1,026
and $4,305
Upper-Middle-Income Countries (UMCs) - $4,036
and $12,745
Middle Income Countries - includes LMCs and
UMCs; GNI per capita between $1,025 and $12,475 in
2011.
High-Income OECD(Organization for Economic
Cooperation and Development) Countries- $12,476
or more
Other High-Income Countries - sometimes classified
as developing countries
Newly industrializing countries (NICs) - Countries at
a relatively advanced level of economic development
with a substantial and dynamic industrial sector and with
close links to the international trade, finance, and
investment system.
Least Developed Countries - A UN designation of
countries with low income, low human capital, and high
economic vulnerability.
Human capital Productive - investments in people,
such as skills, values, and health resulting from
expenditures on education, on-the-job training programs,
and medical care
Emerging Market - widely used in the financial press
to suggest the presence of active stock and bond markets
Gross national income (GNI) - The total domestic and
foreign output claimed by residents of a country,
consisting of gross domestic product (GDP) plus factor
incomes earned by foreign residents, minus income
earned in the domestic economy by nonresidents.
- most common measure of the overall level of
economic activity, is often used as a summary
index of the relative economic well-being of
people in different nations
Value Added - The portion of a product’s final value
that is added at each stage of production. Depreciation
(of the capital stock) - The wearing out of equipment,
buildings, infrastructure, and other forms of capital,
reflected in write-offs to the value of the capital stock.
Capital Stock - The total amount of physical goods
existing at a particular time that have been produced for
use in the production of other goods and services.
Gross Domestic Product (GDP) -The total final output
of goods and services produced by the country’s
economy within the country’s territory by residents and
nonresidents, regardless of its allocation between
domestic and foreign claims.
-measures the total value for final use of output
produced by an economy, by both residents and
nonresidents
Purchasing Power Parity PPP) - Calculation of GNI
using a common set of international prices for all goods
and services, to provide more accurate computations of
living standards
- calculated using a common set of international
prices for all goods and services. In a simple
version
-defined as the number of units of a foreign
country’s currency required to purchase the
identical quantity of goods and services in the
local developing country market as $1 would
buy in the United States.
Life expectancy - is the average number of years
newborn children would live if subjected to the mortality
risks prevailing for their cohort at the time of their birth.
Undernourishment - means consuming too little food
to maintain normal levels of activity; it is what is often
called the problem of hunger.
High fertility - can be both a cause and a consequence
of underdevelopment, so the birth rate is reported as
another basic indicator.
Literacy - is the fraction of adult males and females
reported or estimated to have basic abilities to read and
write; functional literacy is generally lower than the
reported numbers.
Human Development Index (HDI) -An index
measuring national socioeconomic development, based
on combining measures of education, health, and
adjusted real income per capita
New HDI, ranks each country on a scale of 0 (lowest
human development) to 1 (highest human
development) based on three goals or end products of
development:
1. A Long And Healthy Life - as measured by
life expectancy at birth
2. Knowledge - as measured by a combination
of average schooling attained by adults and
expected years of schooling for school-age
children
3. A Decent Standard Of Living - as measured
by real per capita gross domestic product
Diminishing Marginal Utility- The concept that the
subjective value of additional consumption lessens as
total consumption becomes higher
10 Characteristics of the Developing World: Diversity
within Commonality
1. Lower Levels of Living and Productivity
Poverty Trap - or what Nobel laureate Gunnar Myrdal
called “circular and cumulative causation.” low
productivity and economic stagnation
2. Lower Levels of Human Capital
3. Higher Levels of Inequality and Absolute Poverty
Absolute poverty - The situation of being unable or
only barely able to meet the subsistence essentials of
food, clothing, shelter, and basic health care
4. Higher Population Growth Rates
Crude Birth Rate - The number of children born alive
each year per 1,000 population
Dependency Burden - The proportion of the total
population aged 0 to 15 and 65+ (older people and
children), which is considered economically
unproductive and therefore not counted in the labor force
5. Greater Social Fractionalization
Fractionalization - Significant ethnic, linguistic, and
other social divisions within a country
- sometimes associated with civil strife and even
violent conflict
6. Larger Rural Populations but Rapid Rural-to-
Urban Migration
7. Lower Levels of Industrialization and
Manufactured Exports
Industrialization - associated with high productivity
and incomes and has been a hallmark of modernization
and national economic power
8. Adverse Geography
Resource endowment - A nation’s supply of usable
factors of production, including mineral deposits, raw
materials and labor
Curse Of Natural Resources - conflict over the profits
from these industries has often led to a focus on the
distribution of wealth rather than its creation and to
social strife, undemocratic governance, high inequality,
and even armed conflict
9. Underdeveloped Markets
Infrastracture - Facilities that enable economic activity
and markets, such as transportation, communication and
distribution networks, utilities, water, sewer, and energy
supply systems
Imperfect market - A market in which the theoretical
assumptions of perfect competition are violated by the
existence of, for example, a small number of buyers and
sellers, barriers to entry, and incomplete information.
Incomplete information - The absence of information
that producers and consumers need to make efficient
decisions resulting in underperforming markets
10. Lingering Colonial Impacts and Unequal
International Relations
Property rights - The acknowledged right to use and
benefit from a tangible (e.g., land) or intangible (e.g.,
intellectual) entity that may include owning, using,
deriving income from, selling, and disposing.
Decolonization - one of the most important historical
and geopolitical events of the post–World War II era.
Mita - forced labor system in Peru and Bolivia
Regression Discontinuity Design (RDD) - important
tool used by development economists to establish causal
effects
Environmental Dependence - developing world must
rely on the developed world to cease aggravating the
problem
8 Significant differences in initial conditions that
require a special analysis of the growth prospects and
requirements of modern economic development:
1.Physical and human resource endowments
Paul Romer - argues that today’s developing nations
“are poor because their citizens do not have access to the
ideas that are used in industrial nations to generate
economic value.
Ingenuity gap - (Thomas Homer-Dixon) the ability to
apply innovative ideas to solve practical social and
technical problems
2.Per capita incomes and levels of GDP in relation to
the rest of the world
3. Climate
Tropical Or Subtropical Climatic Zones - where
almost all developing countries are situated in
Temperate Zone - where economically most successful
countries are located
4.Population Size, Distribution, And Growth
5. Historical Role Of International Migration
International Migration - in the nineteenth and early
twentieth centuries, a major outlet for rural populations
Brain Drain - The emigration of highly educated and
skilled professionals and technicians from the
developing countries to the developed worlds
6.International trade benefits
Free trade - Trade in which goods can be imported and
exported without any barriers in the forms of tariffs,
quotas, or other restrictions.
International Free Trade - has been called the “engine
of growth” that propelled the development of today’s
economically advanced nations during the nineteenth
and early twentieth centuries
Terms of trade - The ratio of a country’s average export
price to its average import price
-the price they receive for their exports relative
to the price they have to pay for imports
7.Basic scientific and technological research and
development capabilities
Research and development (R&D) - Scientific
investigation with a view toward improving the existing
quality of human life, products, profits, factors of
production, or knowledge
8.Efficacy of domestic institutions
Lant Pritchett - there is no doubt that today’s developed
countries have enjoyed far higher rates of economic
growth averaged over two centuries than today’s
developing countries, a process known as divergence .
Divergence - A tendency for per capita income (or
output) to grow faster in higher-income countries than in
lower-income countries so that the income gap widens
across countries over time (as was seen in the two
centuries after industrialization began).
Convergence - The tendency for per capita income (or
output) to grow faster in lower-income countries than in
higher-income countries so that lower-income countries
are “catching up” over time. When countries are
hypothesized to converge not in all cases but other things
being equal (particularly savings rates, labor force
growth, and production technologies), then the term
conditional convergence is used
"Advantage Of Backwardness,” - term coined by
economic historian Alexander Gerschenkron
1. Relative Country Convergence
2. Absolute Country Convergence
3. Population-Weighted Relative Country Convergence
4. World-as-One-Country Convergence
5. Sectoral Convergence
Economic Institutions - “Humanly devised” constraints
that shape interactions (or “rules of the game”) in an
economy, including formal rules embodied in
constitutions, laws, contracts, and market regulations,
plus informal rules reflected in norms of behavior and
conduct, values, customs, and generally accepted ways
of doing thing
- which play an important role in comparative
development, are defined by Nobel laureate
Douglass North as the “rules of the game” of
economic life.
Chapter 3: Classic Theories of Economic Growth and
Development
Economic development has been dominated by four
major and sometimes competing strands of thought:
(1) the linear-stages-of-growth model,
(2) theories and patterns of structural change,
3) the international-dependence revolution
4) the neoclassical, freemarket counterrevolution.
This linear-stages approach was largely replaced in
the 1970s by two competing schools of thought:
1. The first, which focused on theories and patterns of
structural change, used modern economic theory and
statistical analysis in an attempt to portray the internal
process of structural change that a “typical” developing
country must undergo if it is to succeed in generating
and sustaining rapid economic growth.
2.The second, the international-dependence revolution,
was more radical and more political. It viewed
underdevelopment in terms of international and domestic
power relationships, institutional and structural
economic rigidities, and the resulting proliferation of
dual economies and dual societies both within and
among the nations of the world.
Capital fundamentalism - emphasis on the central role
of accelerated capital accumulation
Walt W. Rostow - American economic historian who
was the most influential and outspoken advocate of the
stages-of-growth model of development
-the transition from underdevelopment to
development can be described in terms of a
series of steps or stages through which all
countries must proceed
Stages-Of-Growth Model Of Development - A theory
of economic development, associated with the American
economic historian Walt W. Rostow, according to which
a country passes through sequential stages in achieving
development.
Harrod-Domar Growth Model / AK Model - A
functional economic relationship in which the growth
rate of gross domestic product ( g ) depends directly on
the national net savings rate ( s ) and inversely on the
national capital-output ratio (c)
Capital-Output Ratio -'A ratio that shows the units of
capital required to produce a unit of output over a given
period of time.
Net savings ratio - Savings expressed as a proportion of
disposable income over some period of time
Net saving ( S ) - some proportion, s, of national
income ( Y ) such that we have the simple equation (S =
sY)
Net investment ( I ) - defined as the change in the
capital stock, K, and can be represented by Δ K such
that (I = Δ K)
Necessary Condition - A condition that must be present,
although it need not be in itself sufficient, for an event to
occur. For example, capital formation may be a
necessary condition for sustained economic growth
(before growth in output can occur, there must be tools
to produce it). But for this growth to continue, social,
institutional, and attitudinal changes may have to occur.
Sufficient Condition - A condition that when present
causes or guarantees that an event will or can occur; in
economic models, a condition that logically requires that
a statement must be true (or a result must hold) given
other assumptions
Structural-Change Theory - The hypothesis that
underdevelopment is due to underutilization of
resources arising from structural or institutional factors
that have their origins in both domestic and international
dualism. Development therefore requires more than just
accelerated capital formation.
- focuses on the mechanism by which
underdeveloped economies transform their
domestic economic structures from a heavy
emphasis on traditional subsistence agriculture
to a more modern, more urbanized, and more
industrially diverse manufacturing and service
economy.
-It employs the tools of neoclassical price and
resource allocation theory and modern
econometrics to describe how this
transformation process takes place-focuses on
the mechanism by which underdeveloped
economies transform their domestic economic
structures from a heavy emphasis on traditional
subsistence agriculture to a more modern, more
urbanized, and more industrially diverse
manufacturing and service economy.
Structural Transformation - The process of
transforming an economy in such a way that the
contribution to national income by the manufacturing
sector eventually surpasses the contribution by the
agricultural sector. More generally, a major alteration in
the industrial composition of any economy.
Lewis Two-Sector Model - A theory of development in
which surplus labor from the traditional agricultural
sector is transferred to the modern industrial sector, the
growth of which absorbs the surplus labor, promotes
industrialization, and stimulates sustained development.
- formulated by Nobel laureate W. Arthur Lewis
in the mid-1950s and later modified, formalized,
and extended by John Fei and Gustav Ranis
- general theory of the development process in
surplus-labor developing nations during most of
the 1960s and early 1970s, and it is sometimes
 still applied, particularly to study the recent
growth experience in China and labor markets in
other developing countries.
Surplus Labor - The excess supply of labor over and
above the quantity demanded at the going free-market
wage rate. In the Lewis two-sector model of economic
development, surplus labor refers to the portion of the
rural labor force whose marginal productivity is zero or
negative.
Production Function- A technological or engineering
relationship between the quantity of a good produced
and the quantity of inputs required to produce it
Average Product -Total output or product divided by
total factor input (e.g., the average product of labor is
equal to total output divided by the total amount of labor
used to produce that output).
Marginal Product -The increase in total output
resulting from the use of one additional unit of a variable
factor of production (such as labor or capital). In the
Lewis two-sector model, surplus labor is defined as
workers whose marginal product is zero.
Self-Sustaining Growth - Economic growth that
continues over the long run based on saving, investment,
and complementary private and public activities.
Patterns-Of-Development Analysis - An attempt to
identify characteristic features of the internal process of
structural transformation that a “typical” developing
economy undergoes as it generates and sustains modern
economic growth and development
Dependence - The reliance of developing countries on
developed-country economic policies to stimulate their
own economic growth. Dependence can also mean that
the developing countries adopt developed-country
education systems, technology, economic and political
systems, attitudes, consumption patterns, dress, and so
on.
Dominance - In international affairs, a situation in
which the developed countries have much greater power
than the less developed countries in decisions affecting
important international economic issues, such as the
prices of agricultural commodities and raw materials in
world markets.
Neocolonial Dependence Model - A model whose main
proposition is that underdevelopment exists in
developing countries because of continuing exploitative
economic, political, and cultural policies of former
colonial rulers toward less developed countries.
Underdevelopment - An economic situation
characterized by persistent low levels of living in
conjunction with absolute poverty, low income per
capita, low rates of economic growth, low consumption
levels, poor health services, high death rates, high birth
rates, dependence on foreign economies, and limited
freedom to choose among activities that satisfy human
wants.
Center - In dependence theory, the economically
developed world.
Periphery - In dependence theory, the developing world
Comprador Group - In dependence theory, local elites
who act as fronts for foreign investors
False-Paradigm Model - The proposition that
developing countries have failed to develop because
their development strategies (usually given to them by
Western economists) have been based on an incorrect
model of development, one that, for example,
overstresses capital accumulation or market
liberalization without giving due consideration to needed
social and institutional change.
Dualism - The coexistence of two situations or
phenomena (one desirable and the other not) that are
mutually exclusive to different groups of society—for
example, extreme poverty and affluence, modern and
traditional economic sectors, growth and stagnation, and
higher education among a few amid large scale illiteracy
Autarky - A closed economy that attempts to be
completely self-reliant.
Neoclassical Counterrevolution - The 1980s
resurgence of neoclassical free-market orientation
toward development problems and policies, counter to
the interventionist dependence revolution of the 1970s
Free Markets -The system whereby prices of
commodities or services freely rise or fall when the
buyer’s demand for them rises or falls or the seller’s
supply of them decreases or increases.
Free-Market Analysis - Theoretical analysis of the
properties of an economic system operating with free
markets, often under the assumption that an unregulated
market performs better than one with government
regulation
Public-Choice Theory (New Political Economy
Approach) - The theory that self-interest guides all
individual behavior and that governments are inefficient
and corrupt because people use government to pursue
their own agendas.
Market-Friendly Approach- 'The notion historically
promulgated by the World Bank that successful
development policy requires governments to create an
environment in which markets can operate efficiently
and to intervene only selectively in the economy in areas
where the market is inefficient.
Market Failure - A market’s inability to deliver its
theoretical benefits due to the existence of market
imperfections such as monopoly power, lack of factor
mobility, significant externalities, or lack of knowledge.
Market failure often provides the justification for
government intervention to alter the working of the free
market.
Capital-Labor Ratio - The number of units of capital
per unit of labor
Solow Neoclassical Growth Model - Growth model in
which there are diminishing returns to each factor of
production but constant returns to scale. Exogenous
technological change generates longterm economic
growth
Closed Economy - An economy in which there are no
foreign trade transactions or other economic contacts
with the rest of the world.
Open Economy - An economy that practices foreign
trade and has extensive financial and nonfinancial
contacts with the rest of the world
Capital Accumulation - Increasing a country’s stock of
real capital (net investment in fixed assets). To increase
the production of capital goods necessitates a reduction
in the production of consumer goods.
Capital Stock - The total amount of physical goods
existing at a particular time that have been produced for
use in the production of other goods and services.
Economic Infrastructure - The amount of physical and
financial capital embodied in roads, railways,
waterways, airways, and other transportation and
communications, plus other facilities such as water
supplies, financial institutions, electricity, and public
services such as health and education
Production Possibility Curve - A curve on a graph
indicating alternative combinations of two commodities
or categories of commodities (e.g., agricultural and
manufactured goods) that can be produced when all the
available factors of production are efficiently employed.
Given available resources and technology, the curve sets
the boundary between the attainable and the
unobtainable
Technological Progress - Increased application of new
scientific knowledge in the form of inventions and
innovations with regard to both physical and human
capital
3 Basic Classification of Technological Progress:
1. Neutral Technological Progress - Higher output
levels achieved with the same quantity or combination of
all factor inputs.
2.Labor Saving Technological Progress - The
achievement of higher output using an unchanged
quantity of labor inputs as a result of some invention
(e.g., the computer) or innovation (such as assembly-line
production).
3.Capital-Saving Technological Progress -
Technological progress that results from some invention
or innovation that facilitates the achievement of higher
output levels using the same quantity of inputs of capital
Labor-Augmenting Technological Progress -
Technological progress that raises the productivity of an
existing quantity of labor by general education, on-the-
job training programs, and so on. Capital-augmenting
technological progress - Technological progress that
raises the productivity of capital by innovation and
inventions
Solow Residual - The proportion of long-term economic
growth not explained by growth in labor or capital and
therefore assigned primarily to exogenous technological
change.
Endogenous Growth Theory (New Growth Theory) -
Economic growth generated by factors within the
production process (e.g., increasing returns or induced
technological change) that are studied as part of a growth
model
Complementary Investments - Investments that
complement and facilitate other productive factors
Romer Endogenous Growth Model- An endogenous
growth model in which technological spillovers are
present; the economy-wide capital stock positively
affects output at the industry level, so there may be
increasing returns to scale at the economy-wide level.
Public Good - An entity that provides benefits to all
individuals simultaneously and whose enjoyment by one
person in no way diminishes that of anyone else.
Chapter 4: Contemporary Models of Development
and Underdevelopment
Binding Constraint - The one limiting factor that if
relaxed would be the item that accelerates growth (or
that allows a larger amount of some other targeted
outcome).
Economic Agent - An economic actor—usually a firm,
worker, consumer, or government official—that chooses
actions so as to maximize an objective; often referred to
as “agents.”
Complementarity - An action taken by one firm,
worker, or organization that increases the incentives for
other agents to take similar actions. Complementarities
often involve investments whose return depends on other
investments being made by other agents.
Coordination Failure - A situation in which the
inability of agents to coordinate their behavior (choices)
leads to an outcome (equilibrium) that leaves all agents
worse off than in an alternative situation that is also an
equilibrium
Big Push - A concerted, economy-wide, and typically
public policy–led effort to initiate or accelerate
economic development across a broad spectrum of new
industries and skills.
O-Ring Model - An economic model in which
production functions exhibit strong complementarities
among inputs and which has broader implications for
impediments to achieving economic development.
Middle-Income Trap - A condition in which an
economy begins development to reach middle-income
status but is chronically unable to progress to high-
income status. Often related to low capacity for original
innovation or for absorption of advanced technology,
and may be compounded by high inequality.
Underdevelopment Trap - A poverty trap at the
regional or national level in which underdevelopment
tends to perpetuate itself over time.
Specialization - is one of the sources of high
productivity
Middlemen - play a key role by effectively vouching for
the quality of the products they sell
Mobutu Sese Seko - the former ruler of the Democratic
Republic of Congo when it was known as Zaire, may
prefer to keep his country in an underdevelopment trap,
knowing full well that as the economy develops, he will
lose power.
Deep Intervention - A government policy that can
move the economy to a preferred equilibrium or even to
a higher permanent rate of growth, which can then be
self-sustaining so that the policy need no longer be
enforced because the better equilibrium will then prevail
without further intervention.
Congestion - The opposite of a complementarity; an
action taken by one agent that decreases the incentives
for other agents to take similar actions.
Where-To-Meet Dilemma - A situation in which all
parties would be better off cooperating than competing
but lack information about how to do so. If cooperation
can be achieved, there is no subsequent incentive to
defect or cheat.
Prisoners’ Dilemma - A situation in which all parties
would be better off cooperating than competing, but
once cooperation has been achieved, each party would
gain the most by cheating, provided that others stick to
cooperative agreements—thus causing any agreement to
unravel.
Multiple Equilibria - A condition in which more than
one equilibrium exists. These equilibria sometimes may
be ranked, in the sense that one is preferred over another,
but the unaided market will not move the economy to the
preferred outcome.
Equilibrium - found where the supply and demand
curves cross
- found where the “privately rational decision
function” (the S-shaped curve in Figure 4.1)
crosses the 45-degree line.
Pareto Improvement - A situation in which one or
more persons may be made better off without making
anyone worse off.
Investment Coordination Perspective - helps clarify
the nature and extent of problems posed when
technology spillovers are present
Argentina - regarded as a future powerhouse of the
world economy, yet it later experienced relative
stagnation for more than half a century.
Pecuniary Externality - A positive or negative
spillover effect on an agent’s costs or revenue
Big Push Model - most famous coordination failures
model in the development literature
- pioneered by Paul Rosenstein-Rodan, who first
raised some of the basic coordination issues
- model of how the presence of market failures
can lead to a need for a concerted economy-wide
and probably public-policy-led effort to get the
long process of economic development under
way or to accelerate it.
6 Types of Assumptions in Big Push Model
1. Factors
2. Factor Payments
3. Technology
4. Domestic Demand
5. International Demand and supply
6. Market structure
Technological Externality- A positive or negative
spillover effect on a firm’s production function through
some means other than market exchange
Other Cases when Big Push is Necessary
1. Intertemporal effects
2. Urbanzation effects
3. Infrastracture effects
4. Training Effects
Agency Costs - A Costs of monitoring managers and
other employees and of designing and implementing
schemes to ensure compliance or provide incentives to
follow the wishes of the employer.
Asymmetric Information - A situation in which one
party to a potential transaction (often a buyer, seller,
lender, or borrower) has more information than another
party
Linkages - Connections between firms based on sales.
A backward linkage is one in which a firm buys a good
from another firm to use as an input; a forward linkage is
one in which a firm sells to another firm. Such linkages
are especially significant for industrialization strategy
when one or more of the industries (product areas)
involved have increasing returns to scale that a larger
market takes advantage of.
Poverty Trap - A bad equilibrium for a family,
community, or nation, involving a vicious circle in
which poverty and underdevelopment lead to more
poverty and underdevelopment, often from one
generation to the next
O-Ring Model - another innovative and influential
model that provides important insights into low-level
equilibrium traps provided by Michael Kremer.
-key feature of the O-ring model is the way it
models production with strong
complementarities among inputs
O-Ring Production Function - A production function
with strong complementarities among inputs, based on
the products (i.e., multiplying) of the input qualities.
Positive Assortative Matching- One of the most
prominent features of this type of production function
which means that workers with high skills will work
together and workers with low skills will work together.
"Marriage Market” Model - by Nobel laureate Gary
Becker, which is a somewhat different case but offers
some additional intuition
Information Externality - The spillover of
information— such as knowledge of a production
process—from one agent to another, without
intermediation of a market transaction; reflects the
public good characteristic of information (and
susceptibility to free riding)—it is neither fully
excludable from other uses, nor nonrival (one agent’s
use of information does not prevent others from using it)
Self-discovery - somewhat whimsically expresses the
assumption that the products in question have already
been discovered by someone else (either long ago, or
recently in a developed economy); what remains to be
discovered is which of these products a local economy is
relatively good at making.
Growth Diagnostics - A decision tree framework for
identifying a country’s most binding constraints on
economic growth.
Social Returns - The profitability of an investment in
which both costs and benefits are accounted for from the
perspective of the society as a whole
Low Private Appropriability - meaning limited ability
of investors to reap an adequate share of the rewards of
their otherwise profitable investments
Bad International Finance - inadequate access to
foreign sources of capital or problems with debt
Chapter 5: Poverty, Inequality and Development
Personal Distribution Of Income (Size Distribution
Of Income) -The distribution of income according to
size class of persons—for example, the share of total
income accruing to the poorest specific percentage or the
richest specific percentage of a population— without
regard to the sources of that income.
Quintile - A 20% proportion of any numerical quantity.
A population divided into quintiles would be divided
into five groups of equal size.
Decile - A 10% portion of any numerical quantity; a
population divided into deciles would be divided into ten
equal numerical groups.
Income Inequality - The disproportionate distribution
of total national income among households
Kuznets Ratio - after Nobel laure- ate Simon Kuznets,
has often been used as a measure of the degree of
inequality between high- and low-income groups in a
country.
Lorenz Curve - A graph depicting the variance of the
size distribution of income from perfect equality.
Gini Coefficient - An aggregate numerical measure of
income inequality ranging from 0 (perfect equality) to 1
(perfect inequality). It is measured graphically by
dividing the area between the perfect equality line and
the Lorenz curve by the total area lying to the right of
the equality line in a Lorenz diagram. The higher the
value of the coefficient is, the higher the inequality of
income distribution; the lower it is, the more equal the
distribution of income
Anonymity Principle - simply means that our measure
of inequality should not depend on who has the higher
income; for example, it should not depend on whether
we believe the rich or the poor to be good or bad people.
Scale Independence Principle - means that our
measure of inequality should not depend on the size of
the economy or the way we measure its income
Population Independence Principle - it states that the
measure of inequality should not be based on the number
of income recipients.
Transfer Principle - (sometimes called the Pigou-
Dalton principle after its creators) it states that, holding
all other incomes constant, if we transfer some income
from a richer person to a poorer person (but not so much
that the poorer person is now richer than the originally
rich person), the resulting new income distribution is
more equal.
Functional Distribution Of Income (Factor Share
Distribution Of Income) - The distribution of income to
factors of production without regard to the ownership of
the factors
Factors Of Production - Resources or inputs required
to produce a good or a service, such as land, labor and
capital.
Total Wage Payments - also sometimes called the total
wage bill.
Ahluwalia Chenery Welfare Index (ACWI) - A final
approach to accounting for the distribution of income in
assessing the quality of growth is to value increases in
income for all individuals but to assign a higher weight
to income gains by lower-income individuals than to
gains by higher-income individuals
Absolute Poverty - The situation of being unable or
only barely able to meet the subsistence essentials of
food, clothing, and shelter.
Headcount Index - The proportion of a country’s
population living below the poverty line
Total Poverty Gap (TPG) The sum of the difference
between the poverty line and actual income levels of all
people living below that line.
Foster-Greer-Thorbecke (FGT) Index - often called
the P class of poverty measures, class of measures of
the level of absolute poverty.
P2 Poverty Measure - also known as the squared
poverty gap index , has become a standard of income
poverty measure used by the World Bank and other
agencies, and it is used in empirical work on income
poverty because of its sensitivity to the depth and
severity of poverty.
Indicators - proxy measures used for each of the
selected dimensions.
Capital Flight - landlords, business leaders, politicians,
and other rich elites are known to spend much of their
incomes on imported luxury goods, gold, jewelry,
expensive houses, and foreign travel or to seek safe
havens abroad for their savings
Relative Poverty - the lack of collateral
Kuznets Curve - A graph reflecting the relationship
between a country’s income per capita and its inequality
of income distribution
Character Of Economic Growth - The distributive
implications of economic growth as reflected in such
factors as participation in the growth process and asset
ownership
Multidimensional Poverty Index (MPI) - most
prominent application of multidimensional poverty
measurement; it incorporates three dimensions at the
household level: health, education, and wealth
- A poverty measure that identifies the poor
using dual cutoffs for levels and numbers of
deprivations, and then multiplies the percentage
of people living in poverty times the percent of
weighted indicators for which poor households
are deprived on average
Dimensional Monotonicity - meaning that when a
person deemed poor becomes deprived in another
indicator, he or she is deemed even poorer
Ultrapoverty - differs from conventional poverty in
terms of depth (degree of deprivation), length (duration
of time), and breadth (the number of dimensions, such as
illiteracy and malnutrition).
Economic Characteristics of High-Poverty groups
1. Rural poverty
2. Women and poverty
3. Ethnic Minorities, Indigenous Populations, and
Poverty
Four Broad Areas Of Possible Government Policy
Intervention, Which Correspond To The Following
Four Major Elements In The Determination Of A
Developing Economy’s Distribution Of Income:
1. Altering the functional distribution —the returns to
labor, land, and capital as determined by factor prices,
utilization levels, and the consequent shares of national
income that accrue to the owners of each factor.
2. Mitigating the size distribution —the functional
income distribution of an economy translated into a size
distribution by knowledge of how ownership and control
over productive assets and labor skills are concentrated
and distributed throughout the population.
3. Moderating (reducing) the size distribution at the
upper levels - through progressive taxation of personal
income and wealth
4. Moderating (increasing) the size distribution at
the lower levels - through public expenditures of tax
revenues to raise the incomes of the poor either directly
(e.g., by conditional or unconditional cash transfers) or
indirectly (e.g., through public employment creation
such as local infrastructure projects or the provision of
primary education and health care)
Disposable Income - The income that is available to
households for spending and saving after personal
income taxes have been deducted.
Asset Ownership - The ownership of land, physical
capital (factories, buildings, machinery, etc.), human
capital, and financial resources that generate income for
owners.
Redistribution Policies - Policies geared to reducing
income inequality and expanding economic
opportunities in order to promote development,
including income tax policies, rural development
policies, and publicly financed services.
Land Reform - A deliberate attempt to reorganize and
transform existing agrarian systems with the intention of
improving the distribution of agricultural incomes and
thus fostering rural development
Progressive Income Tax - A tax whose rate increases
with increasing personal incomes. Regressive tax - A tax
structure in which the ratio of taxes to income tends to
decrease as income increases.
Indirect Taxes - Taxes levied on goods ultimately
purchased by consumers, including customs duties
(tariffs), excise duties, sales taxes, and export duties.
Public Consumption - All current expenditures for
purchases of goods and services by all levels of
government, including capital expenditures on national
defense and security.
Lorenz Curve - named for Max Otto Lorenz, an
American economist who in 1905 devised this
convenient and widely used diagram to show the
relationship between population groups and their
respective income share
Subsidy - A payment by the government to producers
or distributors in an industry to prevent the decline of
that industry, to reduce the prices of its products, or to
encourage hiring
Workfare Program - A poverty alleviation program
that requires program beneficiaries to work in exchange
for benefits, as in a food-for-work program
Neoclassical Price Incentive Model - A model whose
main proposition is that if market prices are to influence
economic activities in the right direction, they must be
adjusted to remove factor price distortions by means of
subsidies, taxes, or the like so that factor prices may
reflect the true opportunity cost of the resources being
used.
Elasticity Of Factor Substitution - A measure of the
degree of substitutability between factors of production
in any given production process when relative factor
proces change
Chapter 6: Population Growth and Economic
Development: Causes, Consequences, and
Controversies
Doubling time - period that a given population or other
quantity takes to increase by its present size.
Rate of population increase - the growth rate of a
population, calculated as the natural increase after
adjusting for immigration and emigration.
Natural increase - the difference between the birth rate
and the death rate of a given population.
Net international migration - the excess of persons
migrating into a country over those who emigrate from
that country.
Crude birth rate - the number of children born alive
each year per 1,000 population (often shortened to birth
rate).
Death rate - the number of deaths each year per 1,000
population.
Total fertility rate (TFR) - the number of children that
would be born to a woman if she were to live to the end
of her childbearing years and bear children in
accordance with the prevailing age-specific fertility
rates.
Life expectancy at birth - the number of years a new-
born child would live if subjected to the mortality risks
prevailing for the population at the time of the child’s
birth.
Under-5 mortality rate - deaths among children
between birth and 5 years of age per 1,000 live births.
Youth dependency ratio - the proportion of young
people under age 15 to the working population aged 16
to 64 in a country.
Hidden momentum of population growth - the
phenomenon whereby population continues to increase
even after a fall in birth rates because the large existing
youthful population expands the population’s base of
potential parents.
Population pyramid - a graphic depiction of the age
structure of the population, with age cohorts plotted on
the vertical axis and either population shares or numbers
of males and females in each cohort on the horizontal
axis.
Demographic transition - the phasing-out process of
population growth rates from a virtually stagnant growth
stage, characterized by high birth rates and death rates
through a rapid-growth stage with high birth rates and
low death rates to a stable, low-growth stage in which
both birth and death rates are low.
Replacement fertility - the number of births per woman
that would result in stable population levels.
Malthusian population trap - the threshold population
level anticipated by Thomas Malthus (1766–1834) at
which population increase was bound to stop because
life sustaining resources, which increase at an arithmetic
rate, would be insufficient to support human population,
which would increase at a geometric rate.
Microeconomic theory of fertility - the theory that
family formation has costs and benefits that determine
the size of families formed.
Family-planning programs - public programs designed
to help parents plan and regulate their family size.
Population-poverty cycle A theory to explain how
poverty and high population growth become reinforcing.
Reproductive choice - the concept that women should
be able to determine on an equal status with their
husbands and for themselves how many children they
want and what methods to use to achieve their desired
family size.
Chapter 7: Urbanization and Rural-Urban
Migration: Theory and Policy
Urban bias - the notion that most governments in
developing countries favor the urban sector in their
development policies, thereby creating a widening gap
between the urban and rural economies.
Rural-urban migration - the movement of people from
rural villages, towns, and farms to urban centers (cities)
in search of jobs.
Agglomeration economies - cost advantages to
producers and consumers from location in cities and
towns, which take the forms of urbanization economies
and localization economies.
Urbanization economies - agglomeration effects
associated with the general growth of a concentrated
geographic region.
Localization economies - agglomeration effects
captured by particular sectors of the economy, such as
finance or autos, as they grow within an area.
Social capital - the productive value of a set of social
institutions and norms, including group trust, expected
cooperative behaviors with predictable punishments for
deviations, and a shared history of successful collective
action, that raises expectations for participation in future
cooperative behaviour.
Congestion - an action taken by one agent that decreases
the incentives for other agents to take similar actions.
Compare to the opposite effect of a complementarity.
Informal sector - the part of the urban economy of
developing countries characterized by small competitive
individual or family firms, petty retail trade and services,
labor-intensive methods, free entry, and market-
determined factor and product prices.
Todaro migration model - a theory that explains rural-
urban migration as an economically rational process
despite high urban unemployment. Migrants calculate
(present value of) urban expected income (or its
equivalent) and move if this exceeds average rural
income.
Harris-Todaro model - an equilibrium version of the
Todaro migration model that predicts that expected
incomes will be equated across rural and urban sectors
when taking into account informal-sector activities and
outright unemployment.
Present value - the discounted value at the present time
of a sum of money to be received in the future.
Labor turnover - worker separations from employers, a
concept used in theory that the urban-rural wage gap is
partly explained by the fact that urban modern-sector
employers pay higher wages to reduce labor turnover
rates and retain trained and skilled workers.
Efficiency wage - the notion that modern-sector urban
employers pay a higher wage than the equilibrium wage
rate in order to attract and retain a higher-quality
workforce or to obtain higher productivity on the job.
Induced migration - process in which the creation of
urban jobs raises expected incomes and induces more
people to migrate from rural areas.
Wage subsidy - a government financial incentive to
private employers to hire more workers, as through tax
deductions for new job creation.
Chapter 8: Human Capital Approach: Education and
Health in Economic Development
Literacy - the ability to read and write.
Human capital - productive investments embodied in
human persons, including skills, abilities, ideals, health,
and locations, often resulting from expenditures on
education, on-the-job training programs, and medical
care.
Discount rate - in present value calculations, the annual
rate at which future values are decreased to make them
comparable to values in the present.
Conditional cash transfer (CCT) programs - welfare
benefits provided conditionally based on family
behaviour such as children’s regular school attendance
and health clinic visitations.
Educational gender gap - male-female differences in
school access and completion.
Private benefits - the benefits that accrue directly to an
individual economic unit. For example, private benefits
of education are those that directly accrue to a student
and his or her family.
Derived demand - demand for a good that emerges
indirectly from demand for another good.
Social Benefits of education - benefits of the schooling
of individuals, including those that accrue to others or
even to the entire society, such as the benefits of a more
literate workforce and citizenry.
Educational certification - the phenomenon by which
particular jobs require specified levels of education.
Basic education - the attainment of literacy, arithmetic
competence, and elementary vocational skills.
Social costs of education - costs borne by both the
individual and society from private education decisions,
including government education subsidies.
Private costs - the costs that accrue to an individual
economic unit.
World Health Organization (WHO) - the key UN
agency concerned with global health matters.
Acquired immunodeficiency syndrome (AIDS) - viral
disease transmitted predominantly through sexual
contact.
Human immunodeficiency virus (HIV) - the virus that
causes the acquired immunodeficiency syndrome
(AIDS).
Neglected tropical diseases - thirteen treatable diseases,
most of them parasitic, that are prevalent in developing
countries but receive much less attention than
tuberculosis, malaria, and AIDS.
Health system - all the activities whose primary purpose
is to promote, restore, or maintain health.
Chapter 9: Agricultural Transformation and Rural
Development
Integrated rural development - the broad spectrum of
rural development activities, including small-farmer
agricultural progress, the provision of physical and
social infrastructure, the development of rural nonfarm
industries, and the capacity of the rural sector to sustain
and accelerate the pace of these improvements over time.
Green Revolution - the boost in grain production
associated with the scientific discovery of new hybrid
seed varieties of wheat, rice, and corn that have resulted
in high farm yields in many developing countries.
Agrarian system - the pattern of land distribution,
ownership, and management, and also the social and
institutional structure of the agrarian economy.
Latifundio - a very large landholding found particularly
in the Latin American agrarian system, capable of
providing employment for more than 12 people, owned
by a small number of landlords, and comprising a
disproportionate share of total agricultural land.
Minifundio - a landholding found particularly in the
Latin American agrarian system considered too small to
provide adequate employment for a single family.
Family farm - a farm plot owned and operated by a
single household.
Medium-size farm - a farm employing up to 12
workers.
Transaction costs - costs of doing business related to
gathering information, monitoring, establishing reliable
suppliers, formulating contracts, obtaining credit, and so
on.
Interlocking factor markets - factor markets whose
supply functions are interdependent, frequently because
different inputs are provided by the same suppliers who
exercise monopolistic or oligopolistic control over
resources.
Diversified (mixed) farming - the production of both
staple crops and cash crops and simple animal husbandry
typical of the first stage in the transition from
subsistence to specialized farming.
Specialized farming - the final and most advanced stage
of the evolution of agricultural production in which farm
output is produced wholly for the market.
Scale-neutral - unaffected by size; applied to
technological progress that can lead to the achievement
of higher output levels irrespective of the size (scale) of
a firm or farm.
Land reform - a deliberate attempt to reorganize and
transform agrarian systems with the intention of
fostering a more equal distribution of agricultural
incomes and facilitating rural development.

Landlord - the proprietor of a freehold interest in land

with rights to lease out to tenants in return for some form
of compensation for the use of the land.

Sharecropper - a tenant farmer whose crop has to be

shared with the landlord, as the basis for the rental
contract.

Tenant farmer - one who farms on land held by a

landlord and therefore lacks ownership rights and has to
pay for the use of that land, for example, by giving a
share of output to the owner.

Moneylender - a person who lends money at high rates

of interest, for example to peasant farmers to meet their
needs for seeds, fertilizers, and other inputs.

Subsistence farming - farming in which crop

production, stock rearing, and other activities are
conducted mainly for personal consumption.

Shifting cultivation - tilling land until it has been

exhausted of fertility and then moving to a new parcel of
land, leaving the former one to regain fertility until it can
be cultivated again.

Cash crops - crops produced entirely for the market.

Staple food - a main food consumed by a large portion

of a country’s population.