CHAPTER 3  Quantitative Measures

DOWNTOWN DEVELOPMENT 1. Number of jobs created/retained

 the promotion of development, redevelopment, and revitalization of the central 2. Number of housing units developed
business districts and adjacent areas in a city 3. Cost per job created/retained
 Commercial and residential growth in the suburbs has contributed to the decline of 4. Vacancy rates for retail and office space
downtown. 5. Absorption rates for retail and office space Quality of available space (ratio of A, B
 Downtowns traditionally are the centers of both business and culture. and C office buildings)
6. Crime rates
Developing downtowns 7. Number of positive press hits on downtown activities, improvements
 involves a range of activities, including marketing for both business and tourist 8. Tourism rates (number of hotel nights, conference attendance)
attraction, building or improving infrastructure, clean-up initiatives, property 9. Culture (attendance at performances, museums, special events)
redevelopment and reuse, and retention programs 10. Private-sector leverage
11. Percent of jobs held by local residents/low income persons
Trends in Downtown Development 12. Average salary of jobs created
 Safety and crime prevention encourage downtown visits. Strategies that are used 13. Spinoff private investment
include:  Qualitative Measures
 Security surveillance equipment 1. Number of actors involved in the downtown development strategy and the quality
 Public advice on using public transportation safely of their relationships
 Environmental design that deters crime, such as improving street lighting 2. Types and degrees of public-private interaction
 Positioning of 911 boxes in the streets and other areas 3. Stated project goals and the degree to which they have been achieved (e.g. crime
 Security guards reduction, increased retail sales or tourism development)
 Ambassadors, which give people important information, such as directions 4. Community engagement in the process
5. Perceptions of downtown (cleanliness, accessibility, safety)
Trends…
 Arts districts - with their galleries, cinemas, opera houses, artist housing, and theaters - E-commerce
are emerging as an important revitalization tool and are continuing to grow in  allows commercial business transactions with the assistance of electronic-based tools.
popularity in downtowns of all sizes.  Today the majority of e-commerce takes place over the Internet, however it also
 Mixed-use downtown developments that include retail, residential, and includes fax and telephone transactions.
entertainment, create downtowns that are busy around the clock all week long.
 Retailers are showing a renewed interest in central business districts (CBDs), due to E-commerce consists of four main markets:
the potential size of untapped markets.  Business to Business (B2B), one business selling a good or service to another business.
 The redevelopment and preservation of railroad stations to attract business near the  Business to Consumer (B2C), business selling a good or service to an individual
stations and help to revive surrounding downtown areas. consumer.
 Communities develop open space to create improve the quality of life in urban cores.  Business to Government/Government to Business/Government to Consumers
 Hotel construction in downtown areas meets the growing demand for (B2G/G2B/G2C): B2G: Sale of a good or service to a branch of the government
accommodation from people on business, and also acts as a spur encouraging G2B: Sale of a good or service to a business e.g. Building permits G2C: Sale of a good
tourists. or service to consumers e.g. driving licenses.
 Integrating transportation and land use in downtown areas produces a more  Consumer to Consumer (C2C), on-line auctions and classified ads allow consumers
efficient transportation system whilst reducing congestion and pollution: to sell goods and services directly to each other.
 Creating and extending cycle routes
 Developing more integrated mass transit systems CLASSIC THEORIES OF ECONOMIC DEVELOPMENT
 Building pedestrian friendly streetscapes (1) the linear-stages-of-growth model,
 Market research has become a key component of downtown developments. (2) theories and patterns of structural change,
Understanding local markets helps to decide which potential projects will meet local (3) the international-dependence revolution, and
demand and receive support. (4) the neoclassical, free market counterrevolution.
 Information technology businesses are moving into downtown offices with large open the linear-stages-of-growth model
plans to nurture team work and collaboration.  focused on theories and patterns of structural change, used modern economic
 Downtowns have also developed fiber optic infrastructures to support IT businesses. theory and statistical analysis in an attempt to portray the internal process of structural
Maps of fiber optic cable help businesses locate near to fiber cable in downtown change that a “typical” developing country must undergo if it is to succeed in
areas. generating and sustaining rapid economic growth.
 Funding for downtown projects has become more widely available and easier to  the international-dependence revolution, was more radical and more political. It
obtain, due to public, media and government interest shown in CBDs. viewed underdevelopment in terms of international and domestic power
relationships, institutional and structural economic rigidities, and the resulting
Benchmarking and Evaluating Downtown Development Programs
 proliferation of dual economies and dual societies both within and among the nations
of the world.
Rostow’s Stages of Growth
 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
 Today, often referred to as the AK model because it is based on a linear production
function with output given by the capital stock K times a constant, often labeled A.
In one form or another, it has frequently been applied to policy issues facing
developing countries
 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. (k)
 Net savings ratio Savings expressed as a proportion of disposable income over some
period of time. (s)
SIMPLE MODEL OF ECONOMIC GROWTH
 Net saving (S) is some proportion, s, of national income (Y) such that we have the
simple equation S = sY (3.1)
 Net investment (I) is defined as the change in the capital stock, K, and can be
represented by ΔK such that (3.2)
 But because the total capital stock, K, bears a direct relationship to total national
income or output, Y, as expressed by the capital-output ratio, c,3 it follows that K Y =
c or ΔK ΔY = c or, finally, ΔK = cΔY (3.3)
 1/c is a measure of the efficiency of capital utilization.
 Finally, because net national savings, S, must equal net investment, I, we can write
this equality as : S = I (3.4)
 But from Equation 3.1 we know that S = sY, and from Equations 3.2 and 3.3 we know
that: I = ΔK = cΔY
 It therefore follows that we can write the “identity” of saving equaling investment
shown by Equation 3.4 as S = sY = cΔY = ΔK = I (3.5)
 or simply as : sY = c∆Y (3.6)
 Dividing both sides of Equation 3.6 first by Y and then by c, we obtain the following
expression: ∆Y Y = s c (3.7)
 Note that the left-hand side of Equation 3.7, ∆Y>Y, represents the rate of change or
rate of growth of GDP.
 ∆Y /Y = sG/ c - δ (3.7’)
 where δ is the rate of capital depreciation
Structural-change theory
 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. Two well-
known representative examples of the structural-change approach are the “two-
sector surplus labor” theoretical model of W. Arthur Lewis and the “patterns of
development” empirical analysis of Hollis B. Chenery and his coauthors.
 Basic Model ---- One of the best-known early theoretical models of development that
focused on the structural transformation of a primarily subsistence economy was that
formulated by Nobel laureate W. Arthur Lewis in the mid-1950s and later modified,
formalized, and extended by John Fei and Gustav Ranis
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.
Self-sustaining growth
 Economic growth that continues over the long run based on saving, investment, and
complementary private and public activities.
“Lewis turning point”
 The process of modern-sector self-sustaining growth and employment expansion is
assumed to continue until all surplus rural labor is absorbed in the new industrial sector.
Thereafter, additional workers can be withdrawn from the agricultural sector only at
a higher cost of lost food production because the declining labor-to-land ratio means
that the marginal product of rural labor is no longer zero.
 the labor supply curve becomes positively sloped as modern-sector wages and
employment continue to grow. The structural transformation of the economy will
have taken place, with the balance of economic activity shifting from traditional rural
agriculture to modern urban industry.
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.
Two types of nation
 Center ---- In dependence theory, the economically developed world.
 Periphery---- In dependence theory, the developing countries.
The 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.
 This attributes underdevelopment to faulty and inappropriate advice provided by
well-meaning but often uninformed, biased, and ethnocentric international “expert”
advisers from developed-country assistance agencies and multinational donor
organizations.
Dualism
  is the existence and persistence of substantial and even increasing divergences
between rich and poor nations and rich and poor peoples on various levels.
 for example, extreme poverty and affluence, modern and traditional economic
sectors, growth and stagnation, and higher education among a few amid large-
scale illiteracy.
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 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.
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.
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.
Comprador group
 In dependence theory, local elites who act as fronts for foreign investors.
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 systemwhereby 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 long term 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.
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).
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.
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.”
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.
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.
Pareto improvement
 A situation in which one or more persons may be made better off without making
anyone worse off.
Pecuniary externality
 A positive or negative spillover effect on an agent’s costs or revenues.
Technological externality
 A positive or negative spillover effect on a firm’s production function through some
means other than market exchange.
Agency costs
 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 production function
 A production function with strong complementarities among inputs, based on the
products (i.e., multiplying) of the input qualities.
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  Resources or inputs required to produce a good or a service, such as land, labor, and
excludable from other uses, nor non-rival (one agent’s use of information does not capital.
prevent others from using it).
Absolute poverty
Growth diagnostics  The situation of being unable or only barely able to meet the subsistence essentials of
 A decision tree framework for identifying a country’s most binding constraints on food, clothing, and shelter.
economic growth.
Headcount index
Social returns  The proportion of a country’s population living below the poverty line.
 The profitability of an investment in which both costs and benefits are accounted for
from the perspective of the society as a whole. Total poverty gap (TPG)
 The sum of the difference between the poverty line and actual income levels of all
Altering the Functional Distribution of Income through Relative Factor Prices people living below that line.
 A traditional economic approach.
 Foster-Greer-Thorbecke (FGT) index
Modifying the Size Distribution through Increasing Assets of the Poor  A class of measures of the level of absolute poverty.

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 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)
 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.
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.

Lorenz curve Redistribution policies

 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.
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
 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.
Direct Transfer Payments and the Public Provision of Goods and Services
 The direct provision of tax-financed public consumption goods and services to the
very poor is another potentially important instrument of a comprehensive policy
designed to eradicate poverty.
 Direct transfers and subsidies can be highly effective, but they need to be designed
carefully
Public consumption
 All current expenditures for purchases of goods and services by all levels of
government, including capital expenditures on national defense and security.
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.
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 newborn 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
 Theconcept 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.