ECONOMIC DEVELOPMENT
MIDTERM
CHAPTER 3: CLASSICAL THEORIES OF
ECONOMIC GROWTH AND DEVELOPMENT
Classical theories of economic development: 4
approaches.
1. The Linear-Stage-of-Growth Model
Right quantity and mixture of saving, investment
and foreign aid were all that is necessary to enable
developing countries to develop.
2. Theories and patterns of structural Changes
Uses modern economy theory and statistical analysis
in attempt to portray the internal process of
structural change that developing countries must
undergo.
3. The International-Dependence Revolution
More radical and more political. Emphasize external
and internal institutional and political constraints on
economic development.
4. The Neoclassical Counterrevolution: market
Fundamentalist
Emphasize the beneficial role of free markets, open
economies and privatization of inefficient public
enterprises.
Development as Growth and the Linear Stages
as theories.
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 depends
directly on the national net savings rate and
inversely on the national capital-output ratio.
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
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Savings expressed as a proportion of disposable
income over some period of time.
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. 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 given other assumptions.
Structural- Change Model
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.
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.
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
ECONOMIC DEVELOPMENT
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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
Marginal product
The increase in total output resulting from the use of
one additional unit of a variable factor of production.
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.
The international- Dependence Revolution
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,
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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
countries.
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 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.
The Neoclassical Counterrevolution: Market
Fundamentalist
Neoclassical counterrevolution
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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
long term economic growth.
Closed economy
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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 5: POVERTY, INEQUALITY AND
DEVELOPMENT
Measuring Inequality
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.
Lorenz curve - A graph depicting the variance of
the size distribution of income from perfect equality.
Kuznets curve - A graph reflecting the relationship
between a country’s income per capita and its
inequality of income distribution.
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.
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Functional distribution of income (factor share

distribution of income) - The distribution of Redistribution policies
income to factors of production without regard to Policies geared to reducing income inequality and
the ownership of the factors. expanding economic opportunities in order to
Factors of production - Resources or inputs promote development, including income tax policies,
required to produce a good or a service, such as rural development policies, and publicly financed
land, labor, and capital. services.
Measuring Absolute poverty
Land reform
Absolute poverty A deliberate attempt to reorganize and transform
existing agrarian systems with the intention of
The situation of being unable or only barely able to
improving the distribution of agricultural incomes
meet the subsistence essentials of food, clothing,
and thus fostering rural development.
and shelter.
Headcount index
Progressive income tax
The proportion of a country’s population living
A tax whose rate increases with increasing personal
below the poverty line.
incomes.
Total poverty gap (TPG)
The sum of the difference between the poverty line
Regressive tax
and actual income levels of all people living below
A tax structure in which the ratio of taxes to income
that line.
tends to decrease as income increases.
Foster-Greer-Thorbecke (FGT) index
A class of measures of the level of absolute poverty.
Indirect taxes
Taxes levied on goods ultimately purchased by
Character of economic growth
consumers, including customs duties (tariffs), excise
Distributive implications of economic growth as
duties, sales taxes, and export duties.
reflected in such factors as participation in the
Public consumption All current expenditures for
growth process and asset ownership.
purchases of goods and services by all levels of
government, including capital expenditures on
Multidimensional Poverty Index (MPI) national defense and security.
A poverty measure that identifies the poor using
dual cutoffs for levels and numbers of deprivations, Subsidy
and then multiplies the percentage of people living
A payment by the government to producers or
in poverty times the percent of weighted indicators
distributors in an industry to prevent the decline of
for which poor households are deprived on average.
that industry, to reduce the prices of its products, or
to encourage hiring.
Policy Options on income Inequality and
Poverty: Some basic consideration Workfare program
A poverty alleviation program that requires program
Disposable income beneficiaries to work in exchange for benefits, as in a
The income that is available to households for food-for-work program.
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.
ECONOMIC DEVELOPMENT
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CHAPTER 6: POPULATION GROWTH AND
ECONOMIC DEVELOPMENT: CAUSES,
CONSEQUENCES ANS CONTROVERSIES
Population growth: past, present, and future
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
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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.
The Demographic Transition
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
The causes of High fertility in developing
countries: The Malthusian and Household
model
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.
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The consequence of high fertility: some
conflicting perspective
Other issues
 Underdevelopment
 World resource depletion and
environmental destruction
 Population distribution
 Subordination of women
Population-poverty cycle
A theory to explain how poverty and high population
growth become reinforcing.
Other Empirical Arguments: Seven negative
Consequences of Population Growth
1. Economic Growth - Evidence shows that
although it is not the culprit behind economic
stagnation, rapid population growth lowers per
capita income growth in most developing countries,
especially those that are already poor, dependent on
agriculture, and experiencing pressures on land and
natural resources.
2. Poverty and Inequality- Even though aggregate
statistical correlations between measures of poverty
and population growth at the national level are often
inconclusive, at the household level the evidence is
strong and compelling. The negative consequences
of rapid population growth fall most heavily on the
poor because they are the ones who are made
landless, suffer first from cuts in government health
and education programs, and bear the brunt of
environmental damage. Poor women once again
bear the greatest burden of government austerity
programs, and another vicious circle ensues. To the
extent that large families perpetuate poverty, they
also exacerbate inequality.
3. Education - Although the data are sometimes
ambiguous on this point, it is generally agreed that
large family size and low incomes restrict the
opportunities of parents to educate all their children.
At the national level, rapid population growth causes
educational expenditures to be spread more thinly,
lowering quality for the sake of quantity. This in turn
feeds back on economic growth because the stock of
human capital is reduced by rapid population
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growth. 4. Health - High fertility harms the health of
mothers and children. It increases the health risks of
pregnancy, and closely spaced births have been
shown to reduce birth weight and increase child
mortality rates.
5. Food - Feeding the world’s population is made
more difficult by rapid population growth—a large
fraction of developing country food requirements
are the result of population increases. New
technologies of production must be introduced more
rapidly, as the best lands have already been
cultivated. International food relief programs
become more widespread.
6. Environment - Rapid population growth
contributes to environmental degradation in the
form of forest encroachment, deforestation, fuel
wood depletion, soil erosion, declining fish and
animal stocks, inadequate and unsafe water, air
pollution, and urban congestion.
7. International Migration - Many observers
consider the increase in international migration,
both legal and illegal, to be one of the major
consequences of developing countries’ population
growth. Though many factors spur migration, an
excess of job seekers over job opportunities is surely
one of them. However, unlike the first six
consequences listed here, some of the economic and
social costs of international migration fall on
recipient countries, increasingly in the developed
world. It is not surprising, therefore, that this issue
has recently taken on political importance in North
America and Europe
Some Policies Approach
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.
ECONOMIC DEVELOPMENT
MIDTERM
CHAPTER 8: HUMAN CAPITAL: EDUCATION
AND HEALTH IN ECONOMI DEVELOPMENT
The central role of education in health
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 behavior such as children’s regular school
attendance and health clinic visitations.
Educational gender gap
Male-female differences in school access and
completion
Educational system and Development
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
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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.
Roundworm (Ascariasis) - Malnutrition and
intestinal obstruction in young children; Child
stunting; Impaired cognition
Whipworm (Trichuriasis) - Colitis and inflammatory
bowel disease; Child stunting and impaired cognition
Hookworm infection - Severe iron deficiency anemia
and protein malnutrition; anemia; Child stunting and
impaired intellectual and cognitive development;
Maternal morbidity and mortality in pregnancy
Schistosomiasis - Bladder damage, intestine or liver
inflammation; Chronic pain, anemia, malnutrition
and stunting; Liver and intestinal fibrosis, kidney
disease, female genital schistosomiasis
Lymphatic filariasis (elephantiasis) - Leg swelling,
disfigurement, extreme pain
Onchocerciasis - arvae in skin and eyes; Onchocerca
skin disease; Blindness Leishmaniasis Fever, weight
loss, enlargement of the spleen and liver, and
anemia.
Chagas’ disease - Heart and digestive problems.
Trypanosomiasis (Human African) - Sleepiness,
wwollen lymph nodes, weakness, psychiatric
disorders, seizures 0.3
ECONOMIC DEVELOPMENT
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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.
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.
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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
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.
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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.
CHAPTER 10: THE ENVIROMENT AND
DEVELOPMENT
Environment and development basic issue
Global warming
Increasing average air and ocean temperatures.
Used in reference to the trend that began in the mid-
twentieth century and attributed largely to human
industrial, forestry, and agricultural activities
emitting greenhouse gases.
Climate change
Non-altering of underlying climate, such as increased
average temperature, decreased annual
precipitation, or greater average intensity of
droughts or storms. Used in reference to the impact
of the global warming phenomenon. Note the
distinction between changes in weather (which
varies within a climate) and changes in climate that
alter underlying probabilities of weather outcomes.
Environmental accounting
The incorporation of environmental benefits and
costs into the quantitative analysis of economic
activities.
Environmental capital - The portion of a country’s
overall capital assets that directly relate to the
environment—for example, forests, soil quality, and
ground water.
Sustainable development - A pattern of
development that permits future generations to live
at least as well as the current generation, generally
requiring at least a minimum environmental
protection
Sustainable net national income (NNI*) - An
environmental accounting measure of the total
annual income that can be consumed without
diminishing the overall capital assets of a nation
(including environmental capital).
Environmental Kuznets curve - A graph reflecting
the concept that pollution and other environmental
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degradation first rises and then falls with increases in
income per capita. There is evidence that this holds
for some pollutants, such as sulfur dioxide and
particulate matter in the air, but not for others, such
as emissions of greenhouse gases.
Biomass fuels - Any combustible organic matter that
may be used as fuel, such as firewood, dung, or
agricultural residues.
Desertification - The transformation of a region into
dry, barren land with little or no capacity to sustain
life without an artificial source of water.
Soil erosion - Loss of valuable topsoil resulting from
overuse of farmland, and deforestation and
consequent flooding of farmland.
Deforestation - The clearing of forested land either
for agricultural purposes or for logging and for use as
firewood.
Economic Models of environmental issues
Total net benefit -The sum of net benefits to all
consumers.
Marginal cost - The addition to total cost incurred by
the producer as a result of increasing output by one
more unit.
Producer surplus - Excess of what a producer of a
good receives and the minimum amount the
producer would be willing to accept because of a
positive-sloping marginal cost curve.
Consumer surplus - Excess utility over price derived
by consumers because of a negative-sloping demand
curve.
Scarcity rent
The premium or additional rent charged for the use
of a resource or good that is in fixed or limited
supply.
Present value - The discounted value at the present
time of a sum of money to be received in the future.
Marginal net benefit - The benefit derived from the
last unit of a good minus its cost.
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.
Common property resource
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A resource that is collectively or publicly owned and Biodiversity
allocated under a system of unrestricted access, or The variety of life forms within an ecosystem.
as self-regulated by users.
Global public good
Externality A public good, whose benefits reach across national
Any benefit or cost borne by an individual economic borders and population groups.
unit that is a direct consequence of another’s
behavior.
Internalization What developing countries can do?
The process whereby external environmental or  Proper Resource Pricing
other costs are borne by the producers or  Community Involvement
consumers who generate them, usually through the  Clearer Property Rights and Resource
imposition of pollution or consumption taxes. Ownership
 Programs to Improve the Economic
Public good - An entity that provides benefits to all Alternatives of the Poor
individuals simultaneously and whose enjoyment by  Raising the Economic Status of Women
one person in no way diminishes that of another.  Industrial Emissions Abatement Policies
Public bad - An entity that imposes costs on groups  Proactive Stance toward Climate Change
of individuals simultaneously. Compare with public and Environmental Degradation
good.
How developed countries can help developing
Free-rider problem
countries
The situation in which people can secure benefits
 Trade Policies
that someone else pays for.
 Debt Relief
 Development Assistance
Urban Development and environment
What develop countries can do for the global
Clean technologies
environment
Technologies that by design produce less pollution
and waste and use resources more efficiently  Emission Controls
 Research and Development
Private costs - The direct monetary outlays or costs  Import restrictions
of an individual economic unit.

Pollution tax - A tax levied on the quantity of

pollutants released into the physical environment.

Social cost - The full cost of an economic decision,

whether private or public, to society as a whole.

Absorptive capacity
The capacity of an ecosystem to assimilate potential
pollutants.

Greenhouse gases
Gases that trap heat within the earth’s atmosphere
and can thus contribute to global warming.