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 soon.

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 birthrates, 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 1980sresurgence 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 - 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.

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 been forced 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 underway 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. Urbanization effects

3. Infrastructure 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 non rival (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 .

Ultra poverty - 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 process 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
birthrate).
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 16to
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-UrbanMigration: 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 behavior.

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 individuals 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 inhuman 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.