ECON DEV REVIEWER

HOW THE OTHER THREE-QUARTERS LIVE

Adam Smith – Father of modern economics. “There is
Inequality between the world’s rich and poor
no equal distribution of wealth”
 Development economics focuses primarily on
the poorest three-fourths (to be precise, 78
percent) of the world's population.
 These poor are the vast majority, but not all, of GROWTH AND DEVELOPMENT
the population of developing countries, which
comprise 81 percent of the world’s population.  Economic growth refers to increases in a
 about 700–1000 million (10–15 percent) of the country's production or income per capita.
world’s 6.5 billion people (5.3 billion in  Income per capita - Total gross national
developing countries) are poor or living on no income of a country divided by its total
more than $1 a day. population.

Absolute poverty- A situation of being unable to meet  Production is usually measured by gross national
the minimum levels of income, food, clothing, health product (GNP) or gross national income (GNI),
care, shelter, and other essentials. used interchangeably, an economy's total output of
goods and services.
Relative Poverty- When people don’t have enough o Gross national Product (Gnp) The total
resources to live up to “normal” standards in a society. domestic and foreign output claimed by
Defined as living below the median (mid-point residents of a country.
income). The criteria will change with economic o Gross domestic product (GDP) The
growth. total final output of goods and services
produced by the country’s economy,
Subsistence economy- An economy in which within the country’s territory, by
production is mainly for personal consumption and the residents and nonresidents, regardless of
standard of living yields little more than basic its allocation between domestic and
necessities of life—food, shelter, and clothing foreign claims
 Economic development refers to economic
growth accompanied by changes in output
Development- The process of improving the quality of distribution and economic structure.
all human lives and capabili ties by raising people’s  These changes may include:
levels of living, self-esteem, and freedom.  an improvement in the material well-being of
the poorer half of the population
Developing countries- Countries of Asia, Africa, the  a decline in agriculture's share of GNP and a
Middle East, Latin America, eastern Europe, and the corresponding increase in the GNP share of
former Soviet Union that are presently characterized industry and services
by low levels of living and other development deficits.  an increase in the education and skills of the labor
Used in the development literature as a synonym for force
less developed countries  substantial technical advances originating within
the country.
More developed countries (MDCs) - The now
economically advanced capitalist countries of western GNI
Europe, North America, Australia, New Zealand, and GNI per capita = Population
Japan.
- dollar value of countries final income in a
Less developed countries - A synonym for developing year, divided by its population
countries
 At the UN Milliennium Summit in
BRICS (2001) coined by Goldman Sachs, economist, September 2000, world leaders adopted the
encompassing countries that have fast growing Millennium Development Goals (MDGs),
economies collectively predicted to dominate global using 1990 as a benchmark, set targets for
economy in 2050 2015. The project is directed by Columbia
Brazil University’s Jeffrey Sachs
Russia
India 1. reducing the people suffering from
China hunger and living on less than a dollar
South Africa a day
 2. ensuring that all boys and girls
complete primary school LMIC- have more developed infrastructures and
3. promoting gender equality and social services compared to LICs but still have
empowering women by eliminating significant challenges achieving sustainable
gender disparities development and reducing poverty. EX. India,
4. reducing by two-thirds mortality Indonesia, Vietnam, Kenya
among children under five years
5. reducing the percentage of women UMC- have more diversified economies w/ well
dying in childbirth by three-fourths developed industrial sectors and significant
6. halting and reversing the spread of progress in infrastructure, education, and
HIV/AIDS, malaria, tuberculosis, and healthcare. EX. China, Brazil, Russia, Indonesia,
other diseases El Salvador
7. ensuring environmental sustainability,
8. developing a global partnership for HIC- typically have well- established, highly
development diversified economies, advanced infrastructure
and high standards of living. EX. US, Canada,
GNP per capita – Is a measure of a country’s Japan, South Korea, Singapore, UK, Australia
economic output that accounts for its population
- Such classifications help intern. Org. and
SUSTAINABLE DEVELOPMENT GOAL gov. to determine where financial
1. NO poverty assistance are most needed. Useful for
2. Zero Hunger tracking economic progress over time.
3. Good health and well- being Allows comparison of living stnadards.
4. Quality Education
5. Gender Equality World Bank – Int’l Financial Institution that
6. Clean water and sanitation provides funding, advice and research to
7. Affordable and clean Energy developing countries w/ the goal of reducing
8. Decent work and economic growth poverty and promoting sustainable development
9. Industry, innovation and infrastructure
10. Reduced inequalities PROBLEMS IN COMPARING DEVELOPED
11. Sustainable cities and communities AND DEVELOPING COUNTRIES' GNP
12. Responsible consumption and production
 International agencies generally do not collect
13. Climate action primary data, getting it from national statistical
14. Life below water agencies which often use different concepts
15. Life on land and methods of data collection.
16. Peace, justice, and strong institutions  The United Nations has not yet successfully
17. Partnership for goals standardized these concepts and
methodologies.
The classification of development used by the  per capita GNI or GNP varies greatly between
World Bank on the basis of per capita GNP countries.
 LIC- low-income countries ($745 or less)  developed countries are located in
 LMIC- lower middle income countries predominantly temperate zones, and LDCs are
($746-2,975) primarily in the tropics.
 upper middle countries ($2,976-9,205)
 high income countries ($9,206 or more).
 High income countries are designated as developed Apart from this discrepancy, the major sources of
countries (DCs) or the North. error and imprecision in comparing GNP figures for
 Middle and low income countries as developing, developed and developing countries are as follows:
underdeveloped, or less-developed countries
(LDCs), or the South. 1. GNP is understated for developing countries, since a
greater proportion of their goods and services are
LIC – these countries often face challenges such produced within the home by family members for
as high poverty rates , limited access to heath care, their own use, rather than for sale in the marketplace.
education and economic instability. EX. 2. GNP may be understated for developing countries,
Afghanistan, Haiti, Uganda, Yemen, African where household size is substantially larger than that
countries
 in developed countries, resulting in household scale  Life expectancy is positively correlated with GNP
economies. per capita through the impact of GNP on incomes of
the poor and public spending, especially on health
3. GNP may be overstated for developed countries, care; indeed GNP adds no extra explanation to those
since a number of items included in their national of poverty and public health expenditure
incomes are intermediate goods, reflecting the costs  Infant mortality reflects the availability of clean
of producing or guarding income. water, the condition of the home environment, and
the mother's health.
4. The exchange rate used to convert GNP in local  Literacy is a measure of well-being as well as a
currency units into U.S. dollars, if market clearing, is requirement for a country's economic development.
based on the relative prices of internationally traded
goods. However, GNP is understated for developing
countries because many of their cheap, The Human Development Index (HDI)
labor-intensive, unstandardized goods and services  The United Nations Development Program (UNDP)
have no impact on the exchange rate, since they are defines human development as "a process of
not traded. enlarging people's choices. The most critical ones are
to lead a long and healthy life, to be educated and
5. GNP is overstated for countries (usually developing enjoy a decent standard of living."
countries) where the price of foreign exchange is less  The HDI summarizes a great deal of social
than a market-clearing price. This overstatement can performance in a single composite index combining
result from import barriers, restrictions on access to three indicators
foreign currency, export subsidies, or state trading.  longevity (a proxy for health and
nutrition)
***  education
MEASURE OF ECONOMIC DEVELOPMENT  living standards.
 Longevity is measured by average life expectancy
PURCHASING-POWER PARITY (PPP) (in years) at birth, computed by assuming that babies
born in a given year will experience the current death
 Penn researchers Robert Summers and Alan
rate of each age cohort throughout their lifetime
Heston compute (P) the price level of GNP as the
 Educational attainment is a composite of two
ratio of the purchasing power parity (PPP)
variables, a 2/3 weight based on the adult literacy
exchange rate to the actual (or market) exchange
rate (in percentage) and a 1/3 weight on the
rate.
combined primary, secondary, and tertiary gross
The PPP exchange rate is that at which the goods and
enrolment rate (in percentage).
services comprising gross domestic product cost the  The indicator for living standards is based on the
same in both countries. Domestic Currency price in logarithm of per capita GDP in purchasing power
terms of US dollars parity (PPP) dollars.
A BETTER MEASURE OF ECONOMIC DEVELOPMENT?

The Physical Quality of Life Index (PQLI) – used to Gender-related development index (GDI)
assess the quality of life or well-being in different  Measure gender inequality is human development.
countries. Assesses how well women are doing in comparison
to men in terms of key dimensions of development.
 Combines three indicators
 Based on shares of family income(men & women)
a) infant mortality (the annual number of
deaths of infants under one year of age per
***
1000 live births) Classic Theories of Economic Growth and
b) life expectancy – means to combat illness, Development
live in good condition. This measures the
average number of years a person is We explore the historical and intellectual evolution
expected to live beyond their 1st birthday. in scholarly thinking about how and why
development does or does not take place. We do
c) adult literacy rate- the ability to read and this by examining four major and often competing
write in any language, basic marh development theories.

 The first two variables represent the effects of Development as Growth and the Linear-Stages
nutrition, public health, income, and the general Theories
environment.
A. Rostow’s Stages of Growth
 Stages-of-growth model of development A condition for sustained eco nomic growth (before
theory of economic development, associated with growth in output can occur, there must be tools to
the American economic historian Walt W. Rostow, produce it). But for this growth to continue, social,
according to which a country passes through institutional, and attitudinal changes may have to
sequential stages in achieving development. occur.
Acc to him, the transition from underdevelopment
to development can be described in terms of a series Sufficient condition
of steps or stages through which all countries must
proceed. A condition that when present causes or guarantees
that an event will or can occur; in economic models,
1. The traditional Society a condition that logically requires that a statement
-subsistence agriculture, traditional economy, must be true (or a result must hold) given other
limited technology assumptions.
2. The Preconditions for Takeoff into self-
sustaining growth STRUCTURAL CHANGE THEORY
-Agri to industrial sectors, investment in
-focuses on the mechanism by which
infrastructures
underdeveloped economies transform their domestic
3. the Take-off
-rapid industrial growth , urbanization, surge economic structures from a heavy emphasis on
in innovation, investment traditional subsistence agriculture to a more modern,
4. the Drive to Maturity more urbanized, and more industrially diverse
-economy diversifies, become more complex, manufacturing and service economy.
living standards improve, more integrated in
global markets - The hypothesis that underdevelopment is due to
5. Age of High Mass Consumption underutilization of resources arising from structural
-widespread availability of consumer goods or institutional factors that have their origins in both
and services, standard of living is high, domestic and international dualism. Development
disposable income used in luxury goods therefore requires more than just accelerated capital
formation.
 Developed countries already passed all stages.
 Underdeveloped countries are in traditional Two well-known representative examples of the
and preconditions stage structural-change approach are
1. “two-sector surplus labor” theoretical
Disposable income- amount of money that an
model of W. Arthur Lewis
individual has after taxes have been deducted.
2. the “patterns of development”
B. Harrod-Domar growth model empirical analysis of Hollis B.
Chenery and his coauthors
A functional economic relationship in which the
growth rate of gross domestic product (g) depends Lewis two-sector model
directly on the national net savings rate (s) and A theory of development in which surplus labor from
inversely on the national capital-output ratio (c). AK the traditional agricultural sector is transferred to the
Model modern industrial sector, the growth of which absorbs
Every economy must save a certain proportion of its the surplus labor, promotes industrialization, and
national income, if only to replace worn-out or stimulates sustained development.
impaired capital goods (buildings, equipment, and In the Lewis model, the underdeveloped economy
materials). However, in order to grow, new consists of two sectors: a traditional, overpopulated,
investments representing net additions to the capital rural subsistence sector characterized by zero marginal
stock are necessary. labor productivity—a situation that permits Lewis to
Main constraints classify this as surplus labor in the sense that it can be
withdrawn from the traditional agri cultural sector
-relativelly low level of new capital formation in without any loss of output—and a high-productivity
most poor countries modern, urban industrial sector into which labor from
the subsistence sector is grad ually transferred.
Necessary condition
Surplus labor
A condition that must be present, although it need not
be in itself sufficient, for an event to occur. For The excess supply of labor over and above the quantity
example, capital formation may be a necessary 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.