DEFINITION OF TERMS Development economics

The study of how economies are

Development transformed from stagnation to growth
The process of improving the quality of all and from low- income to high-income
human lives and capabilities by raising status, and overcome problems of
people's levels of living, self-esteem, and extreme poverty.
freedom.
High-income countries (HICs)
Living standards strata In the World Bank classi cation, countries
Stylized sets of material living conditions; with a GNI per capita above $12,055
the 4-strata schema was created by Hans in 2018.
Rosling
Institutions
Subsistence economy Constitutions, laws, regulations, social
An economy in which production is norms, rules of conduct, and generally
mainly for personal consumption and the accepted ways of doing things. Economic
standard of living yields little more than institutions are "humanly devised"
basic necessities of life-food, shelter, and constraints that shape human
clothing. interactions, including both informal and
formal "rules of the game" of economic
Gross national income (GNI) life in the widely used framework of
The total domestic and foreign output Douglass North.
claimed by residents of a country,
consisting of gross domestic product Social system
(GDP) plus factor incomes earned by The organizational and institutional
foreign residents, minus income earned structure of a society, including its values,
in the domestic economy by attitudes, power structure, and traditions.
nonresidents.
Functionings
Low-Income Country (LIC) What people do or can do with the
In the World Bank classi cation, countries commodities of given characteristics that
with a GNI per capita of less than $996 in they come to possess or control.
2018.
Capabilities
Upper-middle income countries The freedoms that people have, given
(UMCs) their personal features and their
In the World Bank classi cation, countries command over commodities.
with a GNI per capita between $3,896
and $12,055 in 2018. Sustainable Development Goals
(SDGs)
Lower-middle income countries Successor to the earlier Millennium
(LMCs) Development Goals (MDGs), a set of 17
In the World Bank classi cation, countries broad goals, among them to: end poverty
with a GNI per capita incomes between and hunger; ensure healthy lives, quality
$996 and $3,895 in 2018. education, gender equality, water and
sanitation, and modern energy; promote
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inclusive growth, employment, resilient
infrastructure, industrialisation, World Bank
innovation, and improved cities; reduce An organization known as an
inequality; combat climate change and "international nancial institution" that
environmental damage; and promote provides development funds to
peace, justice, and global partnership. developing countries in the form of
interest-bearing loans, grants, and
Sector technical assistance.
A subset (part) of an economy, with four
usages in economic development: Low-income countries (LICs)
technology (modern and traditional In the World Bank classi cation, countries
sectors); activity (industry or product with a GNI per capita of less than $996 in
sectors); trade (export sector); and 2018.
sphere (private, public, and nonpro t or
citizen sectors) Lower-middle-income countries
(LMCs)
Millennium Development Goals In the World Bank classi cation, countries
(MDGs) with a GNI per capital incomes between
Precursor to the SDGs adopted by the $994 and $3,895 in 2018.
United Nations in 2000 to: eradicate
extreme poverty and hunger; achieve Upper middle-income countries
universal primary education; promote (UMCs)
gender equality and empower women; In the World Bank classi cation, countries
reduce child mortality; improve maternal with a GNI per capita between $3,896
health; combat diseases; ensure and $12,055 in 2018.
environmental sustainability; and develop
a global development partnership. Goals High-income countries (HICs)
were assigned targets to be achieved by In the World Bank classi cation, countries
2015. with a GNI per capita above $12,055 in
2018.
Developing countries
Countries primarily in Asia, Africa, the Very high-income country
Middle East, Latin America, eastern An informal category for a per capita
Europe, and the former Soviet Union that income standard indicative of economies
are presently characterized by low levels that master frontier technologies, skills
of living and other development de cits. and productivity at a point in time, such
Used in the development literature as a as $40,000 in 2018.
synonym for less developed countries, or
collectively low and middle income Value added
countries. The portion of a product's nal value that
is added at each stage of production.
Human capital
Productive investments in people, such Depreciation (or wearing out)
as skills, values, and health resulting from The wearing out of equipment, buildings,
expenditures on education, on-the-job infra-structure, and other forms of capital,
training programs, and medical care.
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 re ected in write-offs to the value of the considered economically unproductive
capital stock. and therefore not counted in the labour
force.
Capital stock
The total amount of physical goods Imperfect market
existing at a particular time that have A market in which the theoretical
been produced for use in the production assumptions of perfect competition are
of other goods and services. violated by the existence of, for example,
a small number of buyers and sellers,
Gross domestic product barriers to entry, and incomplete
(GDP) The total nal output of goods and information.
services produced by the country's
economy, within the country's territory, by Incomplete information
residents and nonresidents, regardless of The absence of information that
its allocation between domestic and producers and consumers need to make
foreign claims ef cient decisions resulting in
underperforming markets.
Purchasing power parity
(PPP) Calculation of GNI using a Property rights
common set of international prices for all The acknowledged right to use and
goods and services, to provide more bene t from a tangible (e.g., land) or
accurate comparisons of living standards. intangible (e.g., intellectual) entity that
may include owning, using, deriving
Diminishing marginal utility income from, selling, and disposing.
The concept that the subjective value of
additional consumption (income) lessens Divergence
as total consumption becomes higher. A tendency for per capita income (or
output) to grow faster in higher-income
Absolute poverty countries than in lower-income countries
The situation of being unable or only so that the income gap widens across
barely able to meet the subsistence countries over time (as was seen in the
essentials of food, clothing, shelter, and two centuries after industrialisation
basic health care. began).

Crude birth rate Convergence

The number of children born alive each The tendency for per capita income (or
year per 1,000 population (often output) to grow faster in lower-income
shortened to birth rate). countries than in higher-income countries
so that lower-income countries are
Fractionalisation "catching up" over time.
Signi cant ethnic, linguistic, and other
social divisions within a country. When countries are hypothesized to
converge not in all cases but other things
Dependency burden being equal (particularly savings rates,
The proportion of the total population labour force growth, and production
aged 0 to 15 and 65+, which is
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 technologies), then the term conditional must be true (or a result must hold) given
convergence is used. other assumptions.

Stages-of-growth model of Structural-change theory

development The hypothesis that underdevelopment is
A theory of economic development, due to underutilisation of resources
associated with the American economic arising from structural or institutional
historian Walt W. Rostow, according to factors that have their origins in both
which a country passes through domestic and international dualism.
sequential stages in achieving Development therefore requires more
development. than just accelerated capital formation.

Harrod-Domar growth model Structural transformation

A functional economic relationship in The process of transforming an economy
which the growth rate of gross domestic in such a way that the contribution to
product (g) depends directly on the national income by the manufacturing
national net savings rate (s) and inversely sector eventually surpasses the
on the national capital-output ratio (c). contribution by the agricultural sector.
More generally, a major alteration in the
Capital-output ratio industrial composition of any economy.
A ratio that shows the units of capital
required to produce a unit of output over Lewis two-sector model
a given period of time. A theory of development in which surplus
labour from the traditional agricultural
Net savings ratio sector is transferred to the modern
Savings expressed as a proportion of industrial sector, the growth of which
disposable income over some period of absorbs the surplus labour, promotes
time. industrialization, and stimulates sustained
development.
Necessary condition
A condition that must be present, Surplus labour
although it need not be in itself suf cient, The excess supply of labour over and
for an event to occur. For example, above the quantity demanded at the
capital formation may be a necessary going free-market wage rate. In the Lewis
condition for sustained economic growth two-sector model of economic develop-
(before growth in output can occur, there ment, surplus labour refers to the portion
must be tools to produce it). But for this of the rural labour force whose marginal
growth to continue, social, institutional, productivity is zero or negative.
and attitudinal changes may have to
occur. Production function
A technological or engineering
Suf cient condition relationship between the quantity of a
A condition that when present causes or good produced and the quantity of inputs
guarantees that an event will or can required to produce it.
occur; in economic models, a condition
that logically requires that a statement Average product
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Total output or product divided by total commodities and raw materials in world
factor input (e.g., the average product of markets.
labour is equal to total output divided by
the total amount of labour used to Neocolonial dependence model
produce that output). A model whose main proposition is that
underdevelopment exists in developing
Marginal product countries because of continuing
The increase in total output resulting from exploitative economic, political, and
the use of one additional unit of a variable cultural policies of former colonial rulers
factor of production (such as labour or toward less-developed countries.
capital). In the Lewis two-sector model,
surplus labour is de ned as workers Underdevelopment
whose marginal product is zero. An economic situation characterized by
persistent low levels of living in
Self-sustaining growth conjunction with absolute poverty, low
Economic growth that continues over the income per capita, low rates of economic
long term based on saving, invest-ment, growth, low consumption lev-els, poor
and complementary private and public health services, high death rates, high
activities. birth rates, dependence on foreign econ-
omies, and limited freedom to choose
Patterns of development analysis among activities that satisfy human
An attempt to identify characteristic wants.
features of the internal process of
structural transformation that a “typical” Centre
developing economy undergoes as it In dependence theory, the economically
generates and sustains modern developed world.
economic growth and development.
Periphery
Dependence In dependence theory, the developing
The reliance of developing countries on countries.
developed-country economic policies to
stimulate their own economic growth. Comprador groups
Dependence can also mean that the In dependence theory, local elites who
developing countries adopt developed- act as fronts for foreign investors.
country education systems, technology,
economic and political systems, attitudes, False-paradigm model
consumption patterns, dress, and so on. The proposition that developing countries
have failed to develop because their
Dominance development strategies (usually given to
In international affairs, a situation in them by Western economists) have been
which the developed countries have based on an incorrect model of
much greater power than the less- development—one that, for example,
developed countries in decisions affecting overstresses capital accumulation or
important international economic issues, market liberalization without giving due
such as the prices of agricultural consideration to needed social and
institutional change.
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 Dualism policy requires governments to create an
The coexistence of two situations or environment in which markets can
phenomena (one desirable and the other operate ef ciently and to intervene only
not) that are mutually exclusive to selectively in the economy in areas where
different groups of society-for example, the market is inef cient.
extreme poverty and af uence, modern
and traditional economic sectors, growth Market failure
and stagnation, and higher education for A market's inability to deliver its
a few amid large-scale illiteracy. theoretical bene ts due to the existence
of market imperfections such as
Autarky monopoly power, lack of factor mobility,
A closed economy that attempts to be signi cant externalities, or lack of knowl-
completely self-reliant. edge. Market failure often provides the
justi cation for government intervention to
Neoclassical counter-revolution alter the working of the free market.
The 1980s resurgence of neoclassical
free-market orientation toward Capital-labour ratio
development problems and policies, The number of units of capital per unit of
counter to the interventionist dependence labour.
revolution of the 1970s.
Solow neoclassical growth model
Free markets Growth model in which there are
The system whereby prices of diminishing returns to each factor of
commodities or services freely rise or fall production but constant returns to scale.
when the buyer's demand for them rises Exogenous technological change
or falls or the seller's supply of them generates long-term economic growth.
decreases or increases.
Closed economy
Free-market analysis An economy in which there are no foreign
Theoretical analysis of the properties of trade transactions or other economic
an economic system operating with free contacts with the rest of the world.
markets, often under the assumption that
an unregulated market performs better Open economy
than one with government regulation An economy that practises foreign trade
and has extensive nancial and
Public-choice theory (new political non nancial contacts with the rest of the
economy approach) world.
The theory that self-interest guides all
individual behaviour and that Binding constraints
governments are inef cient and corrupt The one limiting factor that if relaxed
because people use government to would be the item that accelerates growth
pursue their own agendas. (or that allows a larger amount of some
other targeted outcome).
Market-friendly approach
The notion historically promulgated by the
World Bank that successful development
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Economic agent technology, and may be compounded by
An economic actor— usually a rm, high inequality.
worker, consumer, or government of cial
—that chooses actions so as to maximise Underdevelopment trap
an objective; often referred to as A poverty trap at the regional or national
"agents." level in which underdevelopment tends to
perpetuate itself over time.
Complementarity
An action taken by one rm, worker, or Deep interventions
organisation that increases the incentives A government policy that can move the
for other agents to take similar actions. economy to a preferred equilibrium or
Complementarities often involve even to a higher permanent rate of
investments whose return depends on growth, which can then be self-sustaining
other investments being made by other so that the policy need no longer be
agents. enforced because the better equilibrium
will then prevail without further
Coordination failure intervention.
A situation in which the inability of agents
to coordinate their behaviour (choices) Congestion
leads to an outcome (equilibrium) that The opposite of a complementarity; an
leaves all agents worse off than in an action taken by one agent that decreases
alternative situation that is also an the incentives for other agents to take
equilibrium. similar actions

Big push Where-to-meet dilemma

A concerted, economy-wide, and typically A situation in which all parties would be
public policy-led effort to initiate or better off cooperating than competing but
accelerate economic development across lack information about how to do so. If
a broad spectrum of new industries and cooperation can be achieved, there is no
skills. subsequent incentive to defect or cheat.

O-ring model Prisoners' dilemma

An economic model in which production A situation in which all parties would be
functions exhibit strong better off cooperating than competing, but
complementarities among inputs and once cooperation has been achieved,
which has broader implications for each party would gain the most by
impediments to achieving economic cheating provided that others stick to
development. cooperative agreements-thus causing
any agreement to unravel.
Middle-income trap
A condition in which an economy begins Multiple equilibria
development to reach middle-income A condition in which more than one
status but is chronically unable to equilibrium exists.These equilibria
progress to high-income status. Often sometimes may be ranked, in the sense
related to low capacity for original that one is preferred over another, but the
innovation or for absorption of advanced
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 unaided market will not move the underdevelopment lead to more poverty
economy to the preferred outcome. and underdevelopment, often from one
generation to the next.
Pareto improvement
A situation in which one or more persons O-ring production function
may be made better off without making A production function with strong
anyone worse off. complementarities among inputs, based
on the products (i.e., multiplying) of the
Pecuniary externality input qualities.
A positive or negative spillover effect on
an agent's costs or revenues. Information externality
The spillover of information-such as
Technological externality knowledge of a production process-from
A positive or negative spillover effect on a one agent to another, without
rm's production function through some intermediation of a market transaction;
means other than market exchange. re ects the public good characteristic of
information (and susceptibility to free
Agency costs riding)—it is neither fully excludable from
Costs of monitoring managers and other other uses, nor nonrival (one agent's use
employees and of designing and of information does not prevent others
implementing schemes to ensure from using it).
compliance or provide incentives to follow
the wishes of the employer. Growth diagnostics
A decision tree framework for identifying
Asymmetric information a country's most binding constraints on
A situation in which one party to a economic growth.
potential transaction (often a buyer, seller,
lender, or borrower) has more information Social returns
than another party. The pro tability of an investment in which
both costs and bene ts are accounted for
Linkages from the perspective of the society as a
Connections between rms based on whole.
sales. A backward linkage is one in which
a rm buys a good from another rm to Shadow Price
use as an input; a forward linkage is one The change in the objective function due
in which a rm sells to another rm. Such to an increase in the supply of a
linkages are especially signi cant for constrained input.
industrialisation strategy when one or
more of the industries (product areas) Personal distribution of income (size
involved has increasing returns to scale distribution of income)
that a larger market takes advantage of. The distribution of income according to
size class of persons-for example, the
Poverty trap share of total income accruing to the
A bad equilibrium for a family, poorest speci c percentage or the richest
community, or nation, involving a vicious speci c percentage of a population-
circle in which poverty and
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 without regard to the sources of that Headcount index
income. The proportion of a country's population
living below the poverty line.
Quintile
A 20% proportion of any numerical Total poverty gap (TPG)
quantity. A population divided into The sum of the difference between the
quintiles would be divided into ve groups poverty line and actual income levels of
of equal size. all people living below that line.

Decile Foster-Greer-Thorbecke (FGT) index

A 10% portion of any numerical quantity; A class of measures of the level of
a population divided into deciles would be absolute poverty.
divided into ten equal numerical groups.
Kuznets curve
Income inequality A graph re ecting the relationship
disproportionate distribution of total between a country's income per capita
national income among households. and its inequality of income distribution

Lorenz curve Character of economic growth

A graph depicting the variance of the size The distributive implications of economic
distribution of income from perfect growth as re ected in such factors as
equality. participation in the growth process and
asset ownership
Gini coef cient
An aggregate numerical measure of Multidimensional Poverty Index (MPI)
income inequality ranging from 0 (perfect A poverty measure that identi es the poor
equality) to 1 (perfect inequality). using dual cutoffs for levels and numbers
of deprivations, and then multiplies the
It is measured graphically by dividing the percentage of people living in poverty
area between the perfect equality line times the percentage of weighted
and the Lorenz curve by the total area indicators for which poor households are
lying to the right of the equality line in a deprived on average.
Lorenz diagram.
Functional distribution of income
The higher the value of the coef cient, (factor share distribution of income)
the higher the inequality of income The distribution of income to factors of
distribution; the lower it is, the more equal production without regard to the
the distribution of income. ownership of the factors.

Absolute poverty Factors of production

The situation of being unable or only Resources or inputs required to produce
barely able to meet the subsistence a good or a service, such as land, labour,
essentials of food, clothing, and shelter. and capital.
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 Disposable income expenditures on national defence and
The income that is available to security.
households for spending and saving after
personal income taxes have been Subsidy
deducted. A payment by the government to
producers or distributors in an industry to
Asset ownership prevent the decline of that industry, to
The ownership of land, physical capital reduce the prices of its products, or to
(factories, buildings, machin-ery, etc.), encourage hiring.
human capital, and nancial resources
that generate income for owners. Workfare programme
A poverty alleviation pro-gramme that
Redistribution policies requires pro-gramme bene ciaries to
Policies geared to reducing income work in exchange for bene ts, as in a
inequality and expanding economic food-for-work programme.
opportunities in order to promote
development, including income tax
policies, rural development policies, and
publicly nanced 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
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