MODULE 1 humanly devised constraints that shape human

interactions, including both informal and formal “rules of

Absolute poverty A situation of being unable to meet the the game” of economic life in the widely used framework
minimum levels of income, food, clothing, health care, of Douglass North.
shelter, and other essentials.
Income per capita Total gross national income of a
Subsistence economy An economy in which production is country divided by its total population.
mainly for personal consumption and the standard of
living yields little more than basic necessities of life— Gross national income (GNI) The total domestic and
food, shelter, and clothing. foreign output claimed by residents of a country. It
comprises gross domestic product (GDP) plus factor
Development The process of improving the quality of all incomes accruing to residents from abroad, less the
human lives and capabilities by raising people’s levels of income earned in the domestic economy accruing to
living, self-esteem, and freedom. persons abroad.
Developing countries Countries of Asia, Africa, the Gross domestic product (GDP) The total final output of
Middle East, Latin America, eastern Europe, and the goods and services produced by the country’s economy,
former Soviet Union that are presently characterized by within the country’s territory, by residents and
low levels of living and other development deficits. Used nonresidents, regardless of its allocation between
in the development literature as a synonym for less domestic and foreign claims.
developed countries.
Millennium Development Goals (MDGs) A set of eight
Traditional economics An approach to economics that goals adopted by the United Nations in 2000: to eradicate
emphasizes utility, profit maximization, market efficiency, extreme poverty and hunger; achieve universal primary
and determination of equilibrium. education; promote gender equality and empower
Political economy The attempt to merge economic women; reduce child mortality; improve maternal health;
analysis with practical politics— to view economic activity combat HIV/AIDS, malaria, and other diseases; ensure
in its political context. environmental sustainability; and develop a global
partnership for development. The goals are assigned
Development economics The study of how economies specific targets to be achieved by 2015.
are transformed from stagnation to growth and from low
income to high-income status, and overcome problems of
absolute poverty.

More developed countries (MDCs) The now economically

advanced capitalist countries of western Europe, North
America, Australia, New Zealand, and Japan.

Less developed countries A synonym for developing

countries.

Social system The organizational and institutional

structure of a society, including its values, attitudes,
power structure, and traditions.

Values Principles, standards, or qualities that a society or

groups within it considers worthwhile or desirable.

Attitudes The states of mind or feelings of an individual,

group, or society regarding issues such as material gain,
hard work, saving for the future, and sharing wealth.

Institutions Norms, rules of conduct, and generally

accepted ways of doing things. Economic institutions are
 Resource endowment A nation’s supply of usable factors
of production, including mineral deposits, raw materials,
and labor.

Infrastructure Facilities that enable economic activity and

markets, such as transportation, communication and
distribution networks, utilities, water, sewer, and energy
MODULE 2 supply systems.

World Bank An organization known as an “international Imperfect market A market in which the theoretical
financial institution” that provides development funds to assumptions of perfect competition are violated by the
developing countries in the form of interest-bearing existence of, for example, a small number of buyers and
loans, grants, and technical assistance. sellers, barriers to entry, and incomplete information.

Low-income countries (LICs) In the World Bank Incomplete information The absence of information that
classification, countries with a GNI per capita of less than producers and consumers need to make efficient
$1,025 in 2011. decisions resulting in underperforming markets.

Middle-income countries In the World Bank Property rights The acknowledged right to use and
classification, countries with a GNI per capita between benefit from a tangible (e.g., land) or intangible (e.g.,
$1,025 and $12,475 in 2011. intellectual) entity that may include owning, using,
deriving income from, selling, and disposing.
Newly industrializing countries (NICs) Countries at a
relatively advanced level of economic development with Brain drain The emigration of highly educated and skilled
a substantial and dynamic industrial sector and with close professionals and technicians from the developing
links to the international trade, finance, and investment countries to the developed world.
system.
Terms of trade The ratio of a country’s average export
Least developed countries A UN designation of countries price to its average import price.
with low income, low human capital, and high economic
vulnerability. Research and development (R&D) Scientific investigation
with a view toward improving the existing quality of
Human capital Productive investments in people, such as human life, products, profits, factors of production, or
skills, values, and health resulting from expenditures on knowledge.
education, on-thejob training programs, and medical
care. Divergence A tendency for per capita income (or output)
to grow faster in higher-income countries than in lower-
Gross national income (GNI) The total domestic and income countries so that the income gap widens across
foreign output claimed by residents of a country, countries over time (as was seen in the two centuries
consisting of gross domestic product (GDP) plus factor after industrialization began).
incomes earned by foreign residents, minus income
earned in the domestic economy by nonresidents. Convergence The tendency for per capita income (or
output) to grow faster in lower-income countries than in
Value added The portion of a product’s final value that is higher-income countries so that lowerincome countries
added at each stage of production. are “catching up” over time. When countries are
hypothesized to converge not in all cases but other things
Dependency burden The proportion of the total being equal (particularly savings rates, labor force
population aged 0 to 15 and 65+, which is considered growth, and production technologies), then the term
economically unproductive and therefore not counted in conditional convergence is used.
the labor force.
Economic Institutions “Humanly devised” constraints
Fractionalization Significant ethnic, linguistic, and other that shape interactions (or “rules of the game”) in an
social divisions within a country economy, including formal rules embodied in
constitutions, laws, contracts, and market regulations,
plus informal rules reflected in norms of behavior and Development therefore requires more than just
conduct, values, customs, and generally accepted ways of accelerated capital formation.
doing things.
Structural transformation The process of transforming an
economy in such a way that the contribution to national
income by the manufacturing sector eventually surpasses
the contribution by the agricultural sector. More
generally, a major alteration in the industrial composition
of any economy.

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
MODULE 3 industrialization, and stimulates sustained development.

Stages-of-growth model of development A theory of Surplus labor The excess supply of labor over and above
economic development, associated with the American the quantity demanded at the going free-market wage
economic historian Walt W. Rostow, according to which a rate. In the Lewis two-sector model of economic
country passes through sequential stages in achieving development, surplus labor refers to the portion of the
development. rural labor force whose marginal productivity is zero or
negative.
Harrod-Domar growth model A functional economic
relationship in which the growth rate of gross domestic Production function A technological or engineering
product (g) depends directly on the national net savings relationship between the quantity of a good produced
rate (s) and inversely on the national capitaloutput ratio and the quantity of inputs required to produce it.
(c). Average product Total output or product divided by total
Capital-output ratio A ratio that shows the units of factor input (e.g., the average product of labor is equal to
capital required to produce a unit of output over a given total output divided by the total amount of labor used to
period oftime. produce that output).

Net savings ratio Savings expressed as a proportion of Marginal product The increase in total output resulting
disposable income over some period oftime. from the use of one additional unit of a variable factor of
production (such as labor or capital). In the Lewis two-
Necessary condition A condition that must be present, sector model, surplus labor is defined as workers whose
although it need not be in itself sufficient, for an event to marginal product is zero.
occur. For example, capital formation may be a necessary
condition for sustained economic growth (before growth Self-sustaining growth Economic growth that continues
in output can occur, there must be tools to produce it). over the long run based on saving, investment, and
But for this growth to continue, social, institutional, and complementary private and public activities.
attitudinal changes may have to occur. Patterns-of-development analysis An attempt to identify
Sufficient condition A condition that when present characteristic features of the internal process of
causes or guarantees that an event will or can occur; in structural transformation that a “typical” developing
economic models, a condition that logically requires that economy undergoes as it generates and sustains modern
a statement must be true (or a result must hold) given economic growth and development.
other assumptions. Dependence The reliance of developing countries on
Structural-change theory The hypothesis that developed-country economic policies to stimulate their
underdevelopment is due to underutilization of resources own economic growth. Dependence can also mean that
arising from structural or institutional factors that have the developing countries adopt developed-country
their origins in both domestic and international dualism. education systems, technology, economic and political
systems, attitudes, consumption patterns, dress, and so problems and policies, counter to the interventionist
on. dependence revolution ofthe 1970s.

Dominance In international affairs, a situation in which Free markets The system whereby prices of commodities
the developed countries have much greater power than or services freely rise or fall when the buyer’s demand for
the less developed countries in decisions affecting them rises or falls or the seller’s supply of them decreases
important international economic issues, such as the or increases
prices of agricultural commodities and raw materials in
world markets. Free-market analysis Theoretical analysis of the
properties of an economic system operating with free
Neocolonial dependence model A model whose main markets, often under the assumption that an unregulated
proposition is that underdevelopment exists in market performs better than one with government
developing countries because of continuing exploitative regulation.
economic, political, and cultural policies of former
colonial rulers toward less developed countries. Public-choice theory (new political economy approach)
The theory that selfinterest guides all individual behavior
Underdevelopment An economic situation characterized and that governments are inefficient and corrupt because
by persistent low levels of living in conjunction with people use government to pursue their own agendas.
absolute poverty, low income per capita, low rates of
economic growth, low consumption levels, poor health Market-friendly approach The notion historically
services, high death rates, high birth rates, dependence promulgated by the World Bank that successful
on foreign economies, and limited freedom to choose development policy requires governments to create an
among activities that satisfy human wants. environment in which markets can operate efficiently and
to intervene only selectively in the economy in areas
Center In dependence theory, the economically where the market is inefficient.
developed world.
Market failure A market’s inability to deliver its
Periphery In dependence theory, the developing theoretical benefits due to the existence of market
countries. imperfections such as monopoly power, lack of factor
mobility, significant externalities, or lack of knowledge.
Comprador group In dependence theory, local elites who Market failure often provides the justification for
act as fronts for foreign investors. government intervention to alter the working of the free
False-paradigm model The proposition that developing market.
countries have failed to develop because their Capital-labor ratio The number of units of capital per unit
development strategies (usually given to them by of labor.
Western economists) have been based on an incorrect
model of development, one that, for example, Solow neoclassical growth model Growth model in which
overstresses capital accumulation or market liberalization there are diminishing returns to each factor of production
without giving due consideration to needed social and but constant returns to scale. Exogenous technological
institutional change. change generates longterm economic growth.

Dualism The coexistence of two situations or phenomena Closed economy An economy in which there are no
(one desirable and the other not) that are mutually foreign trade transactions or other economic contacts
exclusive to different groups of society—for example, with the rest of the world.
extreme poverty and affluence, modern and traditional
economic sectors, growth and stagnation, and higher Open economy An economy that practices foreign trade
education among a few amid largescale illiteracy and has extensive financial and nonfinancial contacts with
the rest ofthe world.
Autarky A closed economy that attempts to be
completely self-reliant. Capital accumulation Increasing a country’s stock of real
capital (net investment in fixed assets). To increase the
Neoclassical counterrevolution The 1980s resurgence of production of capital goods necessitates a reduction in
neoclassical freemarket orientation toward development the production of consumer goods.
Capital stock The total amount of physical goods existing Endogenous growth theory (new growth theory)
at a particular time that have been produced for use in Economic growth generated by factors within the
the production of other goods and services. production process (e.g., increasing returns or induced
technological change) that are studied as part of a growth
Economic infrastructure The amount of physical and model.
financial capital embodied in roads, railways, waterways,
airways, and other transportation an communications, Complementary investments Investments that
plus other facilities such as water supplies, financial complement and facilitate other productive factors.
institutions, electricity, and public services such as health
and education. Romer endogenous growth model An endogenous
growth model in which technological spillovers are
Production possibility curve A curve on a graph indicating present; the economy-wide capital stock positively affects
alternative combinations of two commodities or output at the industry level, so there may be increasing
categories of commodities (e.g., agricultural and returns to scale at the economy-wide level.
manufactured goods) that can be produced when all the
available factors of production are efficiently employed. Public good An entity that provides benefits to all
Given available resources and technology, the curve sets individuals simultaneously and whose enjoyment by one
the boundary between the attainable and the person in no way diminishes that of anyone else.
unobtainable.

Technological progress Increased application of new

scientific knowledge in the form of inventions and
innovations with regard to both physical and human
capital.

Neutral technological progress Higher output levels

achieved with the same quantity or combination of all
factor inputs.

Laborsaving technological progress The achievement of

higher output using an unchanged quantity of labor
inputs as a result of some invention (e.g., the computer) MODULE 4
or innovation (such as assembly-line production).
Binding constraint The one limiting factor that if relaxed
Capital-saving technological progress Technological would be the item that accelerates growth (or that allows
progress that results from some invention or innovation a larger amount of some other targeted outcome).
that facilitates the achievement of higher output levels Complementarity An action taken by one firm, worker, or
using the same quantity of inputs of capital. organization that increases the incentives for other
agents to take similar actions. Complementarities often
Labor-augmenting technological progress Technological involve investments whose return depends on other
progress that raises the productivity of an existing investments being made by other agents.
quantity of labor by general education, on-thejob training
programs, and so on. Economic agent An economic actor—usually a firm,
worker, consumer, or government official—that chooses
Capital-augmenting technological progress Technological actions so as to maximize an objective; often referred to
progress that raises the productivity of capital by as “agents.”
innovation and inventions.
Big push A concerted, economy-wide, and typically public
Solow residual The proportion of long-term economic policy–led effort to initiate or accelerate economic
growth not explained by growth in labor or capital and development across a broad spectrum of new industries
therefore assigned primarily to exogenous technological and skills.
change.
O-ring model An economic model in which production
functions exhibit strong complementarities among inputs
and which has broader implications for impediments to to ensure compliance or provide incentives to follow the
achieving economic development. wishes of the employer.

Middle-income trap A condition in which an economy Asymmetric information A situation in which one party
begins development to reach middle-income status but is to a potential transaction (often a buyer, seller, lender, or
chronically unable to progress to high-income status. borrower) has more information than another party
Often related to low capacity for original innovation or for
absorption of advanced technology, and may be Linkages Connections between firms based on sales. A
compounded by high inequality backward linkage is one in which a firm buys a good from
another firm to use as an input; a forward linkage is one
Deep intervention A government policy that can move in which a firm sells to another firm. Such linkages are
the economy to a preferred equilibrium or even to a especially significant for industrialization strategy when
higher permanent rate of growth, which can then be self- one or more of the industries (product areas) involved
sustaining so that the policy need no longer be enforced have increasing returns to scale that a larger market takes
because the better equilibrium will then prevail without advantage of.
further intervention.
Poverty trap A bad equilibrium for a family, community,
Congestion The opposite of a complementarity; an action or nation, involving a vicious circle in which poverty and
taken by one agent that decreases the incentives for underdevelopment lead to more poverty and
other agents to take similar actions. underdevelopment, often from one generation to the
next.
Where-to-meet dilemma A situation in which all parties
would be better off cooperating than competing but lack O-ring production function A production function with
information about how to do so. If cooperation can be strong complementarities among inputs, based on the
achieved, there is no subsequent incentive to defect or products (i.e., multiplying) of the input qualities.
cheat.
Information externality The spillover of information—
Prisoners’ dilemma A situation in which all parties would such as knowledge of a production process—from one
be better off cooperating than competing, but once agent to another, without intermediation of a market
cooperation has been achieved, each party would gain transaction; reflects the public good characteristic of
the most by cheating, provided that others stick to information (and susceptibility to free riding)—it is
cooperative agreements—thus causing any agreement to neither fully excludable from other uses, nor nonrival
unravel. (one agent’s use of information does not prevent others
from using it).
Multiple equilibria A condition in which more than one
equilibrium exists. These equilibria sometimes may be Growth diagnostics A decision tree framework for
ranked, in the sense that one is preferred over another, identifying a country’s most binding constraints on
but the unaided market will not move the economy to economic growth.
the preferred outcome.
Social returns The profitability of an investment in which
Pareto improvement A situation in which one or more both costs and benefits are accounted for from the
persons may be made better off without making anyone perspective of the society as a whole.
worse off.

Pecuniary externality A positive or negative spillover

effect on an agent’s costs or revenues.

Technological externality A positive or negative spillover

effect on a firm’s production function through some
means other than market exchange.

Agency costs Costs of monitoring managers and other

employees and of designing and implementing schemes
 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.

Gini coefficient An aggregate numerical measure of

income inequality ranging from 0 (perfect equality) to 1
(perfect inequality). It is measured graphically by dividing
the area between the perfect equality line and the Lorenz
curve by the total area lying to the right of the equality
line in a Lorenz diagram. The higher the value of the
coefficient is, the higher the inequality of income
distribution; the lower it is, the more equal the
distribution of income.

Functional distribution of income (factor share

distribution of income) The distribution of income to
factors of production without regard to the ownership of
the factors.

Factors of production Resources or inputs required to

produce a good or a service, such as land, labor, and
capital.

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.

MODULE 5 Foster-Greer-Thorbecke (FGT) index A class of measures

of the level of absolute poverty.
Summary
Kuznets curve A graph reflecting the relationship
Personal distribution of income (size distribution of between a country’s income per capita and its inequality
income) The distribution of income according to size class of income distribution.
of persons—for example, the share of total income
accruing to the poorest specific percentage or the richest
Character of economic growth The distributive MODULE 6
implications of economic growth as reflected in such
factors as participation in the growth process and asset Crude birth rate
ownership. Death rate
Multidimensional Poverty Index (MPI) A poverty Demographic transition
measure that identifies the poor using dual cutoffs for
levels and numbers of deprivations, and then multiplies Doubling time
the percentage of people living in poverty times the
percent of weighted indicators for which poor households Family-planning programs
are deprived on average. Hidden momentum of
Disposable income The income that is available to population growth
households for spending and saving after personal
income taxes have been deducted. Life expectancy at birth

Asset ownership The ownership of land, physical capital Malthusian population trap
(factories, buildings, machinery, etc.), human capital, and
financial resources that generate income for owners. Microeconomic theory of fertility

Redistribution policies Policies geared to reducing Natural increase

income inequality and expanding economic opportunities Net international migration
in order to promote development, including income tax
policies, rural development policies, and publicly financed Population-poverty cycle
services.
Population pyramid
Land reform A deliberate attempt to reorganize and
transform existing agrarian systems with the intention of Rate of population increase
improving the distribution of agricultural incomes and Replacement fertility
thus fostering rural development.
Reproductive choice
Progressive income tax A tax whose rate increases with
increasing personal incomes. Total fertility rate (TFR)
Regressive tax A tax structure in which the ratio of taxes Under-5 mortality rate
to income tends to decrease as income increases.
Youth dependency ratio
Indirect taxes Taxes levied on goods ultimately purchased
by consumers, including customs duties (tariffs), excise
duties, sales taxes, and export duties.
MODULE 7
Public consumption All current expenditures for
Agglomeration economies
purchases of goods and services by all levels of
government, including capital expenditures on national Congestion
defense and security.
Efficiency wage
Subsidy A payment by the government to producers or
distributors in an industry to prevent the decline of that Harris-Todaro model
industry, to reduce the prices of its products, or to
Induced migration
encourage hiring.
Informal sector
Workfare program A poverty alleviation program that
requires program beneficiaries to work in exchange for Labor turnover
benefits, as in a foodfor-work program.
Localization economies
Present value

Rural-urban migration

Social capital

Todaro migration model

Urban bias

Urbanization economies

Wage subsidy

MODULE 8

Acquired immunodeficiency

syndrome (AIDS)

Basic education

Conditional cash transfer (CCT)

programs

Derived demand

Discount rate

Educational certification

Educational gender gap

Health system

Human capital

Human immunodeficiency virus

(HIV)

Literacy

Neglected tropical diseases

Private benefits

Private costs

Social benefits of education

Social costs of education

World Health Organization

(WHO)