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Chapter 3

Historic Growth and Contemporary Development

In Chapter 3 contains 4 classes of key terms: Values, Factors of Production, Technological Change & Economic Growth.  I will examine each term in alphabetical order.  In each category, please ask what is missing?



Dualism  The coexistence in one place of two situations or phenomena (one desirable and the other one not) that are mutually exclusive to different groups of society - for example, extreme poverty and affluence, modern and traditional economic sectors, growth and stagnation, university education among a few and mass illiteracy.

Modernization ideals  Ideals often regarded as necessary for sustained economic growth.  They include rationality, economic planning, social and economic equalization, and improved institutions and attitudes.

Rationality  One of the behavioral foundations of the theory of traditional economics, holding that an economically rational person will always attempt to maximize satisfaction or profits or minimize costs.  The notion of rationality as one of the modernization ideals means the replacement of age-old traditional practices by modern methods of objective thinking and logical reasoning in production, distribution, and consumption.  See also profit maximization.

Factors of Production

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.  Economic development depends to a large extent on the rate of capital accumulation.

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 (including services).

Human capital  Productive investments embodied in human persons.  These include skills, abilities, ideals, and health resulting from expenditures on education, on-the-job training programs, and medical care.  See also physical capital.

Technological Change

Capital-augmenting technological progress  Technological progress that raises the productivity of capital by innovation and inventions.

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 capital inputs.

Labor-augmenting technological progress  Technological progress that raises the productivity of an existing quantity of labor by general education, on-the-job training programs, etc.  See also labor-saving technological progress.

Labors-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).

Neutral technological progress  Higher output levels achieved with same quantity or combination of all factor inputs.

Research and development (R&D)  Scientific investigation with a view toward improving the existing quality of human life, products, profits, factors of production, or knowledge.  There are two categories of R&D: basic R&D (without a specific commercial objective) and applied R&D (with a commercial objective).

Technological progress  Increased application of new scientific knowledge in form of inventions and innovations with regard to both physical and human capital.  Such progress has been a major factor in stimulating the long-term economic growth of contemporary developed countries.  See also scale-neutral, labor-augmenting, laborsaving, and capital-augmenting technological progress.

Figures: 3.1, 3.2, 3.3, 3.4

Economic Growth

Economic growth  The steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income.

Economic planning A deliberate and conscious attempt by the state to formulate decisions on how the factors of production shall be allocated among different uses or industries, thereby determining how much of total goods and services shall be produced in one or more ensuing periods.  See also economic plan.

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.  See also opportunity cost and production function.

Fig. 3.1: Production Possibility Frontier

Fig. 3.2: Effect of Increase in Capital Stock and Land

Fig. 3.3: Effects of Technological Change on Agriculture

Fig. 3.4: Effects of Technological Change on Industrial Sector

Terms of trade  The ratio of a country’s average export price to its average import price - so known as the commodity terms of trade.  A country’s terms of trade are said to improve when this ratio increases and to worsen when it decreases, that is, when import prices rise at a relatively faster rate than export prices (the experience of most LDCs in recent decades).  See income terms of trade.

Total factor productivity (TFP)  Total monetary value of all units of output per unit of each and every factor of production in an economy.  It is a measure of the average productivity of all factors employed in an economy.


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