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Chapter 4

Classic Theories

Autarky  A closed economy that attempts to be completely self-reliant.

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).  See marginal product.

Capital-labor ratio  The number of units of capital per unit of labor.  In traditional neoclassical growth theory, lower capital-labor ratios in LDCs should mean higher returns to new investment and greater flows of capital from MDCs to LDCs.  But see new growth theory.

Capital-output ratio  A ratio that shows the units of capital required to produce a unit of output over a given period of time.  See Harrod-Domar growth model.

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).

Center  In dependence theory, the economic developed world.

Closed economy  An economy in which there are no foreign trade transactions or any other form of economic contacts with the rest of the world.  See also autarky and inward-looking development policies.

Comprador groups  In dependence theory, local elites who act as fronts for foreign investors.

Dependence  A corollary of dominance; a situation in which the LDCs have to rely on developed country domestic and international economic policy to stimulate their own economic growth.  Dependence can also mean that the LDCs adopt developed-country education systems, technology, economic and political systems, attitudes, consumption patterns, dress, etc.

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.  See also dependence.

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.

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, overstressed capital accumulation without giving due consideration to needed social and institutional change.

Free market  See market mechanism.

Free-market analysis  Theoretical model of an economy as a component of that economy using price system and market mechanism.

Harrod-Domar growth model  A functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (k), that is, g = s/k.  The model takes its name from a synthesis of analyses of the growth process by two economists, Sir Roy Harrod of Britain and E. V Domar of the United States.

Lewis two-sector model  Theory of development in which surplus labor from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labor, promotes industrialization and stimulates sustained development. Fig. 4.1 & 4.2

Marginal product  The increase in total output resulting from the use of one additional unit of a variable factor of production.  In the Lewis two-sector model, surplus labor is defined as workers whose marginal product is zero.  See also average product.

Market-friendly approach  World Bank notion that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene selectively in the economy in areas where the market is inefficient (e.g., social and economic infrastructure, investment coordination, economic ‘safety net”).

Market mechanism  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.

Necessary condition  A condition that must be present, although it need not be in itself sufficient, for an event to occur.  For example, capital formation is a necessary condition for sustained economic growth (before growth in output can occur, there must be tools to produce it).  But for this growth to continue, social, institutional, and attitudinal changes may have to occur.

Neoclassical counterrevolution  The 1980s resurgence of neoclassical free-market orientation toward development problems and policies; counter to the interventionist dependence revolution of the 1970s.

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.

New political economy approach  See public-choice theory.

Patterns-of-development analysis  See structural-change theory.

Periphery  In dependence theory, the developing countries.  Compare center.

Production function  A technological or engineering relationship between the quantity of a good produced and the quantity of inputs required to produce it.

Public-choice theory  Theory that self-interest guides all individual behavior and that governments are inefficient and corrupt because people use government to pursue their own agendas.  Free markets are perceived as more efficient and more just.

Savings ratio  Savings expressed as a proportion of disposable income over some period of time.  It shows the fraction of national income saved over any period.  Savings ratio is sometimes used synonymously with average propensity to save.  See also Harrod-Domar growth model.

Self-sustaining growth  Economic growth that continues over the long run based on saving, investment, and complementary private and public activities.

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 most long-term economic growth.  Fig. A4.1 & A4.2

Stages-of-growth model of development  A theory of development associated with the American economic historian Walt W. Rostow.  According to Rostow, in achieving development, a country inevitably passes through five stages: (1) the traditional and stagnant low per capita stage, (2) the transitional stage (in which the preconditions for growth are laid down), (3) the takeoff stage (beginning of the economic growth process), (4) the drive-to-maturity stage, and (5) the industrialized, mass production and consumption stage (development stage).

Structural-change theory  The hypothesis that under-development is due to underutilization of resources arising from structural or institutional factors that have their origins in both domestic and international dualistic situations.  Development therefore requires more than just accelerated capital formation as espoused in the stages-of-growth and false-paradigm models of development.

Sufficient condition  A condition that when present causes an event to occur - for example, being a low-income university student may be a sufficient condition to get a loan under a university education loan scheme.  See also necessary condition.

Surplus labor  The excess supply of labor over and above the quantity demanded at the going free-market wage rate.  In W. Arthur Lewis’s two-sector model of economic development, surplus labor refers to the portion of the rural labor force whose marginal productivity is zero or negative.  See also underemployment.

Traditional neoclassical growth theory  Growth models associated with Robert Solow and others in which long-run equilibrium growth is zero and income per capita tends to converge among different countries.  Based on the theory of perfect competition with constant returns to scale.  Compare new growth theory.

Underdevelopment  An economic situation in which there are 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.  See also development.



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