Elemental Economics


Todaro & Smith, Economic Development, 8th Ed. , Addison Wesley, 2003



Absolute advantage  If country A can produce more of a commodity with the same amount of real resources than country B (i.e., at a lower absolute Unit cost), country A is, at most, said to have absolute advantage over country B.  See also comparative advantage.

Absolute poverty  A situation where a population or section of a population is, at most, able to meet only its bare subsistence essentials of food, clothing, and shelter to maintain minimum levels of living.  See also international poverty line and subsistence economy.

Absorptive capacity  The ability of a country to absorb foreign private or public financial assistance (to use the funds in a productive manner); also, the capacity of an ecosystem to assimilate potential pollutants - for example, the forests of the earth have a limited capacity to absorb additional CO2 produced as a byproduct of the burning of fossil fuels.

Accounting price  See shadow price.

Adjustment assistance  Public financial assistance provided to workers and industries hurt by imports of lower-priced foreign goods.  Such assistance allows them to “adjust” to a new occupation during a transitional period.

Age structure of the population  The age composition of a given population.  For example, in LDCs, the age structure of the population is typified by a large portion of population under 15 years old, a slightly smaller proportion aged between 15 and 45 years, and a very small proportion above 45 years old.  See population pyramid.

Agency costs  Costs of monitoring managers and other employees (called agents, but in a slightly different sense than its usual definition of independent economic actors) and of designing and implementing schemes to ensure compliance or provide incentives to follow the wishes of the employer.

Agenda 21  The primary document discussed at the United Nations Conference on Environment and Development in June 1992, which outlines the areas for international cooperation in promoting environmentally sustainable growth and development.

Agent  An economic actor, usually a firm, worker, or consumer, but possibly a government official, that chooses actions so as to maximize an objective.

Agglomeration economies  Cost advantages to producers and consumers from location in cities and towns, which take the forms of urbanization economies and localization economies.

Aggregate demand  A measure of the real purchasing power of the community.  Commonly referred to as the total effective demand or total expenditure, it normally comprises private consumption (C), private and public investment (I), government expenditure (G), plus net exports (X-M).

Aggregate growth model  Formal economic model describing growth of the economy in one or at most a few sectors and variables.  Examples include the Harrod-Domar and Solow models.

Agrarian system  The pattern of land distribution, ownership, and management, also the social and institutional structure of the agrarian economy.  Many Latin American and Asian agrarian systems are characterized by concentrations of large tracts of land owned by a few powerful landlords.  Rural development in many LDCs may require extensive reforms of the existing agrarian system.

Agricultural extension services  Services offered to farmers, usually by the government, in the form of transmitting information, new ideas, methods, and advice about, for instance, the use of fertilizers, control of pests and weeds, appropriate machinery, soil conservation methods, and simple accounting, in a bid to stimulate high farm yields.

Agricultural mechanization  The extensive use of machinery in farm production activities, thereby reducing the amount of labor input necessary to produce a given level of output.  See also laborsaving technological progress.

Agricultural sector  The portion of the economy comprising agriculture, forestry, hunting, and fishing.

AID  See United States Agency for International Development and foreign aid.

Aid failure  A situation in which international develop­ment assistance has the effect of retarding development more than facilitating it (or at least assisting development significantly less than it could).  This may be due to the provision of advice that is well meant but, in practice, counterproductive to development objectives (false paradigms).  It also maybe due to the pernicious effects of tied aid, which assists the donor at the expense of the recipient.

AIDS (Acquired Immunodeficiency Syndrome)  A deadly virus that is spreading throughout the developing world and transmitted predominantly through unprotected sexual contact.  It is especially prevalent in Africa.  See also HIV.

Aid weariness  Attitude among some donor-country politicians and populations that foreign aid has been unsuccessful and that they are tired of giving it.

Allocative efficiency  Producing the maximum output possible, given quantities of inputs and using cost-minimizing techniques of production.

Amortization  Gradual payoff of a loan principal.

Andean Group  A customs union formed in 1969 by Bolivia, Colombia, Ecuador, Peru, and Venezuela in an effort to promote economic integration, coordinate industrial development, regulate foreign investment, and maintain a common external tariff among the member countries.

Appropriate technology  Technology that is appropriate for existing factor endowments.  For example, a technology employing a higher proportion of labor relative to other factors in a labor-abundant economy is usually more appropriate than one that uses smaller labor proportions relative to other factors.  See also factor-price distortions and neoclassical price- incentive model.

Asset ownership  The ownership of land, physical capital (factories, buildings, machinery, etc.), human capital, and financial resources that generate income for owners.  The distribution of asset ownership is a major determinant of the distribution of personal income in any non-socialist society.  See also income distribution.

Asymmetric information  A situation in which one party to a potential transaction (often a buyer, seller, lender, or borrower) has more information than another party

Attitude  A state of mind or feeling of an individual, group, or society regarding issues such as material gain, hard work, saving for the future, sharing wealth, etc.  See also values.

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.


Balance of payments  A summary statement of a nation’s financial transactions with the outside world.  See also current account, capital account, and cash account.

Balanced trade  A situation in which the value of a country’s exports and the value of its imports are equal.

Bads  The opposite of goods, that is, something such as garbage that one would pay to remove or eliminate rather than to acquire.

Barter transactions  The trading of goods directly for other goods in economies not fully monetized.

Basic education  The attainment of literacy, arithmetic competence, and elementary vocational skills.

Basic needs  A term used by the International Labor Organization to describe the basic goods and services (food, shelter, clothing, sanitation, education, etc. ) necessary for a minimum standard of living.

Basic transfer  Net foreign-exchange inflow or outflow related to a country’s international borrowing.  The quantitative difference between the net capital inflow (gross inflow minus amortization on past debt) and interest payments on existing accumulated debt.

Big push  A concerted, economy-wide, and probably public policy-led, effort to initiate or accelerate economic development across a broad spectrum of new industries and skills.

Bilateral assistance  See foreign aid.

Biodiversity  The variety of life forms within an ecosystem.

Biomass fuels  Any combustible organic matter that may be used as fuel, such as firewood, dung, or agricultural residues.

Birthrate  See crude birthrate.

Black market  A situation in which there is illegal selling of goods at prices above a legal maximum set by the government.  It occurs due to relative scarcity of the goods concerned and the existence of an excess demand for them at the established price.  See also rationing and exchange control.

Bottlenecks  Sectors in the economy where the development process leads to a more rapid expansion of demand than supply in the goods or factor markets.

Brady Plan  A program, launched in March 1989, designed to reduce the size of outstanding LDC commercial debt through private debt forgiveness procured in exchange for IMF and World Bank debt guarantees and greater LDC adherence to the terms of conditionality.  Named after former U. S. Treasury Secretary Nicholas Brady.

Brain drain  The emigration of highly educated and skilled professional and technical manpower from the developing to the developed countries.

Buffer stocks  Stocks of commodities held by countries or international organizations to moderate the commodities’ price fluctuations.


Calorie requirement  The calories needed to sustain the population at normal levels of activity and health, taking account of its age and sex distributions, average body weights, and physical environment.

Capability  The freedoms that a person has to be or to do, given their personal features and their command over commodities.  See the discussion of Amartya Sen’s approach to defining development in Chapter 1.

Capital  See physical capital and human capital.

Capital account  The portion of a country’s balance of payments that shows the volume of private foreign investment and public grants and loans that flow into and out of a country over a given period, usually one year.  See also current account and cash account.

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

Capital flight  Transfer of funds to a foreign country by a local citizen or business.

Capital-intensive technique  A process of production that uses a higher proportion of capital relative to other factors of production such as labor or land per unit output.

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-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.

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).

Cartel  An organization of producers agreeing to limit the output of their product in an effort to raise prices and profits.

Cash account  The balancing portion of a country’s balance of payments, showing how cash balances (foreign reserves) and short-term financial claims have changed in response to current account and capital account transactions.

Cash crops  Crops produced entirely for the market (e. g. , coffee, tea, cacao, cotton, rubber, pyrethrum, jute, wheat).

Casual employment  Employment on an ad hoc basis without regular hours or a wage contract; most often found in the informal sector.

Center  In dependence theory, the economic developed world.

Central American Common Market (CACM)  An economic union formed in 1960 and disbanded in the 1970s.  It consisted of five Central American nations: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

Central bank  Major financial institution responsible for issuing currency, managing foreign reserves, implementing monetary policy, and providing banking services to the government and commercial banks.

Ceteris paribus  A Latin expression widely used in economics, meaning “all else being equal,” that is, all other variables are held constant.

Character of economic growth  The distributive implications of the process of economic growth; for example, participation in the growth process or asset ownership.  In other words, how that economic growth is achieved and who benefits.

Clean technologies  Technologies that by design produce less waste and use resources more efficiently.

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.

Collective self-reliance  See self-reliance.

Collusion  An agreement among sellers of a commodity (or commodities) to set a common price or share their commodity market.

Commercial bank  A financial institution that provides a wide range of services, including accepting deposits and making loans for commercial purposes.

Commercial policy  Policy encompassing instruments of trade protection employed by countries to foster industrial promotion, export diversification, employment creation, and other desired development-oriented strategies.  They include tariffs, quotas, and subsidies.

Commodity terms of trade  See terms of trade.

Common external tariff  A tariff imposed by members of a customs union, common market, or economic community on imports from nonmembers.

Common market  A form of economic integration in which there is free internal trade, a common tariff and the free movement of labor and capital among partner states.  The European Union is an example.  See also customs union and free-trade area.

Common property resource  A resource that is publicly owned and allocated under a system of unrestricted access.

Comparative advantage  A country has a comparative advantage over another if in producing a commodity it can do so at a relatively lower opportunity cost in terms of the forgone alternative commodities that could be produced.  Taking two countries, A and B, each producing two commodities, X and Y, country A is also said to have comparative advantage in the production of X if its absolute advantage margin is greater or its absolute disadvantage is less in X than in Y.

Complementarity  When complementarities are present, an action taken by one firm, worker, or organization increases the incentives for other agents to take similar actions.  Complementarities often involve investments whose return depends on other investments being made by other agents.

Complementary investments  Investments that complement and facilitate other productive factors - for example, capital with labor, education and training of unskilled workers, pesticides and fertilizer on farmland.

Complementary resources  Factors of production that are necessarily used along with others to produce a given output or to accomplish a specific task; for example, worker-hours of farm labor are complementary to a hectare of land in the production of maize; machinery and equipment are complementary to labor in the construction of a road.

Comprador  A local labor recruiter or purchasing agent employed by a foreign firm.

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

Comprehensive plan  An economic plan that sets targets to cover all the major sectors of the national economy.

Concessional terms  Terms for the extension of credit that are more favorable to the borrower than those available on the money markets.

Conditionality  The requirement imposed by the International Monetary Fund that a borrowing country undertake fiscal, monetary, and international commercial reforms as a condition to receiving a loan for balance of payments difficulties.

Congestion  The opposite of a complementarity; an action taken by one agent that decreases the incentives for other agents to take similar actions.  For example, if most people travel on one highway between two cities, the incentive is present for travelers to try alternate routes.

Consumer surplus  Excess utility over price derived by consumers because of negative sloping demand curve; measured as triangular area under demand curve above price line.

Consumption possibility line  In international free-trade theory, a locus of points showing the highest possible consumption combinations that can be attained as a result of trade.  Graphically, the consumption possibility line is represented by the international price line at its tangency to the domestic production possibility curve of a country.

Coordination failure  A state of affairs in which agents’ inability to coordinate their behavior (choices) leads to an outcome (equilibrium) that leaves all agents worse off than in an alternative situation that is also an equilibrium.

Cost-benefit analysis  A basic tool of economic analysis in which the actual and potential private and social costs of various economic decisions are weighed against actual and potential private and social benefits.  Decisions or projects that yield the highest ratio of benefit to cost are usually thought to be most desirable.  See also project appraisal.

Creditor nation  A nation with a balance of payments surplus.

Crude birthrate  The number of children born alive each year per 1,000 population (a crude birthrate of 20 per 1,000 is the same as a 2% increase).  See also fertility rate and death rate.

Curative medicine  Medical care that focuses on curing rather than preventing disease; requires extensive availability of hospitals and clinics.  See also preventive medicine.

Currency board  Form of central bank that issues domestic currency for foreign exchange at fixed rates.

Currency substitution  The use of foreign currency (e g., U.S. dollars) as a medium of exchange in place of or along with the local currency (e g., Mexican pesos).

Current account  The portion of a balance of payments that portrays the market value of a country’s “visible” (e.g., commodity trade) and “invisible” (e.g., shipping services) exports and imports with the rest of the world.  See also capital account and cash account.

Current account balance  The difference between (1) exports of goods and services plus inflows of unrequited official and private transfers and (2) imports of goods and services plus unrequited transfers to the rest of the world.  Included in this figure are all interest payments on external public and publicly guaranteed debt.

Customs union  A form of economic integration in which two or more nations agree to free all internal trade while levying a common external tariff on all nonmember countries.  See also common market and free-trade area.


Death rate The yearly number of deaths per 1,000 population - an annual crude death rate of 15 per 1,000 would involve 1.5% of the population.  See also crude birthrate and infant mortality rate.

Debt-for-equity swap  A mechanism used by indebted LDCs to reduce the real value of external debt by exchanging equity in domestic companies (stocks) or fixed-interest obligations of the government (bonds) for private foreign debt at large discounts, for example, replacing $100 million of debt obligations with $50 million of equity claims against domestic real assets.

Debt-for-nature swap  The exchange of foreign debt held by an organization for a larger quantity of domestic debt that is used to finance the preservation of a natural resource or environment in the debtor country.

Debtors’ cartel  Group of LDC debtors who join together to bargain as a group with creditors.

Debt renegotiation  Changing the terms of existing loans, usually by extending repayment dates without increases in nominal interest rates.

Debt repudiation  1980s MDC fear that LDCs would decide not to pay debt obligations.

Debt service  The sum of interest payments and repayments of principal on external public and publicly guaranteed debt.

Debt-service ratio  The ratio of interest and principal payments due in a year to export receipts for that year.

Decile  A 10% portion of any numerical quantity; a population divided into deciles would be divided into 10 equal numeric groups.  See also quintile.

Decreasing costs  If increasing returns exist, a given proportionate change in output will require a smaller proportionate change in quantities of factor inputs, thus implying a fall in cost per unit of output.  In short, a fall in average costs of production as output expands.

Deep intervention  A government policy that can move the economy to a preferred equilibrium, or even to a higher permanent rate of growth, that can then be self-sustaining, so that the policy need no longer be enforced, because the better equilibrium will then prevail without further intervention.

Deficit  Excess of expenditures over receipts.  See trade deficit.

Deficit expenditure  Amount by which government expenditure exceeds realized tax revenues.  Deficit expenditure is normally financed by borrowed funds, and its major objective is to stimulate economic activity by increasing aggregate demand.

Deforestation  The clearing of forested land.  Deforestation is generally divided into two broad categories, tropical deforestation, which involves the clearing of dense rain forests in regions with high levels of precipitation, usually for agricultural purposes, and dry forest clearing, which occurs in areas with less precipitation, where most trees are cut for firewood.

Demand curve  A graphical representation of the quantities of a commodity or resource that would be bought over a range of prices at a particular time, when all other prices and incomes are held constant.  When demand curves of all consumers in the market are aggregated, a market demand curve is derived, showing the total amount of goods that consumers are willing to purchase at each price.

Demographic transition  The phasing-out process of population growth rates from a virtually stagnant growth stage characterized by high birthrates and death rates, through a rapid-growth stage with high birthrates and low death rates, to a stable, low-growth stage in which both birth and death rates are low.

Demonstration effects  The effects of transfers of foreign ways of life on nationals of a country.  Such effects are mainly cultural and attitudinal, including consumption habits, modes of dressing, and approaches to education, leisure, and recreation.

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.

Dependency burden  The proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labor force.  In many LDCs, the population under the age of 15 accounts for almost half of the total population, thus posing a burden to the generally small productive labor force and to the government, which has to allocate resources on such things as education, public health, and housing for the consumption of people who don’t contribute to production.

Depreciation  The decline over time in the value or price of one currency in terms of another as a result of market forces of supply and demand.  See devaluation and exchange rate.

Derived demand  Demand for a good that emerges indirectly from demand for another good.  In education, demand for schooling derived from the ultimate demand for modern-sector jobs requiring a school certificate.

Desertification  The transformation of a region into dry barren land with little or no capacity to sustain life without an artificial source of water.  Desertification frequently involves the loss of topsoil, which leads to the permanent loss of cultivability.

Devaluation  A lowering of the official exchange rate between one country’s currency and all other currencies.  See depreciation.

Developed World  The now economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan.  These were the first countries to experience sustained long-term economic growth.

Developing countries  The present countries of Asia, Africa, the Middle East, Latin America and East Europe and the Former Soviet Union, mainly characterized by low levels of living, high rates of population growth, low income per capita, and general economic and technological dependence on developed economies.

Development  The process of improving the quality of all human lives.  Three equally important aspects of development are (1) raising people’s living levels - their incomes and consumption levels of food, medical services, education etc., through relevant economic growth processes; (2) creating conditions conducive to the growth of people’s self-esteem through the establishment of social, political, and economic systems and institutions that promote human dignity and respect; and (3) increasing people’s freedom by enlarging the range of their choice variables, as by increasing varieties of consumer goods and services.

Development banks  Specialized public and private financial intermediaries providing medium- and long-term credit for development projects.

Development economics  The study of how economies are transformed from stagnation to growth and from low-income to high-income status.  See development.

Development plan  The documentation by a government planning agency of the current national economic conditions, proposed public expenditures, likely developments in the private sector, a macroeconomic projection of the economy, and a review of government policies.  Many LDCs publish five-year development plans to announce their economic objectives to their citizens and others.

Diminishing returns  The principle that if one factor of production is fixed and constant additions of other factors are combined with it, the marginal productivity of variable factors will eventually decline.

Direct taxes  Taxes levied directly on individuals or businesses - for example, income tax.  See indirect taxes.

Disposable income  The income that is available to households for spending and saving after personal income taxes have been deducted.

Distributive share index  See GNP growth rate index.  Diversified farming See mixed farming.

Division of labor  Allocation of tasks among workers such that each one engages in tasks that he or she performs most efficiently.  Division of labor promotes worker specialization and thereby raises overall labor productivity.  It has its historical origins in Adam Smith’s Wealth of Nations.

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.

Doubling time  Period that a given population takes to increase by its present size.  Doubling time is approximated by dividing the numerical growth rate into 70 - a population growing at 2% per year will double in size approximately every 35 years.

Dropout rate  Proportion of school-aged children who do not complete a particular school cycle.

Dual exchange rate  Foreign exchange rate system with a highly overvalued and legally fixed rate applied to capital and intermediate good imports and a second, illegal (or freely floating) rate for imported consumption goods.

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.


Earth Summit  See United Nations Conference on Environment and Development (UNCED).

Economic community  Economic union of countries seeking to coordinate fiscal and monetary policies as a step toward a common currency.  This takes place in addition to maintaining a common external tariff and similar commercial policies and to removing restrictions on trade within the community

Economic constraint  A barrier to the attainment of a set target (e.g., economic growth) in a particular period of time.  For example, physical capital has long been thought of as the major constraint on economic growth in LDCs.

Economic efficiency  In production, utilizing factors of production in the least-cost combinations; in consumption, allocating expenditures to maximize consumer satisfaction (utility).

Economic good  Any commodity or service that yields utility to an individual or community and must be paid for in money terms in a monetary economy or in kind in a nonmonetary economy.

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 infrastructure  The underlying amount of physical and financial capital embodied in roads, railways, waterways, airways, and other forms of transportation and communication plus water supplies, financial institutions, electricity, and public services such as health and education.  The level of infrastructural development in a country is a crucial factor determining the pace and diversity of economic development.

Economic integration  The merging to various degrees of the economies and economic policies of two or more countries in a given region.  See also common market, customs union, free-trade area, trade creation, and trade diversion.

Economic plan  A written document containing government policy decisions on how resources shall be allocated among various uses so as to attain a targeted rate of economic growth over a certain period of time.  See economic planning, centralized planning, planning model, and plan implementation.

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.

Economic policy  A statement of objectives and the methods of achieving these objectives (policy instruments) by government, political party busi­ness concern, etc.  Some examples of government economic objectives are maintaining full employment, achieving a high rate of economic growth, reducing income inequalities and regional development inequalities, and maintaining price stability.  Policy instruments include fiscal policy, monetary and financial policy, and legislative controls (e g., price and wage control, rent control).

Economic transition  In Eastern Europe, the structural transformation of highly nationalized socialist economies to privatized capitalist markets.

Economic union  The full integration of two or more economics into a single economic entity See economic integration.

Economic variable  A measure of economic activity such as income, consumption, or price that can take on different quantitative values.  Variables are classified as either dependent or independent in accordance with the economic model being used.  See increasing returns and returns to scale.

Economies of scale Economies of growth resulting from expansion of the scale of productive capacity of a firm or industry, leading to increases in its output and decreases in its cost of production per unit of output.

Educational certification  The phenomenon by which particular jobs require specified levels of education.  Applicants must produce certificates of completed schooling in the formal educational system.

Educational gender gap  Male-female differences in school access and completion.

Effective rate of protection  Degree of protection on value added as opposed to final f.o.b. price of imported product - usually higher than nominal rate of protection.

Efficiency  See allocative efficiency, economic efficiency, and technical efficiency.

Efficiency wage  The notion that modern-sector urban employers pay a higher wage than the equilibrium wage rate in order to attract a higher-quality work-force or to obtain higher productivity on the job.

Elasticity of demand  See price elasticity of demand and income elasticity of demand.

Elasticity of factor substitution  A measure of the degree of substitutability between factors of production in any given production process when relative factor prices change.

Emerging-country stock markets  Equity markets used to finance private corporations in newly industrializing countries (NICs) such as Mexico, Malaysia, and South Korea.

Empowerment of women  The idea that giving women power over their economic, social, and reproductive choices will raise their status, promote development, and reduce population growth.

Enclave economies  LDC economies in which there are small pockets of economically developed regions (often due to the presence of colonial or foreign firms engaged in plantation and mining activities) with the rest of the larger outlying areas experiencing very little progress.  See also dualism.

Endogenous growth theory  Economic growth generated by factors within the production process (e.g., economies of scale, increasing returns, induced technological change) as opposed to outside (exogenous) factors such as increases in population.  See new growth theory.

Enrollment ratios  See gross enrollment ratio and net enrollment ratio.

Environmental accounting  The incorporation of environmental benefits and costs into the quantitative analysis of economic activities.

Environmental capital  The portion of a country’s overall capital assets that directly relate to the environment - forests, soil quality and rangeland.

Equalization (economic and social)  The promotion of more equality in opportunities, status, income, wealth, and general level of living.  See also modernization ideals.

Equilibrium price  The price at which the quantity demanded of a good is exactly equal to the quantity supplied.  It is often referred to as the price at which the market clears itself.

Equilibrium wage rate  The wage rate that equates the demand for and supply of labor, that is, the wage at which all the people who want to work at that wage are able to find jobs and also at which employers are able to find all the workers they desire to employ.  In other words, it is the wage rate that clears the labor market.

Euro  A common European currency adopted by 12 countries of the European Union - Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.  The euro went into circulation on January 1, 2002; local currencies are no longer accepted.

Eurodollars  Dollar deposits of European banks in American ones, or dollar deposits in European banks, which the European banks may use as reserves for dollar loans.

Exchange control  A governmental policy designed to restrict the outflow of domestic currency and prevent a worsened balance of payments position by controlling the amount of foreign exchange that can be obtained or held by domestic citizens.  Often results from overvalued exchange rates.

Exchange rate  The rate at which central banks will exchange one country’s currency for another (i.e., the official rate).  See also overvalued exchange rate and devaluation.

Expected income  In the Todaro migration model, the product of the urban wage rate and the probability of finding an urban job.

Export dependence  A situation in which a country relies heavily on exports as the major source of finance needed for carrying out development activities.  This is the situation of many LDCs, which must export primary products to earn valuable foreign exchange

Export earnings instability  Wide and unpredictable fluctuations in LDC commodity export earnings resulting from low price and income elasticities of demand leading to erratic movements in export prices.

Export incentives  Public subsidies, tax rebates, and other kinds of financial and non-financial measures designed to promote a greater level of economic activity in export industries.

Export promotion  Governmental efforts to expand the volume of a country’s exports through export incentives and other means in order to generate more foreign exchange and improve the current account of its balance of payments.

Exports  The value of all goods and non-factor services sold to the rest of the world; they include mer­chandise, freight, insurance, travel, and other non-factor services.  The value of factor services (such as investment receipts and workers’ remittances from abroad) is excluded from this measure.  See also merchandise exports and imports.

External debt  Total private and public foreign debt owed by a country.

Externality  Any benefit or cost borne by an individual that is a direct consequence of another’s behavior and for which there is no compensation.  Externalities are internalized when adjustments are made such that each individual bears all the costs and benefits of his or her actions.


Factor endowment trade theory  The neoclassical model of free trade, which postulates that countries will tend to specialize in the production of the commodities that make use of their abundant factors of production (land, labor, capital, etc.).  They can then export the surplus in return for imports of the products produced by factors with which they are relatively less endowed.  The basis for trade arises because of differences in relative factor prices and thus domestic price ratios as a result of differences in factor supplies.  See also comparative advantage.

Factor mobility  The unrestricted transference or free voluntary movement of factors of production among different uses and geographic locations.

Factor-price distortions  Situations in which factors of production are paid prices that do not reflect their true scarcity values (i.e., their competitive market prices) because of institutional arrangements that tamper with the free working of market forces of supply and demand.  In many LDCs, the prices paid for capital and intermediate producer goods are artificially low because of special capital depreciation allowances, tax rebates, investment subsidies, etc., while labor is paid a wage above its competitive market value partly because of trade union and political pressures.  Factor-price distortions can lead to the use of inappropriate techniques of production.  See also neoclassical price-incentive model and appropriate technology.

Factor-price equalization  In the factor endowment trade theory, the proposition that because countries trade at a common international price ratio, factor prices among trading partners will tend to be equalized given the assumption of identical technological possibilities for all commodities across countries.  The prices of the more abundantly utilized resources will tend to rise, while those of the relatively scarce factors of production fall.  Over time, international factor payments will tend toward equality; for example, real wages rates for labor will ultimately be the same in Britain and Botswana.

Factor share distribution of income  See functional distribution of income.

Factors of production  Resources or inputs required to produce a good or a service.  Basic categories of factors of production are land, labor, and capital.

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.

Family farms  Mostly small farm plots owned and operated by a single household.

Family-planning programs  Public programs designed to help parents plan and regulate their family size in accordance with their ability to support a family.  The program usually includes supplying contraceptives to the adult population, education on the use of birth control devices, mass-media propaganda on benefits derived from smaller families, and pre- and postnatal health care for mothers.

Fertility rate  The yearly number of children born alive per 1,000 women within the childbearing age bracket (normally between the ages of 15 and 49 years).  See also crude birthrate.  The total fertility rate (TFR) is the number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children at each age in accordance with the prevailing age-specific fertility rates.

Final goods  Commodities that are consumed to satisfy wants rather than passed on to further stages of production.  Whenever a final good is not consumed but is used as an input instead, it becomes an intermediate producer good.

Financial intermediary  Any financial institution, public or private, that serves to channel loanable funds from savers to borrowers.  Examples include commercial banks, savings banks, development banks, and finance companies.

Financial liberalization  Eliminating various forms of government intervention in financial markets, thereby allowing supply and demand to determine the level of interest rates, for example.

Financial repression  The constraints on investment caused by the rationing of credit, usually to a few large borrowers, in financial markets where interest rates and hence the supply of savings are below market-determined levels.

Fixed exchange rate  The exchange value of a national currency fixed in relation to another (usually the U.S. dollar), not free to fluctuate on the international money market.

Fixed inputs  Inputs that do not vary as output varies.  For example, a hectare of land is a fixed input on a small family farm because it can be used to produce different quantities of, say, maize output without its size changing.  See also variable inputs.

Flexible exchange rate  The exchange value of a national currency that is free to move up and down in response to shifts in demand and supply arising from international trade and finance.

Flexible wages  Wages that adjust upward or downward depending on the direction of the forces of demand for and supply of labor - for example, if the demand for labor increases (decreases) or its supply decreases (increases), ceteris paribus, wages will increase (decrease).

Foreign aid  The international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistance agency like the World Bank.  See also tied aid, private foreign investment, and nongovernmental organization.

Foreign direct investment (FDI)  Overseas investments by private multinational corporations.

Foreign exchange  Claims on a country by another held in the form of currency of that country.  The foreign-exchange system enables one currency to be exchanged for (converted into) another, thus facilitating trade between countries.  See also exchange rate and foreign reserves.

Foreign-exchange earnings  The sum total of all foreign currency receipts less expenditures during a given fiscal year.

Foreign-exchange gap  Exists when the planned merchandise trade deficit exceeds the value of capital inflows thus causing output growth to be limited by inadequate foreign exchange.  See savings gap.

Foreign reserves  The total value (usually expressed in dollars) of all gold, currency, and special drawing rights held by a country as both a reserve and a fund from which international payments can be made.

Formal educational system  The organized and accredited school system, with licensed teachers, standard curricula, regular academic years, and recognized certification.  Encompasses primary, secondary, and tertiary educational institutions.  See also nonformal education.

Forster-Greer-Thorbecke (FGT) index  A class of measures of the level of absolute poverty, which include as special cases the headcount ratio and the normalized income shortfall, but in other cases, notably the P2 measure, satisfy all four axioms for desirable poverty measures, including distributional sensitivity

Freedom  A situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants.  See also development.

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.

Free-market exchange rate  Rate determined solely by international supply and demand for domestic currency expressed in terms of, say, U.S. dollars.

Free-rider problem  Situation in which people secure benefits that someone else pays for.

Free trade  Trade in which goods can be imported and exported without any barriers in the forms of tariffs, quotas, or other restrictions.  Free trade has often been described as an engine of growth because it encourages countries to specialize in activities in which they have comparative advantages, thereby increasing their respective production efficiencies and hence their total output of goods and services.

Free-trade area  A form of economic integration in which there exists free internal trade among member countries but each member is free to levy different external tariffs against non-member nations.  See also customs union and common market.

Full employment  A situation in which everyone who wants to work at the prevailing wage rate is able to get a job or, alternatively, a situation in which some job seekers cannot get employment at the going wage rate but open unemployment has been reduced to a desired level (such as 5%).

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

Functionings What people do or can do with the commodities of given characteristics that they come to possess or control (see Chapter 1).


Gains from trade  The increase in output and consumption resulting from specialization in production and free trade with other economic units including persons, regions, or countries.

Gender gap  Any statistical gap between the measured characteristics of men and women in areas such as educational attainment, wage rates, or labor force participation.

General Agreement on Tariffs and Trade (GATF)  An international body set up in 1947 to probe into the ways and means of reducing tariffs on internationally traded goods and services.  Between 1947 and 1962, GATT held seven conferences but met with only moderate success.  Its major success was achieved in 1967 during the so-called Kennedy Round of talks when tariffs on primary commodities were drastically slashed and then in 1994 with the signing of the Uruguay Round agreement.  Replaced in 1995 by World Trade Organization (WTO).

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, the higher the inequality of income distribution; the lower it is, the more equitable the distribution of income.

Global commons  International resources shared by all countries, such as oceans and air.

Global factory  A production facility whose various operations are distributed across a number of countries in order to take advantage of existing price differentials.

Globalization  The increasing integration of national economies into expanding international markets.

Global public goods  Goods (and bads) whose benefits (or costs) reach across national borders, generations, and population groups.  Ozone depletion and greenhouse gas emissions are examples.

Global warming  Theory that world climate is slowly warming as a result of both MDC and LDC industrial and agricultural activities.

Goods See economic good and final goods.

Government failure  Situation in which government intervention in an economy worsens outcomes.

Grant  An outright transfer payment, usually from one government to another (foreign aid); a gift of money or technical assistance that does not have to be repaid.  See also loan and tied aid.

Greenhouse gases  Gases that trap heat within the earth’s atmosphere and can thus contribute to global warming.  See also ozone depletion.

Green revolution  The boost in grain production associated with the scientific discovery of new hybrid seed varieties of wheat, rice, and corn that have resulted in high farm yields in many LDCs.

Gross domestic investment  The outlays for additions to fixed assets of both the private and public sectors plus the net value of inventory changes.  See also investment.

Gross domestic product (GDP)  The total final output of goods and services produced by the country’s economy, within the country’s territory, by residents and nonresidents, regardless of its allocation between domestic and foreign claims.  See also gross national product (GNP).

Gross domestic savings  The amount of gross domestic investment financed from domestic output.  It is calculated as the difference between gross domestic investment and the deficit on current account of goods and non-factor services (excluding net current transfers).  It comprises both public and private savings.  See also savings.

Gross enrollment ratio  The ratio of the number of individuals enrolled in a given level of schooling (e.g. primary school) to the number of children in the age group that typically attends that level.  Ratio can be greater than 100 if older children are attending the primary schools.  See net enrollment ratio.

Gross national income  See national income.

Gross national product (GNP)  The total domestic and foreign output claimed by residents of a country.  It comprises gross domestic product (GDP) plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad.  See also national income.

Group lending schemes  A formal arrangement among a group of potential borrowers to borrow money from commercial or government banks as a single entity and then allocate funds and repay loans as a group, thereby lowering borrowing costs.  See also rotating savings and credit associations.

Group of 7  The seven leading industrialized developed nations (the United States, Canada, Great Britain, France, Germany, Japan, and Italy), who meet annually to discuss global economic issues.

Growth poles  Regions that are more economically and socially advanced than others around them, such as urban centers versus rural areas in LDCs.  Large-scale economic activity tends to cluster around growth poles due to economies of agglomeration and the lower costs of locating an industry in an area where economic infrastructure has been built up.


Hard currency  The currency of a major industrial country, such as the U.S. dollar, the German mark, or the Japanese yen, that is freely convertible into other “soft” currencies.

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.

Headcount index The proportion of a country’s popuation below the poverty line.

Hidden momentum of population growth  A dynamic latent process of population increase that continues even after a fall in birthrates because of a large youthful population that widens the population’s parent base.  Fewer children per couple in the succeeding few generations will not mean a smaller or stable population size because at the same time there will be a much larger number of childbearing couples.  Hence a given population will not stabilize until after two or three generations.

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.

Human Development Index (HDI)  An index measuring national socioeconomic development, based on measures of life expectancy at birth, educational attainment, literacy, and adjusted real per capita income.

Human immunodeficiency virus (HIV)  The virus that causes AIDS.

Human Poverty Index (HPI)  Index measuring deprivation in basic human development in a country.  Variables used are the percentage of people expected to die before age 40, adult illiteracy rate, percentage of people without access to health services and safe water, and percentage of under-weight children 5 years of age.

Human resources  The quantity and quality of a nation’s labor force.

Hybrid seeds  Seeds produced by cross-breeding plants or crops of different species through scientific research.  See also green revolution.


Idea gap  Notion that one explanation for underdevelopment is that LDCs lack knowledge, information, skills, and other attributes of modern production methods in comparison to more developed coun­tries.  See ingenuity gap and object gap.

Imperfect competition  A market situation or structure in which producers have some degree of control over the price of their product.  Examples include monopoly and oligopoly.  See also perfect competition.

Imperfect market  A market where the theoretical assumptions of perfect competition are violated by the existence of, for example, a small number of buyers and sellers, barriers to entry, non-homogeneity of products, and incomplete information.  The three imperfect markets commonly analyzed in economic theory are monopoly, oligopoly, and monopolistic competition.

Import substitution  A deliberate effort to replace major consumer imports by promoting the emergence and expansion of domestic industries such as textiles, shoes, and household appliances.  Import substitution requires the imposition of protective tariffs and quotas to get the new industry started.  See also infant industry.

Income distribution  See functional distribution of income and size distribution of income.

Income effect  The implicit change in real income resulting from the effects of a change in a commodity’s price on the quantity demanded.

Income elasticity of demand  The responsiveness of the quantity demanded of a commodity to changes in the consumer’s income, measured by the proportionate change in quantity divided by the proportionate change in income.

Income gap  The gap between the incomes accruing to the bottom (poor) and the top (rich) sectors of a population.  The wider the gap, the greater the inequality in the income distribution.  Also, the gap between income per capita levels in rich and poor nations.  See Gini coefficient.

Income inequality  The existence of disproportionate distribution of total national income among households whereby the share going to rich persons in a country is far greater than that going to poorer persons (a situation common to most LDCs).  This is largely due to differences in the amount of income derived from ownership of property and to a lesser extent the result of differences in earned income.  Inequality of personal incomes can be reduced by progressive income taxes and wealth taxes.  See also Gini coefficient and Lorenz curve.

Income in kind  A household’s or firm’s income in the form of goods or services instead of in the form of money.  Payments in barter transactions and in subsistence economies are mainly made in kind.

Income per capita  Total gross national product of a country divided by total population.  Per capita income is often used as an economic indicator of level of living and development.  It can, however, be a biased index because it takes no account of income distribution and the ownership of the assets that are employed to generate part of that income.

Income terms of trade  A measure of the relative purchasing power of a country’s exports arrived at by abstracting from relative export price movements.  See terms of trade.

Incomplete information  Notion that LDC markets do not function well because producers and consumers do not possess the requisite information to make efficient decisions.  See imperfect market.

Increasing returns  A disproportionate increase in output that results from a change in the scale of production.  Some industries (e.g., utilities, transportation) are characterized by increasing returns over a wide range of output.  This leads to monopoly situations.  See also economies of scale and returns to scale.

Incremental capital-output ratio (ICOR)  The amount of capital needed to raise output by one unit.

Indirect taxes  Taxes levied on goods purchased by the consumer (and exported by the producer) for which the taxpayer’s liability varies in proportion to the quantity of goods purchased or sold.  Examples of indirect taxes are customs duties (tariffs), excise duties, sales taxes, and export duties.  They are a major source of tax revenue for most LDCs as they are easier to administer and collect than direct taxes (e.g., income and property taxes).

Induced migration  Process in which the creation of urban jobs raises expected incomes and induces more people to migrate from rural areas.  See Todaro migration model.

Industrialization  The process of building up a country’s capacity to process raw materials and to manufacture goods for consumption or further production.

Industrial policy  Deliberate effort by governments to guide the market by coordinating and planning industrial activities.

Infant industry  A newly established industry, usually set up behind the protection of a tariff barrier as a part of a policy of import substitution.  Once the industry is no longer an infant, the protective tariffs are supposed to disappear, but often they do not.

Infant mortality rate  Deaths among children between birth and 1 year of age per 1,000 live births.

Inferior good  A good whose demand falls as consumer incomes rise.  The income elasticity of demand of an inferior good is thus negative.

Inflation  A period of above-normal general price increases as reflected, for example, in the con­sumer and wholesale price indexes.  More generally, the phenomenon of rising prices.  See also cost-push inflation, demand-pull inflation, and structural inflation.

Informal finance  Loans not passed through the formal banking system - for example, family loans.

Informal sector  The part of the urban economy of LDCs characterized by small competitive individual or family firms, petty retail trade and services, labor-intensive methods, free entry, and market-determined factor and product prices.  It often provides a major source of urban employment and economic activity.

Infrastructure  See economic infrastructure.

Ingenuity gap  LDC deficiency compared with MDCs in the capacity to invent and innovate with new or existing technology.  See also idea gap and object gap.

Innovation  The application of inventions of new production processes and methods to production activities as well as the introduction of new products.  Innovations may also include the introduction of new social and institutional methods of organization and management commensurate with modern ways of conducting economic activities.  See modernization ideals.

Input-output model  Formal planning model dividing the economy into sectors and tracing the flow of inter-industry purchases (inputs) and sales (outputs).

Inputs  Goods and services, such as raw materials and hours of labor, used in the process of production.  See also factors of production, physical resources, and human resources.

Institutions  Norms, rules of conduct, and generally accepted ways of doing things.  Social institutions are well-defined, formal organizations of society that govern the way that society operates - for example, the class system, private versus communal ownership, or the educational system.  Political institutions are the systems that govern the operations of the government of a particular society - formal power structures, political parties, and mechanisms for obtaining power.

Integrated rural development  The broad spectrum of rural development activities, including small-farmer agricultural progress; the provision of physical and social infrastructure-i the development of rural non-farm industries; and the capacity of the rural sector to sustain and accelerate the pace of these improvements over time.

Interdependence  Interrelationship between economic and non-economic variables.  Also, in international affairs, the situation in which one nation’s welfare depends to varying degrees on the decisions and policies of another nation, and vice versa.  See also dependence and dominance.

Interest  The payment (or price) for the use of borrowed funds.  See also interest rate and social rate of discount.

Interest rate  The annual amount that a borrower must pay a lender over and above the total amount borrowed, expressed as a percentage of the total amount of funds borrowed - for example, if a person borrowed 100 rupees for one year, at the end of which he or she had to repay 110 rupees, the interest rate would be 10% per annum.

Inter-industry model  See input-output model.

Interlocking factor markets  Factor markets whose supply functions are interdependent, frequently because different inputs are provided by the same suppliers who exercise monopolistic or oligopolistic control over resources.

Intermediate producer goods  Goods that are used as inputs into further levels of production, such as leather in shoe manufacture or iron ore in steel production.  See also final goods.

Internalization  Process whereby external environmental costs are borne by the producers or consumers who generate them, usually through the imposition of pollution or consumption taxes.  See also externality.

Internal rate of return  Discount rate that causes a project to have a net present value of zero.  Used to rank projects in comparison with market rates of interest.

International Bank for Reconstruction and Development (IBRD)  See World Bank.

International commodity agreement  Formal agreement by sellers of a common internationally traded commodity (coffee, sugar) to coordinate supply to maintain price stability.

International Development Association (IDA) An international body set up in 1960 to assist the World Bank in its efforts to promote the econom­ic development of the underdeveloped countries by providing additional capital on a low-interest basis, especially to the poorest of the poor developing countries.

International Finance Corporation (IFC) An international financial institution set up in 1956 to supplement the efforts of the World Bank in providing development capital to private enterprises (mainly industrial) of the underdeveloped countries.

International Labor Organization (ILO)  One of the functional organizations of the United Nations, based in Geneva, Switzerland, whose central task is to look into problems of world labor supply, its training, utilization, domestic and international distribution, etc.  Its aim in this endeavor is to increase world output through maximum utilization of available human resources and thus improve levels of living.

International Monetary Fund (IMF) An autonomous international financial institution that originated in the Bretton Woods Conference of 1944.  Its main purpose is to regulate the international monetary exchange system, which also stems from that conference but has since been modified.  In particular, one of the central tasks of the IMF is to control fluctuations in exchange rates of world currencies in a bid to alleviate severe balance of payments problems.

International poverty line  An arbitrary international real income measure, usually expressed in constant dollars (e.g., $1 per day), used as a basis for estimating the proportion of the world’s population that exists at bare levels of subsistence.

International reserve account  See cash account.

International reserves  A country’s balance of gold, hard currencies, and special drawing rights used to settle international transactions.

Investment  The part of national income or national expenditure devoted to the production of capital goods over a given period of time.  Gross investment is the total expenditure on new capital goods, and net investment is the additional capital goods produced in excess of those that wear out and need to be replaced.

Invisible hand  A concept originating in Adam Smith’s famous book The Wealth of Nations, published in 1776, that holds that the unbridled pursuit of individual self-interest automatically contributes to the maximization of the social interest.  See also laissez-faire and perfect competition.

Inward-looking development policies  Policies that stress economic self-reliance on the part of LDCs, including the development of indigenous appropriate technology, the imposition of substantial protective tariffs and non-tariff trade barriers to promote import substitution, and the general discouragement of private foreign investment.  See also autarky and outward-looking development policies.


Keynesian model   Model developed by Lord John Maynard Keynes in the early 1930s to explain the cause of economic depression and hence the unemployment of that period.  The model states that unemployment is caused by insufficient aggregate demand and can be eliminated by, say, government expenditure that would raise aggregate demand and activate idle or underutilized resources and thus create jobs.

Kuznets curve  A relationship between a country’s income per capita and its equality of income distribution such that as per capita incomes increase, the distribution of income at first worsens and later improves from very low levels.  Named after Nobel laureate Simon Kuznets, who first statistically identified this relationship for developed countries.


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.

Labor force  All economically active persons, including the armed forces and the unemployed, but excluding housewives, students, and economically inactive groups.

Labor-intensive technique  Method of production that uses proportionately more labor relative to other factors of production.  See also capital-intensive technique.

Labor productivity  The level of output per unit of labor input, usually measured as output per worker-hour or worker-year.

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).

Labor turnover model  Theory that the urban-rural wage gap is partly explained by the fact that urban modern-sector employers pay higher wages to reduce labor turnover rates and retain skilled workers.  See efficiency wage.

Laissez-faire  Free-enterprise market capitalism.  See perfect competition.

Landlord  The proprietor of a freehold interest in land with rights to lease out to tenants in return for some form of payment for the use of the land.

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.  Among its many forms, land reform may entail provision of secured tenure rights to the individual farmer, transfer of land ownership away from small classes of powerful landowners to tenants who actually till the land, appropriation of land estates for establishing small new settlement farms, or instituting land improvements and irrigation schemes.

Latifundio  A very large landholding in the Latin American agrarian system, capable of providing employment for over 12 people, owned by a small number of landlords, and comprising a large proportion of total agricultural land.  See also medium-sized farms and minifundio.

Least developed countries (LLDCs)  The poorest LDCs.

Less developed countries (LDC5)  See developing countries.

Levels of living  The extent to which a person, family, or group of people can satisfy their material and spiritual wants.  If they are able to afford only a minimum quantity of food, shelter, and clothing, their levels of living are said to be very low.  If they enjoy a great variety of food, shelter, clothing, and other things, such as good health, education, and leisure, they are enjoying relatively high levels of living.  See development.

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.

Life expectancy at birth  The number of years newborn children would live if subject to the mortality risks prevailing for the cross section of population at the time of their birth.  See also crude birthrate.

Linkage Connections between firms based on sales.  A backward linkage is one in which a firm buys a good from another firm to use as an input; a forward linkage is one in which a firm sells to another firm.  Such linkages are especially significant for industrialization strategy when one or more of the sectors involved have increasing returns to scale that a larger market takes advantage of.

Literacy  The ability to read and write.

Literacy rate  The percentage of the population age 15 and over able to read and write.  Literacy rates are often used as one of the many social and economic indicators of the state of development of a country.

Loan  A transfer of funds from one economic entity to another (government to government, individual to individual, bank to individual) that must be repaid with interest over a prescribed period of time.  Hard loans are given at market rates of interest; soft loans are given at concessional or low rates of interest.  See also grant.

Loan pushing  Attempts by commercial banks to induce developing countries to accept more loans than they would prefer to.  This can sometimes be accomplished by offering a take-it-or-leave-it package of both a loan amount and an interest rate.  Such an offer may induce more borrowing than the country would prefer at that interest rate, but still considers itself better off than with no borrowing.

Localization economies  Agglomeration effects captured by particular sectors of the economy, such as finance or autos, as they grow within an area.

Lorenz curve  A graph depicting the variance of the size distribution of income from perfect equality.  See also Gini coefficient.

Low-income countries (LIC5)  Countries with a gross national income per capita of less than $755 in 2000.


Macroeconomic instability  Situation in which country has high inflation accompanied by rising budget and trade deficits and a rapidly expanding money supply.

Macroeconomics  The branch of economics that considers the relationships among broad economic aggregates such as national income, total volumes of saving, investment, consumption expenditure, employment, and money supply.  It is also concerned with determinants of the magnitudes of these aggregates and their rates of change over time.  See also Keynesian model

Macroeconomic stabilization  Policies designed to eliminate macroeconomic instability.

Malnutrition  A state of ill health resulting from an inadequate or improper diet, usually measured in terms of average daily protein consumption.

Malthusian population trap  An inevitable population level envisaged by Thomas Malthus (1766- 1834) at which population increase was bound to stop because after that level, life-sustaining resources, which increase at an arithmetic rate, would be insufficient to support human population, which increases at a geometric rate.  Consequently, people would die of starvation, disease, wars, etc.  The Malthusian population trap therefore represents the maximum population size that can be supported by the available resources.

Marginal cost  The addition to total cost incurred by the producer as a result of varying output by one more unit.

Marginal net benefit  The benefit derived from the last unit of a good minus its cost.

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.

Marginal utility  The satisfaction derived by consuming one additional unit of a good.  In neoclassical theory, a consumer’s marginal utility is said to be maximized if his or her marginal utility per last unit of expenditure on that good is equal to the marginal utilities of all other goods consumed, divided by their respective prices.

Market economy  A free private-enterprise economy governed by consumer sovereignty, a price system, and the forces of supply and demand.

Market failure  A phenomenon that results from the existence of market imperfections (e.g., monopoly power, lack of factor mobility, significant externalities, lack of knowledge) that weaken the functioning of a free-market economy - it fails to realize its theoretical beneficial results.  Market failure often provides the justification for government interference with the working of the free market.

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.

Market prices  Prices established by demand and supply in a free-market economy.

Medium-sized farm  Multifamily farms in Latin America employing 4 to 12 workers.  See also minifundio and latifundio.

Merchandise exports and imports  All international changes in ownership of merchandise passing across the customs borders of the trading countries.  Exports are valued f.o.b.  (free on board).  Imports are valued c.i.f.  (cost, insurance, and freight).

Merchandise trade balance  Balance on commodity exports and imports.

Microeconomics  The branch of economics concerned with individual decision units - firms and households - and the way in which their decisions interact to determine relative prices of goods and factors of production and how much of these will be bought and sold.  The market is the central concept in microeconomics.  See also price system and traditional economics.

Microeconomic theory of fertility  An extension of the theory of consumer behavior of individual couples.  The central proposition of this theory is that family formation has costs and benefits and hence the size of families formed will depend on these costs and benefits.  If the costs of family formation are high relative to its benefits, the rates at which couples will decide to bring forth children will decline, and vice versa.  See also opportunity cost of a woman’s time, fertility rate, and crude birthrate.

Middle-income countries (MICs)  LDCs with per capita income above $755 and below $9,265 in 2000 according to World Bank measures.

Minifundio   A landholding in the Latin American agrarian system considered too small to provide adequate employment for a single family.  A minifundio is too small to provide the workers with levels of living much above the bare survival minimum.  Holders of minifundios are often required to provide unpaid seasonal labor to latifundios and to seek outside low-paid employment to supplement their meager incomes.  See also latifundio and medium-sized farm.

Mixed economic systems  Economic systems that are a mixture of both capitalist and socialist economies.  Most developing countries have mixed systems.  Their essential feature is the coexistence of substantial private and public activity within a single economy.

Mixed farming  The first step in the transition from subsistence to specialized farming.  This evolutionary stage is characterized by the production of both staple crops and cash crops and, in addition, simple animal husbandry.

Model  An analytic framework used to portray functional relationships among economic factors.

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.

Monetary policy  Activities of a central bank designed to influence financial variables such as money supply and interest rates.

Moneylender  In Asia, a person who lends money at higher than market rates of interest to peasant farmers to meet their needs for seeds, fertilizers, and other inputs.  Activities of moneylenders are often unscrupulous and can accentuate landless-ness among the rural poor.

Money supply  Sum total of currency in circulation plus commercial bank demand deposits and sometimes savings bank time deposits.

Monopolistic market control  A situation in which the output of an industry is controlled by a single producer (or seller) or by a group of producers who make joint decisions.

Monopoly  A market situation in which a product that does not have close substitutes is being produced and sold by a single seller.  See also perfect competition and oligopoly.

More developed countries (MDCs)  See developed world.

Mortality  See death rate.

Multi-fiber arrangement (MFA)  A set of non-tariff bilateral quotas established by developed countries on imports of cotton, wool, and synthetic textiles and clothing from individual LDCs

Multilateral assistance agency  See foreign aid.

Multinational corporation (MNC)  An international or transnational corporation with headquarters in one country but branch offices in a wide range of both developed and developing countries.  Examples include General Motors, Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum, Exxon, and Sony.

Multiple equilibria  A condition in which more than one equilibrium exists.  These equilibria may be ranked, in the sense that one is preferred to an-other, but the unaided market will not move the economy to the preferred outcome.


National income  Total monetary value of all final goods and services produced in an economy over some period of time, usually a year.  See also gross national product (GNP).

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.

Necessity goods  Life-sustaining items (food, shelter, protection, medical care).

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

Neoclassical economics  See traditional economics.

Neoclassical price-incentive model  A model whose main proposition is that if market prices are to influence economic activities in the right direction, they must be adjusted to remove factor-price distortions by means of subsidies, taxes, or the like so that factor prices may reflect the true opportunity cost of the resources being used.  See also appropriate technology.

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.

Net enrollment ratio  The ratio of the number of children actually attending school to the number of school-age children in the population.  See gross enrollment ratio.

Net international migration  Excess of persons migrating into a country over those who emigrate from that country.  See brain drain.

Net present value  Value of a future stream of net benefits discounted to the present by means of a competitive discount (interest) rate.

Network effects (or network externalities)  A situation in which the value of a product or service depends positively on the number of other users.  An example is e-mail.

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

New growth theory  Also known as endogenous growth theory, an extension and modification of the traditional growth theory designed to explain why long-run equilibrium growth can be positive and divergent among countries and why capital tends to flow from poor to rich countries despite the formers low capital-labor ratios.  Compare traditional (neoclassical) growth theory.  See endogenous growth.

New institutionalism  Recent revival of the notion that institutions matter significantly in economic development.

Newly industrializing countries (NICs)  A small group of countries at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance, and investment system (Argentina, Brazil, Greece, Mexico, Portugal, Singapore, South Korea, Spain, and Taiwan).

New political economy approach  See public-choice theory.

New protectionism  Wide range of non-tariff trade barriers erected by developed countries against the manufactured exports of developing nations; typically as quotas or “voluntary” export restrain by LDCs.  See Multifiber arrangement (MFA).

Nominal rate of protection  Ad valorem percentage tariff levied on imports.  See effective rate of protection.

Non-economic variables  Elements of interest to economists in their work but not given a monetary value or expressed numerically because of their intangible nature.  Sometimes non-economic variables such as educational, health, cultural, political, and institutional factors are more important than the quantifiable economic variables in promoting development.

Non-formal education  Any non-school-based program that provides basic skills and training to individuals.  Examples include adult education, on-the-job training programs, and agricultural and other extension services.  Compare formal education system.

Nongovernmental organizations (NGOs)  Privately owned and operated organizations involved in providing financial and technical assistance to LDCs.  See foreign aid.

Nonrenewable resources  Natural resources whose quantity is fixed and cannot be replaced.  Examples include petroleum, iron ore, and coal.  Compare renewable resources.

Non-tariff trade barrier  A barrier to free trade that takes a form other than a tariff, such as quotas or sanitary requirements for imported meats and dairy products.

Normal and superior goods  Goods whose purchased quantities increase as the incomes of consumers increase.  Such goods have a positive income elasticity of demand.  Compare inferior goods.

Normative economics  The notion that economics must concern itself with what “ought to be.” Thus it is argued that economics and economic analysis always involve value judgments, whether explicit or implicit, on the part of the analyst or observer.  See positive economics.

North-South trade models  Trade and development models that focus on the unequal exchange between the North (MDC5) and the South (LDCs) and attempt to show theoretically why the South gains less from trade than the North.


Object gap  Notion that LDCs suffer from a lack of material items including roads, buildings, machinery, etc. , in comparison with developed countries.  See idea gap

Official development assistance (ODA)  Net disbursements of loans or grants made on concessional terms by official agencies of member countries of the Organization for Economic Cooperation and Development (OECD).

Official exchange rate  Rate at which the central bank will buy and sell the domestic currency in terms of a foreign currency such as the U.S. dollar.

Oligopolistic market control A situation in which a small number of rival but not necessarily competing firms dominate an industry.  All recognize the fact that they are interdependent and can maximize their individual advantages through explicit (cartel) or implicit (collusion) joint actions.

Oligopoly  A market situation in which there are a few sellers and many buyers of similar but differentiated products.  The Organization of Petroleum Exporting Countries (OPEC) is a good example of international oligopoly.  See also imperfect competition.

Open economy  An economy that encourages foreign trade and has extensive financial and non-financial contacts with the rest of the world in areas such as education, culture, and technology.  See also closed economy and outward-looking development policies.

Opportunity cost  In production, the real value of resources used in the most desirable alternative -  for example, the opportunity cost of producing an extra unit of a manufactured good is the output of, say, food that must be forgone as a result of transferring resources from agricultural to manufacturing activities.  In consumption, the amount of one commodity that must be forgone in order to consume more of another.

Opportunity cost of a woman’s time  Real or monetary wages or profits that a woman sacrifices by deciding to stay home and raise children instead of working for a wage or engaging in profit-making self-employment activities.  The higher the opportunity cost of a woman’s time involved in rearing children, the more unwilling she will be to have more children, at least in terms of the microeconomic theory of fertility.

Opportunity cost of education  Lost income from paid employment during the time when an individual attends school.

0-ring production function  A production function with strong complementarities among inputs, given by the products of the input qualities.  It emphasizes the idea that in advanced economies, many tasks and activities must be done well in order for any of them to have adequate value.

Organization for Economic Cooperation and Development (OECD)  An organization of 20 countries from the Western world, including all of those in Europe and North America.  Its major objective is to assist the economic growth of its member nations by promoting cooperation and technical analysis of national and international economic trends.

Organization of Petroleum Exporting Countries (OPEC)  An organization consisting of 13 major oil-exporting countries of the developing countries that acts as a cartel or oligopoly to promote their joint national interests.  Members are Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.

Organized money market  The formal banking system in which loanable funds are channeled through recognized and licensed financial intermediaries.  See also unorganized money market.

Outward-looking development policies  Policies that encourage free trade-, the free movement of capi­tal, workers, enterprises, and students; a welcome to multinational corporations; and an open system of communications.  See also open economy.

Overvalued exchange rate  An official exchange rate set at a level higher than its real or shadow value -  for example, 7 Kenyan shillings per dollar instead of, say, 10 shillings per dollar.  Overvalued rates cheapen the real cost of imports while raising the real cost of exports.  They often lead to a need for exchange control.

Ozone  A highly reactive gas, O3, that absorbs harmful ultraviolet rays in the upper atmosphere but is an important contributor to smog in the lower atmosphere.

Ozone depletion  The loss of ozone resulting from atmospheric pollution especially from carbon monoxide pollution.  See also greenhouse gases.


Paradigm Implicit  assumptions from which theories evolve; a model or framework of analysis.

Parallel exchange rate  See dual exchange rate.

Pareto improvement  A situation in which one or more persons may be made better off without making anyone worse off.  Alternatively, it is a situation in which all persons are made better off.

Pareto optimal  A situation in which no one may be made better off without making someone else worse off.

Paris Club  A group formed by representatives from industrialized creditor nations with substantial outstanding debt owed them by developing countries.  Their mandate was to restructure the bilateral debt of highly indebted countries.

Path dependency  A condition in which the past condition of an individual or economy, measured by the level of a variable(s), affects future conditions.

Partial plan  A plan that covers only a part of the national economy (e.g., agriculture, industry, tourism).

Patron  In Latin America, a landlord to whom sharecroppers and other workers owe an economic and often political and social allegiance.

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

Pecuniary externality  A positive or negative spillover effect on an agent’s costs or revenues.

Per capita agricultural production  Total agricultural output, both food and fiber, divided by total population.

Per capita GNP  See income per capita.

Perfect competition  A market situation characterized by the existence of very many buyers and sellers of homogeneous goods or services with perfect knowledge and free entry so that no single buyer or seller can influence the price of the good or service.  See also laissez-faire, and traditional economics.

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

Personal distribution of income  See size distribution of income.

Physical capital  Tangible investment goods (e.g., plant and equipment, machinery, buildings).  See also human capital.

Physical resources  The non-human factors of production (land and capital) used to produce goods and services to satisfy wants.

Planning model  A mathematical model (e.g., an input-output model or macro planning model) designed to simulate quantitatively the major features of the economic structure of a particular country.  Planning models provide the analytic and quantitative basis for most national and regional development plans.

Planning process  Procedure for drawing up and carrying out a formal economic plan.

Policy instruments  See economic policy.

Political economy  The attempt to merge economic analysis with practical politics - to view economic activity in its political context.  Much of classical economics was political economy, and today political economy is increasingly being recognized as necessary for any realistic examination of development problems.

Political will  A determined effort by persons in political authority to achieve certain economic objectives, such as elimination of inequality, poverty, and unemployment through various reforms of social, economic, and institutional structures.  Lack of political will is often said to be one of the main obstacles to development and one of the main reasons for the failure of many development plans.

Pollution tax  Tax levied on quantity of pollutants released into the physical environment.

Population density  The number of inhabitants per unit area of land (e. g. , per square kilometer).

Population-poverty cycle  Theory to explain how poverty and high population growth become reinforcing.

Population pyramid  Graphical depiction of the age structure of the population, with age cohorts plotted on the vertical axis and numbers of males and females in each cohort on the horizontal axis.

Portfolio investment  Financial investments by private individuals, corporations, pension funds, and mutual funds in stocks, bonds, certificates of deposit, and notes issued by private companies and the public agencies of LDCs.  See also private foreign investment.

Positive checks  In Malthusian theory, the effects of war, disease, and famine in controlling excess population growth.

Positive economics  The notion that economics should be concerned with what is, was, or will be, with answers to economic questions based on facts or empirical observation.  See also normative economics.

Poverty  See absolute poverty.

Poverty gap  The sum of the difference between the poverty line and actual income levels of all people living below that line.

Poverty line  See international poverty line.

Poverty-weighted index  Welfare index in which income gains for lower income groups are given greater weight than gains for upper income groups.

Poverty trap  A bad equilibrium for a family, community or nation, involving a vicious cycle in which poverty and underdevelopment breed more poverty and underdevelopment, often from one generation to the next.

Prebisch-Singer thesis  The argument that the primary-product export orientation of LDCs results in a decline in their terms of trade and a loss of income.

Present value  The discounted value at the present time of a sum of money to be received in the future.

Preventive checks  In Malthusian theory, the effects of delayed marriage, sexual abstinence, and birth control in controlling excess population growth.

Preventive medicine  Medical care that focuses on the prevention of sickness and disease through immunology and health education.  See also cura­tive medicine.

Price  The monetary or real value of a resource, commodity, or service.  The role of prices in a market economy is to ration or allocate resources in accordance with supply and demand; relative prices should reflect the relative scarcity of different resources, goods, or services.

Price bands  A fixed range in which prices are free to fluctuate, but not allowed to exceed.

Price elasticity of demand  The responsiveness of the quantity of a commodity demanded to a change in its price, expressed as the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of supply  The responsiveness of the quantity of a commodity supplied to a change in its price, expressed as the percentage change in quantity supplied divided by the percentage change in price.

Price-incentive micro model  See neoclassical price-incentive model.

Primary industrial sector  The part of the economy that specializes in the production of agricultural products and the extraction of raw materials.  Major industries in this sector include mining, agriculture, forestry, and fishing.

Primary products  Products derived from all extractive occupations - farming, lumbering, fishing, mining, and quarrying; foodstuffs and raw materials.

Prisoners’ dilemma  A situation in which all parties would be better off cooperating than competing, but, given that cooperation has been initially achieved, each party would gain the most by cheating while others stick to the cooperative agreements.

Private benefits  Gains that accrue to a single individual, such as profits received by an individual farm.  See also social benefits.

Private benefits of education  Benefits that accrue directly to a student and his or her family.

Private consumption  The market value of all goods and services purchased or received as income in kind by households and nonprofit institutions; includes imputed rent for owner-occupied dwellings.

Private costs  The direct monetary outlays or costs of an individual economic unit; the private costs of a firm are the direct outlays on fixed and variable inputs of production.

Private costs of education  Direct and opportunity costs borne by a student and his or her family.

Private foreign investment  The investment of private foreign funds in the economy of a developing nation, usually by multinational corporations (MNCs).  See also foreign aid and portfolio investment.

Private sector  The part of an economy whose activities are under the control and direction of non-governmental economic units such as households or firms.  Each economic unit owns its own resources and uses them mainly to maximize its own well-being.

Privatization  Selling public assets (corporations) to individuals or private business interests.  See state-owned enterprises (SOEs).

Producer surplus  Excess of total revenue over total costs (profits); also referred to as scarcity rent.

Product cycle  In international trade, the progressive replacement of MDCs by LDCs in the production of manufactures of increasing complexity.  For example, South Korea and Taiwan first exported textiles, then machinery, and now VCRs and computers.

Product differentiation  Attempt by producers to distinguish their product from similar ones by advertising or minor design changes.

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

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.

Production technique  Method of combining inputs to produce the required output.  A production technique is said to be appropriate (“best”) if it produces a given output with the least cost (thus being economically efficient) or with the least possible quantity of real resources (technically efficient).  A technique may be labor-intensive or capital-intensive.

Productive resources  See physical resources and human resources.

Productivity gap  The difference between per capita product of, say, the agricultural population (i.e., agricultural labor productivity) in LDCs versus developed countries.  It has tended to be wide because of differences in the application of technological and biological improvements.

Profit  The difference between the market value of output and the market value of inputs employed to produce the output.  Also, the difference between total revenue and total cost.

Profit maximization  Making the profits of a firm or a farm as large as possible.  Producers often want to find the level of output that results in maximum profits, at least according to a fundamental assumption of traditional economics.

Progressive income tax  A tax whose rate increases with increasing personal incomes, such that the propor­tion of personal income paid in taxes by a rich person is higher than that paid by a poorer person.  A progressive tax structure therefore tends to improve income distribution.  Compare regressive tax.

Project appraisal  The quantitative analysis of the relative desirability (profitability) of investing a given sum of public or private funds in alternative projects - for example, building either a steel mill or a textile factory.  Cost-benefit analysis is the main analytic tool of project appraisal.

Property rights  Legal titles given to landowners enabling them freely to buy and sell their plots, and other rights to use, gain income from, or sell property.

Public bad  An entity that imposes costs on individuals.  Compare public good.

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.

Public consumption  All current expenditures for purchases of goods and services by all levels of government; includes capital expenditures on national defense and security.

Public development assistance  See foreign aid.

Public good  An entity that provides benefits to all individuals simultaneously and whose enjoyment by one person is in no way diminished by that of another.  Compare public bad.

Public sector  The portion of an economy whose activities (economic and non-economic) are under the control and direction of the state.  See also private sector.

Purchasing power equivalent  The real buying power of a given monetary income.

Purchasing power parity (PPP)  The purchasing power of a country’s currency: the number of units of that currency required to purchase the same basket of goods and services that a U.S. dollar would buy in the United States.


Quintile  A 20% proportion of any numeric quantity.  A population divided into quintiles would be divided into five equal numeric groups.  See also decile.

Quota  A physical limitation on the quantity of any item that can be imported into a country, such as so many automobiles per year.  Also a method for allocating limited school places by noncompetitive means - for example, by income or ethnicity.


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.

Rationing  A system of distribution employed to restrict the quantities of goods and services that consumers or producers can purchase or be allocated freely.  It arises because of excess demand and inflexible prices.  Rationing can be done by coupons, points, or simply administrative decisions with regard to commodities, by academic credentialing with regard to job allocation, by industrial licenses with regard to capital good imports, etc.  See also black market.

Recession  A period of slack general economic activity as reflected in rising unemployment and excess productive capacity in a broad spectrum of industries.

Redistribution policies  Policies geared to reducing income inequality and expanding economic opportunities in order to promote development.  Examples include progressive income tax policies, provision of services financed out of such taxation to benefit persons in the lower-income groups, rural development policies giving emphasis to raising levels of living for the rural poor through land reform, and other forms of asset and wealth redistribution.

Regional trading bloc  An economic coalition among countries within a geographic region, usually characterized by liberalized internal trade and uniform restrictions on external trade, designed to promote regional economic integration and growth.

Regressive tax  A tax structure in which the ratio of taxes to income tends to decrease as income increases.  Relatively poor people will pay a larger proportion of their income in taxes than relatively rich people.  A regressive tax therefore tends to worsen income distribution.  See also progressive tax.

Renewable resources  Natural resources that can be replaced so that the total supply is not fixed for all time.  Examples include timber and other forest products.  See also nonrenewable resources.

Rent  In macroeconomics, the share of national income going to the owners of the productive resource, land (i.e., landlords).  In everyday usage, the price paid for the use if property (e. g. , buildings, housing).  In microeconomics, economic rent is the payment to a factor of production over and above its highest opportunity cost.

Rent seeking  Efforts by individuals and businesses in an LDC society to capture the economic rent arising from price distortions and physical controls caused by excessive government intervention, such as licenses, quotas, interest rate ceilings, and exchange control.

Replacement fertility  The level of fertility at which childbearing women have just enough daughters to replace themselves in the population.  This keeps the existing population size constant through an infinite number of succeeding generations.  See also fertility rate and crude birthrate.

Reproductive choice  Argument that women should be able to determine on an equal status with their husbands and for themselves how many children they want and what methods to use to achieve their desired family size.  See empowerment of women.

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).

Reserves  The sum of a country’s holdings of gold, special drawing rights (SDR5), the reserve position of International Monetary Fund members in the IMF, and holdings of foreign exchange under the control of monetary authorities.  Also known as gross international reserves.

Resource endowment  A nation’s supply of factors of production.  Normally such endowments are supplied by nature (e.g., mineral deposits, raw materials, timber forests, labor).  See also factor endowment trade theory.

Resources  See physical resources and human resources.  See also fixed inputs and variable inputs.

Restructuring  Alteration of the terms and conditions of LDC debt repayment, usually by lowering interest rates or extending the repayment period.

Returns to scale  How much output expands when all inputs are proportionately increased.  See economies of scale and increasing returns.

Risk  A situation in which the probability of obtaining some outcome of an event is not precisely known; that is, known probabilities cannot be precisely assigned to these outcomes, but their general level can be inferred.  In everyday usage, a risky situation is one in which one of the outcomes involves some loss to the decision maker (e.g., changes of demand, weather, or tastes).  See also uncertainty.

Romer endogenous growth model  An endogenous growth model in which technological spillovers are present; the economy wide capital stock positively affects output at the industry level, so that there may be increasing returns to scale at the economy wide level.

Rotating savings and credit associations  A formal agreement among 40 to 50 individuals to pool their savings and allocate interest-free loans on a rotating basis to each member.  See also group lending schemes.

Rural development  See integrated rural development.

Rural-urban migration  The movement of people from rural villages, towns, and farms to urban centers (cities) in search of jobs.  See Todaro migration model.

Rural-urban migration models  See Todaro migration model.


Savings  The portion of disposable income not spent on consumption by households plus profits retained by firms.  Savings are normally assumed to be positively related to the level of income (personal or national).

Savings gap  Exists where capital inflows plus domestic saving exceeds domestic investment and the economy is at full capacity.  See also foreign exchange gap.

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.

Scale-neutral  Unaffected by size; applied to technological progress that can lead to the achievement of higher output levels irrespective of the size (scale) of a firm or farm, making it equally applicable to small- and large-scale production processes.  An often-cited example is the hybrid seeds of the green revolution, which can theoretically increase yields on both small and large farms (if complementary resources such as fertilizer, irriga­tion, and pesticides are available).

Scarcity  In economics, a situation that arises when there is less of something (e.g., an economic good, service, or resource) than people would like to have if it were free.  The quantity of goods and services are scarce relative to people’s desire for them because the economy’s resources used in their production are themselves scarce.  Scarcity therefore gives rise to price and the need for efficient allocation of resources among alternative competing uses through, for example, the free market in capitalist economies or through a centralized command system in planned economies.

Scarcity rent  The premium or additional rent charged for the use of a resource or good that is in fixed or limited supply.  See rent seeking.

Scatter diagram  A two-dimensional graph on which numerical values of statistically observed variables are plotted in pairs, one measured on the horizontal axis and the other on the vertical axis.

Secondary industrial sector  The manufacturing portion of the economy, which uses raw materials and intermediate producer goods to produce final goods or other intermediate products.  Industries such as motor assembly, textiles, and building and construction are part of this sector.

Self-esteem  The feeling of worthiness that a society enjoys when its social, political, and economic systems and institutions promote human respect, dignity, integrity, self-determination, etc.  See development.

Self-reliance  Reliance on one’s own capabilities, judgment, resources, and skills in a bid to enhance political, economic, social, cultural, attitudinal, and moral independence.  Countries may also desire self-reliance in particular aspects such as food production, labor, and skills.  Increasingly, the concept of collective self-reliance is being used in developing-country forums.

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

Services   Economic activities other than industry and primary-goods production.  Examples include banking, shipping, and tourism and legal, insurance, and financial activities.  See also tertiary industrial sector.

Shadow price  A price that reflects the true opportunity cost of a resource.

Sharecropper  In the agrarian systems of LDCs, the tenant peasant farmer whose crop has to be shared with the landlord, who usually appropriates a large portion of total crop production.

Shifting cultivation  A peasant agricultural practice in Africa in which land is tilled by a family or community for cropping until such time as it has been exhausted of fertility.  Thereafter, the family or community moves to a new parcel of land, leaving the former one to regain fertility until eventually it can be cultivated again.

Size distribution of income  The distribution of income according to size class of persons - for example, the share of total income accruing to, say, the poorest 40% of a population or the richest 10%, without regard to the sources of that income (whether it comes from wages, interest, rent, or profits).  See also functional distribution of income, Lorenz curve, and Gini coefficient.

Social benefits  Gains or benefits that accrue or are available to the society as a whole rather than solely to a private individual, such as the protection and security provided by the police or the armed forces, the external economies afforded by an effective health delivery system, and the widespread benefits of a literate population.  See private benefits.

Social benefits of education  Benefits of the schooling of individuals that accrue to the entire society, such as better government financing, improved teacher training, and a more literate workforce and citizenry.

Social capital  The productive value of a set of social institutions and norms, including group trust, expected cooperative behaviors with predictable punishments for deviations, and a shared history of successful collective action, that raises expectations for participation in future cooperative behavior.

Social cost  The cost of an economic decision, whether private or public, to society as a whole.  Where there exist external diseconomies of production (e.g., pollution) or consumption (alcoholism), social costs will normally exceed private costs, and decisions based solely on private calculations will lead to misallocation of resources.

Social costs of education  Costs borne by society from private education decisions, such as high educated unemployment.

Social indicators  Non-economic measures of development, such as life expectancy at birth, infant mortality rate, literacy rate, and physicians per 100,000 population.

Socialism  See command socialism and market socialism.

Social profit  Difference between social benefits and social costs, both direct and indirect.

Social rate of discount  The rate at which a society discounts potential future social benefits to find out whether such benefits are worth their present social cost.  The rate used in this discounting procedure is usually the social opportunity cost of the funds committed.

Social safety net  A set of government programs such as food stamps, welfare payments, free health clinics, and unemployment insurance designed to provide the absolute poor with a minimal level of living below which they should not fall.

Social system  The organizational and institutional structure of a society, including its value premises, attitudes, power structure, and traditions.  Major social systems include political processes, religions, and ethnic divisions.

Soil erosion  Loss of valuable top soils resulting from deforestation and consequent flooding of productive farm lands.

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.

Solow residual  The proportion of long-term economic growth not explained by growth in labor or capital and therefore assigned primarily to exogenous technological change.

Special drawing rights (SDRs)  A form of international financial asset, often referred to as “paper gold,” created by the International Monetary Fund in 1970 and designed to supplement gold and dollars in settling international balance of payments accounts.

Specialization  A situation in which resources are concentrated in the production of relatively few commodities.  See also comparative advantage and division of labor.

Specialized farming  The final and most advanced stage of the evolution of agricultural production in which farm output is produced wholly for the market.  It is most prevalent in advanced industrial countries.  High farm yields are ensured by a high degree of capital formation, technological progress, and scientific research and development.  See also subsistence farming.

Stabilization policies  A coordinated set of mostly restrictive fiscal and monetary policies aimed at reducing inflation, cutting budget deficits, and improving the balance of payments.  See conditionality and Internal Monetary Fund (IMF).

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).

Staple food  A leading or main food consumed by a large portion of a country’s population (e.g., maize meal in Kenya, Zambia, and Tanzania; rice in Southeast Asian countries; yams in West Africa; mamoc in Brazil).

State-owned enterprises (SOEs)  Public corporations and parastatal agencies (e. g. , agricultural marketing boards) owned and operated by the government.

Structural adjustment loans  Loans by the World Bank designed to foster structural adjustment in the LDCs by supporting measures to remove excessive governmental controls, getting factor and product prices to reflect scarcity values, and promoting market competition.  See World Bank and International DevelopmentAgency (IDA).

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.

Structural transformation  The process of transforming the basic industrial structure of an economy so that the contribution to national income by the manufacturing sector increasingly becomes higher than that by the agricultural sector.  More generally, an alteration in the industrial composition of any economy.  See also primary, secondary, and tertiary industrial sectors.

Subsidy  A payment by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy).  Examples are export subsidies to encourage the sale of exports: subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and farm subsidies to encourage expansion of farm production and achieve self-reliance in food production.

Subsistence economy  An economy in which production is mainly for personal consumption and the standard of living yields no more than the basic necessities of life - food, shelter, and clothing.  See also subsistence farming.

Subsistence farming  Farming in which crop production, stock rearing, and other activities are conducted mainly for personal consumption, characterized by low productivity, risk, and uncertainty.  See also subsistence economy.

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.

Supply curve  A positively sloped curve relating the quantity of a commodity supplied to its price.

Surplus  An excess of revenues over expenditures.  See trade surplus.

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.

Sustainable development  Pattern of development that permits future generations to live at least as well as the current generation.

Sustainable National Income  An environmental accounting measure of the total annual income that can be consumed without diminishing the overall capital assets of a nation (including environmental capital).

Sustenance  The basic goods and services, such as food, clothing, and shelter, that are necessary to sustain an average human being at the bare minimum level of living.

Synthetic substitutes  Commodities that are artificially produced but of like nature with and substi­tutes for the natural commodities (e.g., those involving rubber, cotton, wool, camphor, pyrethrum).  Producers of raw materials, mainly LDCs, are becoming more and more vulnerable to competition from synthetics from industrialized countries as a result of the latter’s more advanced state of scientific and technical progress.


Tariff  A fixed percentage tax on the value of an imported commodity levied at the point of entry into the importing country.

Technical assistance  Foreign aid (either bilateral or multilateral) that takes the form of the transfer of expert personnel, technicians, scientists, educators, economic advisers, and consultants rather than a simple transfer of funds.

Technological efficiency  Producing the maximum output possible, given quantities of inputs and existing technology, without regard to effective market demand.

Technological externality  A positive or negative spillover effect on a firm’s production function through some means other than market exchange, such as productivity benefits of “learning by watching” how other firms produce goods or services.  Compare pecuniary externalities.

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.

Tenant farmer  One who farms on land held by a landlord and therefore lacks secure ownership rights and has to pay for the use of that land, for example, by surrendering part of his output to the owner.  Examples are found in the Latin American and Asian agrarian systems.  See also sharecropper.

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.

Tertiary industrial sector  The services and commerce portion of an economy.  Examples of services include repair and maintenance of capital goods, haircuts, public administration, medical care, transport and communications, finance, and teaching.  See also primary and secondary industrial sectors and services.

Tied aid  Foreign aid in the form of bilateral loans or grants that require the recipient country to use the funds to purchase goods or services from the donor country.

Todaro migration model  A theory that explains rural-urban migration as an economically rational process despite high urban unemployment.  Migrants calculate urban expected income and move if this exceeds average rural income.  See also induced migration.

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.

Total fertility rate (TFR)  See fertility rate.

Total net benefit  Sum of net benefits to all consumers and/or producers resulting from environ­mental policy interventions.  In general, total benefits minus total costs.

Trade creation  A situation in the theory of customs unions that occurs when, following the formation of the union, there is a shift in the geographic location of production from higher-cost to lower-cost member states.  See also trade diversion.

Trade deficit  An excess of import expenditures over export receipts measured on the current account also known as merchandise trade deficit.  See also balance of payments and trade surplus.

Trade diversion  Shift, upon formation of a customs union, of the locus of production of formerly imported goods from a lower-cost nonmember state to a higher-cost member nation.  See also trade creation.

Trade liberalization  Removal of obstacles to free trade, such as quotas, nominal and effective rates of protection, and exchange controls.

Trade-off  The necessity of sacrificing (trading off) something in order to get more of something else - for example, sacrificing consumption now for consumption later by devoting some present resources to investment.  See also opportunity cost.

Trade optimists  Theorists who believe in the benefits of free trade, open economies, and outward-looking development policies.

Trade pessimists  Theorists who argue that without tariff protection or quantitative restrictions on trade, LDCs inevitably gain little or nothing from an export-oriented, open-economy posture.  See also import substitution, Prebisch-Singer thesis, and infant industry.

Trade surplus  An excess of export receipts over import payments.  See also trade deficit.

Traditional economics  The economics of capitalist market economies characterized by consumer sovereignty, profit maximization, private enterprise, and perfect competition.  The major focus is on the efficient allocation of scarce resources (see economic efficiency) through the price system and the forces of supply and demand.  See also microeconomics, macroeconomics, laissez-faire, invisible hand, and market economy.

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.

Transaction costs  Costs of doing business related to gathering information, establishing reliable suppliers, formulating contracts, obtaining credit, etc.

Transfer payment  Any payment from one economic entity to another that takes the form of a gift, that is, any payment not for a service rendered that need not be repaid.  Examples include unemployment insurance, food stamps, welfare payments, subsidies, and grants.

Transfer pricing  An accounting procedure usually designed to lower total taxes paid by multinational corporations in which intra-corporate sales and purchases of goods and services are artificially invoiced so that profits accrue to the branch offices located in low-tax countries (tax havens) while offices in high-tax countries show little or no taxable profits.

Transition  See economic transition.

Transparency  Full disclosure by public and private banks of the quality and status of their loan and investment portfolios so that domestic and foreign investors can make informed decisions.

Trickle-down theory of development  The notion that development is purely an economic phenomenon in which rapid gains from the overall growth of gross national product and income per capita would automatically bring benefits (trickle down) to the mass­es in the form of jobs and other economic opportunities.  The main preoccupation is therefore to get the growth job done while problems of poverty, unemployment, and income distribution are perceived to be of secondary importance.

Two-gap model  Theoretical foreign aid model comparing savings and foreign exchange gaps to determine which is the binding constraint on economic growth.


Uncertainty  A situation in which the probability of obtaining a given outcome of an event is not known.  There are thus a number of possible outcomes to which no objective probability can be attached.  See also risk.

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.

Underdevelopment trap  A poverty trap at a regional or national level, in which underdevelopment tends to perpetuate itself over time.

Underemployment  A situation in which persons are working less than they would like to work, either daily, weekly, monthly, or seasonally.  See also surplus labor.

Unit cost  The average cost per unit of output of any economic good or service.

United Nations  A global organization set up at the end of World War II with the basic aim of cultivating international cooperation and hence ensuring that any conflicts or misunderstanding between or among countries would be resolved by peaceful means.  At present, the United Nations has a membership of more than 180 countries drawn from both the developed and less developed nations.

United Nations Conference on Environment and Development (UNCED)  A conference held in Rio de Janeiro in June 1992, whose purpose was to enhance international cooperation in promoting sustainable environmental policy.  Also known as the Earth Summit.

United Nations Conference on Trade and Development (UNCTAD)  A body of the United Nations whose primary objective is to promote international trade and commerce with a principal focus on trade and balance of payments problems of developing nations.  Its first secretary general was Raul Prebisch.

United Nations Development Program (UNDP)  A body of the United Nations whose major function is to promote development in developing countries.  Major development-oriented projects financed and carried out by the UNDP include the initiation of nutrition, health, and education programs and the building up of agricultural, industrial, and transport infrastructure.

United Nations Educational, Scientific and Cultural Organization (UNESCO)  A major agency of the United Nations charged with promoting international understanding by spreading ideas of knowledge through the educational process, encouraging multiracial coexistence through reconciliation of cultural values of different societies, and spon­soring educational, cultural, and scientific exchange programs that make it possible for edu­cators, artists, writers, and scientists from a wide variety of countries and cultures to meet and exchange ideas and knowledge.

United States Agency for International Development (USAID)  A bilateral assistance agency of the U. S. government whose primary objective is to assist developing countries in their development efforts as part of U. S. foreign policy.  The economic assis­tance given by USAID normally takes the form of educational grants, special-interest loans, and technical assistance.  However, much of USAID’s activity consists of noneconomic (mostly military) assistance to friendly LDC governments.

Unlimited supplies of labor  Infinite elasticity of labor at a given wage as postulated in the Lewis two-sector model.

Unorganized money market  The informal and often usurious credit system that exists in most devel­oping countries (especially in rural areas) where low-income farms and firms with little collateral are forced to borrow from moneylenders and loan sharks at exorbitant rates of interest.  Compare organized money market.

Urban bias  The notion that most LDC governments favor the urban sector in their development policies, thereby creating a widening gap between the urban and rural economies.  See rural-urban migration.

Urbanization  The economic and demographic growth process of the urban centers.

Urbanization economies Agglomeration effects associated with the general growth of a concentrated geographic region.

Uruguay Round  A round of the GATT negotiations, started in Uruguay in 1986 and designed to pro­mote international free trade.  The resulting agreement was signed in April 1994 and took effect in 1995.  See World Trade Organization.


Value added  Amount of product’s final value added at each stage of production.

Value premises  See values.

Values  Principles, standards, or qualities considered worthwhile or desirable.  A value judgment reflects personal or class beliefs.  See also normative economics.

Variable inputs  inputs or resources whose required use in a production function will vary with changes in the level of output.  For example, in the production of shoes, labor is usually a variable input because as more shoes are produced, more labor must be used.  See also fixed inputs.

Vent-for-surplus theory of international trade  A theory that states that the opening up of world markets to developing countries through international trade provides them with the opportunity to take advantage of formerly underutilized land and labor resources to produce larger primary-product outputs, the surplus of which can be exported to foreign markets.  Such economies will usually be operating at a point somewhere inside their production possibility curves so that trade permits an outward shift of this production point.

Vicious cycle  A self-reinforcing situation in which factors tend to perpetuate a certain undesirable phenomenon - for example, low incomes in poor countries lead to low consumption, which then leads to poor health and low labor productivity and eventually to the persistence of poverty.


Wage-price spiral  Vicious cycle in which higher consumer prices (e.g., as a result of devaluation) cause workers to demand higher wages, which in turn cause producers to raise prices and worsen inflationary forces.

Wage subsidy  A government financial incentive to private employers to hire more workers, as through tax deductions for new job creation.

Where-to-meet problem  A situation in which all parties would be better off cooperating than competing but lack information about how to do so.  If cooperation can be achieved, unlike the prisoners’ dilemma, there is no subsequent incentive to defect or cheat.

Workfare  A poverty program that requires program beneficiaries to work in exchange for benefits, such as a Food for Work Program.  The term work-fare is used as a contrast with “welfare,” which provides benefits without work requirements.

World Bank  An international financial institution owned by its 181 member countries and based in Washington, D. C.  Its main objective is to provide development funds to developing nations in the form of interest-bearing loans and technical assistance.  The World Bank operates with borrowed funds.  See International Development Association


World Health Organization  The key United Nations agency concerned with global health matters.

World Trade Organization (WTO)  Geneva-based watchdog and enforcer of 1995 Uruguay Round agreement.  Replaces GATT.


Youth dependency ratio  The proportion of young people under age 15 to the working population aged 16-64 in a country.  See also dependency burden.