Development Economics Definitions


    Aid. Aid is the voluntary transfer of resources from one country to another. A donor country gives a recipient country aid. Aid could be a grant or a loan on concessionary terms. Aid could be tied or untied. Aid could be bilateral or multilateral.

    Capital Flight. Capital flight occurs when investors lose confidence in an economy so domestic and/or foreign agents rapidly pull their money out of the economy. The economy suffers a rapid, dramatic and large outflow of capital.

    Capital-Intensive Production Techniques. Production that requires a lot of machinery and limited labour.

    Debt Relief. A country receives debt relief if all or part of its foreign debt is cancelled.

    Developed Countries. Developed countries or high income countries (HICs) are typically characterized by high GDP per capita, high living standards and social freedoms.

    Disguised Unemployment. Labour is disguisedly unemployed if there is an excess supply of labour with a zero MPL. Basically, there is so much labour that each additional unit of labour adds nothing to output.

    Domestic Savings Gap. An LDC suffers a domestic savings gap when it does not have enough domestic savings to use for investment to grow and develop.

    Economic Development. Economic development is multidimensional and includes health, nutrition, education, happiness, social and political freedoms.

    Fair Trade. Fair trade guarantees that farmers receive a fair price, that is, a price that is above market equilibrium. Farmers must meet certain conditions like not using child labour and avoiding environmental degradation.

    Foreign Exchange Gap. An LDC suffers a foreign exchange gap when it does not have enough foreign exchange reserves to grow and develop.

    Harrod-Domar Model. The Harrod-Domar model posits that economic growth will increase if the economy raises its rate of savings or lowers its capital-output ratio.

    Human Capital. Human capital includes the education, skills and health of workers.

    International Monetary Fund (IMF). The IMF aims to deliver international macroeconomic stability and provide loans for countries experiencing an exchange rate crisis or an unsustainable current account deficit. Additionally, the IMF aim to alleviate poverty in LDCs.

    Labour-Intensive Production Techniques. Production that requires a lot of labour and limited machinery.

    Less Developed Countries (LDCs). Developing countries or LDCs are typically characterized by low GDP per capita, low living standards and civil unrest.

    Lewis Model. A dual sector model with a capitalist and non-capitalist sector. The Lewis model posits that this dual sector economy develops if it mobilizes resources to make the capitalist sector grow.

    Microfinance. Microfinance is the provision of micro-credit (small loans) to the poor in LDCs.

    Multinational Company (MNC). A multinational company (MNC) is a firm operating in more than one country.

    Poverty Cycle. LDCs have low savings and remain underdeveloped because they are stuck in a vicious poverty cycle. Low incomes mean low savings, low investment, low capital accumulation, low productivity per worker and again low incomes.

    Prebisch-Singer Hypothesis. As the Prebisch-Singer hypothesis posits, primary commodity exporters suffer declining ToT due to the differences in the income elasticity of demand (YεD) between primary commodities and manufacture goods. Primary commodities have a low inelastic YεD (due to Engel’s law), whilst manufacture goods have a high elastic YεD. Thus, as world incomes rise, the demand (and hence price) of manufacture goods rise faster than that for primary commodities.

    Primary Product Dependency. Occurs when an LDC is dependent on producing and exporting primary commodities. The LDC suffers from fluctuating prices and supply side shocks because of natural disasters and extreme weather conditions (hurricanes, tornadoes, droughts and tsunamis).

    World Bank. The World Bank helps LDCs develop by providing low interest loans, interest-free loans and grants to develop the infrastructure, health, education and communications.



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