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Chapter 3 - Classic Theories of Economic Growth and Development
Terms in this set (43)
Stages of Growth Model of Development
A theory of economic development associated with American Economic historian Walt W. Rostow that says that states pass through sequential stages in achieving development.
Stages: Traditional society --> preconditions for takeoff --> takeoff -->drive to maturity --> high mass consumption
Harrod-Domar Growth Model
a functional economic relationship in which the growth rate of GDP (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c)
a ratio that shows the units of capital required to produce a unit of output over a given period of time
net savings ratio
savings expressed as a proportion of disposable income over some period of time
a condition that must be present, although it need not be in itself suffient, for an event to occuer
a condition that when present causes or guarantees that an event will or can occur, in economic models, a condition that logically requires that a statement must be true give other assumptions.
the hypothesis that underdevelopment is due to under-utilization of resources arising form structural or institutional factors that have their origin in both domestic and international dualism. Development therefore requires more than just accelerated capital formation.
the process of transforming an economy in such a way that the contribution to national income by the manufacturing sector eventually surpasses the contribution by the agricultural sector. More generally, a major alteration in the industrial composition of any economy.
Lewis Two-Sector Model
a theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development
The excess supply of labor over and above the quantity demanded at the going free-market wage rate. In the Lewis Two-Sector Model, this refers to the portion of the rural labor fore whose marginal productivity is zero.
a technological or engineering relationship between the quantity of a good produced and the quantity inputs required to produce it.
total output or product divided by total factor input
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.
this continues over the long-run based on savings, investment, and complementary private and public activities.
Patterns of Development Analysis
an attempt to identify characteristic features of the internal processes that a typical developing economy undertakes as it generates and sustains modern economic growth and development
reliance of developing countries on developed countries' economic policies to stimulate their own growth. Can also mean that the developing countries adopting the developed countries' education systems, technology, economic and political system, attitudes, consumption patterns, dress, etc
in IR, a situation in which the developed countries have much greater power than the less developed countries in decisions affecting international economic issues, such as prices of agricultural commodities and raw materials in world markets.
(Legacy of colonialism, Unequal power, Core-periphery)
Neocolonial dependence model
a model whose main proposition is that underdevelopment exists in developing countries due to continuing exploitative economic, political, and cultural policies of former colonial rulers towards less developed countries
a situation characterized by by persistent low levels of living in conjunction with absolute poverty, low income per capita, low rates of growth, low consumption, poor health services, high death rates, high birth rates, dependence on foreign economies, and limited freedom to choose among activities that satisfy human wants
in dependence theory, the economically developed world
in dependence theory, the developing countries
in dependence theory, local elites who act as fronts for foreign investors
proposition that devleoping countries have failed to develop because their development strategies have been based on an incorrect model of development, usually from a well-meaning by ill-informed Western economist/expert
(Pitfalls of using "expert" foreign advisors who misapply developed-country models)
the coexistence of two situations that are mutually exclusive to different groups of society
a closed economy that attempts to be completely self-reliant
The 1980s resurgences of neoliberal free market orientation toward development problems and policies, counter to the interventionist dependence revolution of the 1970s
system where prices of commodities or serviecs freely rise or fall based on supply and demand
Free market analysis
the theoretical analysis of the properties of an economic system operating with free markets, often under the assumption that an unregulated market performs better than one with government regulations
Public Choice Theory
the theory that self-interest guides all individual behavior and that governments are ineffiicent and corrupt because people use government to pursue their own interest
Four Approaches to Classic Theories of Economic Development
Linear stages of growth model
Theories and Patterns of structural change
Neoclassical, free market counterrevolution
Components of Economic Growth
1. Capital accumulation (including all investments in land, labor, and capital)
2. Population growth
3. Technological progress
Growth Rate Equation (Harrod-Domar Model)
Criticisms of the Stages Model
Necessary versus sufficient condition
The Lewis two-sector model
The dualistic-development thesis: Superior and inferior elements can coexist
The International-Dependence Revolution
The neocolonial dependence model
The false-paradigm model
The dualistic-development thesis
Criticisms and limitations: Does little to show how to achieve development in a positive sense; accumulating counterexamples
Denies efficiency of intervention
Points up state owned enterprise failures
Stresses government failures
Traditional neoclassical growth theory - with diminishing returns, cannot sustain growth by capital accumulation alone
Uses Free Markets, Public Choice, and Market-Friendly Approaches
a market's inability to deliver its theoretical benefits due to the existence of market imperfections such as monopoly power, significantly externalities, or lack of knowledge. Often provides justification for government intervention to alter the working of the free market.
Market friendly approach
the notion historically promulgated by the World Bank that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient
Solow Neoclassical Growth Model
model in which there are diminishing returns to each factor of production but constant returns to scale. Exogenous technological changes generates long-term economic growth
an economy in which there are no foreign trade transactions or other economic contacts with the rest of the world
an economy that practices foreign trade and has extensive financial and non-financial contacts with the rest of the world
The number of units of capital per unit of labor
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