EC207 Midterm: Review Session
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Lewis model: why it’s a good model? Structural change model. Model of unemployed in developing
countries, excessive unemployment.
Financial market impt: info, transaction, enforcement. Real econ growth.
Poor people need capital for immediate needs, dependency rates are higher Absolute poverty: A
situation of being unable to meet the minimum levels of income, food, clothing, health care,
shelter, and other essentials.
Keywords from textbook:
Subsistence economy: An economy in which production is mainly for personal consumption
and the standard of living yields little more than basic necessities of life—food, shelter, and clothing.
Development The process of improving the quality of all human lives and capabilities by raising people’s
levels of living, self-esteem, and freedom.
Developing countries: Countries of Asia, Africa, the Middle East, Latin America, eastern Europe, and the
former Soviet Union that are presently characterized by low levels of living and other development
deficits. Used in the development literature as a synonym for less developed countries
Development economics: The study of how economies are transformed from stagnation to growth and
from low income to high-income status, and overcome problems of absolute poverty.
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.
Self-esteem: The feeling of worthiness that a society enjoys when its social, political, and economic
systems and institutions promote human values such as respect, dignity, integrity, and self-
Freedom: A situation in which a society has at its disposal a variety of alternatives from which to satisfy
its wants and individuals enjoy real choices according to their preferences.
Purchasing power parity (PPP): Calculation of GNI using a common set of international
prices for all goods and services, to provide more accurate comparisons of living standards.
Human Development Index (HDI): An index measuring national socioeconomic development,
based on combining measures of education, health, and adjusted real income per capita.
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Imperfect market: A market in which the theoretical assumptions of perfect competition
are violated by the existence of, for example, a small number of buyers and
sellers, barriers to entry, and incomplete information.
Incomplete information The absence of information that producers and consumers
need to make efficient decisions resulting in underperforming markets.
Brain drain The emigration of highly educated and skilled professionals and technicians
from the developing countries to the developed world.
Convergence The tendency for per capita income (or output) to grow faster in lower-income countries
than in higher-income countries so that lower-income countries are “catching up” over time. When
countries are hypothesized to converge not in all cases but other things being equal (particularly savings
rates, labor force growth, and production technologies), then the term conditional convergence is used.
Stages-of-growth model of development A theory of economic development, associated with the
American economic historian Walt W. Rostow, according to which a country passes through sequential
stages in achieving development
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 (c).
Capital-output ratio 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.
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 may be 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.
Sufficient condition 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 (or a result must
hold) given other assumptions.
Structural-change theory The hypothesis that underdevelopment is due to underutilization of resources
arising from structural or institutional factors that have their origins in both domestic and international
dualism. Development therefore requires more than just accelerated capital formation.
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