ECON 314
Washington Consensus
Washington consensus refers to a particular set of policy guidelines to countries regarding the relative role of the state and markets that was popular with international agencies and in US policy makers. These policies focused on minimalist fiscal and monetary policies and the role of the state while emphasizing the efficiency of markets. Low tax rates, low public expenditures, secure property rights, less regulation, liberalized financial sector, free trade and capital markets, and privatization of property are core propositions of the Consensus. The Asian Crisis of 1997-98 and the American Crisis of 2007-2008 has weakened the consensus considerably, especially with respect to capital movements, financial liberalization and regulations, while the pre-eminence given to the private sector in goods and services production remains.
Market Power
When firms can influence price by restricting quantity, a power most common under increasing returns to scale.
Coordination Failure
When several agents would be better off if they could cooperate on actions if all or most agents participate but worse off taking the action if too few participate.
Disadvantages of FDI to MNCs
*1. Expensive and risky * *2. Establishing costs* - i.e. setting up factories or advertising costs - When you establish your company in a new country, you need to adapt advertising to the local culture *3. Engaging in business with a different culture* - Again, business practices must adapt to the local culture and customs *4. Impediments to selling knowledge* - Risk of giving info to competitors - Low control over how foreign entity uses that knowledge
What are the benefits of FDI to LDCs?
*1. Fills the gap between the desired and current levels of savings in technological development* *2. Fills the gap for foreign reserves (for BOP deficits, buying imports) or debt service payments* *3. Fills the gap between projected and actual tax revenues* (government can't really tax agricultural sector or ISI industries) *4. Fills the gap between management and entrepreneurship* (through tech. and knowledge transfers)
Benefits of FDI to MNCs
*1. Helps them get a presence in foreign markets* *2. Control over the growth of foreign markets* - can enter the foreign market with a new product first *3. Ward off competition* *4. Adapt to needs and preferences of locals * - It's easier to be aware of local needs when you are in the country
Disadvantages of FDI for LDCs
*1. May lower domestic savings and investment rates* - crowds out domestic investors - replaces rather than supplements domestic investors *2. MNCs repatriate their earnings * - they send money back to their home countries *3. Tax contributions are quite low * - they already have liberal tax prices *4. Stifles indigenous entrepreneurship * - MNCs dominate local markets *5. Skews patterns of consumption to the rich* *6. Influences government policies towards their own interests* *7. Enforces dualistic economic structures* - Deepens inequalities *8. Uses superior knowledge to block out local competition*
What are the 3 main sources of the international flow of financial resources?
*1. Private direct and portfolio investment * -Foreign portfolio investment (FPI) is investing in financial assets, such as stocks or bonds, in a foreign country *2. Remittances on earnings from international migrants* *3. Public and private development assistance * - Help from international donations to development
Basic Transfer Equation
*BT = dD - rD = (d - r)D* Where d is the percent increase in total debt, D is the total debt and r is the average interest rate. BT will be positive if d > r, and the country will be gaining foreign exchange. However, if r > d, the basic transfer turns negative, and the nation loses foreign exchange.
What are the origins of the debt crisis?
*Pre-debt crisis: 1974-79* After the first OPEC oil shock, international lending exploded -> developing countries were borrowing heavily, and were advancing economically. In order to sustain that development, they continued to borrow in high quantities. As a result, by 1979 the developing world had accumulated approx. $406 billion in debt. *1. Oil shocks* - 1979 oil shock led to OPEC oil price increase - OPEC sends oil to Europe, Japan and the US and US sends money back - OPEC countries don't have the financial institutions to absorb that money, so they deposit it in US and European banks *2. Debt servicing obligations * - Europe and U.S. banks lend OPEC's petrodollars to developing-country borrowers, leading to debt expansion - Burgeoning interest rates *3. Debt-service payments * - Developing-country debtors have to pay debt service (interest and principal) to OPEC countries *4. Debt-service difficulty* - In order to finance their increasing debt, developing countries had one of two options: curtail imports and impose restrictive fiscal and monetary policies to pay off the debt, or increase borrowing. Developing countries were either unable or unwilling to follow the first option, so many of them borrowed more money -> massive debt service accumulation
Typology of Goods
*Type I: Private Goods* - High excludability, high rivalry - E.g. My laptop - It is easy for me to prevent other people from using it, and other people using it would significantly diminish my own enjoyment of it *Type II: Common-Pool Goods* - High rivalry, Low excludability - E.g. A village well: It is difficult to prevent people from using it, but the more other people use it, the less beneficial it is for others (water supply diminishes) *Type III: Public Goods* - Low excludability, low rivalry - E.g. Public park *Type IV: Local Public Goods* - High excludability, low rivalry - E.g. A local radio station: it is easy to exclude people who don't live in the region, and the quality of the content is not changed by the number of people who listen (a.k.a. consume the resource)
Perfect Property Rights
1. Excludability 2. Universality 3. Transferability 4. Enforceability
What are the ideal conditions for portfolio investment?
1. High interest rate 2. Lower tax rate 3. Exchange rate should be steady
What are the sources of International Funds?
1. Remittances 2. Foreign aid and loans 3. NGOs working with LDCs 4. FDI (biggest %) and portfolio investment
What are the three steps to calculating the social profitability of an investment?
1. Specify the objective function to be maximized (i.e. net social benefit) with some measure of how different benefits (e.g., per capita consumption, income distribution) are to be calculated and what the trade-off between them might be. 2. Calculate shadow prices vs. market prices. The greater the divergence between shadow and market prices, the greater the need for social cost-benefit analysis in arriving at public investment decision rules. 3. Develop a decision criterion to rank the projects against one another.
What are some criticisms of the Neoclassical model?
1. The model assumes fixed resources and full employment, which is not the case in real life. 2. There are ongoing development of synthetic substitutes for exports 3. Governmental non-interference in trade vs. active trade policies
Computable general equilibrium (CGE)
A CGE is an elaboration on the SAM. The CGE assumes that households maximize utility and firms maximize profits. CGEs are beneficial because they enable policymakers to take into account the possible reactions of consumers and firms to the alternative policies being considered rather than assume that they will be- have the way they did before the new policies were implemented.
Social Accounting Matrix (SAM)
A SAM is created by accumulating data on factor payments, sources of household income, and the pattern of household goods consumption across various social groups. This is accomplished by adding data from the system of national accounts, balance of payments, and flow-of-funds databases, often supplemented with household survey data, to the basic input-output table. As such, the SAM provides a comprehensive snapshot of interrelationships in an economy.
MNC
A company that has facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management.
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. (By the IMF)
Autarky
A country that attempts to be completely self-reliant in terms of imports.
International Reserves
A country's balance of gold, hard currencies, and special drawing rights used to settle international transactions.
Export Dependence
A country's reliance on exports as the major source of financing for development activities.
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.
What is the difference between depreciation and devaluation?
A devaluation is when a country makes a conscious decision to lower its exchange rate in a fixed or semi fixed exchange rate. Therefore, technically a devaluation is only possible if a country is a member of some fixed exchange rate policy. Depreciation occurs when there is a fall in the value of a currency in a floating exchange rate. This is not due to a government's decision, but due to supply and demand side factors.
Increasing Returns
A disproportionate increase in output that results from a change in the scale of production.
Aggregate Growth Model
A formal economic model describing the growth of an economy in one or a few sectors using a limited number of variables. It deals with the entire economy in terms of a limited set of macroeconomic variables deemed most critical to the determination of levels and growth rates of national output: savings, investment, capital stocks, exports, imports, foreign assistance, etc.
Input-output model
A formal model dividing the economy into sectors and tracing the flow of interindustry purchases (inputs) and sales (outputs).
Debtor's Cartel
A group of developing-country debtors who join together to bargain as a group with creditors.
Price Elasticity of Demand
A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded. E.g. The price of sugar decreases from $5/pound to $3/pound, but the number of pounds of sugar demanded does not increase significantly with the drop in price. This means that sugar has a *low* elasticity of demand.
Net Capital Inflow
A net flow of capital, real and/or financial, into a country, in the form of increased purchases of domestic assets by foreigners and/or reduced holdings of foreign assets by domestic residents. Recorded as positive, or a credit, in the balance on capital account. *Fn = dD* Where D represents the total accumulated foreign debt, and d is the percentage rate of increase in that total debt.
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 market economy. There are several concrete ways in which market failure can occur: 1. The market cannot function properly or no market exists 2. The market exists but has an inefficient allocation of resources 3. The market produces undesirable results as measured by social objectives other than the allocation of resources. Market failure is arguably the most cited reason for government intervention in developing countries.
Partial Plan
A plan that covers only a part of the national economy (e.g., agriculture, industry, tourism).
Brady Plan
A program launched in 1989 designed to reduce the size of outstanding developing-country commercial debt through private debt forgiveness procured in ex- change for IMF and World Bank debt guarantees and greater adherence to the terms of conditionality.
Uruguay Round
A round of the General Agreement on Tariffs and Trade negotiations, started in Uruguay in 1986 and signed in 1994, designed to promote international free trade.
Industrialization Strategy Approach
A school of thought in trade and development that emphasizes the importance of overcoming market failures through government policy to encourage technology transfer and exports of progressively more advanced products. Problem: Governments are not always competent enough to carry out these policies efficiently.
Dual Exchange Rate
A situation in which there is a fixed official exchange rate and an illegal market-determined parallel exchange rate. The different exchange rates are used in different situations, either in exchanges or evaluations, as mandated by the government.
Balance of Payments
A statement that summarizes an economy's transactions with the rest of the world for a specified time period. The BOP encompasses all transactions between a country's residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. BOP is split into two accounts: current and capital.
Cost-Benefit Analysis
A 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. The point of departure for social cost-benefit analysis is that it does not accept that actual receipts are a true measure of social benefits or that actual expenditures are a true measure of social costs.
Managed Float
A type of exchange rate that lies between fixed and flexible exchange rates. Government sets a band between which the exchange rate is allowed to fluctuate, but it is managed in the sense that it has upper and lower limits.
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 or other goals over a certain period of time.
Horizontally-Integrated MNC
All countries producing at the same stage.
Comprehensive plan
An economic plan that sets tar- gets to cover all the major sectors of the national economy.
Mixed Developing Economy
An economy in which some of the resources are privately owned and operated and others are owned by the public sector. Mixed economies are often distinguished by a substantial amount of government ownership and control.
General Agreement on Tariffs and Trade (GATT)
An international body set up in 1947 to explore ways and means of reducing tariffs on internationally traded goods and services; replaced in 1995 by the World Trade Organization.
Special Drawing Rights (IMF deposits)
An international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs augment international liquidity by supplementing the standard reserve currencies.
Export Promotion (Outward-Looking development policies)
An umbrella term for economic policies, development interventions and private initiatives aimed at improving the trade performance of an economic area.
Eurodollar
Any currency that resides outside of its country, i.e. having deposits of the Japanese Yen in Canadian banks
Debt Service
Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular time period. Interest payments.
Two-Gap Model
Essentially a Harrod-Domar model generalized to take foreign-trade problems into account. It is a model of foreign aid comparing savings and foreign-exchange gaps to determine which is the binding constraint on economic growth.
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. E.g. Domestic companies selling stocks to foreigners.
FDI
Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business.
Vertically-Integrated MNC
Forward linkages: The MNC produces, and industry sells abroad Backward linkages: MNC produces inputs for other domestic industries
World Trade Organization (WTO)
Geneva-based watchdog and enforcer of international trade agreements since 1995; replaced the General Agreement on Tariffs and Trade.
Amortization
Gradual pay- off of a loan principle.
Returns to Scale
How much output expands when all inputs are proportionately increased.
Import Substitution Industrialization (ISI)
ISI is a theory of economics typically utilized by developing countries or emerging market nations seeking to decrease dependence on developed countries and to increase self-sufficiency. The implemented theory targets protection and incubation of newly-formed domestic industries, aiming to fully develop the sectors so that goods produced have the ability to compete with imported goods. Under the ISI theory, this process makes local economies self-sufficient. Practices include a working industrial policy that subsidizes and organizes a production of strategic substitutes; barriers to trade, such as tariffs; an overvalued currency that aids manufacturers in importing goods; and a lack of support for foreign direct investment (FDI).
Factor Price Equalization
In factor endowment trade theory, the proposition that be- cause countries trade at a common international price ratio, factor prices among trading partners will tend to equalize.
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 of property (e.g., buildings, housing). In microeconomics, economic rent is the payment to a factor of production over and above its highest opportunity cost. In public choice theory, rent refers to those excess payments that are gained as a result of government laws, policies, or regulations.
The Planning Mystique
In the decades after WWII, the pursuit of economic development was reflected in the almost universal acceptance of development planning as the surest path to development. Before the 1980s, few governments in the developing world would have questioned that planning was the best way to achieve growth. However, despite producing elaborate development plans every 5 years, developing countries did not see the results they were promised.
Internal Rate of Return
It is helpful to think of the IRR as the rate of growth a project is expected to generate. Technically speaking, it is the 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. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. While IRR is a very popular metric in estimating a project's profitability, it can be misleading if used alone. Depending on the initial investment costs, a project may have a low IRR but a high NPV, meaning that while the pace at which the company sees returns on that project may be slow, the project may also be adding a great deal of overall value to the company. The IRR is used frequently in the evaluation of educational assets.
Debt for Equity Swap
Lender forgiving debt in exchange for equity in domestic companies (i.e. 10% off local petroleum)
Structural Adjustment Loans
Loans by the World Bank to developing countries in sup- port of measures to remove excessive governmental controls, make factor and product prices reflect scarcity values, and promote market competition.
Formula for NPV
NPV = Σ ((Bt - Ct) / (1 + r) ^t) Where Bt is the expected benefit of the project at time t, Ct is the expected cost (both evaluated using shadow prices), and r is the government's social rate of discount.
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.
Do market prices give an accurate evaluation of social benefits and costs? Why/why not?
No. *1. Inflation and currency over-evaluation* - Controlled prices do not typically reflect the real opportunity cost to society of producing these goods and services. - Government managing the price of foreign exchange *2. Wage rates, capital costs, and unemployment* - Factor price distortions (e.g. wage rates exceeding the shadow price of labour) -> unemployment *3. Tariffs, quotas, subsidies, and import substitution* - Rent seeking *4. Savings deficiency* *5. Social rate of discount* -
Formula: Aggregate Growth Model
Once you have the target GDP & national input-output ratio, use Harrod-Domar model to determine the savings rate. We start with the assumption that the ratio of total output to reproducible capital is constant. Harrod-Domar model: *① K(t) = cY(t)* Phonetically: The capital stock (K) at time t is equal to the average capital output ratio (c) times output (Y) at time t. Incremental capital-output ratio: c = ΔK/ΔY -> ΔK = cΔY We assume next that a constant share (s) of output (Y) is always saved (S), so that... *② I(t) = K(t+1) - K(t) + 𝛿K(t) = sY = S(t)* Phonetically: Total investment at time t = capital stock at a future time minus capital stock at the present time (a.k.a. total capital) plus the depreciation in capital at time t = savings rate times output = Savings at time t If g is the targeted rate of growth of output, then... *③ g = Y(t + 1) - Y(t) / Y(t) = 𝛿Y(t) / Y(t)* From ①, we can assume that... *④ ΔK/K = cΔY/K = (K/Y)ΔY / K = ΔY/Y*. Phonetically: Rate of growth of capital = to the incremental capital-output ratio times change in income divided by capital = capital over output times change in income divided by capital = rate of growth of income. This tells us that capital is growing at the same rate as output (*ΔK/K = ΔY/Y*). Using ②, we arrive at the basic Harrod-Domar growth formula: *⑤ g = sY - 𝛿K / K = s/c - 𝛿* Output growth can also be expressed as the sum of labour force growth (n) and the rate of growth of labor productivity (p), so ⑤ can be re-written as... * ⑥ n + p = s/c - 𝛿*
What is the formula for determining whether domestic savings will be sufficient to provide an adequate number of new employment opportunities to a growing labor force?
One way of doing this is to disaggregate the overall savings function (S = sY) into at least two component sources of saving - normally, the propensity to save out of wage income (W) and profit income (π). *⑦ W + π = Y* Phonetically: Wage income plus profit income is equal to total income. * ⑧ (sπ)π + (sw)W = I* where sπ and sw are the savings propensities from π and W, respectively. Phonetically: Propensity to save out of profit income times the profit income + propensity to save out of wage income times wage is equal to total investment. Manipulate equation ⑤ and put equations ⑦ and ⑧ into it, so that you get the complete Harrod-Domar model for growth: * ⑨ c(g + 𝛿) = (sπ - sw) (π / Y) + sw* Example: If a 4% growth rate is desired (g = .04), depreciation is occuring at δ = 0.03, the capital-output ratio (c) = 3.0, and π/Y= 0.5, then the equation becomes :
Inward-Looking Development Policies
Policies that stress economic self-reliance on the part of developing countries including domestic development of technology, the imposition of barriers to imports, and the discouragement of private foreign investment.
Market prices
Prices established by demand and supply in markets.
Comparative Advantage
Production of a commodity at a lower opportunity cost than any of the alternative commodities that could be produced.
Absolute Advantage
Production of a commodity with the same amount of real resources as another producer but at a lower absolute unit cost. Example: Jane can knit a sweater in 10 hours while Kate can knit a sweater in eight hours. Kate has an absolute advantage over Jane because it takes her fewer hours to produce a sweater. Jane can produce a painting in five hours while Kate needs nine hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting. If both Jane and Kate specialize in the products they have an absolute advantage in and buy the products they don't have an absolute advantage in from the other entity, they will both be better off.
Exchange rate
Rate at which the domestic currency may be converted into (sold for) a foreign currency such as the U.S. dollar.
Rent Seeking
Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. *Example:* One of the most common ways companies in the 21st century engage in rent-seeking is by using their capital to contribute to politicians who influence the laws and regulations that govern and industry and how government subsidies are distributed within. If the company succeeds in receiving subsidies or in getting laws passed that restrict competition and create new barriers to entry into the industry, it has increased its share of existing wealth without increasing the total of that wealth.
Enclave Economy
Small economically developed regions in developing countries in which the remaining areas have experienced much less progress. An enclave economy typically develops when foreign investors - all operating in a similar industry - invest heavily in a specific region with the intent of manufacturing products for export.
Trade Adjustment Assistance (TAA)
TAA is a federal program of the United States government to act as a way to reduce the damaging impact of imports felt by certain sectors of the U.S. economy.
Prebisch-Singer Hypothesis
The argument that the commodity terms of trade for primary-product exports of developing countries tends to decline over time.
Cash Account (International Reserve 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. It offsets the sum of the current and capital accounts such that BOP is balanced (sum of zero).
Capital Account
The capital account includes: 1. Direct private investment (inflow) 2. Foreign loans (inflow) 3. Increase in foreign assets of the domestic banking system (Outflow) 4. Resident capital outflow (Outflow) It may help to think of it as a country's net inflow or outflow of private and public financial resources. A capital account shows the net change in physical or financial asset ownership for a nation and, together with the current account, constitutes a nation's balance of payments.
Economic Infrastructure
The capital embodied in roads, railways, waterways, airways, and other forms of transportation and communication plus water supplies, electricity, and public services such as health and education.
Vent-For-Surplus Theory of International Trade
The contention that opening world markets to developing countries through international trade allows those countries to make better use of formerly under-utilized land and labor resources so as to produce larger primary-product out- puts, the surpluses of which can be exported.
Economies of Scale (Increasing Returns to Scale)
The cost savings that are realized from an increase in the volume of production. Example: You sell 10 apple pies a day from your small bakery, and purchase your inputs (apples) from a local grocery store at $1 each. If you were to scale up your production to 100 apple pies per day, you could buy your apples in bulk at Costco for 20c per apple. In this way, you are saving money by scaling up production.
Current Account
The current account is defined as the sum of: 1. The balance of trade (goods and services exports less imports) 2. Investment income earned abroad (inflow) 3. Debt service payments (Outflow) 4. Net remittances and transfers (Inflow) The current account is an important indicator about an economy's health. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world.
Effective Rate of Protection (a.k.a. Effective Tariff Rate)
The degree of protection on value added as opposed to the final price of an imported product. In other words, it shows by what percentage the sum of wages, interest, profits, and depreciation allowances payable by local firms can, as a result of protection, exceed what this sum would be if these same firms had to face unrestricted competition (no tariff protection) from foreign producers. *ρ = (v' - v) / v* Where v' and v are the value added per unit of output with and without protection, respectively.
New Protectionism
The erection of various non-tariff trade barriers by developed countries against the manufactured exports of developing nations.
Savings gap
The excess of domestic investment opportunities over domestic savings, causing investments to be limited by the available foreign exchange. *I ≤ F + sY*
Nominal Rate of Protection (A.k.a. Nominal Tariff Rate)
The extent, in percentages, to which the domestic price of imported goods exceeds what their price would be in the absence of protection. *t = (p' - p) /p* Where p' is the tariff-inclusive price and p is the free trade price. For example: If the domestic price, p', of an imported automobile is $5,000 whereas the CIF (cost plus insurance and freight) price, p, when the automobile arrives at the port of entry is $4,000, the nominal rate of tariff protection, t, would be 25%.
Which model is the most appropriate to use in development?
The input-output model. It offers a much more sophisticated approach to development planning, because all industries are viewed both as producers of outputs and users of inputs from other industries. For example, the agricultural sector is both a producer of output (e.g., wheat) and a user of inputs from, say, the manufacturing sector (e.g., machinery, fertilizer). Because it acknowledges this, the input-output model is theoretically able to determine how a change in demand for the outputs of one industry would affect a related industry.
Factor Endowment Trade Theory (Neoclassical Model)
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.).
NPV Rule
The net present value rule, a logical outgrowth of net present value theory, refers to the idea that company managers or investors should only invest in projects or engage in transactions that have a positive net present value (NPV), and should avoid investing in projects that have a negative net present value. According to the net present value rule theory, investing in something that has a net present value greater than zero should logically increase a company's earnings; or in the case of an investor, increase a shareholder's wealth.
Marginal Propensity to Save
The proportion of an aggregate raise in pay that a consumer spends on saving rather than on the consumption of goods and services. Marginal propensity to save is a component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income. Example: Suppose you receive a $500 bonus with your paycheck. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase on a new business suit and save the remaining $100, your marginal propensity to save is 0.2 ($100 change in saving divided by $500 change in income).
Project Appraisal
The quantitative analysis of the relative desirability (profitability) of investing a given sum of public or private funds in alternative projects.
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. Essentially, it is a price of time - the rate used to calculate the net present value of project benefits and costs. Example: Social rate of discount may be used in estimating the value of creating a highway system, schools, or enforcing environmental protection. All of these things require a cost-benefit analysis where policy makers measure the *social marginal cost* and the *social marginal benefit* for each project. The social discount rate can appear in both calculations either as future costs such as maintenance or as future benefits such as reduced pollution emissions.
Commodity Terms of Trade
The ratio of a country's average export price to its average import price.
Foreign-exchange gap
The shortfall that results when the planned trade deficit exceeds the value of capital inflows, causing output growth to be limited by the available foreign exchange for capital goods imports. *(m1 - m2) I + m2Y ≤ F + E* Where... m1 = marginal share of imports m2 - marginal propensity to improt m2Y = total imports Y = national income E = exports F = capital inflows
Shadow prices (or accounting prices)
The social opportunity cost of goods, services and factors. Essentially, it is assigning a quantitative value to an intangible asset (e.g. social well-being) in order to perform a more accurate cost-benefit analysis. By assigning a shadow price to an asset that is usually qualitative, analysts can get a clearer sense of how the costs of a project or investment affects the current circumstances (i.e. will this action improve or worsen the current conditions of a community/organization?). One refers to shadow prices to reflect the proposition that market prices, in many cases, and especially with respect to LDCs, diverge from true social costs. This reflects market failures and distortionary effects of public policies.
Capital Flight
The transfer of funds to a foreign country by a citizen or business to avoid conditions in the source country.
Increasing returns to scale
The variation or change in productivity that is the outcome from a proportionate increase of all the input. Increasing returns to scale, therefore, is when the output increases by a larger proportion than the increase in inputs during the production process. For example, if input is increased by 3 times, but output increases by 3.75 times, then the firm or economy has experienced an increasing return to scale. Example: Barry's Barbershop was experiencing what it thought was overwhelming customer purchases. In one week the shop served 250 clients. To capitalize on this market, Barry hired 2 additional barbers, which gave him a total of 10 barbers. In this case the barbers were the input of resource, increased by 25%. As a result, the barbershop experienced average weekly sales of 320 for the next five weeks, an increase in output of 28%, increasing returns to scale.
External Debt
Total private and public foreign debt owed by a country.
North-South theories
Trade and development theories that focus on the unequal exchange between the North developed countries and the South developing countries in an attempt to explain why the South gains less from trade than the North.