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

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


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.

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


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

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.

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.

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.

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.

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.

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.


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

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

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.

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

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.


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 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 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).

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.

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 nonfinancial measures designed to promote a greater level of economic activity in export industries.

Exports The value of all goods and nonfactor services sold to the rest of the world; they include merchandise, freight, insurance, travel, and other nonfactor 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.


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.

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.

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 organizations.

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.

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

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.


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.

General Agreement on Tariffs and Trade (GATT) 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).

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.

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.

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.


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.


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, nonhomogeneity 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.

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.

Interdependence Interrelationship between economic and noneconomic 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.

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

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., $270), used as a basis for estimating the proportion of the world's population that exists at bare levels of subsistence.


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.


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. 

Macroeconomic stabilization Policies designed to eliminate macroeconomic instability.

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.

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. 

Middle-income countries (MICs) LDCs with per capita income above $785 and below $9,655 in 1997 according to World Bank measures.

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.

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

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

Multi-Fiber Arrangement (MFA) A set of nontariff bilateral quotas established by developed countries on imports of cotton, wool, and synthetic textiles and clothing from individual LDCs

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 ITT.

Firms become multinational corporations when they perceive advantages to establishing production and other activities in foreign locations. Firms globalize their activities both to supply their home-country market more cheaply and to serve foreign markets more directly. Keeping foreign activities within the corporate structure lets firms avoid the costs inherent in arm's-length dealings with separate entities while utilizing their own firm-specific knowledge such as advanced production techniques. By internalizing what would otherwise be cross-border transactions, multinationals can bridge the information obstacles that often hinder trade. For example, they may be able to more carefully monitor product quality or worker conditions in factories they own than in those of contractors, or adapt the composition of output more quickly to changes in market conditions.

Improvements in information technology have reduced the impediments to exerting corporate control across borders. These advances have combined in recent years with an increased openness on the part of governments to foreign multinationals, as the economic benefits of a foreign presence to the host country have become more widely recognized. These benefits include the increased investment and the associated jobs and income that the multinational firm brings, as well as technological transfer and improved productivity. The role of multinationals in spreading industry best practices is likely to be especially important in services, many of which are not easily traded across national boundaries.

Evidence of the heightened role of multinationals can be seen in the quickened pace of foreign direct investment (FDI) in recent years. In 1999 FDI flows both in and out of OECD countries reached record levels: over 2.5 percent of their combined GDP for inflows and 3.0 percent for outflows. Most FDI is between developed countries: since 1982, 75 percent of FDI outflows from OECD countries have gone to other OECD members.


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).

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

Nontariff 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.


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.

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

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.

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.


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. 

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.

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.

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

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 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.

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

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.


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.


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 International Monetary Fund (IMF).

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

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.


Terms of trade The ratio of a country's average export price to its average import price; also 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).

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.

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

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. 

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.


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 the Third World nations in the form of interest-bearing loans and technical assistance. The World Bank operates with borrowed funds.

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


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