Econ 333 Lecture 2 Development Theories

Production function

a technological or engineering relationship between the quantity of a good and the quantity of inputs required to produce it

Labor, physical capital, human capital, natural resources

Y is a function of… (Production Function)

Productivity

The quantity of goods and services produced from each unit of labor input

Natural endowments

inputs into the production function that are provided by nature

Human capital

The knowledge and skills that workers acquire through education, training, and experience

brain drain

the emigration of many highly educated workers to developed countries

Physical Capital

The stock of equipment, tools, and structures that are used to produce goods and services

Criticisms of the Harrod-Domar theory

• Low level of saving due to low levels of income

• If they can’t save, they can’t borrow from developed countries

• Model assumes country has circumstance of Europe after WWII

Structural transformation

Transforming an economy so that the contribution to national income by manufacturing surpasses the contribution by agriculture

Lewis Theory

The theory in which surplus labor from agriculture is transferred to modern industrial, stimulating sustainable development

Surplus labor

The excess supply of labor over and above the quantity demanded (MPL=0)