ECON of Latin America Midterm 1

ECON of Latin America

rule of 70

a mental-math shortcut showing that years to double approximately equals: 70 / annual growth rate (%)

total (nominal) GDP

the total market value of all production, which tells you the overall size of the economy

real GDP

economic output valued using constant base-year prices, which tells you whether physical output actually expanded

real GDP per capita

real production divided by total population, measuring average output per person

human development index (HDI)

a composite welfare metric created by the UNDP that combines health, education, and standard of living

trade openness

the ratio of total trade to economic output, calculated as: (Exports + Imports) / GDP

current account

the macroeconomic balance consisting of the trade balance, net income, and net transfers

foreign direct investment (FDI)

foreign capital invested with a lasting interest or managerial influence in an enterprise

portfolio investment

foreign purchases of liquid financial assets like stocks and bonds

other investment

cross-border capital consisting primarily of international bank loans, trade credit, and bank deposits

commodity-export dependent

the UNCTAD classification applied, when raw commodities account for more than 60% of total merchandise exports

institutions

the “rules of the game” in a society—humanly devised formal rules (constitutions, property rights) and informal constraints (customs, norms) that structure interactions

proximate causes of growth

capital accumulation and technology

fundamental cause of growth

underlying institutions that incentivize people to invest and innovate

credible commitment

when a ruler or government legally self-binds its own power (such as England’s 1688 Glorious Revolution creating an independent judiciary and parliamentary budget control) so property rights become secure and private capital markets can flourish

path dependence

the principle that early institutional frameworks constrain future options, causing long-term economic divergence across nations

inclusive institutions (Acemoglu & Robinson)

frameworks that distribute political power broadly, guarantee secure property rights, enforce rule of law, and provide a level playing field for market participation

extractive institutions (Acemoglu & Robinson)

frameworks where political power is concentrated in a narrow elite with few checks and balances, designed to extract wealth and resources from the majority to benefit a few

creative destruction

the process by which new technologies, innovations, and business models replace outmoded, inefficient ones to drive sustained productivity

factor endowments hypothesis (Engerman & Sokoloff)

the theory that initial climate, soil, and mineral endowments dictated colonial labor systems and institutional setups, establishing long-run inequality

reversal of fortunes

the historical phenomenon where regions that were the wealthiest and most densely populated in 1500 (such as Mexico and Peru) became relatively poorer centuries later because colonizers established extractive frameworks there

encomienda system

royal land and labor grants from the Spanish Crown where colonizers coerced indigenous labor under the pretext of Christianization and protection

mita system

an Inca-rooted mandatory labor tax adapted by the Spanish to force adult indigenous men into silver and gold mining

latifundia system

an ancient Greco-Roman land-grant framework revived after the Reconquista and reinstated in the colonies, which granted vast tracts of land to the nobility, military, and Catholic Church, establishing a deeply unequal initial distribution of land, wealth, and income

haciendas

nearly self-sufficient feudal estates, equipped with livestock, machinery, and tools for crop cultivation and cattle farming, relying on debt peonage rather than open labor markets to bind nominally “free” wage laborers to the land

Spanish mercantilism

an imperial trade policy designed to maximize the Spanish Crown’s surplus and bullion by requiring all trade to route through Spain, while strictly prohibiting colonial manufacturing and intra-regional trade

rule of law

applies universal, impersonal rules enforced by an independent judiciary

rule by law

relies on identity-based rules applied selectively to safeguard elite privilege

autarky

a state of total economic self-sufficiency where a country does not engage in international trade

import substitution industrialization (ISI)

a state-led development strategy aimed at replacing foreign manufactured imports with domestic industrial production through high tariffs, quotas, and state subsidies

overvalued exchange rate

when a government keeps its nominal currency rate fixed while domestic inflation is high, making foreign imports artificially cheap and domestic exports penalized and uncompetitive

solow growth framework

an aggregate economic model that explains long-run GDP growth through accumulation of physical capital, labor expansion, and technological progress

total factor productivity (TFP/A)

a measure of efficiency that accounts for anything allowing an economy to produce more output with the same inputs—including technological innovations, managerial practices, secure property rights, and low corruption

marginal product of labor (MPL)

the additional GDP generated by adding one extra worker to the labor force

law of diminishing marginal returns

the principle that as more workers are added while holding physical capital (K) and technology (A) fixed, each additional worker adds progressively smaller increments to total output

capital-to-labor ratio (K/L or k)

the amount of physical equipment and infrastructure available per worker, which directly determines labor productivity and real wages

capital dilution

the process where rapid population/labor force growth absorbs national savings just equipping new workers with existing tools, preventing the capital-per-worker ratio (K/L) from rising

absolute convergence

the theoretical prediction that poor countries will automatically grow faster and catch up to rich countries because of high returns on scarce capital

• rejected by global data

conditional convergence

the empirical reality that countries do not converge to the same wealthy level, but rather to their own unique steady-state equilibrium based on their specific savings rates, population growth, and institutional productivity

growth accounting

an empirical “audit” framework that breaks down historical GDP expansion to assign credit to physical capital (K), labor (L), human skills (H), and efficiency (A)

solow residual (TFP residual)

the left-over growth calculated by subtraction (TFP = GDP Growth - Factor Contributions), it causes unmeasured efficiency gains, technological adoption, property rights, and market distortions

• often called the “measure of ignorance”

resource misallocation

when distortions (subsidized loans to connected firms, labor rules, tax exemptions) trap machines and workers in low-efficiency companies instead of letting them flow to high-productivity firms

informality

workers and businesses operating outside official tax registration, legal frameworks, and labor regulations (representing 55% of the workforce and 43% of regional GDP)

mincer earnings equation

an empirical model where an extra year of schooling yields an ~8% wage increase, though aggregate economic growth requires school quality and technology adoption alongside extra years in school

crime tax

direct security costs that act like an extraction tax, diverting productive capital into private guards and armoring while scaring off FDI

natural capital

the world’s stock of physical and biological assets—including geology, soil, air, water, and living organisms—yielding a continuous flow of vital ecosystem services

provisioning services

direct physical goods extracted for market use (e.g., timber, agricultural food crops, and freshwater)

regulating services

natural climate and disease control (e.g., carbon storage, flood control, water filtration, pollination)

cultural services

non-material benefits (e.g., ecotourism revenues, cultural identity)

supporting services

fundamental biological infrastructure (e.g., soil formation, nutrient cycling)

negative externality

a cost imposed on an unconsenting third party during economic activity; because private markets ignore external damage, unregulated output exceeds the socially optimal level (Q_market > Q_social)

tragedy of the commons

resources like frontier rainforests that are rivalrous (one logger’s harvest reduces availability) but non-excludable (difficult to enforce access limits); individual loggers capture 100% of the private profit from clearing land, while ecological costs are borne globally

environmental kuznets curve (EKC)

the hypothesized inverted-U relationship where environmental degradation initially rises with GDP per capita (Y), reaches a peak turning point (Y* = B₁ / 2B₂), and then declines as economies transition to services and clean technology

payments for ecosystem services (PES)

a market-based policy instrument where governments or beneficiaries make direct financial transfers to landowners who voluntarily preserve intact forests or ecosystems

escazú agreement (2018)

a regional treaty guarenteeing public access to environmental information, decision-making, and justice, while establishing the world’s first binding legal protections for environmental human rights defenders

china-driven commodity super-cycle (2000-2014)

a 15-year global surge in primary commodity demand and prices driven by rapid Chinese urban industrialization, followed by a severe bust (2014-2020) as Chinese growth slowed

dutch disease

the economic mechanism where a natural resource export boom triggers massive foreign currency inflows, causing the domestic currency to appreciate sharply in real terms and rendering non-resource manufacturing and agriculture globally uncompetitive (deindustrialization)

pro-cyclical trap

spending heavily during commodity price booms and enacting severe fiscal cuts during busts

counter-cyclical policy

saving temporary windfall revenues in Sovereign Wealth Funds (SWFs) to cushion downturns

point-source commodities

geographically concentrated resources (oil wells, copper mines) foster rent-seeking and extractive institutions

diffuse commodities

dispersed resources (family-farmed coffee) encourage broader property rights and democratic participation

Prebisch-Singer hypothesis

the empirical thesis showing that over the long run, primary commodity prices decline relative to manufactured goods, leading to a secular decline in developing nations’ net barter terms of trade

net barter terms of trade (TOT)

the ratio of export prices (P_x) to import prices (P_m), calculated as TOT = (P_x / P_m) x 100

structuralism

the ECLAC/CEPAL framework dividing the world into an industrial “Center” and a resource-exporting “Periphery”, arguing that uncoordinated free trade transfers productivity gains to rich nations

dependency theory

a radical structuralist critique asserting that underdevelopment is an active condition produced by integrating peripheral nations into global capitalism through commercial, financial, and technological dependence

infant industry argument

the policy rationale stating that new domestic factories need temporary state protection to achieve economies of scale and “learn by doing” before facing open global competition

backward linkage

a new industry creates demand for raw materials and component parts (supplier inputs), pulling domestic suppliers into existence behind it in the supply chain (e.g., an auto assembly plant creates demand for domestic steel, rubber, glass, and leather)

forward linkage

an industry produces a basic input or raw material that makes it cheaper and easier for other new domestic businesses to form ahead of it in the supply chain (e.g., a state steel mill provides cheap inputs for domestic machinery, construction, and appliance manufacturing)

multiple exchange rates

currency manipulation using different rate tiers (e.g., cheap dollars for state machinery vs. low peso payouts for farm exporters) to subsidize factories at the expense of agriculture

Phase 1: “Easy” ISI

substitutes simple non-durable consumer goods (textiles, shoes, processed food) with low tech/capital needs

Phase 2: “Hard” ISI

substitutes complex durables, intermediate inputs, and capital machinery (autos, steel, chemicals) requiring high capital and advanced technology

rent-seeking

corporate strategy where firm profits depend on political lobbying for tariff protection, subsidized loans, and import licenses rather than engineering higher product quality or productivity

neo-structuralism (ECLAC today)

the modern revival of state industrial policy that supports national development and green transition, but explicitly avoids the self-defeating traps of old ISI