- Industry: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
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An approach to regulation often used for a public utility to stop it exploiting monopoly power. A public utility is forbidden to earn above a certain rate of return decided by the regulator. In practice, this often encourages the utility to be inefficient, slow to innovate and quick to spend money on such things as big offices and executive jets, to keep down its profit and thus the rate of return. Contrast with price regulation.
Industry:Economy
A way to measure economic success, albeit one that can be manipulated quite easily. It is calculated by expressing the economic gain (usually profit) as a percentage of the capital used to produce it. Deciding what number to use for profit is rarely simple. Likewise, totaling up how much capital was used can be tricky, especially if it is expanded to include intangible assets and human capital. When firms are evaluating a project to decide whether to go ahead with it, they estimate the project’s expected rate of return and compare it with their cost of capital. (See net present value and discount rate. )
Industry:Economy
Impossible to predict the next step. Efficient market theory says that the prices of many financial assets, such as shares, follow a random walk. In other words, there is no way of knowing whether the next change in the price will be up or down, or by how much it will rise or fall. The reason is that in an efficient market, all the information that would allow an investor to predict the next price move is already reflected in the current price. This belief has led some economists to argue that investors cannot consistently outperform the market. But some economists argue that asset prices are predictable (they follow a non-random walk) and that markets are not efficient.
Industry:Economy
An indicator of the reliability of a relationship identified by regression analysis. An R2 of 0. 8 indicates that 80% of the change in one variable is explained by a change in the related variable.
Industry:Economy
A form of protectionism. A country imposes limits on the number of goods that can be imported from another country. For instance, France may limit the number of cars imported from Japan to, say, 20,000 a year. As a result of limiting supply, the price of the imported good is higher than it would be under free trade, thus making life easier for domestic producers.
Industry:Economy
Market failure? Not necessarily. Usually a queue reflects a price that is set too low, so that demand exceeds supply, so some customers have to wait to buy the product. But a queue may also be the result of deliberate rationing by a producer, perhaps to attract attention – by a restaurant that wants to appear popular, say. Customers may regard a queue, such as a waiting list for health treatment, as a fairer way to distribute the product than using the price mechanism.
Industry:Economy
Part of the “ile” family that signposts positions on a scale of numbers (see also percentile). The top quartile on, say, the distribution of income, is the richest 25% of the population.
Industry:Economy
The foundation stone of monetarism. The theory says that the quantity of money available in an economy determines the value of money. Increases in the money supply are the main cause of inflation. This is why Milton Friedman claimed that “inflation is always and everywhere a monetary phenomenon”. The theory is built on the Fisher equation, MV = PT, named after Irving Fisher (1867–1947). M is the stock of money, V is the velocity of circulation, P is the average price level and T is the number of transactions in the economy. The equation says, simply and obviously, that the quantity of money spent equals the quantity of money used. The quantity theory, in its purest form, assumes that V and T are both constant, at least in the short-run. Thus any change in M leads directly to a change in P. In other words, increase the money supply and you simply cause inflation. In the 1930s, Keynes challenged this theory, which was orthodoxy until then. Increases in the money supply seemed to lead to a fall in the velocity of circulation and to increases in real income, contradicting the classical dichotomy (see monetary neutrality). Later, monetarists such as Friedman conceded that V could change in response to variations in M, but did so only in stable, predictable ways that did not challenge the thrust of the theory. Even so, monetarist policies did not perform well when they were applied in many countries during the 1980s, as even Friedman has since conceded.
Industry:Economy
A method for calculating the correct value of a currency, which may differ from its current market value. It is helpful when comparing living standards in different countries, as it indicates the appropriate exchange rate to use when expressing incomes and prices in different countries in a common currency. By correct value, economists mean the exchange rate that would bring demand and supply of a currency into equilibrium over the long-term. The current market rate is only a short-run equilibrium. Purchasing power parity (PPP) says that goods and services should cost the same in all countries when measured in a common currency. PPP is the exchange rate that equates the price of a basket of identical traded goods and services in two countries. PPP is often very different from the current market exchange rate. Some economists argue that once the exchange rate is pushed away from its PPP, trade and financial flows in and out of a country can move into disequilibrium, resulting in potentially substantial trade and current account deficits or surpluses. Because it is not just traded goods that are affected, some economists argue that PPP is too narrow a measure for judging a currency’s true value. They prefer the fundamental equilibrium exchange rate (FEER), which is the rate consistent with a country achieving an overall balance with the outside world, including both traded goods and services and capital flows. (See Big Mac index. )
Industry:Economy
Using private firms to carry out aspects of government. This has become increasingly popular since the early 1980s as governments have tried to obtain some of the benefits of the private sector without going as far as full privatization. The gains have been greatest when services have been allocated to private firms through competitive bidding. They have been smallest, and arguably even negative, in cases when the main contribution of the private firm has been to raise finance. That is because governments can usually borrow more cheaply than private firms, so when they ask them to raise money the question that springs to mind is: are they doing this to make their public borrowing look smaller?
Industry:Economy
