- Industry: Economy; Printing & publishing
- Number of terms: 15233
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Changes in the money supply have no effect on real economic variables such as output, real interest rates and unemployment. If the central bank doubles the money supply, the price level will double too. Twice as many dollars means half as much bang for the buck. This theory, a core belief of classical economics, was first put forward in the 18th century by David Hume. He set out the classical dichotomy that economic variables come in two varieties, nominal and real, and that the things that influence nominal variables do not necessarily affect the real economy. Today few economists think that pure monetary neutrality exists in the real world, at least in the short run. Inflation does affect the real economy because, for instance, there may be sticky prices or money illusion.
Industry:Economy
When a country’s own money is replaced as its citizens’ preferred currency by the US dollar. This can be a deliberate government policy or the result of many private choices by buyers and sellers (for instance, at the first sign of trouble, investors across Latin America generally flee into dollars). When it is government policy, dollarization is, in essence, a beefed up currency board. The appeal of dollarization is that the value of the dollar is more stable than the distrusted local currency, which may well have a history of suddenly falling in value. By eliminating all possible risk of devaluation against the dollar, the cost of local companies’ and the government’s borrowing in international markets is reduced, as the currency risk is removed. A big downside is that the country hands over control of monetary policy to the Federal Reserve, and the right interest rate for the United States may not be appropriate for the dollarized country, if that country and the United States do not constitute an optimal currency area. This is one reason that in some countries the local currency has been displaced by another fairly stable currency, such as, in some central European economies, the Euro (and before that the d-mark).
Industry:Economy
All the parties that have an interest, financial or otherwise, in a company, including shareholders, creditors, bondholders, employees, customers, management, the community and government. How these different interests should be catered for, and what to do when they conflict, is much debated. In particular, there is growing disagreement between those who argue that companies should be run primarily in the interests of their shareholders, in order to maximize shareholder value, and those who argue that the wishes of shareholders should sometimes be traded off against those of other stakeholders.
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
Control the money supply, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 Keynesian policies of demand management, echoing earlier debates between mercantilism and classical economics. Monetarism is based on the belief that inflation has its roots in the government printing too much money. It is closely associated with Milton Friedman, who argued, based on the quantity theory of money, that government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. If it did this, market forces would efficiently solve the problems of inflation, unemployment and recession. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK. Many central banks had set formal targets for money-supply growth, so every wiggle in the data was scrutinized for clues to the next move in the rate of interest. Since then, the notion that faster money-supply growth automatically causes higher inflation has fallen out of favor. The money supply is useful as a policy target only if the relationship between money and nominal GDP, and hence inflation, is stable and predictable. The way the money supply affects prices and output depends on how fast it circulates through the economy. The trouble is that its velocity of circulation can suddenly change. During the 1980s, the link between different measures of the money supply and inflation proved to be less clear than monetarist theories had suggested, and most central banks stopped setting binding monetary targets. Instead, many have adopted explicit inflation targets.
Industry:Economy
People are better off specializing than trying to be jacks of all trades and ending up masters of none. The logic of dividing the workforce into different crafts and professions is the same as that underpinning the case for free trade: everybody benefits from doing those things in which they have a comparative advantage and using income from doing so to meet their other needs.
Industry:Economy
A measure of how far a variable moves over time away from its average (mean) value.
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
One of the most important and influential economic theories about finance and investment. Modern portfolio theory is based upon the simple idea that diversification can produce the same total returns for less risk. Combining many financial assets in a portfolio is less risky than putting all your investment eggs in one basket. The theory has four basic premises. * Investors are risk averse. * securities are traded in efficient markets. * Risk should be analyzed in terms of an investor’s overall portfolio, rather than by looking at individual assets. * For every level of risk, there is an optimal portfolio of assets that will have the highest expected returns. All of this seems comparatively straightforward now, except perhaps the bit about efficient markets. But it was shocking when it was put forward in the early 1950s by Harry Markowitz, who later won the Nobel Prize for it. According to Mr. Markowitz, when he explained his theory to the high priests of the Chicago school, “Milton Friedman argued that portfolio theory was not economics”. It is now. (See arbitrage pricing theory, capital asset pricing model and black-scholes. )
Industry:Economy
The part of a company’s profit distributed to shareholders. Unlike interest on debt, the payment of a dividend is not automatic. It is decided by the company’s managers, subject to the approval of the company’s owners (shareholders). However, when a company cuts its dividend, this usually triggers a sharp fall in its share price by more than would be appear to be justified by the reduced dividend. Economists theorize that this is because a dividend cut signals to shareholders that the company is in a bad way, with more bad news to follow.
Industry:Economy
