- Industry: Economy; Printing & publishing
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Over their lives, people try to spread their spending more evenly than their income. The permanent income hypothesis, developed by Milton Friedman, says that a person’s spending decisions are guided by what they think over their lifetime will be their average (also known as permanent) income. A sharp increase in short-term income will not result in an equally sharp increase in short-term consumption. What if somebody unexpectedly comes into money, say by winning the lottery? The permanent income hypothesis suggests that people will save most of any such windfall gains. Reality may be somewhat different. (See life-cycle hypothesis. )
Industry:Economy
A unit of size, a one-hundredth of the total. Not to be confused with percentage change. When something increases by 1 percentage point this may be quite different from a 1% increase. For instance, if GDP grew last year by 1% and this year by 2%, the growth rate this year increased by 1 percentage point compared with last year (the difference between 1% and 2%) and also by 100% (2% is double 1%). A 1% increase would mean that the growth rate this year was only 1. 01%.
Industry:Economy
History matters. Where you have been in the past determines where you are now and where you can go in future. Indeed, even small, apparently trivial, differences in the path you have taken can have huge consequences for where you are and can go. In economics, path dependence refers to the way in which apparently insignificant events and choices can have huge consequences for the development of a market or an economy. Economists disagree over how widespread path dependence is, and whether it is a form of market failure. One focus of this debate is the QWERTY keyboard. Some argue that the QWERTY design was deliberately made slow to use so as to overcome a jamming-at-speed problem in early typewriters. Much faster alternative layouts of keys have failed to prosper, even though the anti-jamming rationale for QWERTY has been defunct for years. Others say that the QWERTY system is as efficient a layout of keys as any other and that its success is a triumph of market forces. Having invested in learning to make and use the QWERTY keyboard, it makes no economic sense to switch to an alternative that is no better than QWERTY.
Industry:Economy
When an economy is growing too fast and its productive capacity cannot keep up with demand. It often boils over into inflation.
Industry:Economy
Shifting activities that used to be done inside a firm to an outside company, which can do them more cost-effectively. Big firms have outsourced a growing amount of their business since the early 1990s, including increasingly offshoring work to cheaper employees at firms in countries such as India. This has become politically controversial in countries that lose jobs as a result of offshoring. However, a firm that outsources can improve its efficiency by focusing on those activities in which it can create the most value; the firm to which it outsources can also increase efficiency by specializing in that activity. That, at least, is the theory. In practice, managing the outsourcing process can be tricky, particularly for more complex activities.
Industry:Economy
A description of what happens to unemployment when the rate of growth of GDP changes, based on empirical research by Arthur Okun (1928–80). It predicts that if GDP grows at around 3% a year, the jobless rate will be unchanged. If it grows faster, the unemployment rate will fall by half of what the growth rate exceeds 3% by; that is, if GDP grows by 5%, unemployment will fall by 1 percentage point. Likewise, a lesser, say 2%, increase in GDP would be associated with a half a percentage point increase in the jobless rate. This relationship is not carved in stone, as it merely reflects the American economy during the period studied by Okun. Even so, in most economies Okun’s Law is a reasonable rule of thumb for estimating the likely impact on jobs of changes in output
Industry:Economy
When average income increases, the demand for normal goods increases, too. The opposite of inferior goods.
Industry:Economy
Although most economists support free trade, in the 1970s a growing number of them became increasingly puzzled by the large differences between the predictions of free trade theory and real-world trade flows. Their solution to this puzzle is known as new trade theory. One mystery was that trade was growing fastest between industrial countries with similar economies and endowments of the factors of production. In many new industries, there was no clear comparative advantage for any country. Patterns of production and trade often seemed matters of chance. Trade between two countries would often consist mostly of similar goods, for example, one country would sell cars to another country from which it would import different models of cars. One explanation, associated in particular with Paul Krugman of the Massachusetts Institute of Technology, drew on Adam Smith’s idea that the division of labor lowers unit costs. Economies of scale within firms are incompatible with the perfect competition assumed by traditional trade theory. A more realistic assumption is that many markets have monopolistic competition. When a monopolistically competitive market expands, it does so through a mixture of more firms (greater product variety) and bigger firms, with bigger-scale economies. Free trade expands market size beyond national borders and so allows firms to reap bigger economies of scale, to the benefit of consumers, workers and shareholders. The upside may be greater the more similar are the trading economies. This may explain why trade liberalization is easier to achieve between similar countries. Thus, for example, the free-trade agreement between the United States and Canada produced only minor local complaints, whereas its subsequent expansion to include the very different economy of Mexico was much more controversial (see NAFTA).
Industry:Economy
When the value of a good to a consumer changes because the number of people using it changes. For instance, owning a phone becomes more valuable as more people are plugged into the telephone network. Network effects are sometimes called network externality, although this implies, often wrongly, that the benefits from being part of a network are a sort of market failure. They give a huge competitive advantage to the firm that owns the network. This incumbent advantage arises because a new entrant must persuade people to join a network that starts with fewer members, and thus may be less valuable to them than the network they are currently in. This is why markets for products with network effects are often dominated by only a few firms or a single monopoly. Some economists argue that many recent technological innovations, notably the Internet, have large positive network effects, which make possible much higher productivity and growth than in the past.
Industry:Economy
One of two main sorts of market failure often associated with the provision of insurance. The other is adverse selection. Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for. (See also deposit insurance, lender of last resort, IMF and World Bank. )
Industry:Economy
