- Industry: Economy; Printing & publishing
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Somewhere between perfect competition and monopoly, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few firms enjoy a pure monopoly; oligopoly is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by advertising or through small differences in design. These small differences form barriers to entry. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce prices through competition. Prices are higher and output lower than under perfect competition
Industry:Economy
When people are misled by inflation into thinking that they are getting richer, when in fact the value of money is declining. Whether, and how much, people are fooled by inflation is much debated by economists. Money illusion, a phrase coined by Keynes, is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial, helping to “grease the wheels” of the economy. Because of money illusion, workers like to see their nominal wages rise, giving them the illusion that their circumstances are improving, even though in real (inflation-adjusted) terms they may be no better off. During periods of high inflation double-digit pay rises (as well as, say, big increases in the value of their homes) can make people feel richer even if they are not really better off. When inflation is low, growth in real incomes may hardly register
Industry:Economy
A much quoted, great British economist, not famous for holding the same opinion for long. Born in 1883, he studied at Cambridge but came to reject much of the classical economics and Neo-classical economics associated with that university. Keynes helped set up the Bretton Woods framework, but he is best known for his General Theory of Employment, Interest and Money, published in 1936 in the depths of the Great Depression. This invented modern macroeconomics. It argued that economies could sometimes be stable (in equilibrium) even when they did not have full employment, but that a government could remedy this under-employment problem by increasing public spending and/or reducing taxation, thereby increasing the level of aggregate demand in the economy. Many politicians picked up on these ideas. As President Richard Nixon observed in 1971, “We are all Keynesians now. ” However, it is much debated whether Keynes would have supported the way many of them put his thoughts into practice. Keynes identified the economic importance of animal spirits. Making and losing fortunes in the financial markets led him to refer to the “casino capitalism” of the stock market. He also noted that “there is nothing so dangerous as the pursuit of a rational investment policy in an irrational world”. He had an amusingly accurate view of the impact and transmission of economic ideas: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. ” As for the frequency with which his opinions would evolve: “When the facts change, I change my mind – what do you do, sir?” “In the long run we are all dead,” he said. For him, the long run was 1946.
Industry:Economy
Earmarking taxes for a specific purpose. It may be a clever way to get around public hostility to paying more in taxation. If people are told that a specific share of their income tax will go to some popular cause, say education or health, they may be more willing to cough up. At the very least they may be forced to make more informed decisions about the trade-offs between taxes and public services. There is a downside, however. Hypothecated taxes may tie the hands of a government at times when the hypothecated revenue could be spent to better effect elsewhere in the public sector. Conversely, and perhaps more likely, hypothecated taxes may prove to be less hypothecated than the public is led to believe. Civil servants, doubtless under pressure from their political bosses, can usually find ways to fudge the definition of the specific purpose for which a tax is hypothecated, letting government regain control over how the money is spent.
Industry:Economy
When they go through the roof it is usually a warning sign that an economy is overheating. House prices often rise after interest rate reductions, which lower mortgage payments and thus give buyers the ability to fund a larger amount of borrowing and so offer a higher price for their new home. Strangely, people often regard house-price inflation as good news, even though it creates as many losers as gainers. They argue that rising house prices help to boost consumer confidence, and are part of the wealth effect: as house prices rise, people feel wealthier and so spend more. However, against this must be set a negative wealth effect. An increase in house prices makes many people worse off, such as first-time buyers and anyone planning to trade up to a better property. As long as people think that their house is a vehicle for speculation, rather than merely accommodation, it seems inevitable that prices will be volatile, prone to a boom-bust cycle. As house prices rise, profits are made, tempting more speculative buyers into the market; eventually, they start to pay too much, interest rates rise, demand falls and prices plunge. People have also invested in housing as a hedge against inflation: house prices generally rise when other prices rise, whereas the real value of mortgage debt is eroded by inflation. However, when mortgage interest rates are variable (as they generally are in the UK) rather than fixed (as in the United States), they may rise painfully during times of high inflation as a result of macroeconomic policy efforts to slow the pace of economic growth. One of the reasons why the United States has long-term fixed mortgage rates is the financing provided by government-sponsored agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, nicknamed, respectively, Fannie Mae and Freddie Mac. Economists increasingly debate their role, especially as they have grown into some of the world's largest lenders. Supporters claim that, as well as reducing macroeconomic volatility, they make housing more affordable, particularly for poorer people, and that other governments should play a similar role in the mortgage market. Critics say they have become a huge potential risk in the global financial system by creating a moral hazard through the controversial but widespread belief that if they were to get into difficulties the government would bail them out and, thus, their financial counterparties.
Industry:Economy
Spending by national and local government and some government-backed institutions. See fiscal policy, golden rule and budget.
Industry:Economy
Public goods that cannot be provided by one country acting alone but only by the joint efforts of many (strictly, all) countries. Some economists, along with global institutions such as the UN, reckon that such goods include international law and law enforcement, a stable global financial system, an open trading system, health, peace and environmental sustainability.
Industry:Economy
Economic perfection. This is when demand and supply are in balance (the market is in equilibrium) for each and every good and service in the economy. Nobody thinks that real-world economies can ever be that perfect; at best there is "partial equilibrium". But most economists think that general equilibrium is something worth aspiring to.
Industry:Economy
Jobs for all that want them. This does not mean zero unemployment because at any point in time some people do not want to work. Also, because some people are always between jobs, there will usually be some frictional unemployment. Full employment means that everyone who wants work and is willing to work at the market wage is in work. Most governments aim to achieve full employment, although nowadays they rarely try to lower unemployment below the nairu: the lowest jobless rate consistent with stable, low inflation.
Industry:Economy
An influential economist of the Austrian school, who won the Nobel Prize for economics in 1974 for his theory of the business cycle many years after this body of work seemed to have been disproved by Keynes. Born in 1899, Hayek attended his home-town University of Vienna after the First World War. He was attracted to socialism until he read a pioneering Austrian economist, Ludwig von Mises, on the subject, after which, he said, “the world was never the same again”. Hayek argued that the business cycle originated from expanded credit creation by banks, which was followed by firms and people making mistaken capital investments in producing things for which the market turns out to be smaller (or larger) than expected. But after an initially enthusiastic reception, the Austrian business-cycle theory lost out in policy debates to Keynes's General Theory. After the Second World War, Hayek was a leading member of the Chicago school along with Milton Friedman, among others. Hayek was a noted proponent of the free-market system and a critic of state planning. His 1944 book, The Road to Serfdom, anticipated the demise of command economies that sought to suppress price signals. This prediction came from his belief in the limits of human reason and has faith in the superior ability of capitalism to make efficient use of limited information and to learn by trial and error. His views, which echo Adam Smith’s invisible hand, are said to have inspired the free-market economic reforms undertaken in the 1980s by Margaret Thatcher and Ronald Reagan. He died in 1992.
Industry:Economy
