- Industry: Economy; Printing & publishing
- Number of terms: 15233
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A market in second-hand financial instruments. Bonds and shares are first sold in the primary market, for instance, through an initial public offering. After that, their new owners often sell them in the secondary market. The existence of liquid secondary markets can encourage people to buy in the primary market, as they know they are likely to be able to sell easily should they wish.
Industry:Economy
A theory of how people form their views about the future that assumes they do so using past trends and the errors in their own earlier predictions. Contrast with rational expectations.
Industry:Economy
As we do not live in a perfect world, how useful are economic theories based on the assumption that we do? Second-best theory, set out in 1956 by Richard Lipsey and Kelvin Lancaster (1924–99), looks at what happens when the assumptions of an economic model are not fully met. They found that in situations where not all the conditions are met, the second-best situation – that is, meeting as many of the other conditions as possible – may not result in the optimum solution. Indeed, reckoned Lipsey and Lancaster, in general, when one optimal equilibrium condition is not satisfied all of the other equilibrium conditions will change. Potentially, the second-best equilibrium may be worse than a new equilibrium brought about by government intervention, either to restore equilibrium to the market that is in disequilibrium, or to move the other markets away from their second-best conditions. Economists have seized on this insight to justify all sorts of interventions in the economy, ranging from taxing certain goods and subsidizing others to restricting free trade. Whenever there is market failure, second-best theory says it is always possible to design a government policy that would increase economic welfare. Alas, the history of government intervention suggests that although the second best may be improved on in theory, in practice second best is often least worst.
Industry:Economy
The founder of economics as we know it. Born in Kirkcaldy, Fife, Adam Smith (1723–90) was educated at Glasgow and Oxford, and in 1751 became professor of logic at Glasgow University. Eight years later he made his name by publishing the THEORY OF MORAL SENTIMENTS. His 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, is the bible of classical economics. He emphasized the role of specialization (the division of labor), technical progress and capital investment as the main engines of economic growth. Above all, he stressed the importance of the invisible hand, the way in which self-interest pursued in free markets leads to the most efficient use of economic resources and makes everybody better off in the process.
Industry:Economy
Financial contracts, such as bonds, shares or derivatives, that grant the owner a stake in an asset. Such securities account for most of what is traded in the financial markets.
Industry:Economy
This is the simplest yardstick of economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers. Being the best at something does not mean that doing that thing is the best way to use your scarce economic resources. The question of what to specialize in--and how to maximize the benefits from international trade--is best decided according to comparative advantage. Both absolute and comparative advantage may change significantly over time.
Industry:Economy
Turning a future cashflow into tradable, bond-like securities. Creating such asset-backed securities became a lucrative business for financial firms during the 1990s, as they invented new securities based on cashflow ranging from future mortgage and credit-card payments to bank loans, movie revenue and even the royalties on songs by David Bowie (so-called Bowie-bonds). Securitization has many benefits, at least in theory. Issuers gain instant access to money for which they would otherwise have to wait months or years, and they can shed some of the risk that their expected revenue will not materialize. By selling securitized loans, investment banks are able to finance their customers without tying up large amounts of capital. Investors can hold a new sort of asset, less risky than unsecured bonds, giving them the risk-reducing benefit of diversification. But there are dangers. The future cashflow underlying the securities may flow earlier or later than promised, or not at all.
Industry:Economy
Doing as you are done by. A grants B certain privileges on the condition that B grants the same privileges to A. Most international economic agreements, for example, on trade, include binding reciprocity requirements.
Industry:Economy
Traditionally, the profit rulers made from allowing metals to be turned into coins. Now it refers in a loosely defined way to the power of a country whose notes and coins are held by another country as a reserve currency.
Industry:Economy
Not lending to people in certain poor or troubled neighbourhoods – drawn with a red line on a map – simply because they live there, regardless of their credit-worthiness judged by other criteria.
Industry:Economy
