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 specialise in--and how to maximise the benefits from international trade--is best decided according to comparative advantage. Both absolute and comparative advantage may change significantly over time.
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. When you do business with people you would be better off avoiding.
This is one of two main sorts of market failure often associated with insurance. The other is moral hazard. Adverse selection can be a problem when there is asymmetric information between the seller of insurance and the buyer; in particular, insurance will often not be profitable when buyers have better information about their risk of claiming than does the seller.
Ideally, insurance premiums should be set according to the risk of a randomly selected person in the insured slice of the population year-old male smokers, say.
In practice, this means the average risk of that group. When there is adverse selection, people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying. In this case, premiums set according to the average risk will not be sufficient to cover the claims that eventually arise, because among the people who have bought the policy more will have above-average risk than below-average risk.
Putting up the premium will not solve this problem, for as the premium rises the insurance policy will become unattractive to more of the people who know they have a lower risk of claiming.
One way to reduce adverse selection is to make the purchase of insurance compulsory, so that those for whom insurance priced for average risk is unattractive are not able to opt out. Many firms advertise their goods or services, but are they wasting economic resources? Some economists reckon that advertising merely manipulates consumer tastes and creates desires that would not otherwise exist.
By increasing product differentiation and encouraging brand loyalty advertising may make consumers less price sensitive, moving the market further from perfect competition towards imperfect competition see monopolistic competition and increasing the ability of firms to charge more than marginal cost.
Heavy spending on advertising may also create a barrier to entry, as a firm entering the market would have to spend a lot on advertising too. However, some economists argue that advertising is economically valuable because it increases the flow of information in the economy and reduces the asymmetric information between the seller and the consumer.
How to Convert PDF to Excel
This intensifies competition, as consumers can be made aware quickly when there is a better deal on offer. These can arise when somebody the principal hires somebody else the agent to carry out a task and the interests of the agent conflict with the interests of the principal.
An example of such principal-agent problems comes from the relationship between the shareholders who own a public company and the managers who run it. The owners would like managers to run the firm in ways that maximise the value of their shares, whereas the managers' priority may be, say, to build a business empire through rapid expansion and mergers and acquisitions , which may not increase their firm's share price.
One way to reduce agency costs is for the principal to monitor what the agent does to make sure it is what he has been hired to do. But this can be costly, too. It may be impossible to define the agent's job in a way that can be monitored effectively.
For instance, it is hard to know whether a manager who has expanded a firm through an acquisition that reduced its share price was pursuing his own empire-building interests or, say, was trying to maximise shareholder value but was unlucky.
Another way to lower agency costs, especially when monitoring is too expensive or too difficult, is to make the interests of the agent more like those of the principal. For instance, an increasingly common solution to the agency costs arising from the separation of ownership and management of public companies is to pay managers partly with shares and share options in the company. This gives the managers a powerful incentive to act in the interests of the owners by maximising shareholder value.
But even this is not a perfect solution. Some managers with lots of share options have engaged in accounting fraud in order to increase the value of those options long enough for them to cash some of them in, but to the detriment of their firm and its other shareholders. See, for example, Enron. Broadly speaking, governments have tried two methods of subsidising agriculture. The first, used in the United States during the s and in the UK before it joined the European Union, is to top up farmers' incomes if they fall below a level deemed acceptable.
Farmers may be required to set aside some of their land in return for this support. The second is to guarantee a minimum level of farm prices by buying up surplus supply and storing or destroying it if prices would otherwise fall below the guaranteed levels.
To keep down the direct cost of this subsidy the EU used trade barriers, including import levies, to minimise competition to EU farmers from produce available more cheaply on world agriculture markets.
Recent American farm-support policy has combined income top-ups and some guaranteed prices. As most governments have become more committed to international trade, such agricultural policies have come under increasing attack, although the free trade rhetoric has often run far ahead of genuine reform.
Finding a way to end agricultural support had become by far the biggest remaining challenge for those trying to negotiate global free trade.
Farming around the world continues to become more productive while generally accounting for a smaller share of employment and national income , although in some poor countries it remains the sector on which the country and its people depend. The total value of international trade in agriculture has risen steadily.
But the global agriculture market remains severely distorted by trade barriers and government subsidy, such as the european union 's Common agricultural policy. See international aid. It is often alleged that altruism is inconsistent with economic rationality, which assumes that people behave selfishly.
Certainly, much economic analysis is concerned with how individuals behave, and homo economicus economic man is usually assumed to act in his or her self-interest.
However, self-interest does not necessarily mean selfish.
Some economic models in the field of behavioural economics assume that self-interested individuals behave altruistically because they get some benefit, or utility , from doing so. For instance, it may make them feel better about themselves, or be a useful insurance policy against social unrest, say.
Convert to and from PDF
Some economic models go further and relax the traditional assumption of fully rational behaviour by simply assuming that people sometimes behave altruistically, even if this may be against their self-interest. Either way, there is much economic literature about charity, international aid , public spending and redistributive taxation.
The running down or payment of a loan by instalments. An example is a repayment mortgage on a house, which is amortised by making monthly payments that over a pre-agreed period of time cover the value of the loan plus interest. With loans that are not amortised, the borrower pays only interest during the period of the loan and then repays the sum borrowed in full. The colourful name that keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, "naive optimism".
How to import a table from PDF into Excel
He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". Where these animal spirits come from is something of a mystery. Certainly, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good.
Antitrust laws aim to stop abuses of market power by big companies and, sometimes, to prevent corporate mergers and acquisitions that would create or strengthen a monopolist. There have been big differences in antitrust policies both among countries and within the same country over time.
This has reflected different ideas about what constitutes a monopoly and, where there is one, what sorts of behaviour are abusive. This prohibited contracts or conspiracies to restrain trade or, in the words of a later act, to monopolise commerce.
In the early 20th century this law was used to reduce the economic power wielded by so-called "robber barons", such as JP Morgan and John D. Rockefeller, who dominated much of American industry through huge trusts that controlled companies' voting shares.
Du Pont chemicals, the railroad companies and Rockefeller's Standard Oil, among others, were broken up. In the s a more laissez-faire approach was adopted, underpinned by economic theories from the chicago school. These theories said that the only justification for antitrust intervention should be that a lack of competition harmed consumers, and not that a firm had become, in some ill-defined sense, too big. Some monopolistic activities previously targeted by antitrust authorities, such as predatory pricing and exclusive marketing agreements, were much less harmful to consumers than had been thought in the past.
They also criticised the traditional method of identifying a monopoly, which was based on looking at what percentage of a market was served by the biggest firm or firms, using a measure known as the herfindahl-hirschman index.
Instead, they argued that even a market dominated by one firm need not be a matter of antitrust concern, provided it was a contestable market. In the s American antitrust policy became somewhat more interventionist.
Economic Glossary - the Complete Economic Terms and Definitions
A high-profile lawsuit was launched against Microsoft in The giant software company was found guilty of anti-competitive behaviour, which was said to slow the pace of innovation. However, fears that the firm would be broken up, signalling a far more interventionalist American antitrust policy, proved misplaced. The firm was not severely punished. In the UK, antitrust policy was long judged according to what policymakers decided was in the public interest.
Economics A-Z terms beginning with A
At times this approach was comparatively permissive of mergers and acquisitions; at others it was less so. However, in the mids the UK followed the American lead in basing antitrust policy on whether changes in competition harmed consumers.
Within the rest of the european union several big countries pursued policies of building up national champions, allowing chosen firms to enjoy some monopoly power at home which could be used to make them more effective competitors abroad. However, during the s the European Commission became increasingly active in antitrust policy, mostly seeking to promote competition within the EU.
In , the EU controversially blocked a merger between two American firms, GE and Honeywell; the deal had already been approved by America's antitrust regulators.
The controversy highlighted an important issue. As globalisation increases, the relevant market for judging whether market power exists or is being abused will increasingly cover far more territory than any one single economy. Indeed, there may be a need to establish a global antitrust watchdog, perhaps under the auspices of the world trade organisation.
Common economic terms pdf to excel
A rise in the value of an asset and the opposite of depreciation. When the value of a currency rises relative to another, it appreciates.
Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price. Sometimes these will be identical assets in different markets, for instance, shares in a company listed on both the London Stock Exchange and New York Stock Exchange.
Often the assets being arbitraged will be identical in a more complicated way, for example, they will be different sorts of financial securities that are each exposed to identical risks.
Some kinds of arbitrage are completely risk-free-this is pure arbitrage. Today, a lot of so called arbitrage, much of it done by hedge funds , involves assets that have some similarities but are not identical. This is not pure arbitrage and can be far from risk free. This is one of two influential economic theories of how assets are priced in the financial markets. The other is the capital asset pricing model.