Economics Glossary

Animal Spirits

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". 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

Asian Financial Crisis 1997

During 1997-98, many of the East Asian tiger economies suffered a severe finanical and economic crisis. This had big consequences for the global financial markets, which had become increasingly exposed to the promise that Asia had seemed to offer. The crisis destroyed wealth on a massive scale and sent absolute poverty shooting up. In the banking system alone, corporate loans equivalent to around half of one year's GDP went bad - a destruction of savings on a scale more usually associated with a full-scale war. The precise cause of the crisis remains a matter of debate. Fingers have been pointed at the currency peg adopted by some countries, and a reduction of capital controls in the years before the crisis. Some blamed economic contagion. The crisis brought an end to a then widespread belief that there was a distinct "Asian way" of capitalism that might prove just as successful as capitalism in America or Europe. Instead, critics turned their fire on Asian cronyism, ill-disciplined banking and lack of transparency. In the years following the crisis, most of the countries involved have introduced reforms designed to increase transparency and improve the health of the banking system, although some (such as South Korea) went much further than others (such as Indonesia)

Asymetric Information

When something unexpected happens that affects one economy (or part of an economy) more than the rest. This can create big problems for policymakers if they are trying to set a macroeconomic policy that works for both the area affected by the shock and the unaffected area. For instance, some economic areas may be oil exporters and thus highly dependent on the price of oil, but other areas are not. If the oil price plunges, the oil-dependent area would benefit from policies designed to boost demand that might be unsuited to the needs of the rest of the economy. This may be a constant problem for those responsible for setting the interest rate for the euro given the big differences--and different potential exposures to shocks--among the economies within the euro zone.

Basel 1 and 2

An attempt to reduce the number of bank failures by tying a bank's capital adequacy ratio to the riskiness of the loans it makes. For instance, there is less chance of a loan to a government going bad than a loan to, say, an internet business, so the bank should not have to hold as much capital in reserve against the first loan as against the second. The first attempt to do this worldwide was by the Basel committee for international banking supervision in 1988. However, its system of judging the relative riskiness of different loans was crude. For instance, it penalised banks no more for making loans to a fly-by-night software company in Thailand than to Microsoft; no more for loans to South Korea, bailed out by the IMF in 1998, than to Switzerland. In 1998, "Basel 2" was proposed, using much more sophisticated risk classifications. However, controversy over these new classifications, and the cost to banks of administering the new approach, led to the introduction of Basel 2 being delayed until (at least) 2005

Bounded Rationality

A theory of human decision making that assumes that people behave rationally, but only within the limits of the information available to them. Because their information may be inadequate (bounded) they make take decisions that appear to be irrational according.

Catch Up Effect

In any period, the economies of countries that start off poor generally grow faster than the economies of countries that start off rich. As a result, the NATIONAL INCOME of poor countries usually catches up with the national income of rich countries. New technology may even allow DEVELOPING COUNTRIES to leap-frog over industrialised countries with older technology

Comparative Advantage

Standard economic concept accounting for gains from trade due to tendency of countries to export goods they produce relatively efficiently. "A country has comparative advantage in producing a good if the opportunity cost [value of opportunities forgone in making a choice] of producing that good in terms of other goods is lower in that country than it is in other countries" (P. Krugman and M. Obstfeld, International Economics: Theory and Policy, 1997, p. 14). In particular cases, used to justify specialization by countries in international division of labor.

Derivatives

In finance, a derivative is a financial instrument that has a value, based on the expected future price movements of the asset to which it is linked—called the underlying asset such as a share or a currency. There are many kinds of derivatives, with the most common being swaps, futures, and options. Derivatives are a form of alternative investment which can be thought as a way of insuring against the fall of the underlying asset. If Derivatives are used as an instrument in themselves they can be a risky form of investment.

Endogenous/Exdogenous

Inside or Outside the model. Eg:To keep growing, an eco­nomy needs continual infusions of technological progress. Yet this is a force that the neo-classical model makes no attempt to explain. The rate of technological progress comes from outside the model

Foreign Direct Investment

Investment by firm based in one country in actual productive capacity or other real assets in another country, normally through creation of a subsidiary by a multinational corporation. Measure of globalization of capital.

Gini Coefficient

An inequality indicator. The Gini coefficient measures the inequality of income distribution within a country. It varies from zero, which indicates perfect equality, with every household earning exactly the same, to one, which implies absolute inequality, with a single household earning a country's entire income. Latin America is the world's most unequal region, with a Gini coefficient of around 0.5; in rich countries the figure is closer to 0.3

General Theory of Employment Interest and Money, The

Written by Keynes in 1936

Glass Steagall

The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation.The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. Many claim its repeal by the Gramm-Leach-Bliley act directly contributed to the severity of the Financial crisis of 2007–2011.

International Labor Organization

Founded in 1919 as part of the Treaty of Versailles, which created the League of Nations. In 1946, it became the first specialised agency of the UN. Based in Geneva, it formulates international LABOUR standards, setting out desired minimum rights for workers: freedom of association; the right to organise and engage in collective bargaining; equality of opportunity and treatment; and the abolition of forced labour.

Market Failure

When a market left to itself does not allocate resources efficiently. Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure.

• The abuse of MARKET POWER, which can occur whenever a single buyer or seller can exert significant influence over PRICES or OUTPUT

• EXTERNALITIES – when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment.

• PUBLIC GOODS, such as national defence. How much defence would be provided if it were left to the market?

• Where there is incomplete or ASYMMETRIC INFORMATION or uncertainty.

Abuse of market power is best tackled through ANTITRUST policy. Externalities can be reduced through REGULATION, a tax or subsidy, or by using property rights to force the market to take into account the WELFARE of all who are affected by an economic activity. The SUPPLY of public goods can be ensured by compelling everybody to pay for them through the tax system.

Moral Hazard

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected

Munificence

Abundance

Pareto Efficiency

A situation in which nobody can be made better off without making somebody else worse off. If an economy’s resources are being used inefficiently, it ought to be possible to make somebody better off without anybody else becoming worse off.

Pari Passu

Pari passu literally means "with an equal step" or "on equal footing" and by extension, "fairly," "without partiality. In stock holding agreements it is meant to mean that shareholders with the same ranking stock will not be treated more or less favourable than other stock holders.

Ricardian, Ricardo

Ricardian equivalence:GOVERNMENT deficits do not affect the overall level of DEMAND in an economy. This is because taxpayers know that any DEFICIT has to be repaid later, and so increase their SAVINGS in anticipation of a tax bill. Thus government attempts to stimulate an economy by increasing PUBLIC SPENDING and/or cutting taxes will be rendered impotent by the private-sector reaction

Safe Harbour

A provision of a statute or a regulation that reduces or eliminates a party's liability under the law, on the condition that the party performed its actions in good faith or in compliance with defined standards

Saticificing

Settling for what is good enough, rather than the best that is possible. This may occur in any situation in which decision makers are trying to pursue more than one goal at a time. Defined by Herb Simon.

Secondary Banking Crisis 1973

The Secondary Banking Crisis of 1973–75 was a dramatic crash in property prices in Great Britain which caused dozens of small ("secondary") lending banks to be threatened with bankruptcy. The Bank of England bailed out around thirty of these smaller banks, and intervened to assist some thirty others.

Shorting

Selling a SECURITY, such as a SHARE, that you do not currently own, in the expectation that its PRICE will fall by the time the security has to be delivered to its new owner. If the price does fall, you can buy the security at the lower price, deliver it to whoever you sold it to and make a PROFIT. The RISK is that the price rises, leaving you with a loss

Stochastic Process

One which exhibits random behaviour

Tobin Tax

A tax on international finance transactions. The levy would be very small, perhaps 0.005% but it would deter the speculative nature of financial ttransactions where traders make thousands of transactions to profit from very small changes in prices. The proceeds of the tax would be distributed to developing countries to alleivate the negative impacts of Globalization.