- Industry: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
- Company Profile:
Falling inflation and interest rates lead to higher spending (see wealth effect).
Industry:Economy
An exchange rate that has been adjusted to take account of any difference in the rate of inflation in the two countries whose currency is being exchanged.
Industry:Economy
A theory of “irrational” economic behavior. Prospect theory holds that there are recurring biases driven by psychological factors that influence people’s choices under uncertainty. In particular, it assumes that people are more motivated by losses than by gains and as a result will devote more energy to avoiding loss than to achieving gain. The theory is based on the experimental work of two psychologists, Daniel Kahneman (who won a Nobel Prize for economics for it) and Amos Tversky (1937–96). It is an important component of behavioral economics.
Industry:Economy
Opposition to free trade. Although intended to protect a country’s economy from foreign competitors, it usually makes the protected country worse off than if it allowed international trade to proceed without hindrance from trade barriers such as quotas and tariffs.
Industry:Economy
Things that can be consumed by everybody in a society, or nobody at all. They have three characteristics. They are:
* non-rival – one person consuming them does not stop another person consuming them;
* non-excludable – if one person can consume them, it is impossible to stop another person consuming them;
* non-rejectable – people cannot choose not to consume them even if they want to. Examples include clean air, a national defense system and the judiciary. The combination of non-rivalry and non-excludability means that it can be hard to get people to pay to consume them, so they might not be provided at all if left to market forces. Thus public goods are regarded as an example of market failure, and in most countries they are provided at least in part by government and paid for through compulsory taxation. (See also global public goods. )
Industry:Economy
A newish theory of how to take investment decisions when the future is uncertain, which draws parallels between the real economy and the use and valuation of financial options. It is becoming increasingly fashionable at business schools and even in the boardroom. Traditional investment theory says that when a firm evaluates a proposed project, it should calculate the project’s net present value (NPV) and if it is positive, go ahead. Real options theory assumes that firms also have some choice in when to invest. In other words, the project is like an option: there is an opportunity, but not an obligation, to go ahead with it. As with financial options, the interesting question is when to exercise the option: certainly not when it is out of the money (the cost of investing exceeds the benefit). Financial options should not necessarily be exercised as soon as they are in the money (the benefit from exercising exceeds the cost). It may be better to wait until it is deep in the money (the benefit is far above the cost). Likewise, companies should not necessarily invest as soon as a project has a positive NPV. It may pay to wait. Most firms’ investment opportunities have embedded in them many managerial options. For instance, consider an oil company whose bosses think they have discovered an oil field, but they are uncertain about how much oil it contains and what the price of oil will be once they start to pump. Option one: to buy or lease the land and explore? Option two: if they find oil, to start to pump? Whether to exercise these options will depend on the oil price and what it is likely to do in future. Because oil prices are highly volatile, it might not make sense to go ahead with production until the oil price is far above the price at which traditional investment theory would say that the NPV is positive and give the investment the green light. Options on real assets behave rather like financial options (a share option, say). The similarities are such that they can, at least in theory, be valued according to the same methodology. In the case of the oil company, for instance, the cost of land corresponds to the down-payment on a call (right to buy) option, and the extra investment needed to start production to its strike price (the money that must be paid if the option is exercised). As with financial options, the longer the option lasts before it expires and the more volatile is the price of the underlying asset (in this case, oil) the more the option is worth. This is the theory. In practice, pricing financial options is often tricky, and valuing real options is harder still.
Industry:Economy
Spending by national and local government and some government-backed institutions. See fiscal policy, golden rule and budget.
Industry:Economy
A firm providing essential services to the public, such as water, electricity and postal services, usually involving elements of natural monopoly. Food is essential, but because it is provided in a competitive market, food supply is not usually regarded as a public utility. Because public utilities have some monopoly power, they are typically subject to some regulation by government, such as price controls and perhaps an obligation to provide their services to everybody, even to those who cannot afford to pay a market price (the universal service obligation). Public utilities are often owned by the state, although this has become less common as a result of privatization.
Industry:Economy
A measure of the value of money that removes the effect of inflation. Contrast with nominal value.
Industry:Economy
