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The rate of return earned on a risk-free asset. This is a crucial component of modern portfolio theory, which assumes the existence of both risky and risk-free assets. The risk-free asset is usually assumed to be a government bond, and the risk-free rate is the yield on that bond, although in fact even a Treasury is not entirely without risk. In modern portfolio theory, the risk-free rate is lower than the expected return on the risky asset, because the issuer of the risky asset has to offer risk averse investors the expectation of a higher return to persuade them to forgo the risk-free asset.
Industry:Economy
The colorful 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.
Industry:Economy
Protection from the rough seas of regulation. Laws and regulations often include a safe harbor clause that sets out the circumstances in which otherwise regulated firms or individuals can do something without regulatory oversight or interference.
Industry:Economy
The running down or payment of a loan by installments. An example is a repayment mortgage on a house, which is amortized 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 amortized, the borrower pays only interest during the period of the loan and then repays the sum borrowed in full.
Industry:Economy
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. Classical economics and Neo-classical economics assume that individuals, firms and governments try to achieve the optimum, best possible outcome from their decisions. Satisficing assumes they decide for each goal a level of achievement that would be good enough and try to find a way to achieve all of these sub-optimal goals at once. This approach to decision making is commonplace in behavioral economics. It can be regarded as a realist’s theory of how decisions are taken. The concept was invented by Herbert Simon (1916-2001), a Nobel ¬prize-winning economist, in his book, Models of Man, in 1957.
Industry:Economy
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 behavioral 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. Some economic models go further and relax the traditional assumption of fully rational behavior 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.
Industry:Economy
Any income that is not spent. Ultimately, savings are the source of investment in an economy, although domestic savings may be supplemented by capital from foreign savers or themselves be invested abroad. In an economic sense, savings include purchases of shares or other financial securities. However, many official measures of a country’s savings ratio--total savings expressed as a percentage of total income--leave out such financial transactions. At times when the demand for financial securities is unusually high, this can give a misleading impression of how much saving is taking place. How much individuals save varies significantly among different age groups (see life-cycle hypothesis) and nationalities. Everywhere, people of all ages save more as their income rises. The supply of savings rises when interest rates rise; a rise in interest rates causes demand for funds to invest to fall; a rise in demand for investment funds may cause interest rates, and thus the cost of capital, to rise. The level of savings is also influenced by changes in wealth (see wealth effect) and by taxation policies.
Industry:Economy
A British economist (1842–1924), who developed some of the most important concepts in microeconomics. In his best-known work, Principles of Economics, he retained the emphasis on the importance of costs, which was standard in classical economics. But he added to it, helping to create Neo-classical economics, by explaining that the output and price of a product are determined by both supply and demand, and that marginal costs and benefits are crucial. He was the first economist to explain that demand falls as price increases, and that therefore the demand curve slopes downwards from left to right. He was also first with the concept of price elasticity of demand and consumer surplus.
Industry:Economy
Supply creates its own demand. So argued a French economist, Jean-Baptiste Say (1767–1832), and many classical and neo-classical economists since. Keynes argued against Say, making the case for the use of fiscal policy to boost demand if there is not enough of it to produce full employment.
Industry:Economy
The most famous of all central bank bosses, so far. A former jazz musician turned economist, he became chairman of the board of governors of America's Federal Reserve in 1987, shortly before Wall Street crashed. In 2003, he was reappointed until 2005. He won admirers for delivering monetary policy that helped to bring down inflation and create the conditions for strong economic growth. Some people considered him the nearest thing capitalism had to God. In 1996, he famously wondered aloud whether rising share prices were the result of "irrational exuberance". Economists debate whether history will judge him a failure because he did not prevent the growth of a huge bubble in America's economy.
Industry:Economy
