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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 guide to the riskiness of a financial instrument provided by a ratings agency, such as Moody’s, Standard and Poor’s and Fitch IBCA. These measures of credit quality are mostly offered on marketable government and corporate debt. A triple-A or A++ rating represents a low risk of default; a C or D rating an extreme risk of, or actual, default. Debt prices and yields often (but not always) reflect these ratings. A triple-A bond has a low yield. High-yielding bonds, also known as junk bonds, usually have a rating that suggests a high risk of default. A series of financial market crises from the mid-1990s onwards led to growing debate about the reliability of ratings, and whether they were slow to give warning of impending trouble. After the Enron debacle, which again the ratings agencies had failed to predict, some critics argued that the big three agencies had formed a cosy oligopoly and that encouraging more competition was the way to improve ratings.
Industry:Economy
A way to measure economic success, albeit one that can be manipulated quite easily. It is calculated by expressing the economic gain (usually profit) as a percentage of the capital used to produce it. Deciding what number to use for profit is rarely simple. Likewise, totaling up how much capital was used can be tricky, especially if it is expanded to include intangible assets and human capital. When firms are evaluating a project to decide whether to go ahead with it, they estimate the project’s expected rate of return and compare it with their cost of capital. (See net present value and discount rate. )
Industry:Economy
How some economists believe that people think about the future. Nobody can predict the future perfectly; but rational expectations theory assumes that, over time, unexpected events (shocks) will cancel out each other and that on average people’s expectations about the future will be accurate. This is because they form their expectations on a rational basis, using all the information available to them optimally, and learn from their mistakes. This is in contrast to other theories of how people look ahead, such as adaptive expectations, in which people base their predictions on past trends and changes in trends, and behavioral economics, which assumes that expectations are somewhat irrational as a result of psychological biases. The theory of rational expectations, for which Robert Lucas won the Nobel prize for economics, initially became popular with monetarists because it seemed to prove that Keynesian policies of demand management would fail. With rational expectations, people learn to anticipate government policy changes and act accordingly; since macroeconomic fine tuning requires that governments be able to fool people, this implies that it is usually futile. Subsequently, this conclusion has been challenged. However, rational and near-rational expectations have become part of the mainstream of economic though
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
The name given to the arrangements through which countries reschedule their official debt; that is, money borrowed from other governments rather than banks or private firms. The club is based on Avenue Kléber in Paris. Its members are the 19 founders of the OECD as well as Russia. Other institutions such as the World Bank attend in an informal role. Rescheduling requires the consensus agreement of members and must not favor one creditor nation over another. Private debt re¬scheduling takes place through the London Club.
Industry:Economy
Economics that tries to change the world, by suggesting policies for increasing economic welfare. The opposite of positive economics, which is content to try to describe the world as it is, rather than prescribe ways to make it better.
Industry:Economy
A measure used to help decide whether or not to proceed with an investment. Net means that both the costs and benefits of the investment are included. To calculate net present value (NPV), first add together all the expected benefits from the investment, now and in the future. Then add together all the expected costs. Then work out what these future benefits and costs are worth now by adjusting future cashflow using an appropriate discount rate. Then subtract the costs from the benefits. If the NPV is negative, then the investment cannot be justified by the expected returns. If the NPV is positive, it can, although it pays to make comparisons with the NPVs of alternative investment opportunities before going ahead.
Industry:Economy
The school of economics that developed the free-market ideas of classical economics into a full-scale model of how an economy works. The best-known neo-classical economist was Alfred Marshall, the father of marginal analysis. Neo-classical thinking, which mostly assumes that markets tend towards equilibrium, was attacked by Keynes and became unfashionable during the Keynesian-dominated decades after the Second World War. But, thanks to economists such as Milton Friedman, many neo-classical ideas have since become widely accepted and uncontroversial.
Industry:Economy
A way of building redistribution into the taxation system by taking money from people with high incomes and paying it to people with low incomes. Because it takes place automatically through the tax system, it may attach less stigma to the receipt of financial help than some other forms of welfare assistance. However, it may also discourage recipients from working to increase their income (see poverty trap), which is why some countries have introduced a form of negative income tax that is available only to the working poor. In the United States, this is known as the earned income tax credit.
Industry:Economy
