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One of the two words economists use most; the other is supply. These are the twin driving forces of the market economy. Demand is not just about measuring what people want; for economists, it refers to the amount of a good or service that people are both willing and able to buy. The demand curve measures the relationship between the price of a good and the amount of it demanded. Usually, as the price rises, fewer people are willing and able to buy it; in other words, demand falls (but see Giffen goods, normal goods and inferior goods). When demand changes, economists explain this in one of two ways. A movement along the demand curve occurs when a price change alters the quantity demanded; but if the price were to go back to where it was before, so would the amount demanded. A shift in the demand curve occurs when the amount demanded would be different from what it was previously at any chosen price, for example, if there is no change in the market price, but demand rises or falls. The slope of the demand curve indicates the elasticity of demand. For approaches to modeling demand see revealed preference. Policymakers seek to manipulate aggregate demand to keep the economy growing as fast as is possible without pushing up inflation. Keynesians try to manage demand through fiscal policy; monetarists prefer to use the money supply. Neither approach has been especially successful in practice, particularly when attempting to manage short-term demand through fine tuning.
Industry:Economy
In the red – when more money goes out than comes in. A budget deficit occurs when public spending exceeds government revenue. A current account deficit occurs when exports and inflows from private and official transfers are worth less than imports and transfer outflows (see balance of payments).
Industry:Economy
Cancelling or rescheduling a borrower’s debts to lessen the pain of the debt burden. Debt forgiveness is increasingly viewed as the best way to relieve the financial problems facing poorer countries. Some of these countries have to pay so much in interest each year to foreign lenders that they have little money left to spend on the long-term solutions to their poverty, such as educating their workers and building a modern infrastructure. In 1998 the World Bank calculated that around 40 of the world’s poorest countries had an “unsustainably high” debt burden: the present value of their total debts was more than 220% of their exports. Debt forgiveness has potential drawbacks. For instance, there is a risk of moral hazard. If countries that borrow too much are let off their financial obligations, poor countries may feel they have nothing to lose by borrowing as much as they can. This is why policymakers often argue that debt forgiveness should come with a conditionality clause, for instance, a requirement that countries have a track record of implementing economic reforms designed to prevent a repeat of the errors that first created the need for debt forgiveness. This is the approach taken by the World Bank's HIPC (highly indebted poor country) initiative, launched in 1996 and expanded in 1999. However, by 2003, only eight of the 38 poor countries eligible under the program had made enough progress in reform to have some debt forgiven.
Industry:Economy
“Neither a borrower nor a lender be,” wrote Shakespeare in “Hamlet”. Actually, the availability of debt, and the willingness to take it on, is a crucial ingredient of economic growth, because it allows individuals, firms and governments to make investments they would not otherwise be able to afford. The price of debt is interest. Until recently, lending was an activity dominated by banks (although mortgages for individuals buying their homes have long been available from special housing savings institutions). Since the 1960s, debt has become increasingly available from other sources. Companies have sold trillions of dollars worth of bonds to investors in the financial markets. Individuals have been able to borrow with credit cards, and for those who have nowhere else to turn there are pawn shops and loan sharks, which charge very high rates of interest. Total private-sector debt in 2003 was around 150% of GDP in the United States, compared with less than 100% in 1928. In most countries, by far the biggest single borrower is the state, through the national debt.
Industry:Economy
If you pay your cleaner or builder in cash, or for some reason neglect to tell the taxman that you were paid for a service rendered, you participate in the black or underground economy. Such transactions do not normally show up in the figures for GDP, so the black economy may mean that a country is much richer than the official data suggest. In the United States and the UK, the black economy adds an estimated 5—10% to GDP; in Italy, it may add 30%. As for Russia, in the late 1990s estimates of the black economy ranged as high as 50% of GDP.
Industry:Economy
The third of 17 children of a wealthy banker, David Ricardo (1772–1823) was disinherited at the age of 21 after he married a Quaker against the wishes of his parents. He became a stockbroker and did so well that he retired at 42 to concentrate on writing and politics. A friend of fellow classical economists Thomas Malthus and Jean-Baptiste Say (see Say's law), he developed many economic theories that are still in use today. The most influential was comparative advantage, the theory underpinning the case for free trade. In his 1817 book, The Principles of Political Economy and Taxation, he outlined a theory of distribution of output in an economy. In this he argued that the allocation of factors of production to any area of economic activity is determined by the level of economic rent that can be earned from it. As this gradually falls because of diminishing returns, capital and other resources shift to more profitable projects. He examined the split between wages and profit, arguing that “there can be no rise in the value of labor without a fall of profits”. He also claimed that changes in the government deficit did not affect the level of demand in the economy (Ricardian equivalence).
Industry:Economy
A sudden fall in the value of a currency against other currencies. Strictly, devaluation refers only to sharp falls in a currency within a fixed exchange rate system. Also it usually refers to a deliberate act of government policy, although in recent years reluctant devaluers have blamed financial speculation. Most studies of devaluation suggest that its beneficial effects on competitiveness are only temporary; over time they are eroded by higher prices (see j-curve).
Industry:Economy
Financial assets that “derive” their value from other assets. For example, an option to buy a share is derived from the share. Some politicians and others responsible for financial regulation blame the growing use of derivatives for increasing volatility in asset prices, and for being a source of danger to their users. Economists mostly regard derivatives as a good thing, allowing more precise pricing of financial risk and better risk management. However, they concede that when derivatives are misused the leverage that is often an integral part of them can have devastating consequences. So they come with an economists’ health warning: if you don’t understand it, don’t use it. The world of derivatives is riddled with jargon. Here are translations of the most important bits. * A forward contract commits the user to buying or selling an asset at a specific price on a specific date in the future. * A future is a forward contract that is traded on an exchange. * A swap is a contract by which two parties exchange the cashflow linked to a liability or an asset. For example, two companies, one with a loan on a fixed interest rate over ten years and the other with a similar loan on a floating interest rate over the same period, may agree to take over each other’s obligations, so that the first pays the floating rate and the second the fixed rate. * An option is a contract that gives the buyer the right, but not the obligation, to sell or buy a particular asset at a particular price, on or before a specified date. * An over-the-counter is a derivative that is not traded on an exchange but is purchased from, say, an investment bank. * Exotics are derivatives that are complex or are available in emerging economies. * Plain-vanilla derivatives, in contrast to exotics, are typically exchange-traded, relate to developed economies and are comparatively uncomplicated.
Industry:Economy
A bad, depressingly prolonged recession in economic activity. The textbook definition of a recession is two consecutive quarters of declining output. A slump is where output falls by at least 10%; a depression is an even deeper and more prolonged slump. The most famous example is the Great Depression of the 1930s. After growing strongly during the “roaring 20s”, the American economy (among others) went into prolonged recession. Output fell by 30%. Unemployment soared and stayed high: in 1939 the jobless rate was still 17% of the workforce. Roughly half of the 25,000 banks in the United States failed. An attempt to stimulate growth, the New Deal, was the most far-reaching example of active fiscal policy then seen and greatly extended the role of the state in the American economy. However, the depression only ended with the onset of preparations to enter the second world war. Why did the Great Depression happen? It is not entirely clear, but forget the popular explanation: that it all went wrong with the Wall Street stock market crash of October 1929; that the slump persisted because policymakers just sat there; and that it took the New Deal to put things right. As early as 1928 the Federal Reserve, worried about financial speculation and inflated stock prices, began raising interest rates. In the spring of 1929, industrial production started to slow; the recession started in the summer, well before the stock market lost half of its value between October 24th and mid-November. Coming on top of a recession that had already begun, the crash set the scene for a severe contraction but not for the decade-long slump that ensued. So why did a bad downturn keep getting worse, year after year, not just in the United States but also around the globe? In 1929 most of the world was on the gold standard, which should have helped stabilize the American economy. As demand in the United States slowed its imports fell, its balance of payments moved further into surplus and gold should have flowed into the country, expanding the money supply and boosting the economy. But the Fed, which was still worried about easy credit and speculation, dampened the impact of this adjustment mechanism, and instead the money supply got tighter. Governments everywhere, hit by falling demand, tried to reduce imports through tariffs, causing international trade to collapse. Then American banks started to fail, and the Fed let them. As the crisis of confidence spread more banks failed, and as people rushed to turn bank deposits into cash the money supply collapsed. Bad monetary policy was abetted by bad fiscal policy. Taxes were raised in 1932 to help balance the budget and restore confidence. The New Deal brought deposit insurance and boosted government spending, but it also piled taxes on business and sought to prevent excessive competition. Price controls were brought in, along with other anti-business regulations. None of this stopped – and indeed may well have contributed to – the economy falling into recession again in 1937–38, after a brief recovery starting in 1935.
Industry:Economy
A fall in the value of an asset or a currency; the opposite of appreciation.
Industry:Economy
