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The central bank of the European union, responsible since January 1999 for setting the official short-term interest rate in countries using the Euro as their domestic currency. In this role, the European Central Bank (ECB) replaced national central banks such as Germany’s Bundesbank, which became local branches of the ECB.
Industry:Economy
A deposit in dollars held in a bank outside the United States. Such deposits are often set up to avoid taxes and currency exchange costs. They are frequently lent out and have become an important method of credit creation.
Industry:Economy
The economy comprising all the countries that have adopted the Euro. There is much debate among economists about whether the Euro zone is in fact an optimal currency area.
Industry:Economy
The main currency of the European Union, launched in January 1999 and in general circulation since 2002 (see economic and monetary union).
Industry:Economy
The extra reward investors get for buying a share over what they get for holding a less risky asset, such as a government bond. Modern financial theory assumes that the premium will be just big enough on average to compensate the investor for the extra risk. However, studies have found that the average equity premium over many years has been much larger than appears to be justified by the average riskiness of shares. To solve this so-called equity premium puzzle, some economists have suggested that investors may have greater risk aversion towards shares than traditional theory assumes. Some claim that the past equity premium was mismeasured, or reflected an unrepresentative sample of share prices. Others suggest that the high premium is evidence that the efficient market hypothesis does not apply to the stock market. Some economists think that the premium fell to more easily explained levels during the 1990s. Nobody really knows which, if any, of these interpretations is right.
Industry:Economy
There are two definitions in economics. # The capital of a firm, after deducting any liabilities to outsiders other than shareholders, who are typically the legal owners of the firm’s equity. This ownership right is the reason shares are also known as equities. # Fairness. Dividing up the economic pie. Economists have been particularly interested in this with regard to how systems of taxation work. They have examined whether taxes treat fairly people with the same ability to pay (horizontal equity) and people with different abilities to pay (vertical equity). The fairness of other aspects of how the gains from economic activity are distributed through society have also been debated by economists, especially those interested in welfare economics. Some economists start with the presumption that the free-market outcome is inherently inequitable, and that equity (sharing out the pie) must be traded off against efficiency (maximizing the size of the pie). Others argue that it is inequitable to take money away from someone who has created economic value to give to people who have been less skilled or industrious.
Industry:Economy
When supply and demand are in balance. At the equilibrium price, the quantity that buyers are willing to buy exactly matches the quantity that sellers are willing to sell. So everybody is satisfied, unlike when there is disequilibrium. In classical economics, it is assumed that markets always tend towards equilibrium and return to it in the event that something causes a temporary disequilibrium. General equilibrium is when supply and demand are balanced simultaneously in all the markets in an economy. Keynes questioned whether the economy always moved to equilibrium, for instance, to ensure full employment.
Industry:Economy
Some people think capitalism is wholly bad for the environment as it is based on consuming scarce resources. They want less consumption and greater reliance on renewable resources. They oppose free trade because they favor self-sufficiency (autarky), or at least so-called fair trade, and because they believe it encourages poorer countries to destroy their natural resources in order to get rich quick. Although few professional economists would share these views, in recent years many attempts have been made to incorporate environmental concerns within mainstream economics. The traditional measure of GDP incorporates only those things that are paid for; this may include things that reduce the overall quality of life, including harming the environment. For instance, cleaning up an oil spill will increase GDP if people are paid for the clean-up. Attempts have been made to devise an alternative environmentally friendly measure of national income, but so far progress has been limited. At the very least, traditional economists increasingly agree that maximizing GDP growth does not necessarily equal maximizing social welfare. Much of the damage done to the environment may be a result of externalities. An externality can arise when people engaged in economic activity do not have to take into account the full costs of what they are doing. For instance, car drivers do not have to bear the full cost of making their contribution to global warming, even though their actions may one day impose a huge financial burden on society. One way to reduce externalities is to tax them, say, through a fuel tax. Another is prohibition, say, limiting car drivers to one gallon of fuel per week. This could result in black markets, however. Allowing trade in pollution rights may encourage “efficient pollution”, with the pollution permits ending up in the hands of those for which pollution has the greatest economic upside. As this would still allow some environmental destruction, it might be unpopular with extreme greens. There may be a case for international eco markets. For instance, people in rich countries might pay people in poor countries to stop doing activities that do environmental damage outside the poor countries, or that rich people disapprove of, such as chopping down the rain forests. Choices on environmental policy, notably on measures to reduce the threat of global warming, involve costs today with benefits delayed until the distant future. How are these choices to be made? Traditional cost-benefit analysis does not help much. In measuring costs and benefits in the far distant future, two main things seem to intervene and spoil the conventional calculations. One is uncertainty. We know nothing about what the state of the world will be in 2200. The other is how much people today are willing to pay in order to raise the welfare of others who are so remote that they can barely be imagined, yet who seem likely to be much better off materially than people today. Some economists take the view that the welfare of each future generation should be given the same weight in the analysis as the welfare of today’s. This implies that a much lower discount rate should be used than the one appropriate for short-term projects. Another option is to use a high discount rate for costs and benefits arising during the first 30 or so years, then a lower rate or rates for more distant periods. Many studies by economists and psychologists have found that people do in fact discount the distant future at lower rates than they apply to the near future.
Industry:Economy
A controversial phrase, which actually means little more than the lowest rate of unemployment at which the jobs market can be in stable equilibrium. Keynesians, encouraged by the Phillips curve, assumed that a government could lower the rate of unemployment if it was willing to accept a little more inflation. However, economists such as Milton Friedman argued that this supposed inflation-for-jobs trade-off was in fact a trap. Governments that tolerated higher inflation in the hope of lowering unemployment would find that joblessness dipped only briefly before returning to its previous level, while inflation would rise and stay high. Instead, they argued, unemployment has an equilibrium or natural rate, determined not by the amount of demand in an economy but by the structure of the labor market. This is the lowest level of unemployment at which inflation will remain stable. When unemployment is above the natural rate demand can potentially be increased to bring it to the natural rate, but attempting to lower it even further will only cause inflation to accelerate. Hence the natural rate is also known as the non-accelerating-inflation rate of unemployment, or NAIRU. At first, the NAIRU became synonymous with the view that macroeconomic policy could not conquer unemployment. It was often used to justify policy inaction even when unemployment rose to more than 10% of workers in industrialized countries during the 1980s and 1990s, even though economists’ estimates of the NAIRU differed hugely. More recently, economists looking for ways to reduce unemployment have started to ask whether, and under what circumstances, the natural rate might change. Most solutions have stressed the need to make more people employable at the prevailing level of wages, in particular by increasing labor market flexibility. Economists still disagree over what jobless rate at any particular point in time is the NAIRU, but nobody any longer thinks that the natural rate is fixed. Indeed, some think the concept has no meaning at all.
Industry:Economy
The life and soul of the capitalist party. Somebody who has the idea and enterprise to mix together the other factors of production to produce something valuable. An entrepreneur must be willing to take a risk in pursuit of a profit.
Industry:Economy
