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The process of becoming a commodity. Micro¬chips, for example, started out as a specialized technical innovation, costing a lot and earning their makers a high profit on each chip. Now chips are largely homogeneous: the same chip can be used for many things, and any manufacturer willing to invest in some fairly standardized equipment can make them. As a result, competition is fierce and prices and profit margins are low. Some economists argue that in today's economy the faster pace of innovation will make the process of commoditization increasingly common.
Industry:Economy
When a government controls all aspects of economic activity (see, for example, communism).
Industry:Economy
An asset pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to meet the required interest charges or repayments.
Industry:Economy
An economy that does not take part in inter¬national trade; the opposite of an open economy. At the turn of the century about the only notable example left of a closed economy is North Korea (see autarky).
Industry:Economy
The dominant theory of economics from the 18th century to the 20th century, when it evolved into Neo-classical economics. Classical economists, who included Adam Smith, David Ricardo and John Stuart Mill, believed that the pursuit of individual self-interest produced the greatest possible economic benefits for society as a whole through the power of the invisible hand. They also believed that an economy is always in equilibrium or moving towards it. Equilibrium was ensured in the labor market by movements in wages and in the capital market by changes in the rate of interest. The interest rate ensured that total savings in an economy were equal to total investment. In disequilibrium, higher interest rates encouraged more saving and less investment, and lower rates meant less saving and more investment. When the demand for labor rose or fell, wages would also rise or fall to keep the workforce at full employment. In the 1920s and 1930s, John Maynard Keynes attacked some of the main beliefs of classical and neo-classical economics, which became unfashionable. In particular, he argued that the rate of interest was determined or influenced by the speculative actions of investors in bonds and that wages were inflexible downwards, so that if demand for labor fell, the result would be higher unemployment rather than cheaper workers.
Industry:Economy
A fervently free-market economic philosophy long associated with the University of Chicago. At times, especially when Keynesian economics was the orthodoxy in much of the world, the Chicago School was regarded as a bastion of unworldly extremism. However, from the late 1970s it came to be regarded as mainstream by many and Chicago trained economists often played a crucial part in the implementation of policies of low inflation and market liberalization that swept the world during the 1980s and 1990s. By 2003, boasted the University of Chicago, some 22 of the 49 then winners of the Nobel Prize for economics had been faculty members, students or researchers there.
Industry:Economy
“Bah! Humbug”, was Scrooge’s opinion of charitable giving. Some economists reckon charity goes against economic rationality. Some have argued that the popularity of charitable giving is proof that people are not economically rational. Others argue that it shows that altruism is something that people get pleasure (utility) from, and so are willing to spend some of their income on it. An interesting question is the extent to which the state is competing with private charity when it redistributes money from rich to poor or spends more on health care and whether this is inefficient.
Industry:Economy
Other things being equal. Economists use this Latin phrase to cover their backs. For example, they might say that “higher interest rates will lead to lower inflation, ceteris paribus”, which means that they will stand by their prediction about inflation only if nothing else changes apart from the rise in the interest rate.
Industry:Economy
A guardian of the monetary system. A central bank sets short-term interest rates and oversees the health of the financial system, including by acting as lender of last resort to commercial banks that get into financial difficulties. The Federal Reserve, the central bank of the United States, was founded in 1913. The Bank of England, known affectionately as the “Old Lady of Threadneedle Street”, was established in 1694, 26 years after the creation of the world’s first central bank in Sweden. With the birth of the Euro in 1999, the monetary policy powers of the central banks of 11 European countries were transferred to a new European Central Bank, based in Frankfurt. During the 1990s there was a trend to make central banks independent from political intervention in their day-to-day operations and allow them to set interest rates. Independent central banks should be able to concentrate on the long-term needs of an economy, whereas political intervention may be guided by the short-term needs of the government. In theory, an independent central bank should reduce the risk of inflation. Some central banks are legally required to set interest rates so as to hit an explicit inflation target. Politicians are often tempted to exploit a possible short-term trade-off between inflation and unemployment, even though the long-term consequence of easing policy in this way is (most economists say) that the unemployment rate returns to what you started with and inflation is higher. An independent central bank, because it does not have to worry about persuading an electorate to vote for it, is more likely to act in the best long-run interests of the economy.
Industry:Economy
In any period, the economies of countries that start off poor generally grow faster than the economies of countries that start off rich. As a result, the national income of poor countries usually catches up with the national income of rich countries. New technology may even allow developing countries to leap-frog over industrialized countries with older technology. This, at least, is the traditional economic theory. In recent years, there has been considerable debate about the extent and speed of convergence in reality. One reason to expect catch-up is that workers in poor countries have little access to capital, so their productivity is often low. Increasing the amount of capital at their disposal by only a small amount can produce huge gains in productivity. Countries with lots of capital, and as a result higher levels of productivity, would enjoy a much smaller gain from a similar increase in capital. This is one possible explanation for the much faster growth of Japan and Germany, compared with the United States and the UK, after the Second World War and the faster growth of several Asian “tigers”, compared with developed countries, during the 1980s and most of the 1990s.
Industry:Economy
