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A risk faced by private-sector firms that regulatory changes will hurt their business. In competitive markets, regulatory risk is usually small. But in natural monopoly industries, such as electricity distribution, it may be huge. To ensure that regulatory risk does not deter private firms from offering their services, a government wishing to change its regulations may have good reason to compensate private firms that suffer losses as a result of the change.
Industry:Economy
The Big Mac index was devised by Pam Woodall of The Economist in 1986, as a light-hearted guide to whether currencies are at their "correct" level. It is based on one of the oldest concepts in international economics, purchasing power parity (PPP), the notion that a dollar, say, should buy the same amount in all countries. In the long run, argue PPP fans, currencies should move towards the exchange rate, which equalizes the prices of an identical basket of goods and services in each country. In this case, the basket is a McDonalds' Big Mac, which is produced in more than 100 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in the United States as elsewhere. Comparing actual exchange rates with PPP signals whether a currency is undervalued or overvalued. Some studies have found that the Big Mac index is often a better predictor of currency movements than more theoretically rigorous models.
Industry:Economy
People often care more about their relative well being than their absolute well being. Someone who prefers a $100 a week pay rise when a colleague gets $50 to both of them getting a $200 increase, for example. Poor people may consume more of their income than rich people do because they want to reduce the gap in their consumption levels. The relative income hypothesis, set out by James Duesenberry, says that a household’s consumption depends partly on its income relative to other families. Contrast with permanent income hypothesis.
Industry:Economy
Part of an economic theory for valuing financial securities and calculating the cost of capital, known as the capital asset pricing model, beta measures the sensitivity of the price of a particular asset to changes in the market as a whole. If a company's shares have a beta of 0. 8 it implies that on average the share price will change by 0. 8% if there is a 1% change in the market. There is a long-running debate about whether a beta calculated from a security's past relationship with the market actually predicts how that relationship will behave in future, leading some doubting economists to claim that beta is "dead".
Industry:Economy
Confusingly, rent has two different meanings for economists. The first is the commonplace definition: the income from hiring out land or other durable goods. The second, also known as economic rent, is a measure of market power: the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use. A soccer star may be paid $50,000 a week to play for his team when he would be willing to turn out for only $10,000, so his economic rent is $40,000 a week. In perfect competition, there are no economic rents, as new firms enter a market and compete until prices fall and all rent is eliminated. Reducing rent does not change production decisions, so economic rent can be taxed without any adverse impact on the real economy, assuming that it really is rent.
Industry:Economy
A branch of economics that concentrates on explaining the economic decisions people make in practice, especially when these conflict with what conventional economic theory predicts they will do. Behaviorists try to augment or replace traditional ideas of economic rationality (homo economicus) with decision-making models borrowed from psychology. According to psychologists, people are disproportionately influenced by a fear of feeling regret and will often forgo benefits even to avoid only a small risk of feeling they have failed. They are also prone to cognitive dissonance, often holding on to a belief plainly at odds with new evidence, usually because the belief has been held and cherished for a long time. Then there is anchoring: people are often overly influenced by outside suggestion. People apparently also suffer from status quo bias: they are willing to take bigger gambles to maintain the status quo than they would be to acquire it in the first place. Traditional utility theory assumes that people make individual decisions in the context of the big picture. But psychologists have found that they generally compartmentalize, often on superficial grounds. They then make choices about things in one particular mental compartment without taking account of the implications for things in other compartments. There is lots of evidence that people are persistently and irrationally overconfident. They are also vulnerable to hindsight bias: once something happens they overestimate the extent to which they could have predicted it. Many of these traits are captured in prospect theory, which is at the heart of much of behavioral economics.
Industry:Economy
Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers. Classic examples of rent-seeking, a phrase coined by an economist, Gordon Tullock, include:
* a protection racket, in which the gang takes a cut from the shopkeeper’s profit;
* a cartel of firms agreeing to raise prices;
* a union demanding higher wages without offering any increase in productivity;
* lobbying the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals. Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs on an economy.
Industry:Economy
An investor who thinks that the price of a particular security or class of securities (shares, say) is going to fall; the opposite of a bull.
Industry:Economy
One one-hundredth of a percentage point. Small movements in the interest rate, the exchange rate and bond yields are often described in terms of basis points. If a bond yield moves from 5. 25% to 5. 45%, it has risen by 20 basis points.
Industry:Economy
