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When there are strings attached, for example, to international aid or loans from the IMF or World Bank. The delivery of the money may be made subject to the government of the country implementing economic or political reforms desired by the donor or lender.
Industry:Economy
The tendency of a market to be dominated by a few big firms. A high degree of concentration may be evidence of antitrust problems, if it reflects a lack of competition. Traditionally, economists examined whether there was too much concentration using the Herfindahl-Hirschman index, which is determined by adding the squares of the market shares of all firms involved. A low Herfindahl indicated many competitors and thus great difficulty in exercising market power; a high Herfindahl, however, suggested a concentrated market in which price rises are easier to sustain. More recently, antitrust authorities have placed less emphasis on concentration. One reason is that it is hard to define the market in which concentration should be measured. Instead, antitrust authorities have turned their attention to finding examples of firms earning excessive profits or holding back innovation, although this too raises tricky conceptual and practical questions.
Industry:Economy
If a deposit account of $100 earns an interest rate of 10% a year, then at the end of the year the account will contain $110. If all of that money is left in the account, then the 10% interest will be paid on the $110, so at the end of the second year $11 of interest will be added, making $121 in all. This is known as compound interest. By contrast, simple interest pays the 10% only on the original sum in the account.
Industry:Economy
When you buy a computer, you will also need to buy software. Computer hardware and software are therefore complementary goods: two products, for which an increase (or fall) in demand for one leads to an increase (fall) in demand for the other. Complements are the opposite of substitute goods. For instance, Microsoft Windows-based personal computers and Apple Macs are substitutes.
Industry:Economy
“Real economists don’t talk about competitiveness,” said Paul Krugman, a much-respected contemporary economist. Real businessmen and real politicians talk about it all the time, however. Many firms have undergone savage downsizing to remain competitive, and governments have set up numerous committees to examine how to sharpen their countries’ economic performance. Mr. Krugman’s objection was not to the use of the term competitiveness by companies, which often do have competitors that they must beat, but to applying it to countries. At best, it is a meaningless word when applied to national economies; at worst, it encourages protectionism. Countries, he claimed, do not compete in the same way as companies. When two companies compete, one’s gain is the other’s loss, whereas international trade, Mr. Krugman argued, is not a zero-sum game: when two countries compete through trade they both win. Yet measures of national competitiveness are not complete nonsense. A country’s future prosperity depends on its growth in productivity, which government policies can influence. Countries do compete in that they choose policies to promote higher living standards. Even so, conceptual and measurement difficulties mean that the growing number of indices purporting to compare the competitiveness of different countries should probably be taken with a large pinch of salt.
Industry:Economy
Something that gives a firm (or a person or a country) an edge over its rivals.
Industry:Economy
The more competition there is, the more likely are firms to be efficient and prices to be low. Economists have identified several different sorts of competition. Perfect competition is the most competitive market imaginable in which everybody is a price taker. Firms earn only normal profits, the bare minimum profit necessary to keep them in business. If firms earn more than this (excess profits) other firms will enter the market and drive the price level down until there are only normal profits to be made. Most markets exhibit some form of imperfect or monopolistic competition. There are fewer firms than in a perfectly competitive market and each can to some degree create barriers to entry. Thus firms can earn some excess profits without a new entrant being able to compete to bring prices down. The least competitive market is a monopoly, dominated by a single firm that can earn substantial excess profits by controlling either the amount of output in the market or the price (but not both). In this sense it is a price setter. When there are few firms in a market (oligopoly) they have the opportunity to behave as a monopolist through some form of collusion (see cartel). A market dominated by a single firm does not necessarily have monopoly power if it is a contestable market. In such a market, a single firm can dominate only if it produces as efficiently as possible and does not earn excess profits. If it becomes inefficient or earns excess profits, another more efficient or less profitable firm will enter the market and dominate it instead.
Industry:Economy
Paul Samuelson, one of the 20th century’s greatest economists, once remarked that the principle of comparative advantage was the only big idea that economics had produced that was both true and surprising. It is also one of the oldest theories in economics, usually ascribed to David Ricardo. The theory underpins the economic case for free trade. But it is often misunderstood or misrepresented by opponents of free trade. It shows how countries can gain from trading with each other even if one of them is more efficient – it has an absolute advantage – in every sort of economic activity. Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing. To see how this theory works imagine two countries, Alpha and Omega. Each country has 1,000 workers and can make two goods, computers and cars. Alpha’s economy is far more productive than Omega’s. To make a car, Alpha needs two workers, compared with Omega’s four. To make a computer, Alpha uses 10 workers, compared with Omega’s 100. If there is no trade, and in each country half the workers are in each industry, Alpha produces 250 cars and 50 computers and Omega produces 125 cars and 5 computers. What if the two countries specialize? Although Alpha makes both cars and computers more efficiently than Omega (it has an absolute advantage), it has a bigger edge in computer making. So it now devotes most of its resources to that industry, employing 700 workers to make computers and only 300 to make cars. This raises computer output to 70 and cuts car production to 150. Omega switches entirely to cars, turning out 250. World output of both goods has risen. Both countries can consume more of both if they trade, but at what price? Neither will want to import what it could make more cheaply at home. So Alpha will want at least 5 cars per computer, and Omega will not give up more than 25 cars per computer. Suppose the terms of trade are fixed at 12 cars per computer and 120 cars are exchanged for 10 computers. Then Alpha ends up with 270 cars and 60 computers, and Omega with 130 cars and 10 computers. Both are better off than they would be if they did not trade. This is true even though Alpha has an absolute advantage in making both computers and cars. The reason is that each country has a different comparative advantage. Alpha’s edge is greater in computers than in cars. Omega, although a costlier producer in both industries, is a less expensive maker of cars. If each country specializes in products in which it has a comparative advantage, both will gain from trade. In essence, the theory of comparative advantage says that it pays countries to trade because they are different. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad. There is no reason to assume that a country’s comparative advantage will be static. If a country does what it has a comparative advantage in and sees its income grow as a result, it can afford better education and infrastructure. These, in turn, may give it a comparative advantage in other economic activities in future.
Industry:Economy
The enemy of capitalism and now nearly extinct. Invented by Karl Marx, who predicted that feudalism and capitalism would be succeeded by the “dictatorship of the proletariat”, during which the state would “wither away” and economic life would be organized to achieve “from each according to his abilities, to each according to his needs”. The Soviet Union was the most prominent attempt to put communism into practice and the result was conspicuous failure, although some modern followers of Marx reckon that the Soviets missed the point.
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
