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Not putting all your eggs in one basket. Investors are encouraged to do this by modern portfolio theory, as holding several different shares and other assets helps to reduce risk. At the sharp end of business, however, diversification is somewhat out of fashion. Economic studies of diversifying corporate mergers have found that these often hurt the shareholders of the acquiring firm; by contrast, diversified firms that have sold off non-core businesses have typically made their shareholders much better off.
Industry:Economy
Cutting out the middleman. Disintermediation has become a buzz word in financial services in particular, as competitive and technological changes have done away with the need for established intermediaries. Banks have seen much of their business slip away, such as lending to companies that now tap capital markets direct. New economy ¬theorists argued that many retailers would be disintermediated as the internet enabled customers to transact directly with producers without needing to visit a shop. But this has happened more slowly than they predicted.
Industry:Economy
A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices, which is known as deflation.
Industry:Economy
When supply and demand in a market are not in balance. Contrast with equilibrium.
Industry:Economy
How much less is a sum of money due in the future worth today? The answer is found by ¬discounting the future cashflow, using an interest rate that reflects the fact that money in future is worth less than money now, because money now could be invested and earn interest, whereas future money cannot. Firms use discounted cashflow to judge whether an investment project is worthwhile. The interest rate is a means of reflecting the opportunity cost of tying up money in the investment project. To test whether an investment makes economic sense the income must be discounted so that it can be measured against the costs. If the present value of the benefits exceeds the costs, the investment is a good one.
Industry:Economy
The rate of interest charged by a central bank when lending to other financial institutions. It also refers to a rate of interest used when calculating discounted cashflow.
Industry:Economy
Taxes levied on the income or wealth of an individual or company. Contrast with indirect taxation. In much of the world, direct tax rates fell during the 1980s and 1990s, partly because some economists argued that high rates of tax on income discouraged people from working, and that high rates of tax on profit encouraged companies to move to countries with lower rates. Furthermore, high rates of income tax were viewed as politically unpopular. Even so, although rates were cut, because both personal income and corporate profits grew steadily throughout this period the total amount collected via direct taxation continued to rise. Economists often disagree about which of direct taxes or indirect taxes are the least inefficient method of taxation.
Industry:Economy
The more you have, the smaller is the extra benefit you get from having even more; also known as diseconomies of scale (see economies of scale). For instance, when workers have a lot of capital giving them a little more may not increase their productivity anywhere near as much as would giving the same amount to workers who currently have little or no capital. This underpins the catch-up effect, whereby there is (supposedly) convergence between the rates of growth of developing countries and developed ones. In the new economy, some economists argue, capital may not suffer from diminishing returns, or at least the amount of diminishing will be much smaller. There may even be ever increasing returns.
Industry:Economy
Spawned by the end of the colonial era in the 1950s and 1960s, a whole branch of economic theory grew up around the question of how to promote economic development in poor countries. The proposition on which development economics was built was that poor countries were intrinsically different from rich ones and so needed their own set of economic models. Some development economists argued, for instance, that the self-interested, rational individual (homo economicus) did not exist in traditional tribal societies. They claimed that because many poor countries had large agricultural populations and were often dependent on a few commodity exports for foreign exchange earnings, economic policies that suited rich countries would not work for them. With hindsight, much of this was misguided, and policies based on it had disastrous effects. Development economists believed that the state had to play a big role in fostering modernization. Instead, the result was huge, inefficient ¬bureaucracies riddled with corruption, massive budget deficits and rampant inflation. During the 1990s, most governments of developing countries started to reverse these policies and undo the damage they had done by introducing policies based on similar economic models to those that had worked in rich countries. However, the sequencing of these new policies seemed to make a big difference to how well they worked. Doing the right things in the right order is crucial.
Industry:Economy
A euphemism for the world’s poor countries, also known, often optimistically, as emerging economies. Some four-fifths of the world’s 6 billion people already live in developing countries, many of them in abject poverty. Developing countries account for less than one-fifth of total world GDP. Economists disagree about how likely--and how fast--developing countries are to become developed. Neo-classical economics predicts that poor countries will grow faster than richer ones. The reason is diminishing returns on capital. Since poor countries start with less capital, they should reap higher returns than a richer country with more capital from each slice of new investment. But this catch-up effect (or convergence) is not supported by the data. For one thing, there is, in fact, no such thing as a typical developing country. The official developing world includes the (sometimes) fast-growing Asian tigers and the poorest nations in Africa. Studies of the relationship between growth and GDP per head in rich and poor countries found no evidence that poorer countries grew faster. Indeed, if anything, poorer countries have grown more slowly. Development economics has argued that this is because poor countries have unique problems that require different policy solutions from those offered by conventional developed-world economics. But new endogenous growth theory instead argues that there is conditional convergence. Hold constant such factors as a country’s fertility rate, its human capital and its government policies (proxied by the share of current government spending in GDP), and poorer countries generally grow faster than richer ones. Since, in reality, other factors are not constant (not all countries have the same level of human capital or the same government policies), absolute convergence does not happen. Government policies seem to be crucial. Countries with broadly free-market policies – in particular, free trade and the maintenance of secure property rights--have raised their growth rates. (Although some economists argue that the Asian tigers are an exception to this free-market rule. ) Open economies have grown much faster on average than closed economies. Higher public spending relative to GDP is usually associated with slower growth. Furthermore, high inflation is bad for growth and so is political instability. The poorest countries can indeed catch up. Their chances of doing so are maximized by policies that give a greater role to competition and incentives, at home and abroad. Despite starting with a big disadvantage, there is evidence that some developing countries do not help themselves because they squander the resources they have. Institutions that produce effective governance of an economy are crucial. Those countries that use their resources well can grow quickly. Indeed, the world’s fastest-growing economies are a small subgroup of exceptional performers among the poor countries.
Industry:Economy
