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A measure used to help decide whether or not to proceed with an investment. Net means that both the costs and benefits of the investment are included. To calculate net present value (NPV), first add together all the expected benefits from the investment, now and in the future. Then add together all the expected costs. Then work out what these future benefits and costs are worth now by adjusting future cashflow using an appropriate discount rate. Then subtract the costs from the benefits. If the NPV is negative, then the investment cannot be justified by the expected returns. If the NPV is positive, it can, although it pays to make comparisons with the NPVs of alternative investment opportunities before going ahead.
Industry:Economy
The school of economics that developed the free-market ideas of classical economics into a full-scale model of how an economy works. The best-known neo-classical economist was Alfred Marshall, the father of marginal analysis. Neo-classical thinking, which mostly assumes that markets tend towards equilibrium, was attacked by Keynes and became unfashionable during the Keynesian-dominated decades after the Second World War. But, thanks to economists such as Milton Friedman, many neo-classical ideas have since become widely accepted and uncontroversial.
Industry:Economy
A way of building redistribution into the taxation system by taking money from people with high incomes and paying it to people with low incomes. Because it takes place automatically through the tax system, it may attach less stigma to the receipt of financial help than some other forms of welfare assistance. However, it may also discourage recipients from working to increase their income (see poverty trap), which is why some countries have introduced a form of negative income tax that is available only to the working poor. In the United States, this is known as the earned income tax credit.
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
When a monopoly occurs because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scale available in that market. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water. One firm can do the job at a lower average cost per customer than two firms with competing networks of pipes. Monopolies can arise unnaturally by a firm acquiring sole ownership of a resource that is essential to the production of a good or service, or by a government granting a firm the legal right to be the sole producer. Other unnatural monopolies occur when a firm is much more efficient than its rivals for reasons other than economies of scale. Unlike some other sorts of monopoly, natural monopolies have little chance of being driven out of a market by more efficient new entrants. Thus regulation of natural monopolies may be needed to protect their captive consumers.
Industry:Economy
When a government takes ownership of a private-sector business. Nationalization was a fashionable part of the mix in countries with a mixed economy between 1945 and 1980, after which the privatization of state-owned firms became increasingly popular. The amount of public ownership in different countries has always varied considerably. Nationalization has taken place for various reasons, ranging from socialist ideology to attempts to remedy examples of market failure. The performance of nationalized firms has often, but not always, been poor compared with their private-sector counterparts. State-owned businesses often enjoy a legally protected monopoly, and the lack of competition means the firms face little pressure to be efficient. Politicians often interfere in important management decisions, making it harder to take unpopular actions on pay, factory closures and job cuts, particularly when there are strong public-sector trade unions and a union-friendly government. Politically imposed financial constraints may also force public-sector firms to underinvest. Although privatization has not been universally beneficial, on balance it has increased economic efficiency.
Industry:Economy
Shorthand for everything that is produced, earned or spent in a country (see GDP and GNP).
Industry:Economy
The total outstanding borrowing of a country’s government (usually including national and local government). It is often described as a burden, although public debt may have economic benefits (see balanced budget, fiscal policy and golden rule). Certainly, debt incurred by one generation may become a heavy burden for later generations, especially if the money borrowed is not invested wisely. The national debt is a total of all the money ever raised by a government that has yet to be paid off; this is very different from an annual public-sector budget deficit. In 1999, the American government celebrated a huge budget surplus, yet the country still had a national debt equal to nearly half its GDP.
Industry:Economy
Creating a country that works out of one that does not - because the old order has collapsed (as in the former Soviet Union), or been destroyed by war (Iraq), or never really functioned in the first place (Afghanistan). To transform a failed country can involve establishing order through the rule of law and creating legitimate government and other effective social institutions, as well as a credible currency and a functioning market economy. Nation building is rarely easy, and often fiendishly difficult, especially where there are deep ethnic, religious or political divisions in the population or the country has no history of ever functioning effectively. Outside expertise, such as from the World Bank, and money (as in, most famously, the Marshall plan) can help, but they are no guarantee of success.
Industry:Economy
An important concept in game theory, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist.
Industry:Economy
