- Industry: Economy; Printing & publishing
- Number of terms: 15233
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Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price. Sometimes these will be identical assets in different markets, for instance, shares in a company listed on both the London Stock Exchange and New York Stock Exchange. Often the assets being arbitraged will be identical in a more complicated way, for example, they will be different sorts of financial securities that are each exposed to identical risks. Some kinds of arbitrage are completely risk-free—this is pure arbitrage. For instance, if Euros are available more cheaply in dollars in London than in New York, arbitrageurs (also known as arbs) can make a risk-free profit by buying euros in London and selling an identical amount of them in New York. Opportunities for pure arbitrage have become rare in recent years, partly because of the globalization of financial markets. Today, a lot of so called arbitrage, much of it done by hedge funds, involves assets that have some similarities but are not identical. This is not pure arbitrage and can be far from risk free.
Industry:Economy
A rise in the value of an asset and the opposite of depreciation. When the value of a currency rises relative to another, it appreciates.
Industry:Economy
When somebody knows more than somebody else. Such asymmetric information can make it difficult for the two people to do business together, which is why economists, especially those practicing game theory, are interested in it. Transactions involving asymmetric (or private) information are everywhere. A government selling broadcasting licenses does not know what buyers are prepared to pay for them; a lender does not know how likely a borrower is to repay; a used-car seller knows more about the quality of the car being sold than do potential buyers. This kind of asymmetry can distort people's incentives and result in significant inefficiencies.
Industry:Economy
The running down or payment of a loan by installments. An example is a repayment mortgage on a house, which is amortized by making monthly payments that over a pre-agreed period of time cover the value of the loan plus interest. With loans that are not amortized, the borrower pays only interest during the period of the loan and then repays the sum borrowed in full.
Industry:Economy
A British economist (1842–1924), who developed some of the most important concepts in microeconomics. In his best-known work, Principles of Economics, he retained the emphasis on the importance of costs, which was standard in classical economics. But he added to it, helping to create Neo-classical economics, by explaining that the output and price of a product are determined by both supply and demand, and that marginal costs and benefits are crucial. He was the first economist to explain that demand falls as price increases, and that therefore the demand curve slopes downwards from left to right. He was also first with the concept of price elasticity of demand and consumer surplus.
Industry:Economy
The most famous of all central bank bosses, so far. A former jazz musician turned economist, he became chairman of the board of governors of America's Federal Reserve in 1987, shortly before Wall Street crashed. In 2003, he was reappointed until 2005. He won admirers for delivering monetary policy that helped to bring down inflation and create the conditions for strong economic growth. Some people considered him the nearest thing capitalism had to God. In 1996, he famously wondered aloud whether rising share prices were the result of "irrational exuberance". Economists debate whether history will judge him a failure because he did not prevent the growth of a huge bubble in America's economy.
Industry:Economy
Many firms advertise their goods or services, but are they wasting economic resources? Some economists reckon that advertising merely manipulates consumer tastes and creates desires that would not otherwise exist. By increasing product differentiation and encouraging brand loyalty advertising may make consumers less price sensitive, moving the market further from perfect competition towards imperfect competition (see monopolistic competition) and increasing the ability of firms to charge more than marginal cost. Heavy spending on advertising may also create a barrier to entry, as a firm entering the market would have to spend a lot on advertising too. However, some economists argue that advertising is economically valuable because it increases the flow of information in the economy and reduces the asymmetric information between the seller and the consumer. This intensifies competition, as consumers can be made aware quickly when there is a better deal on offer.
Industry:Economy
A branch of economics, based, often loosely, on the ideas of Keynes, characterized by a belief in active government and suspicion of market outcomes. It was dominant in the 30 years following the second world war, and especially during the 1960s, when fiscal policy became bigger-spending and looser in most developed countries as policymakers tried to kill off the business cycle. During the 1970s, widely blamed for the rise in inflation, Keynesian policies gradually gave way to monetarism and microeconomic policies that owed much to the Neo-classical economics that Keynes had at times opposed. Even so, the idea that public spending and taxation have a crucial role to play in managing demand, in order to move towards full employment, remained at the heart of macroeconomic policy in most countries, even after the monetarist and supply-side revolution of the 1980s and 1990s. Recently, a school of new, more pro-market Keynesian economists has emerged, believing that most markets work, but sometimes only slowly.
Industry:Economy
Much followed, and much misunderstood, German economist (1818–83). His two best-known works were the Communist Manifesto, written in 1848 with Friedrich Engels, and Das Kapital, in four volumes published between 1867 and 1910. Most of his economic assumptions were drawn from orthodox classical economics, but he used them to reach highly unorthodox conclusions. Although claimed and blamed as the inspiration of some of the most virulently anti-market governments the world has ever seen, he was not wholly against capitalism. Indeed, he praised it for rescuing millions of people from “the idiocy of rural life”. Even so, he thought it was doomed. A shortage of demand would concentrate economic power and wealth in ever fewer hands, producing an ever-larger and more miserable proletariat. This would eventually rise up, creating a “dictatorship of the proletariat” and leading eventually to a “withering away” of the state. Marx thought that this version of history was inevitable. So far, history has proved him wrong, largely because capitalism has delivered a much better deal to the masses than he believed it would.
Industry:Economy
After growing up in the Austro-Hungarian empire, in which he worked as an itinerant lawyer, Joseph Schumpeter (1883–1950) became an academic in 1909. He was appointed Austrian minister of finance in 1919, presiding over a period of hyper-inflation. He then became president of a small Viennese bank, which collapsed. He returned to academia in Bonn in 1925 and in the 1930s joined the faculty of Harvard. In 1911, while teaching at Czernowitz (now in Ukraine), he wrote the Theory of Economic Development. In this he set out his theory of entrepreneurship, in which growth occurred, usually in spurts, because competition and declining profit inspired entrepreneurs to innovate. This developed into a theory of the trade cycle (see business cycle), and into a notion of dynamic competition characterized by his phrase “creative destruction”. In capitalism, he argued, there is a tendency for firms to acquire a degree of monopoly power. At this point, competition no longer takes place through the price mechanism but instead through innovation. Perhaps because monopolies often become lazy, successful innovation may come from new entrants to a market, who take it away from the incumbent, thus blowing “gales of creative destruction” through the economy. Eventually, the new entrants grow fat on their monopoly profits, until the next gale of creative destruction blows them away. Ever controversial, and often wrong, in his 1942 book, CAPITALISM, SOCIALISM AND DEMOCRACY, he predicted the downfall of capitalism at the hands of an intellectual elite. He is associated with both Austrian economics and, arguably as founding father, evolutionary economics.
Industry:Economy
