- Industry: Economy; Printing & publishing
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The founder of economics as we know it. Born in Kirkcaldy, Fife, Adam Smith (1723–90) was educated at Glasgow and Oxford, and in 1751 became professor of logic at Glasgow University. Eight years later he made his name by publishing the THEORY OF MORAL SENTIMENTS. His 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, is the bible of classical economics. He emphasized the role of specialization (the division of labor), technical progress and capital investment as the main engines of economic growth. Above all, he stressed the importance of the invisible hand, the way in which self-interest pursued in free markets leads to the most efficient use of economic resources and makes everybody better off in the process.
Industry:Economy
This is the simplest yardstick of economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers. Being the best at something does not mean that doing that thing is the best way to use your scarce economic resources. The question of what to specialize in--and how to maximize the benefits from international trade--is best decided according to comparative advantage. Both absolute and comparative advantage may change significantly over time.
Industry:Economy
Rules governing the activities of private-sector enterprises. Regulation is often imposed by government, either directly or through an appointed regulator. However, some industries and professions impose rules on their members through self-regulation. Regulation is often introduced to tackle market failure. Externalities such as pollution have inspired rules limiting factory emissions. Regulations on the selling of financial products to individuals have been introduced as protection against unscrupulous financial firms with better information than their customers. Rate of return regulation and price regulation have been used to combat natural monopoly, sometimes instead of nationalization. Some regulation has been motivated by politics rather than economics, for instance, restrictions on the number of hours people can work or the circumstances in which an employer can dismiss employees. Even when introduced for sound economic reasons, regulation can generate more costs than benefits. Regulated firms or individuals may face substantial compliance costs. Firms may devote substantial resources to regulatory arbitrage, which would leave consumers no better off. Regulation may lead to moral hazard if people believe that the government is keeping an eye on the behavior of the regulated business and so do less monitoring of their own. Regulation may be badly designed and thus lock an industry into an inefficient equilibrium. Rigid regulation may hold back innovation. There is also the danger of regulatory capture. In short, then, regulatory failure may be even worse for an economy than market failure.
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
Number-crunching to discover the relationship between different economic variables. The findings of this statistical technique should always be taken with a pinch of salt. How big a pinch can vary considerably and is indicated by the degree of statistical significance and r squared. The relationship between a dependent variable (GDP, say) and a set of explanatory variables (demand, interest rates, capital, unemployment, and so on) is expressed as a regression equation.
Industry:Economy
The fertility rate required in a country to keep its population steady. In rich countries, this is usually reckoned to be 2. 1 children per woman, the extra 0. 1 reflecting the likelihood that some children will die before their parents. In poorer countries with higher infant mortality, the replacement rate may be much higher. In many countries, since the early 1990s the fertility rate has fallen below the replacement rate. There has been much debate about why, and much agreement that, if this trend continues, those countries may face long-term problems such as a relatively growing proportion of retired older people having to be supported by a relatively shrinking proportion of younger people.
Industry:Economy
An agreement in which one party sells a security to another party and agrees to buy it back on a specified date for a specified price. Central banks deal in short-term repos to provide liquidity to the financial system, buying securities from banks with cash on the condition that the banks will repurchase them a few weeks later.
Industry:Economy
A foreign currency held by a government or central bank as part of a country’s reserves. Outside the United States the dollar is the most widely used reserve currency. Everywhere the Euro is increasingly widely used.
Industry:Economy
