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EconomicsAZtermsbeginningwithA|TheEconomist

EconomicsAZtermsbeginningwithA

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Absolute
advantage
Adaptive
expectations
Adverseselection
Advertising
Agencycosts
Agriculturalpolicy
Agriculture

Altruism

Assets

Amortisation

Asymmetric
information

Animalspirits
Antitrust
Appreciation
Arbitrage
Arbitragepricing
theory
Asiancrisis

Aid

Asymmetric
shock
Auctions
Austrian
economics
Autarky
Average

Absoluteadvantage
Thisisthesimplestyardstickofeconomicperformance.Ifoneperson,firmorcountrycan
producemoreofsomethingwiththesameamountofeffortandresources,theyhavean
absoluteadvantageoverotherproducers.Beingthebestatsomethingdoesnotmeanthat
doingthatthingisthebestwaytouseyourscarceeconomicresources.Thequestionofwhat
tospecialiseinandhowtomaximisethebenefitsfrominternationaltradeisbestdecided
accordingtocomparativeadvantage.Bothabsoluteandcomparativeadvantagemaychange
significantlyovertime.

Adaptiveexpectations
Atheoryofhowpeopleformtheirviewsaboutthefuturethatassumestheydosousingpast
trendsandtheerrorsintheirownearlierpredictions.Contrastwithrationalexpectations.

Adverseselection
Whenyoudobusinesswithpeopleyouwouldbebetteroffavoiding.Thisisoneoftwomain
sortsofmarketfailureoftenassociatedwithinsurance.Theotherismoralhazard.Adverse
selectioncanbeaproblemwhenthereisasymmetricinformationbetweentheseller
ofinsuranceandthebuyerinparticular,insurancewilloftennotbeprofitablewhenbuyers
havebetterinformationabouttheirriskofclaimingthandoestheseller.Ideally,insurance
premiumsshouldbesetaccordingtotheriskofarandomlyselectedpersonintheinsured
sliceofthepopulation(55yearoldmalesmokers,say).Inpractice,thismeans
theaverageriskofthatgroup.Whenthereisadverseselection,peoplewhoknowtheyhavea
higherriskofclaimingthantheaverageofthegroupwillbuytheinsurance,whereasthose
whohaveabelowaverageriskmaydecideitistooexpensivetobeworthbuying.Inthis
case,premiumssetaccordingtotheaverageriskwillnotbesufficienttocovertheclaimsthat
eventuallyarise,becauseamongthepeoplewhohaveboughtthepolicymorewillhave
aboveaverageriskthanbelowaveragerisk.Puttingupthepremiumwillnotsolvethis
problem,forasthepremiumrisestheinsurancepolicywillbecomeunattractivetomoreofthe
peoplewhoknowtheyhavealowerriskofclaiming.Onewaytoreduceadverseselectionis
tomakethepurchaseofinsurancecompulsory,sothatthoseforwhominsurancepricedfor
averageriskisunattractivearenotabletooptout.

Advertising
Manyfirmsadvertisetheirgoodsorservices,butaretheywastingeconomicresources?
Someeconomistsreckonthatadvertisingmerelymanipulatesconsumertastesandcreates
desiresthatwouldnototherwiseexist.Byincreasingproductdifferentiationand
encouragingbrandloyaltyadvertisingmaymakeconsumerslesspricesensitive,movingthe
marketfurtherfromperfectcompetitiontowardsimperfectcompetition(seemonopolistic
competition)andincreasingtheabilityoffirmstochargemorethanmarginalcost.Heavy
spendingonadvertisingmayalsocreateabarriertoentry,asafirmenteringthemarket
wouldhavetospendalotonadvertisingtoo.
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However,someeconomistsarguethatadvertisingiseconomicallyvaluablebecauseit
increasestheflowofinformationintheeconomyandreducestheasymmetricinformation
betweenthesellerandtheconsumer.Thisintensifiescompetition,asconsumerscanbe
madeawarequicklywhenthereisabetterdealonoffer.

Agencycosts
Thesecanarisewhensomebody(theprincipal)hiressomebodyelse(theagent)tocarryout
ataskandtheinterestsoftheagentconflictwiththeinterestsoftheprincipal.Anexampleof
suchprincipalagentproblemscomesfromtherelationshipbetweentheshareholderswho
ownapubliccompanyandthemanagerswhorunit.Theownerswouldlikemanagerstorun
thefirminwaysthatmaximisethevalueoftheirshares,whereasthemanagers'prioritymay
be,say,tobuildabusinessempirethroughrapidexpansionandmergersandacquisitions,
whichmaynotincreasetheirfirm'sshareprice.
Onewaytoreduceagencycostsisfortheprincipaltomonitorwhattheagentdoestomake
sureitiswhathehasbeenhiredtodo.Butthiscanbecostly,too.Itmaybeimpossibleto
definetheagent'sjobinawaythatcanbemonitoredeffectively.Forinstance,itishardto
knowwhetheramanagerwhohasexpandedafirmthroughanacquisitionthatreducedits
sharepricewaspursuinghisownempirebuildinginterestsor,say,wastryingtomaximise
shareholdervaluebutwasunlucky.
Anotherwaytoloweragencycosts,especiallywhenmonitoringistooexpensiveortoo
difficult,istomaketheinterestsoftheagentmorelikethoseoftheprincipal.Forinstance,an
increasinglycommonsolutiontotheagencycostsarisingfromtheseparationofownership
andmanagementofpubliccompaniesistopaymanagerspartlywithsharesandshare
optionsinthecompany.Thisgivesthemanagersapowerfulincentivetoactintheinterestsof
theownersbymaximisingshareholdervalue.Buteventhisisnotaperfectsolution.Some
managerswithlotsofshareoptionshaveengagedinaccountingfraudinordertoincrease
thevalueofthoseoptionslongenoughforthemtocashsomeofthemin,buttothedetriment
oftheirfirmanditsothershareholders.See,forexample,Enron.

Agriculturalpolicy
Countriesoftenprovidesupportfortheirfarmersusingtradebarriersandsubsidybecause,
forexample:
*domesticagriculture,evenifitisinefficientbyworldstandards,canbeaninsurancepolicyin
caseitbecomesdifficult(asitdoes,forexample,inwartime)tobuyagriculturalproducefrom
abroad
*farmersgroupshaveprovedadeptatlobbying
*politicianshavesoughttoslowthedepopulationofruralareas
*agriculturalpricescanbevolatile,asaresultofunpredictableweather,amongotherthings
and
*financialsupportcanprovideasafetynetinunexpectedlyseveremarketconditions.
Broadlyspeaking,governmentshavetriedtwomethodsofsubsidisingagriculture.Thefirst,
usedintheUnitedStatesduringthe1930sandintheUKbeforeitjoinedtheEuropean
Union,istotopupfarmers'incomesiftheyfallbelowaleveldeemedacceptable.Farmers
mayberequiredtosetasidesomeoftheirlandinreturnforthissupport.Thesecondisto
guaranteeaminimumleveloffarmpricesbybuyingupsurplussupplyandstoringor
destroyingitifpriceswouldotherwisefallbelowtheguaranteedlevels.Thiswasthe
approachadoptedbytheEUwhenitsetupitsCommonAgriculturalPolicy.Tokeepdown
thedirectcostofthissubsidytheEUusedtradebarriers,includingimportlevies,tominimise
competitiontoEUfarmersfromproduceavailablemorecheaplyonworldagriculturemarkets.
RecentAmericanfarmsupportpolicyhascombinedincometopupsandsomeguaranteed
prices.
Asmostgovernmentshavebecomemorecommittedtointernationaltrade,suchagricultural
policieshavecomeunderincreasingattack,althoughthefreetraderhetorichasoftenrunfar
aheadofgenuinereform.In2003,richcountriestogetherspentover$300billionayear
supportingtheirfarmers,morethansixtimeswhattheyspentonforeignAID.Findingaway
toendagriculturalsupporthadbecomebyfarthebiggestremainingchallengeforthosetrying
tonegotiateglobalfreetrade.

Agriculture
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Farmingaroundtheworldcontinuestobecomemoreproductivewhilegenerallyaccounting
forasmallershareofemploymentandnationalincome,althoughinsomepoorcountriesit
remainsthesectoronwhichthecountryanditspeopledepend.Farming,forestryandfishing
in1913accountedfor28%ofemploymentintheUnitedStates,41%inFranceand60%in
Japan,butonly12%intheUK.Nowtheproportionoftheworkforceemployedinsuch
activitieshasdroppedbelow6%intheseandmostotherindustrialisedcountries.
Thetotalvalueofinternationaltradeinagriculturehasrisensteadily.Buttheglobal
agriculturemarketremainsseverelydistortedbytradebarriersandgovernmentsubsidy,such
astheeuropeanunion'sCommonagriculturalpolicy.

Aid
Seeinternationalaid.

Altruism
Itisoftenallegedthataltruismisinconsistentwitheconomicrationality,whichassumesthat
peoplebehaveselfishly.Certainly,mucheconomicanalysisisconcernedwithhowindividuals
behave,andhomoeconomicus(economicman)isusuallyassumedtoactinhisorherself
interest.However,selfinterestdoesnotnecessarilymeanselfish.Someeconomicmodelsin
thefieldofbehaviouraleconomicsassumethatselfinterestedindividualsbehavealtruistically
becausetheygetsomebenefit,orutility,fromdoingso.Forinstance,itmaymakethemfeel
betteraboutthemselves,orbeausefulinsurancepolicyagainstsocialunrest,say.Some
economicmodelsgofurtherandrelaxthetraditionalassumptionoffullyrationalbehaviourby
simplyassumingthatpeoplesometimesbehavealtruistically,evenifthismaybeagainsttheir
selfinterest.Eitherway,thereismucheconomicliteratureaboutcharity,international
aid,publicspendingandredistributivetaxation.

Amortisation
Therunningdownorpaymentofaloanbyinstalments.Anexampleisarepaymentmortgage
onahouse,whichisamortisedbymakingmonthlypaymentsthatoverapreagreedperiodof
timecoverthevalueoftheloanplusinterest.Withloansthatarenotamortised,theborrower
paysonlyinterestduringtheperiodoftheloanandthenrepaysthesumborrowedinfull.

Animalspirits
Thecolourfulnamethatkeynesgavetooneoftheessentialingredientsofeconomic
prosperity:confidence.AccordingtoKeynes,animalspiritsareaparticularsortofconfidence,
"naiveoptimism".Hemeantthisinthesensethat,forentrepreneursinparticular,"thethought
ofultimatelosswhichoftenovertakespioneers,asexperienceundoubtedlytellsusandthem,
isputasideasahealthymanputsasidetheexpectationofdeath".Wheretheseanimalspirits
comefromissomethingofamystery.Certainly,attemptsbypoliticiansandotherstotalkup
confidencebymakingoptimisticnoisesabouteconomicprospectshaverarelydonemuch
good.

Antitrust
governmentpolicyfordealingwithmonopoly.Antitrustlawsaimtostopabusesofmarket
powerbybigcompaniesand,sometimes,topreventcorporatemergersandacquisitionsthat
wouldcreateorstrengthenamonopolist.Therehavebeenbigdifferencesinantitrustpolicies
bothamongcountriesandwithinthesamecountryovertime.Thishasreflecteddifferent
ideasaboutwhatconstitutesamonopolyand,wherethereisone,whatsortsofbehaviour
areabusive.
IntheUnitedStates,monopolypolicyhasbeenbuiltontheShermanAntitrustActof1890.
Thisprohibitedcontractsorconspiraciestorestraintradeor,inthewordsofalateract,to
monopolisecommerce.Intheearly20thcenturythislawwasusedtoreducetheeconomic
powerwieldedbysocalled"robberbarons",suchasJPMorganandJohnD.Rockefeller,
whodominatedmuchofAmericanindustrythroughhugetruststhatcontrolledcompanies'
votingshares.DuPontchemicals,therailroadcompaniesandRockefeller'sStandardOil,
amongothers,werebrokenup.Inthe1970stheShermanActwasturned(ultimatelywithout
success)againstIBM,andin1982itsecuredthebreakupofAT&T'snationwidetelecoms
monopoly.
Inthe1980samorelaissezfaireapproachwasadopted,underpinnedbyeconomictheories
fromthechicagoschool.Thesetheoriessaidthattheonlyjustificationforantitrustintervention
shouldbethatalackofcompetitionharmedconsumers,andnotthatafirmhadbecome,in
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someilldefinedsense,toobig.Somemonopolisticactivitiespreviouslytargetedbyantitrust
authorities,suchaspredatorypricingandexclusivemarketingagreements,weremuchless
harmfultoconsumersthanhadbeenthoughtinthepast.Theyalsocriticisedthetraditional
methodofidentifyingamonopoly,whichwasbasedonlookingatwhatpercentageofa
marketwasservedbythebiggestfirmorfirms,usingameasureknownastheherfindahl
hirschmanindex.Instead,theyarguedthatevenamarketdominatedbyonefirmneednotbe
amatterofantitrustconcern,provideditwasacontestablemarket.
Inthe1990sAmericanantitrustpolicybecamesomewhatmoreinterventionist.Ahighprofile
lawsuitwaslaunchedagainstMicrosoftin1998.Thegiantsoftwarecompanywasfoundguilty
ofanticompetitivebehaviour,whichwassaidtoslowthepaceofinnovation.However,fears
thatthefirmwouldbebrokenup,signallingafarmoreinterventionalistAmericanantitrust
policy,provedmisplaced.Thefirmwasnotseverelypunished.
IntheUK,antitrustpolicywaslongjudgedaccordingtowhatpolicymakersdecidedwasinthe
publicinterest.Attimesthisapproachwascomparativelypermissiveofmergersand
acquisitionsatothersitwaslessso.However,inthemid1980stheUKfollowedthe
Americanleadinbasingantitrustpolicyonwhetherchangesincompetitionharmed
consumers.Withintherestoftheeuropeanunionseveralbigcountriespursuedpoliciesof
buildingupnationalchampions,allowingchosenfirmstoenjoysomemonopolypowerat
homewhichcouldbeusedtomakethemmoreeffectivecompetitorsabroad.However,
duringthe1990stheEuropeanCommissionbecameincreasinglyactiveinantitrustpolicy,
mostlyseekingtopromotecompetitionwithintheEU.
In2000,theEUcontroversiallyblockedamergerbetweentwoAmericanfirms,GEand
HoneywellthedealhadalreadybeenapprovedbyAmerica'santitrustregulators.The
controversyhighlightedanimportantissue.Asglobalisationincreases,therelevantmarketfor
judgingwhethermarketpowerexistsorisbeingabusedwillincreasinglycoverfarmore
territorythananyonesingleeconomy.Indeed,theremaybeaneedtoestablishaglobal
antitrustwatchdog,perhapsundertheauspicesoftheworldtradeorganisation.

Appreciation
Ariseinthevalueofanassetandtheoppositeofdepreciation.Whenthevalueofacurrency
risesrelativetoanother,itappreciates.

Arbitrage
Buyinganassetinonemarketandsimultaneouslysellinganidenticalassetinanothermarket
atahigherprice.Sometimesthesewillbeidenticalassetsindifferentmarkets,forinstance,
sharesinacompanylistedonboththeLondonStockExchangeandNewYorkStock
Exchange.Oftentheassetsbeingarbitragedwillbeidenticalinamorecomplicatedway,for
example,theywillbedifferentsortsoffinancialsecuritiesthatareeachexposedto
identicalrisks.
Somekindsofarbitragearecompletelyriskfreethisispurearbitrage.Forinstance,
ifEUROSareavailablemorecheaplyindollarsinLondonthaninNewYork,arbitrageurs
(alsoknownasarbs)canmakeariskfreePROFITbybuyingeurosinLondonandsellingan
identicalamountoftheminNewYork.Opportunitiesforpurearbitragehavebecomerarein
recentyears,partlybecauseoftheGLOBALISATIONofFINANCIALMARKETS.Today,a
lotofsocalledarbitrage,muchofitdonebyhedgefunds,involvesassetsthathavesome
similaritiesbutarenotidentical.Thisisnotpurearbitrageandcanbefarfromriskfree.

Arbitragepricingtheory
Thisisoneoftwoinfluentialeconomictheoriesofhowassetsarepricedinthefinancial
markets.Theotheristhecapitalassetpricingmodel.Thearbitragepricingtheorysaysthat
thepriceofafinancialassetreflectsafewkeyriskfactors,suchastheexpectedrateof
interest,andhowthepriceoftheassetchangesrelativetothepriceofaportfolioofassets.If
thepriceofanassethappenstodivergefromwhatthetheorysaysitshouldbe,arbitrageby
investorsshouldbringitbackintoline.

Asiancrisis
During199798,manyoftheEastAsiantigereconomiessufferedaseverefinanicaland
economiccrisis.Thishadbigconsequencesfortheglobalfinancialmarkets,whichhad
becomeincreasinglyexposedtothepromisethatAsiahadseemedtooffer.Thecrisis
destroyedwealthonamassivescaleandsentabsolutepovertyshootingup.Inthebanking
systemalone,corporateloansequivalenttoaroundhalfofoneyear'sGDPwentbada
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destructionofsavingsonascalemoreusuallyassociatedwithafullscalewar.Theprecise
causeofthecrisisremainsamatterofdebate.Fingershavebeenpointedatthecurrency
pegadoptedbysomecountries,andareductionofcapitalcontrolsintheyearsbeforethe
crisis.Someblamedeconomiccontagion.Thecrisisbroughtanendtoathenwidespread
beliefthattherewasadistinct"Asianway"ofcapitalismthatmightprovejustassuccessfulas
capitalisminAmericaorEurope.Instead,criticsturnedtheirfireonAsiancronyism,ill
disciplinedbankingandlackoftransparency.Intheyearsfollowingthecrisis,mostofthe
countriesinvolvedhaveintroducedreformsdesignedtoincreasetransparencyandimprove
thehealthofthebankingsystem,althoughsome(suchasSouthKorea)wentmuchfurther
thanothers(suchasIndonesia).

Assets
Thingsthathaveearningpowerorsomeothervaluetotheirowner.

Asymmetricinformation
Whensomebodyknowsmorethansomebodyelse.Suchasymmetricinformationcanmakeit
difficultforthetwopeopletodobusinesstogether,whichiswhyeconomists,especiallythose
practisinggametheory,areinterestedinit.Transactionsinvolvingasymmetric(orprivate)
informationareeverywhere.Agovernmentsellingbroadcastinglicencesdoesnotknowwhat
buyersarepreparedtopayforthemalenderdoesnotknowhowlikelyaborroweristo
repayausedcarsellerknowsmoreaboutthequalityofthecarbeingsoldthandopotential
buyers.Thiskindofasymmetrycandistortpeople'sincentivesandresultinsignificant
inefficiencies.

Asymmetricshock
Whensomethingunexpectedhappensthataffectsoneeconomy(orpartofaneconomy)
morethantherest.Thiscancreatebigproblemsforpolicymakersiftheyaretryingtoset
amacroeconomicpolicythatworksforboththeareaaffectedbytheshockandtheunaffected
area.Forinstance,someeconomicareasmaybeoilexportersandthushighlydependenton
thepriceofoil,butotherareasarenot.Iftheoilpriceplunges,theoildependentareawould
benefitfrompoliciesdesignedtoboostdemandthatmightbeunsuitedtotheneedsofthe
restoftheeconomy.Thismaybeaconstantproblemforthoseresponsibleforsetting
theinterestratefortheeurogiventhebigdifferencesanddifferentpotentialexposuresto
shocksamongtheeconomieswithintheeurozone.

Auctions
Going,going,gone.Holdinganauctioncanbeanextremelyefficientwayforasellertoset
thepriceofitsproducts,especiallyifitdoesnothavemuchinformationabouthowmuch
peoplemaybewillingtopayforthem.Auctionsfascinateeconomists,especiallythosewho
specialiseingametheory.Theyhavelongbeenafeatureofthesaleofartandantiquesin
theroomsoffirmssuchasSotheby'sandChristie's.Butinrecentyearstheyhaveplayeda
growingroleinotherpartsoftheeconomy,rangingfromtheallocationofgovernment
controlledbroadcastingbandwidthtotheawardingofworktosubcontractorsbygovernments
andbigfirmsusingcompetitivetendering,andevenmorerecentlythesaleofgoodsoverthe
Internet.
AnEnglishauctionisthemostfamiliar.Bidderscompetetoofferhigherpricesanddropout
untilonlyoneremains.InaDutchauction,theauctioneercallsoutahighpricethenkeeps
loweringituntilthereisabuyer.Therearevariousformsofsealedbidauctions.Inafirstprice
sealedbid,eachbuyersubmitsapriceinasealedenvelopeandallbidsareopened
simultaneously,withthehighestofferwinning.Inasecond(orthird,fourth,andsoon)price
sealedbid,thehighestbidderwinsbutpaysonlythesecond(third,fourth)highestpricebid.
AnEnglishorDutchauctionwillworkwellforasellerifthereismorethanoneseriousbidder,
ascompetitionwillensurethatthepriceissetatthelevelatwhichitisnotworthmoretoany
otherbidderbutthewinner.Indeed,inacompetitiveauctionthesuccessfulbiddermayend
upofferingmorethanwhatisbeingauctionedisactuallyworth.Thisisknownasthewinner's
curse.
Whichmethodwillgeneratethebestpriceforthesellerdependsonhowmanybidderstake
partandhowwellinformedtheyare.Unfortunatelyfortheseller,thisinformationisnot
alwaysavailablebeforetheauctiontakesplace.

Austrianeconomics
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AbrandofneoclassicaleconomicsestablishedinViennaduringthelate19thcenturyandthe
firsthalfofthe20thcentury.ItwasstronglyopposedtoMarxismand,morebroadly,tothe
useofeconomictheoriestojustifygovernmentinterventionintheeconomy.Prominent
membersincludedFriedrichhayek,JosephschumpeterandLudwigvonMises.Itgavebirth
tothedefinitionofeconomicsasthescienceofstudyinghumanbehaviourasarelationship
betweenendsandscarcemeansthathavealternativeuses.Austrianeconomicthinkingwas
characterisedbyattributingalleconomicactivity,includingthebehaviourofapparently
impersonalinstitutions,tothewishesandactionsofindividuals.Itdidthisbyexamining
choicesintermsoftheiropportunitycost(thatis,whatisthenextbestuseofresourcesto
thatwhichisbeingconsidered?)andbyanalysingtheimpactoftimingondecisionmaking.
HayekcorrectlypredictedthefailureofSovietstylecentralplanning.Hisideasaresaidto
haveinspiredmanyofthefreemarketreformscarriedoutduringthe1980sintheUnited
StatesunderRonaldReaganandintheUKunderMargaretThatcher.Schumpeter
developedatheoryofinnovationandeconomicchangecharacterisedbythephrasecreative
destruction.

Autarky
Theideathatacountryshouldbeselfsufficientandnottakepartininternationaltrade.The
experienceofcountriesthathavepursuedthisUtopianidealbysubstitutingdomestic
productionforimportsisanunhappyone.Nocountryhasbeenabletoproducethefullrange
ofgoodsdemandedbyitspopulationatcompetitiveprices.Indeed,thosethathavetriedtodo
sohavecondemnedthemselvestoinefficiencyandcomparativepoverty,comparedwith
countriesthatengageininternationaltrade.

Average
Anumberthatiscalculatedtosummariseagroupofnumbers.Themostcommonlyused
averageisthemean,thesumofthenumbersdividedbyhowevermanynumberstherearein
thegroup.Themedianisthemiddlevalueinagroupofnumbersrankedinorderofsize.The
modeisthenumberthatoccursmostofteninagroupofnumbers.Takethefollowinggroup
ofnumbers:1,2,2,9,12,13,17
Themeanis56/7=8,
Themedianis9,
Themodeis2

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