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The A to Z of
economics
Economic terms, from “absolute advantage”
to “zero-sum game”, explained to you in
plain English

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

Absolute advantage
A concept that helps to explain international trade. If country A is better at
making toasters than country B, and B is better at making kettles than A, it
makes sense for each country to focus on the area where they have this
advantage, and then trade toasters for kettles. But see, more importantly,
comparative advantage.

Active management
A branch of investment management that attempts to outperform other
investors by selecting a limited number of assets, and trading them regularly.
See also passive management.

Activist investing
Fund managers who take a stake in a company and then agitate for a change of
management, or strategy, in the belief that this will increase pro ts, and thus
the share price.

Adverse selection
A risk associated with insurance, and linked to asymmetric information.
People who are worried about their health will be more inclined to pay for
health insurance than those who are ghting t. One way to avoid the problem
is to make insurance compulsory for all, as happens with car ownership. For
more detail, see our Schools Brief.

Agency costs
The expense involved in using a third party to carry out a task. Examples
include hiring a fund manager to look after an individual’s investment
portfolio, or the cost to shareholders of having professional managers run a
business. See also principal-agent problem.

Aggregate demand
The ow of spending, across the economy, on goods and services. Demand can
fall, even if people’s income and wealth are unchanged, if they decide to save,
rather than spend.

Agriculture
The cultivation of crops and the tending of animals for the purpose of
supplying food. For millennia, this was mankind’s primary economic activity.

Alpha
That part of an investment return that is due to the skill of the fund manager.
This can be very hard to measure.

Amortisation
The gradual reduction in the value of an asset (or a debt) over time. A debt
(such as a mortgage) is amortised via regular repayments. Companies use
amortisation to steadily reduce the value of intangible assets on their balance-
sheets.

Animal spirits
Term used by John Maynard Keynes to describe sentiment among
businesspeople and consumers. If sentiment is depressed, economies may
struggle to escape from recession. For more detail, read this article. See also
Keynesian economics.

Antitrust
Term used to describe laws or regulations designed to stop rms from
exploiting their monopoly positions in markets at the expense of consumers
or rival businesses. To learn more, see our Schools Brief.

Appreciation
The rise in the value of an asset. In particular, currencies are often described as
appreciating when they go up and depreciating when they go down.

Arbitrage
The practice of exploiting price di erentials in di erent markets; for example,
buying an asset cheaply in London and selling it for a higher price in New York.
Thanks to the speed of modern information ows, risk-free arbitrage
opportunities are rare. See also regulatory arbitrage.

Asset
Something that can be used to create economic value. An asset can be
tangible, such as a building or machinery or intangible, such as a patent or a
brand name. Assets make up one side of a company’s balance-sheet; the other
is liabilities.

Asset stripping