This is the third article based on the words/phrases used in Economics and extends what we started in the previous articles. Our aim: to cover all words related to this super important subject in the easy to remember form of 10 words at a time. Time to shoot:
1. Disinflation: A fall in the rate of INFLATION. This means a slower increase in PRICES but not a fall in prices, which is known as DEFLATION.
2. Dumping: Selling something for less than the cost of producing it. This may be used by a DOMINANT FIRM to attack rivals, a strategy known to ANTITRUST authorities as PREDATORY PRICING. Participants in international trade are often accused of dumping by domestic FIRMS charging more than rival IMPORTS. Countries can slap duties on cheap imports that they judge are being dumped in their markets. Often this amounts to thinly disguised PROTECTIONISM against more efficient foreign firms.
3. Exchange rate: The PRICE at which one currency can be converted into another. Over the years, economists and politicians have often changed their minds about whether it is a good idea to try to hold a country’s exchange rate steady, rather than let it be decided by MARKET FORCES. For two decades after the second world war, many of the major currencies were fixed under the BRETTON WOODS agreement. During the following two decades, the number of currencies allowed to float increased, although in the late 1990s a number of European currencies were permanently fixed under ECONOMIC AND MONETARY UNION and some other countries established a CURRENCY BOARD.
4. Economies of scale: Bigger is better. In many industries, as output increases, the AVERAGE cost of each unit produced falls. One reason is that overheads and other FIXED COSTS can be spread over more units of OUTPUT. However, getting bigger can also increase average costs (diseconomies of scale) because it is more difficult to manage a big operation, for instance.
5. Factors of production: The ingredients of economic activity: land, labour, capital and enterprise.
6. Foreign direct investment: Investing directly in production in another country, either by buying a company there or establishing new operations of an existing business. This is done mostly by companies as opposed to financial institutions, which prefer indirect investment abroad such as buying small parcels of a country’s supply of shares or bonds.
7. GDP: Gross domestic product, a measure of economic activity in a country. It is calculated by adding the total value of a country’s annual output of goods and services. GDP = private consumption + investment + public spending + the change in inventories + (exports – imports). It is usually valued at market prices; by subtracting indirect tax and adding any government subsidy, however, GDP can be calculated at factor cost. This measure more accurately reveals the income paid to factors of production.
8. GNP: Short for gross national product, another measure of a country’s economic performance. It is calculated by adding to gdp the income earned by residents from investments abroad, less the corresponding income sent home by foreigners who are living in the country.
9. Hedge funds: These bogey-men of the FINANCIAL MARKETS are often blamed, usually unfairly, when things go wrong. There is no simple definition of a hedge fund (few of them actually HEDGE). But they all aim to maximise their absolute returns rather than relative ones; that is, they concentrate on making as much MONEY as possible, not (like many mutual funds) simply on outperforming an index. Although they are often accused of disrupting financial markets by their SPECULATION, their willingness to bet against the herd of other investors may push security prices closer to their true fundamental values, not away.
10. Hyper-inflation: Very, very bad. Although people debate when, precisely, very rapid INFLATION turns into hyper-inflation (a 100% or more increase in PRICES a year, perhaps?) nobody questions that it wreaks huge economic damage. After the first world war, German prices at one point were rising at a rate of 23,000% a year before the country’s economic system collapsed, creating a political opportunity grasped by the Nazis. In former Yugoslavia in 1993, prices rose by around 20% a day. Typically, hyper-inflation quickly leads to a complete loss of confidence in a country’s currency, and causes people to search for other forms of MONEY that are a better store of value. These may include physical ASSETS, GOLD and foreign currency. Hyper-inflation might be easier to live with if it was stable, as people could plan on the basis that prices would rise at a fast but predictable rate. However, there are no examples of stable hyper-inflation, precisely because it occurs only when there is a crisis of confidence across the economy, with all the behavioural unpredictability this implies.
Source for the article: The Economist
The Previous Articles in the series:
Article 1: The Vocabulary of Wealth-1
Article 2: The Vocabulary of Wealth-2
