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Equal treatment, at least, in international trade. If country A grants country B the status of most-favored nation, it means that B’s exports will face tariff that are no higher (and also no lower) than those applied to any other country that A calls a most-favored nation. This will be the most favorable tariff treatment available to imports. Most-favored nation treatment is one of the most important building blocks of the international trading system. The World Trade Organization requires member countries to accord the most favorable tariff and regulatory treatment given to the product of any one member to the “like products” of all other members. Before the general agreement on tariffs and trade, there was often a most-favored nation clause in bilateral trade agreements, which helped the world move towards free trade. In the 1930s, however, there was a backlash against this, and most-favored nations were treated less favorably. This shift pushed the world economy towards division into regional trade areas. In the United States, most-favored nation status has to be re-ratified periodically by Congress.
Industry:Economy
When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. Contrast with perfect competition, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity. In practice, few monopolies are absolute, and their power to set prices or limit supply is constrained by some actual or potential near-competitors (see monopolistic competition). An extreme case of this occurs when a single firm dominates a market but has no pricing power because it is in a contestable market; that is if it does not operate efficiently, a more efficient rival firm will take its entire market away. Antitrust policy can curb monopoly power by encouraging competition or, when there is a natural monopoly and thus competition would be inefficient, through regulation of prices. Furthermore, the mere possibility of ¬antitrust action may encourage a monopoly to self-regulate its behavior, simply to avoid the trouble an investigation would bring.
Industry:Economy
The amount of money available in an economy. In the heyday of monetarism in the early 1980s, economists pounced upon the monthly (in some countries, even weekly) money-supply numbers for clues about future inflation. Central banks aim to manage demand by controlling the supply of money through open-market operations, reserve requirements and changing the rate of interest (to be exact, the discount rate). One difficulty for policymakers lies in how to measure the relevant money supply. There are several different methods, reflecting the different liquidity of various sorts of money. Notes and coins are completely liquid; some bank deposits cannot be withdrawn until after a waiting period. M3 (M4 in the UK) is known as broad money, and consists of cash, current account deposits in banks and other financial institutions, savings deposits and time-restricted deposits. M1 is known as narrow money, and consists mainly of cash in circulation and current account deposits. M0 (in the UK) is the most liquid measure, including only cash in circulation, cash in banks’ tills and banks’ operational deposits held at the Bank of England. Although it is a poor predictor of inflation, monetary growth can be a handy leading indicator of economic activity. In many countries, there is a clear link between the growth of the real broad-money supply and that of real GDP.
Industry:Economy
Makes the world go round and comes in many forms, from shells and beads to gold coins to plastic or paper. It is better than barter in enabling an economy’s scarce resources to be allocated efficiently. Money has three main qualities:
* as a medium of exchange, buyers can give it to sellers to pay for goods and services;
* as a unit of account, it can be used to add up apples and oranges in some common value;
* as a store of value, it can be used to transfer purchasing power into the future. A farmer who exchanges fruit for money can spend that money in the future; if he holds on to his fruit it might rot and no longer be useful for paying for something. Inflation undermines the usefulness of money as a store of value, in particular, and also as a unit of account for comparing values at different points in time. Hyper-inflation may destroy confidence in a particular form of money even as a medium of exchange. Measures of liquidity describe how easily an asset can be exchanged for money (the easier this is, the more liquid is the asset).
Industry:Economy
What a central bank does to control the money supply, and thereby manage demand. Monetary policy involves open-market operations, reserve requirements and changing the short-term rate of interest (the discount rate). It is one of the two main tools of macroeconomic policy, the side-kick of fiscal policy, and is easier said than done well. (See monetarism. )
Industry:Economy
Changes in the money supply have no effect on real economic variables such as output, real interest rates and unemployment. If the central bank doubles the money supply, the price level will double too. Twice as many dollars means half as much bang for the buck. This theory, a core belief of classical economics, was first put forward in the 18th century by David Hume. He set out the classical dichotomy that economic variables come in two varieties, nominal and real, and that the things that influence nominal variables do not necessarily affect the real economy. Today few economists think that pure monetary neutrality exists in the real world, at least in the short run. Inflation does affect the real economy because, for instance, there may be sticky prices or money illusion.
Industry:Economy
Control the money supply, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 Keynesian policies of demand management, echoing earlier debates between mercantilism and classical economics. Monetarism is based on the belief that inflation has its roots in the government printing too much money. It is closely associated with Milton Friedman, who argued, based on the quantity theory of money, that government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. If it did this, market forces would efficiently solve the problems of inflation, unemployment and recession. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK. Many central banks had set formal targets for money-supply growth, so every wiggle in the data was scrutinized for clues to the next move in the rate of interest. Since then, the notion that faster money-supply growth automatically causes higher inflation has fallen out of favor. The money supply is useful as a policy target only if the relationship between money and nominal GDP, and hence inflation, is stable and predictable. The way the money supply affects prices and output depends on how fast it circulates through the economy. The trouble is that its velocity of circulation can suddenly change. During the 1980s, the link between different measures of the money supply and inflation proved to be less clear than monetarist theories had suggested, and most central banks stopped setting binding monetary targets. Instead, many have adopted explicit inflation targets.
Industry:Economy
A minimum rate of pay that firms are legally obliged to pay their workers. Most industrial countries have a minimum wage, although certain sorts of workers are often exempted, such as young people or part-timers. Most economists reckon that a minimum wage, if it is doing what it is meant to do, will lead to higher unemployment than there would be without it. The main justification offered by politicians for having a minimum wage is that the wage that would be decided by buyers and sellers in a free market would be so low that it would be immoral for people to work for it. So the minimum wage should be above the market-clearing wage, in which case fewer workers would be demanded at that wage than would be hired at the market wage. How many fewer will depend on how far the minimum wage is above the market wage?
Some economists have challenged this simple supply and demand model. Several empirical studies have suggested that a minimum wage moderately above the free-market wage would not harm employment much and could (in rare circumstances) potentially raise it. These studies are not widely accepted among economists. Whatever it does for those in work, a minimum wage cannot help the majority of the very poorest people in most countries, who typically have no job in which to earn a minimum wage.
Industry:Economy
The study of the individual pieces that together make an economy. Contrast with macroeconomics, the study of economy-wide phenomena such as growth, inflation and unemployment. Microeconomics considers issues such as how households reach decisions about consumption and saving, how firms set a price for their output, whether privatization improves efficiency, whether a particular market has enough competition in it and how the market for labor works.
Industry:Economy
When two businesses join together, either by merging or by one company taking over the other. There are three sorts of mergers between firms: horizontal integration, in which two similar firms tie the knot; vertical integration, in which two firms at different stages in the supply chain get together; and diversification, when two companies with nothing in common jump into bed. These can be a voluntary marriage of equals; a voluntary takeover of one firm by another; or a hostile takeover, in which the management of the target firm resists the advances of the buyer but is eventually forced to accept a deal by its current owners. For reasons that are not at all clear, merger activity generally happens in waves. One possible explanation is that when share prices are low, many firms have a market capitalization that is low relative to the value of their assets. This makes them attractive to buyers (see tobin). In theory, the different sorts of mergers have different sorts of potential benefits. However, the damning lesson of merger waves stretching back over the past 50 years is that, with one big ex ception – the spate of leveraged buy-outs in the United States during the 1980s – they have often failed to deliver benefits that justify the costs.
Industry:Economy
