- Industry: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
- Company Profile:
Shorthand for implementing economic reforms in the right order. In recent years, this has become a hot topic in development economics. Some economists argue that introducing the right policies alone is not enough to revive a malfunctioning economy; reforms must be implemented in the right sequence. Thus they debate when in the reform process there should be, say, privatization of state enterprises, and in which order, or the lifting of capital controls or other trade barriers. Other economists dispute whether there is a right sequence.
Industry:Economy
Products of economic activity that you can’t drop on your foot, ranging from hairdressing to websites. In most countries, the share of economic activity accounted for by services rose steadily during the 20th century at the expense of agriculture and manufacturing. More than two-thirds of output in OECD countries, and up to four-fifths of employment, is now in the services sector.
Industry:Economy
The true economic price of an activity: the opportunity cost. Shadow prices can be calculated for those goods and services that do not have a market price, perhaps because they are set by government. Shadow pricing is often used in cost-benefit analysis, where the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those for which market prices exist.
Industry:Economy
Putting shareholders first; the notion that all business activity should aim to maximize the total value of a company’s shares. Some critics argue that concentrating on shareholder value will be harmful to a company’s other stakeholders, such as employees, suppliers and customers.
Industry:Economy
Financial securities, each granting part ownership of a company. In return for risking their capital by giving it to the company’s management to develop the business, shareholders get the right to a slice of whatever is left of the firm’s revenue after it has met all its other obligations. This money is paid as a dividend, although most companies retain some of their residual revenue for investment purposes. Shareholders have voting rights, including the right to vote in the election of the company’s board of directors. Shares are also known as equities. They can be traded in the public financial markets or held as private equity.
Industry:Economy
A rough guide to whether the rewards from an investment justify the risk, invented by Bill Sharpe, a winner of the Nobel prize for economics and co-creator of the capital asset pricing model. You simply divide the past return on the investment (less the risk-free rate) by its standard deviation, the simplest measure of risk. The higher the Sharpe ratio is the better, that is, the greater is the return per unit of risk. However, as it is a backward-looking measure, based on what an investment has done in the past, the Sharpe ratio does not guarantee similar performance in future.
Industry:Economy
Selling a security, such as a share, that you do not currently own, in the expectation that its price will fall by the time the security has to be delivered to its new owner. If the price does fall, you can buy the security at the lower price, deliver it to whoever you sold it to and make a profit. The risk is that the price rises, leaving you with a loss.
Industry:Economy
Doing things that make you better off in the short-run but worse off in the end. After the bursting of the stock market bubble and the failure of Enron at the start of the 2000s, much like during the 1980s, accusations of short-termism were often made against the stock market-focused capitalism of the United States and the UK. During the bubble, it was claimed, investors had become too focused on short-term profits and changes in share prices, and failed to probe deeply enough into long-term performance. As a result, managers did things that made their profits look as good as possible in the short run, often to the detriment of their company's long-term health. Indeed, many firms engaged in misleading and even fraudulent accounting practices to inflate short-term profits. In the 1980s and early 1990s, the complaint took a slightly different form, and was arguably less convincing, namely that short-termism caused lower levels of investment by businesses than in countries where the stock market was less important, such as Germany and Japan.
Industry:Economy
A solution to one of the biggest sources of market failure: asymmetric information. Often the biggest problem facing sellers is how to convince buyers that what they are selling is as good as they say it is. This problem arises in situations where the qualities of the thing being sold cannot be observed easily by buyers, who thus fear that sellers may be conning them. In such situations, an answer may be for sellers to do something that shows they mean what they say about quality. This something is what economists call signaling. Going to a leading university might be worth far more for what it signals to prospective employers about your abilities than for what you learn as a student. Likewise, the fact that a firm is willing to spend a lot of money advertising its product may say far more about what it thinks of the product than any information included in the actual ad. To be useful, signals must impose more costs on those who use them to send false messages than any gains to be had from lying.
Industry:Economy
