Factor cost
A
measure of output reflecting the costs of the factors of production used,
rather than market prices, which may differ because of indirect tax and subsidy
.
Factors of production
The
ingredients of economic activity: land, labour, capital and enterprise.
Factory prices
The
prices charged by producers to wholesalers and retailers. Because these prices
are eventually passed on to the end customer, changes in factory prices, also
known as producer prices, can be a leading indicator of consumer price
inflation.
Fair trade
Many
politicians and ngos argue that free trade is not enough; it should also be
fair. On the face of it, fairness is self-evidently a good thing. However,
fairness, in trade as in beauty, lies in the eye of the beholder. Frederic bastiat,
a 19th-century french satirist, once observed that the sun offered unfair
competition to candle makers. If windows could be boarded up during the day, he
argued, more jobs could be created making candles. American trade unions
complain that mexicans' lower wages, say, give them an unfair advantage.
Mexicans say they cannot compete fairly against more productive american
counterparts. Both sides are wrong. Mexicans are paid less than americans
largely because they are, in general, less productive. There is nothing unfair
about that; indeed, it helps to make trade mutually beneficial. The mutual
benefits of trade also disprove the fair traders' other complaint, that free
trade harms poor countries.
Federal reserve system
America's
central bank. Set up in 1913, and popularly known as the fed, the system
divides the united states into 12 federal reserve districts, each with its own
regional federal reserve bank. These are overseen by the federal reserve board,
consisting of seven governors based in washington, dc. Monetary policy is
decided by its federal open market committee.
Financial centre
A
place in which an above-average amount of financial business takes place. The
big ones are new york, london, tokyo and frankfurt. Small ones such as dublin,
bermuda, luxembourg and the cayman islands also play an important part in the
global financial system. Globalisation and the increase in electronic trading
has raised concerns about whether there will be as much need for financial
centres in the 21st century as there was in the 19th and 20th centuries. So
far, the evidence suggests that the biggest, at least, will remain important.
Financial instrument
Certificate
of ownership of a financial asset, such as a bond or a share.
Financial intermediary
A
middleman. An individual or institution that brings together investors (the
source of funds) and users of funds (such as borrowers). May be increasingly at
risk of disintermediation.
Financial system
The
firms and institutions that together make it possible for money to make the
world go round. This includes financial markets, securities exchanges, banks,
pension funds, mutual funds, insurers, national regulators, such as the
securities and exchange commission (sec) in the united states, central banks,
governments and multinational institutions, such as the imf and world bank.
Fine tuning
A
favourite government policy in the keynesian-dominated 1950s and 1960s, involving
frequent adjustments to fiscal policy and/or monetary policy to alter the level
of demand to keep the economy growing at a steady rate. The trouble was and is,
partly because of the inadequacies of economic forecasting, that these frequent
adjustments were and are often mistaken, making the economy's growth path more,
rather than less, erratic. In the 1990s, fine tuning was increasingly shunned
by central banks and governments, which stopped trying to manage short-term
demand and instead aimed to pursue long-term macroeconomic goals, which
required fewer adjustments to policy. Or so they claimed. In practice, there
continued to be some attempted fine tuning.
Firms
For
many years, economists had little interest in what happened inside firms,
preferring instead to examine the workings of the different sorts of industries
in which firms operate, ranging from perfect competition to monopoly. Since the
1960s, however, sophisticated economic theories of how firms work have been
developed. These have examined why firms grow at different rates and tried to
model the normal life cycle of a company, from fast-growing start-up to
lumbering mature business. The aim is to explain when it pays to conduct an
activity within a firm and when it pays to externalise it through short- or
long-term arrangements with outsiders, be they individuals, exchanges or other
companies. The theories also look at the economic consequences of the different
incentives influencing individuals working within companies, tackling issues
such as pay, agency costs and corporate governance structures.
First-mover advantage
The
early bird gets the worm. Game theory shows that being the first to enter a
market or to introduce an innovation can be a huge advantage, not just because
the first firm in can erect barriers to entry, but also because potential
rivals may be discouraged from committing the resources necessary to compete
successfully. However, this advantage may sometimes be cancelled out by the
benefits enjoyed by followers, such as the chance to avoid--and learn from--the
mistakes made by the first mover.
Fiscal drag
A
nice little earner for the state. Fiscal drag is the tendency of revenue from
taxation to rise as a share of gdp in a growing economy. Tax allowances, progressive
tax rates and the threshold above which a particular rate of tax applies
usually remain constant or are changed only gradually. By contrast, when the
economy grows, income, spending and corporate profit rise. So the tax-take
increases too, without any need for government action. This helps slow the rate
of increase in demand, reducing the pace of growth, making it less likely to
result in higher inflation. Thus fiscal drag is an automatic stabiliser, as it
acts naturally to keep demand stable.
Fiscal neutrality
When
the net effect of taxation and public spending is neutral, neither stimulating
nor dampening demand. The term can be used to describe the overall stance of
fiscal policy: a balanced budget is neutral, as total tax revenue equals total
public spending. It can also refer more narrowly to the combined impact of new
measures introduced in an annual budget: the budget can be fiscally neutral if
any new taxes equal any new spending, even if the overall stance of the budget
either boosts or slows demand.
Fiscal policy
One
of the two instruments of macroeconomic policy; monetary policy's side-kick. It
comprises public spending and taxation, and any other government income or
assistance to the private sector (such as tax breaks). It can be used to influence
the level of demand in the economy, usually with the twin goals of getting
unemployment as low as possible without triggering excessive inflation. At
times it has been deployed to manage short-term demand through fine tuning,
although since the end of the keynesian era it has more often been targeted on
long-term goals, with monetary policy more often used for shorter-term
adjustments.
For
a government, there are two main issues in setting fiscal policy: what should
be the overall stance of policy, and what form should its individual parts
take?
Some
economists and policymakers argue for a balanced budget. Others say that a
persistent deficit (public spending exceeding revenue) is acceptable provided,
in accordance with the golden rule, the deficit is used for investment (in
infrastructure, say) rather than consumption. However, there may be a danger
that public-sector investment will result in the crowding out of more
productive private investment. Whatever the overall stance on average over an
economic cycle, most economists agree that fiscal policy should be
counter-cyclical, aiming to automatically stabilise demand by increasing public
spending relative to revenue when the economy is struggling and increasing
taxes relative to spending towards the top of the cycle. For instance, social
(welfare) handouts from the state usually increase during tough times, and
fiscal drag boosts government revenue when the economy is growing.
As
for the bits and pieces making up fiscal policy, one debate is about how high
public spending should be relative to gdp. In the united states and many asian
countries, public spending is less than 30% of gdp; in european countries, such
as germany and sweden, it has been as high as 40-50%. Some economic studies
suggest that lower public spending relative to gdp results in higher rates of
growth, though this conclusion is controversial. Certainly, over the years,
much public spending has been highly inefficient.
Another
issue is the form that taxation should take, especially the split between
direct taxation and indirect taxation and between capital, income and
expenditure tax.
Fixed costs
Production
costs that do not change when the quantity of output produced changes, for
instance, the cost of renting an office or factory space. Contrast with
variable costs.
Flotation
Going
public. When shares in a company are sold to the public for the first time
through an initial public offering. The number of shares sold by the original
private investors is called the "float". Also, when a bond issue is
sold in the financial markets.
Forecasting
Best
guesses about the future. Despite complex economic theories and cutting-edge
econometrics, the forecasts economists make are often badly wrong. Indeed,
following economic forecasts has been likened to driving a car blindfolded,
following directions given by a person who is looking out of the back window.
Some of the inaccuracies in forecasts reflect badly designed models; often, the
problem is that the future actually is unpredictable. Maybe it would be better
to take the advice of sam goldwyn, a movie mogul, "never prophesy,
especially about the future."
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. Foreign direct investment (fdi) grew rapidly during the 1990s before
slowing a bit, along with the global economy, in the early years of the 21st
century. Most of this investment went from one oecd country to another, but the
share going to developing countries, especially in asia, increased steadily.
There
was a time when economists considered fdi as a substitute for trade. Building
factories in foreign countries was one way of jumping tariff barriers. Now
economists typically regard fdi and trade as complementary. For example, a firm
can use a factory in one country to supply neighbouring markets. Some
investments, especially in services industries, are essential prerequisites for
selling to foreigners. Who would buy a big mac in london if it had to be sent
from new york?
Governments
used to be highly suspicious of fdi, often regarding it as corporate
imperialism. Nowadays they are more likely to court it. They hope that
investors will create jobs, and bring expertise and technology that will be
passed on to local firms and workers, helping to sharpen up their whole economy.
Furthermore, unlike financial investors, multinationals generally invest
directly in plant and equipment. Since it is hard to uproot a chemicals
factory, these investments, once made, are far more enduring than the flows of
hot money that whisk in and out of emerging markets (see developing countries).
Mergers
and acquisitions are a significant form of fdi. For instance, in 1997, more
than 90% of fdi into the united states took the form of mergers rather than of
setting up new subsidiaries and opening factories.
Free riding
Getting
the benefit of a good or service without paying for it, not necessarily
illegally. This may be possible because certain types of goods and services are
actually hard to charge for--a firework display, for instance. Another way to
look at this may be that the good or service has a positive externality.
However, there can sometimes be a free-rider problem, if the number of people
willing to pay for the good or service is not enough to cover the cost of
providing it. In this case, the good or service might not be produced, even
though it would be beneficial for the economy as a whole to have it. Public
goods are often at risk of free riding; in their case, the problem can be
overcome by financing the good by imposing a tax on the entire population.
Free trade
The
ability of people to undertake economic transactions with people in other
countries free from any restraints imposed by governments or other regulators.
Measured by the volume of imports and exports, world trade has become
increasingly free in the years since the second world war. A fall in barriers
to trade, as a result of the general agreement on tariffs and trade and its
successor, the world trade organisation, has helped stimulate this growth. The
volume of world merchandise trade at the start of the 21st century was about 17
times what it was in 1950, and the world's total output was not even six times
as big. The ratio of world exports to gdp had more than doubled since 1950. Of
this, trade in manufactured goods was worth three times the value of trade in
services, although the share of services trade was growing fast.
For
economists, the benefits of free trade are explained by the theory of
comparative advantage, with each country doing those things in which it is
comparatively more efficient. As long as each country specialises in products
in which it has a comparative advantage, trade will be mutually beneficial.
Some critics of free trade argue that trade with developing countries, where
wages are usually lower and working hours longer than in developed countries,
is unfair and will wipe out jobs in high-wage countries. They want autarky or
fair trade.
Real-world
trade patterns sometimes seem to challenge the theory of comparative advantage
(see new trade theory). Most trade occurs between countries that do not have
huge cost differences. The biggest trading partner of the united states, for
instance, is canada. Well over half the exports from france, germany and italy
go to other european union countries. Moreover, these countries sell similar
things to each other: cars made in france are exported to germany, and german
cars go to france. The main reason seems to be cross-border differences in
consumer tastes. But the agricultural exports of australia, say, or saudi
arabia's reliance on oil, do clearly stem from their particular stock of
natural resources. Also poorer countries often have more unskilled labour, so
they export simple manufactures such as clothing.
Frictional unemployment
That
part of the jobless total caused by people simply changing jobs and taking
their time about it, because they are spending time on job search or are taking
a break before starting with a new employer. There is likely to be some
frictional unemployment even when there is technically full employment, because
most people change jobs from time to time.
Friedman, milton
Loved
and loathed; perhaps the most influential economist of his generation. He won
the nobel prize for economics in 1976, one of many chicago school economists to
receive that honour. He has been recognised for his achievements in the study
of consumption, monetary history and theory, and for demonstrating how complex
policies aimed at economic stabilisation can be.
A
fierce advocate of free markets, mr friedman argued for monetarism at a time
when keynesian policies were dominant. Unusually, his work is readily
accessible to the layman. He argues that the problems of inflation and
short-run unemployment would be solved if the federal reserve had to increase
the money supply at a constant rate.
Like
adam smith and friedrich hayek, who inspired him, mr friedman praises the free
market not just for its economic efficiency but also for its moral strength. For
him, freedom--economic, political and civil--is an end in itself, not a means
to an end. It is what makes life worthwhile. He has said he would prefer to
live in a free country, even if it did not provide a higher standard of living,
than a country run by an alternative regime. However, the likelihood of a free
country being poorer than an unfree one strikes him as implausible; the
economic as well as the moral superiority of free markets is, he has declared,
"now proven".
An
adviser to richard nixon, he was disappointed when the president went against
the spirit of monetarism in 1971 by asking him to urge the chairman of the fed
to increase the money supply more rapidly. The 1980s economic policies of
margaret thatcher and general pinochet were inspired--and defended--by mr
friedman. However, in 2003, he admitted that one of those policies, the
targeting of the money supply, had "not been a success" and that he
doubted he would "as of today push it as hard as i once did".
Full employment
Jobs
for all that want them. This does not mean zero unemployment because at any
point in time some people do not want to work. Also, because some people are
always between jobs, there will usually be some frictional unemployment. Full
employment means that everyone who wants work and is willing to work at the
market wage is in work. Most governments aim to achieve full employment,
although nowadays they rarely try to lower unemployment below the nairu: the
lowest jobless rate consistent with stable, low inflation.
Fungible
You
can't tell them apart. Something is fungible when any one single specimen is
indistinguishable from any other. Somebody who is owed $1 does not care which
particular dollar he gets. Anything that people want to use as money must be
fungible, whether it be gold bars, beads or shells.
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