OECD
The
Organisation for Economic Co-operation and Development, a Paris-based club for
industrialised countries and the best of the rest. It was formed in 1961,
building on the Organisation for European Economic Co-operation (OEEC), which
had been established under the marshall plan. By 2003, its membership had risen
to 30 countries, from an original 20. Together, OECD countries produce
two-thirds of the world's goods and services. The OECD provides a policy
talking shop for governments. It produces forests-worth of documents discussing
public policy ideas, as well as detailed empirical analysis. It also publishes
reports on the economic performance of individual countries, which usually
contain lots of valuable information even if they are rarely very critical of
the policies implemented by a member government.
Offshore
Where
the usual rules of a person or firm’s home country do not apply. It can be
literally offshore, as in the case of investors moving their MONEY to a Caribbean
island tax haven. Or it can be merely legally offshore, as in the case of
certain financial transactions that take place within, say, the City of London,
which are deemed for regulatory purposes to have taken place offshore.
Okun's
law
A
description of what happens to unemployment when the rate of growth of gdp
changes, based on empirical research by Arthur okun (1928-80). It predicts that
if gdp grows at around 3% a year, the jobless rate will be unchanged. If it
grows faster, the unemployment rate will fall by half of what the growth rate
exceeds 3% by; that is, if gdp grows by 5%, unemployment will fall by 1
percentage point. Likewise, a lesser, say 2%, increase in gdp would be
associated with a half a percentage point increase in the jobless rate. This
relationship is not carved in stone, as it merely reflects the American economy
during the period studied by okun. Even so, in most econo mies okun's law is a
reasonable rule of thumb for estimating the likely impact on jobs of changes in
output.
Oligopoly
When
a few firms dominate a market. Often they can together behave as if they were a
single monopoly, perhaps by forming a cartel. Or they may collude informally,
by preferring gentle non-price competition to a bloody price war. Because what
one firm can do depends on what the other firms do, the behaviour of oligopolists
is hard to predict. When they do compete on price, they may produce as much and
charge as little as if they were in a market with perfect competition.
OPEC
The
organisation of petroleum exporting countries, a cartel set up in 1960 that
wrought havoc in industrialised countries during the 1970s and early 1980s by
forcing up oil prices (which quadrupled in a few weeks during 1973-74 alone),
resulting in high inflation and slow growth. A lot of productive capital
equipment that had been viable at lower oil prices proved to be unprofitable to
run at the higher prices and was shut down. Some economists reckon that market
forces would have driven up oil prices anyway and that opec merely capitalised
on the opportunity. Since the early 1980s, opec's influence has waned. Many
firms have switched to production methods that need less oil, or less energy
altogether. Non-opec producers such as the uk have brought new oil fields on
stream. And some individual members of the cartel have broken ranks by failing
to restrict their oil production, resulting in lower oil prices.
Open
economy
An
economy that allows the unrestricted flow of people, capital, goods and
services across its borders; the opposite of a closed economy.
Open-market
operations
Central
banks buying and selling securities in the open market, as a way of controlling
interest rates or the growth of the money supply. By selling more securities,
they can mop up surplus money; buying securities adds to the money supply. The securities
traded by central banks are mostly government bonds and treasury bills,
although they sometimes buy or sell commercial securities.
Opportunity
cost
The
true cost of something is what you give up to get it. This includes not only
the money spent in buying (or doing) the something, but also the economic
benefits (utility) that you did without because you bought (or did) that
particular something and thus can no longer buy (or do) something else. For
example, the opportunity cost of choosing to train as a lawyer is not merely
the tuition fees, price of books, and so on, but also the fact that you are no
longer able to spend your time holding down a salaried job or developing your
skills as a footballer. These lost opportunities may represent a significant
loss of utility. Going for a walk may appear to cost nothing, until you
consider the opportunity forgone to use that time earning money. Everything you
do has an opportunity cost. Economics is primarily about the efficient use of
scarce resources, and the notion of opportunity cost plays a crucial part in
ensuring that resources are indeed being used efficiently.
Optimal
currency area
A
geographical area within which it would pay to have a single currency. An
optimal currency area can come in many sizes. Some may span several countries
and others may be smaller than an individual country. The benefits of having
one currency are lower foreign exchange and currency hedging costs and more
transparent pricing (because every price is expressed in the same currency).
But unless the single currency is used within an optimal currency area, these
benefits may be dwarfed by the costs. A single currency means a single monetary
policy and no opportunity for one part of the currency area to change its
exchange rate with the other parts. This can be a big problem if a country or
region is likely to suffer from asymmetric shocks that affect it differently
from the rest of the single-currency area, because it will no longer be able to
respond by loosening its national monetary policy or devaluing its currency.
This may not be an insuperable problem if workers in the affected country are
able and willing to move freely to other countries; if wages and prices are
flexible and can adjust to the shock; or if fiscal policy can shift resources
to areas hurt by a shock from areas that are not hurt. For a currency area to
be optimal, ideally asymmetric shocks should be rare, implying that the
economies involved are on similar business cycles and have similar structures.
Moreover, the single monetary policy should affect all the constituent parts in
the same way (an interest rate cut should not, say, reduce unemployment in one
part and increase inflation in another). There should be no cultural,
linguistic or legal barriers to labour mobility across frontiers; there should
be wage flexibility; and there should be some system for transferring resources
to regions that are suffering. In practice, few of the parts of the world that
have a single currency are optimal currency areas, probably including the euro
zone, although having a single currency often makes them become gradually more
alike and thus more optimal.
Optimum
As
good as it gets, given the constraints you are operating within. For the
concept of optimum to mean anything, there must be both a goal, say, to
maximise economic welfare, and a set of constraints, such as an available stock
of scarce economic resources. Optimising is the process of doing the best you
can in the circumstances.
Output
The
fruit of economic activity: whatever is produced by using the factors of production?
Output
gap
How
far an economy’s current output is below what it would be at full capacity. On
average, inflation rises when output is above potential and falls when output
is below potential. However, in the short run, the relationship between
inflation and the output gap can deviate from the longer-term pattern and can
thus be misleading. Alas for policymakers – because nobody really knows what an
economy’s potential output is, the size and even the direction of the output
gap can easily be misdiagnosed, which can contribute to serious errors in
macroeconomic policy.
Outsourcing
Shifting
activities that used to be done inside a firm to an outside company, which can
do them more cost-effectively. Big firms have outsourced a growing amount of
their business since the early 1990s, including increasingly offshoring work to
cheaper employees at firms in countries such as India. This has become
politically controversial in countries that lose jobs as a result of
offshoring. However, a firm that outsources can improve its efficiency by
focusing on those activities in which it can create the most value; the firm to
which it outsources can also increase efficiency by specialising in that
activity. That, at least, is the theory. In practice, managing the outsourcing
process can be tricky, particularly for more complex activities.
Over
the counter
In
the case of drugs, those that can be purchased without a prescription from a
doctor. In the case of financial securities, those that are bought or sold
through a private dealer or bank rather than on a financial exchange.
Overheating
When
an economy is growing too fast and its productive capacity cannot keep up with
demand. It often boils over into inflation.
Overshooting
The
common tendency of prices in financial markets initially to move further than
would seem strictly necessary in response to changes in the fundamentals that
should, in theory, determine value. One reason may be that in the absence of
perfect information, investors move in herds, rushing in and out of markets on
rumour. Eventually, as investors become better informed, the price usually
returns to a more appropriate level. Overshooting is especially common during
significant realignments of exchange rates, but there are plenty of other
examples. For instance, following the abolition of capital controls by some
developing countries, the prices of equities in those countries initially
soared to what proved to be unjustified levels as foreign capital rushed in,
before settling in the longer-term at more sustainable valuations.
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