Nafta
Short for North American free-trade agreement.
In 1993, the United States, Mexico and Canada agreed to lower the barriers to
trade among the three economies. The formation of this regional trade area was
opposed by many politicians in all three countries. In the United States and Canada,
in particular, there were fears that nafta would result in domestic job losses
to cheaper locations in Mexico. In the early years of the agreement, however,
most studies found that the economic gains far outweighed any costs.
Nairu
The non-accelerating-inflation rate of unemployment.
Nash equilibrium
An important concept in game theory, Nash
equilibrium occurs when each player is pursuing their best possible strategy in
the full knowledge of the strategies of all other players. Once Nash
equilibrium is reached, nobody has any incentive to change their strategy. It
is named after John Nash, a mathematician and Nobel prize-winning economist.
Nation building
Creating a country that works out of one that
does not - because the old order has collapsed (as in the former Soviet Union),
or been destroyed by war (Iraq), or never really functioned in the first place
(Afghanistan). To transform a failed country can involve establishing order
through the rule of law and creating legitimate government and other effective
social institutions, as well as a credible currency and a functioning market
economy. Nation building is rarely easy, and often fiendishly difficult,
especially where there are deep ethnic, religious or political divisions in the
population or the country has no history of ever functioning effectively.
Outside expertise, such as from the World Bank, and money (as in, most famouly,
the Marshall Plan) can help, but they are no guarantee of success.
National debt
The total outstanding borrowing of a country's government
(usually including national and local government). It is often described as a burden;
although public debt may have economic benefits. Certainly, debt incurred by
one generation may become a heavy burden for later generations, especially if
the money borrowed is not invested wisely. The national debt is a total of all
the money ever raised by a government that has yet to be paid off; this is very
different from an annual public-sector budget deficit. In 1999, the American
government celebrated a huge budget surplus, yet the country still had a national
debt equal to nearly half its GDP.
National income
Shorthand for everything that is produced
earned or spent in a country.
Nationalisation
When a government takes ownership of a
private-sector business. Nationalisation was a fashionable part of the mix in
countries with a mixed economy between 1945 and 1980, after which the privatisation
of state-owned FIRMS became increasingly popular. The amount of public
ownership in different countries has always varied considerably. Nationalisation
has taken place for various reasons, ranging from socialist ideology to
attempts to remedy examples of market failure.
The performance of nationalised firms has
often, but not always, been poor compared with their private-sector
counterparts. State-owned businesses often enjoy a legally protected monopoly,
and the lack of competition means the firms face little pressure to be
efficient. Politicians often interfere in important management decisions,
making it harder to take unpopular actions on pay, factory closures and job
cuts, particularly when there are strong public-sector trade unions and a
union-friendly government. Politically imposed financial constraints may also
force public-sector firms to underinvest. Although privatisation has not been
universally beneficial, on balance it has increased economic efficiency.
Natural monopoly
When a monopoly occurs because it is more
efficient for one firm to serve an entire market than for two or more firms to
do so, because of the sort of economies of scale available in that market. A
common example is water distribution, in which the main cost is laying a
network of pipes to deliver water. One firm can do the job at a lower average
cost per customer than two firms with competing networks of pipes. Monopolies can
arise unnaturally by a firm acquiring sole ownership of a resource that is
essential to the production of a good or service, or by a government granting a
firm the legal right to be the sole producer. Other unnatural monopolies occur
when a firm is much more efficient than its rivals for reasons other than
economies of scale. Unlike some other sorts of monopoly, natural monopolies
have little chance of being driven out of a market by more efficient new
entrants. Thus regulation of natural monopolies may be needed to protect their
captive consumers.
Natural rate of unemployment
A controversial phrase, which actually means
little more than the lowest rate of unemployment at which the jobs market can
be in stable equilibrium. Keynesians, encouraged by the Phillips curve, assumed
that a government could lower the rate of unemployment if it was willing to
accept a little more inflation. However, economists such as Milton Friedman argued
that this supposed inflation-for-jobs trade-off was in fact a trap. Governments
that tolerated higher inflation in the hope of lowering unemployment would find
that joblessness dipped only briefly before returning to its previous level,
while inflation would rise and stay high. Instead, they argued, unemployment
has an equilibrium or natural rate, determined not by the amount of demand in
an economy but by the structure of the labour market. This is the lowest level
of unemployment at which inflation will remain stable. When unemployment is
above the natural rate demand can potentially be increased to bring it to the
natural rate, but attempting to lower it even further will only cause inflation
to accelerate. Hence the natural rate is also known as the
non-accelerating-inflation rate of unemployment, or nairu.
At first, the nairu became synonymous with the
view that macroeconomic policy could not conquer unemployment. It was often
used to justify policy inaction even when unemployment rose to more than 10% of
workers in industrialised countries during the 1980s and 1990s, even though
economists' estimates of the nairu differed hugely. More recently, economists
looking for ways to reduce unemployment have started to ask whether, and under
what circumstances, the natural rate might change. Most solutions have stressed
the need to make more people employable at the prevailing level of wages, in
particular by increasing labour market flexibility. Economists still disagree
over what jobless rate at any particular point in time is the nairu, but nobody
any longer thinks that the natural rate is fixed. Indeed, some think the
concept has no meaning at all.
Negative income tax
A way of building redistribution into the taxation
system by taking money from people with high incomes and paying it to people
with low incomes. Because it takes place automatically through the tax system,
it may attach less stigma to the receipt of financial help than some other
forms of welfare assistance. However, it may also discourage recipients from working
to increase their income, which is
why some countries have introduced a form of negative income tax that is
available only to the working poor. In the United States, this is known as the
earned income tax credit.
Neo-classical economics
The school of economics that developed the
free-market ideas of classical economics into a full-scale model of how an
economy works. The best-known neo-classical economist was Alfred marshall, the
father of marginal analysis. Neo-classical thinking, which mostly assumes that
markets tend towards equilibrium, was attacked by KEYNES and became
unfashionable during the Keynesian-dominated decades after the Second World War.
But, thanks to economists such as Milton Friedman, many neo-classical ideas
have since become widely accepted and uncontroversial.
Net present value
A measure used to help decide whether or not to
proceed with an investment. Net means that both the costs and benefits of the
investment are in cluded. To calculate net present value (NPV), first add
together all the expected benefits from the investment, now and in the future.
Then add together all the expected costs. Then work out what these future
benefits and costs are worth now by adjusting future cashflow using an
appropriate discount rate. Then subtract the costs from the benefits. If the
NPV is negative, then the investment cannot be justified by the expected
returns. If the NPV is positive, it can, although it pays to make comparisons
with the NPVs of alternative investment opportunities before going ahead.
Network effect
When the value of a good to a consumer changes
because the number of people using it changes. For instance, owning a phone
becomes more valuable as more people are plugged into the telephone network.
Network effects are sometimes called network externality, although this
implies, often wrongly, that the benefits from being part of a network are a
sort of market failure. They give a huge competitive advantage to the firm that
owns the network. This incumbent advantage arises because a new entrant must
persuade people to join a network that starts with fewer members, and thus may
be less valuable to them than the network they are currently in. This is why
markets for products with network effects are often dominated by only a few
firms or a single monopoly. Some economists argue that many recent
technological innovations, notably the Internet, have large positive network
effects, which make possible much higher productivity and growth than in the
past.
New economy
In the last years of the 20th century, some
economists argued that developments in information technology and globalisation
had given birth to a new economy (first, in the United States), which had a
higher rate of productivity and growth than the old economy it replaced. Some
went further, adding that in the new economy inflation was dead, the business
cycle abolished and the traditional rules of economics were redundant. These
claims were highly controversial. Other economists pointed out those similar
predictions had been made during earlier periods of rapid technological change,
yet the nature of economics was not fundamentally altered.
With the bursting of the dotcom stockmarket
bubble in 2000, the phrase fell into disuse, although productivity continued to
soar, thanks not least to new technology, especially in the United States.
New trade theory
Although most economists support free trade, in
the 1970s a growing number of them became increasingly puzzled by the large
differences between the predictions of free trade theory and real-world trade
flows. Their solution to this puzzle is known as new trade theory.
One mystery was that trade was growing fastest
between industrial countries with similar economies and endowments of the factors
of production. In many new industries, there was no clear comparative advantage
for any country. Patterns of production and trade often seemed matters of
chance. Trade between two countries would often consist mostly of similar
goods, for example, one country would sell cars to another country from which
it would import different models of cars.
One explanation, associated in particular with
Paul Krugman of the Massachusetts Institute of Technology, drew on Adam smith's
idea that the division of labour lowers unit costs. Economies of scale within
firms are incompatible with the perfect competition assumed by traditional
trade theory. A more realistic assumption is that many markets have monopolistic
competition. When a monopolistically competitive market expands, it does so
through a mixture of more firms (greater product variety) and bigger firms,
with bigger-scale economies. Free trade expands market size beyond national
borders and so allows firms to reap bigger economies of scale, to the benefit
of consumers, workers and shareholders.
The upside may be greater the more similar are
the trading economies. This may explain why trade liberalisation is easier to
achieve between similar countries. Thus, for example, the free-trade agreement
between the United States and Canada produced only minor local complaints,
whereas its subsequent expansion to include the very different economy of
Mexico was much more controversial.
NGO
Short for non-government organisation. Although
such groups have existed for generations (in the early 1800s, the British and
Foreign Anti-Slavery Society played a powerful part in abolishing slavery
laws), recent social and economic shifts have given these typically voluntary,
non-profit, 'issue-driven' organisations new life. The collapse of communism,
the spread of democracy, technological change and economic integration (globalisation,
in short) have each helped NGOs grow. Globalisation itself has exacerbated a
host of worries about the environment, labour rights, human rights, consumer
rights, and so on. Democratisation and technological progress have revolutionised
the way in which citizens can unite to express their disquiet.
Governments have been at the sharp end of
pressure from NGOs. Arguably, however, it is inter-governmental institutions
such as the world bank, the IMF, the UN agencies and the world trade
organisation (WTO) that have felt it more, owing to their lack of political
leverage. Few parliamentarians will face direct pressure from the IMF or the
WTO, but every policymaker faces pressure from citizens' groups with special
interests. Add to this the poor public image that these technocratic, faceless
bureaucracies have developed, and it is hardly surprising that they are popular
targets for NGO 'swarms'. How governments and inter-governmental organisations
respond to NGOs could have huge implications, including for the world's
economies. Equally important will be how NGOs themselves respond to greater
scrutiny and to growing concern about how accountable they are, and to whom.
Nobel Prize for economics
The sixth annual prize established in memory of
Alfred Nobel. Strictly speaking, this is not a fully fledged Nobel prize, as it
was not mentioned in Nobel’s will, unlike the five prizes established earlier
for peace, literature, medicine, chemistry and physics. Still, the title of
Nobel laureate and the $1m award stumped up each year by Sweden’s central bank make
it worth winning. Since 1969, when its first (joint) winners hailed from Norway
and the Netherlands, it has been won mostly by American economists, many of
them of the Chicago school.
Nominal value
The value of anything expressed simply in the money
of the day. Since inflation means that money can lose its value over time,
nominal figures can be misleading when used to compare values in different
periods. It is better to compare their real value, by adjusting the nominal
figures to remove the inflationary distortions.
Non-price competition
Trying to win business from rivals other than
by charging a lower price. Methods include advertising, slightly
differentiating your product, improving its quality or offering free gifts or
discounts on subsequent purchases. Non-price competition is particularly common
when there is an oligopoly, perhaps because it can give an impression of fierce
rivalry while the firms are actually colluding to keep prices high.
Normal goods
When average income increases, the demand for
normal goods increases, too. The opposite of inferior goods.
Normative economics
Economics that tries to change the world, by
suggesting policies for increasing economic welfare. The opposite of positive
economics, which is content to try to describe the world as it is, rather than
prescribe ways to make it better.
Null hypothesis
A statement that is being put to the test. In econometric
economists often start with a null hypothesis that a particular variable equals
a particular number, and then crunch their data to see if they can prove or
disprove it, according to the laws of statistical significance. The null
hypothesis chosen is often the reverse of what the experimenter actually
believes; it may be put forward to allow the data to contradict it.
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