X-efficiency
Producing
output at the minimum possible cost. This is not enough to ensure the best sort
of economic efficiency, which maximizes society's total consumer plus producer
surplus, because the quantity of output produced may not be ideal. For
instance, a monopoly can be an x-efficient producer, but in order to maximize
its profit it may produce a different quantity of output than there would be in
a surplus-maximizing market with perfect competition.
Yield
The
annual income from a security, expressed as a percentage of the current market
price of the security. The yield on a share is its dividend divided by its
price. A bond yield is also known as its interest rate: the annual coupon
divided by the market price.
Yield
curve
Shorthand
for comparisons of the interest rate on government bonds of different maturity.
If investors think it is riskier to buy a bond with 15 years until it matures
than a bond with five years of life, they will demand a higher interest rate
(yield) on the longer-dated bond. If so, the yield curve will slope upwards
from left (the shorter maturities) to right. It is normal for the yield curve
to be positive (upward sloping, left to right) simply because investors
normally demand compensation for the added risk of holding longer-term
securities. Historically, a downward-sloping (or inverted) yield curve has been
an indicator of recession on the horizon, or, at least, that investors expect
the central bank to cut short-term interest rates in the near future. A flat
yield curve means that investors are indifferent to maturity risk, but this is
unusual. When the yield curve as a whole moves higher, it means that investors
are more worried that inflation will rise for the foreseeable future and
therefore that higher interest rates will be needed. When the whole curve moves
lower, it means that investors have a rosier inflationary outlook.
Even
if the direction (up or down) of a yield curve is unchanged, useful information
can be gleaned from changes in the spreads between yields on bonds of different
maturities and on different sorts of bonds with the same maturity (such as
government bonds versus corporate bonds, or thinly traded bonds versus highly
liquid bonds).
Yield
gap
A
way of comparing the performance of bonds and shares. The gap is defined as the
average yield on equities minus the average yield on bonds. Because shares are
usually riskier investments than bonds, you might expect them to have a higher
yield. In practice, the yield gap is often negative, with bonds yielding more
than equities. This is not because investors regard equities as safer than
bonds (see equity risk premium). Rather, it is that they expect most of the
benefit from buying shares to come from an increase in their price (capital
appreciation) rather than from dividend payments. Bond investors usually expect
more of their gains to come from coupon payments. They also worry that
inflation will erode the real value of future coupons, making them value
current payments more highly than those due in years to come. Moreover, the
usefulness of the dividend yield as a guide to the performance of shares has
declined since the early 1990s, as increasingly companies have chosen to return
cash to shareholders by buying back their own shares rather than paying out
bigger dividends.
Zero-sum
game
When
the gains made by winners in an economic transaction equal the losses suffered
by the losers. It is identified as a special case in game theory. Most economic
transactions are in some sense positive-sum games. But in popular discussion of
economic issues, there are often examples of a mistaken zero-sum mentality,
such as “profit comes at the expense of wages”, “higher productivity means
fewer jobs”, and “imports mean fewer jobs here”.
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