Economic Vocabulary Start from 'O'

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.

economics vocabulary start from 'N'

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. 

पद्म पुरस्कार

पद्म पुरस्कार वर्ष 1954 में प्रारम्भ किए गए थे। वर्ष 1978, 1979 तथा 1993 से 1997 के दौरान थोड़े से अन्तराल को छोड़कर, ये पुरस्कार प्रत्येक गणतन्त्र दिवस पर प्रदान किये जाते हैं। ये पुरस्कार तीन श्रेणियों में दिए जाते हैं- पद्मश्री, पद्मभूषण, पद्मविभूषण। पद्म श्री विशिष्ट सेवा के लिये, पद्मभूषण उच्च कोटि की विशिष्ट सेवा के लिये तथा पद्मविभूषण असाधारण एवं विशिष्ट सेवा के लिये प्रदान किय जाता है।

इन पुरस्कारों को देने का आशय विशिष्ट कार्यों को प्रोत्साहित तथा मान्यता प्रदान करना है। ये पुरस्कार सभी प्रकार की गतिविधियों/क्षेत्रों जैसे कला,साहित्य व शिक्षा, खेलकूद, चिकित्सा, सामाजिक कार्य, विज्ञान और इंजीनियरी, सार्वजानिक मामले सिविल सेवा, व्यापार और उद्योग आदि में विशिष्ट और असाधरण उपलब्धियों के लिये प्रदान किये जाते हैं। जाति, लिंग, व्यवसाय, पद इत्यादि के भेदभाव के बिना ये सभी व्यक्तियों को प्रदान किये जाते हैं।   

ये पुरस्कार सामान्यत: मरणोपरान्त प्रदान नहीं किए जाते हैं। तथापि अत्यधिक उपयुक्त मामलों में सरकार मरणोपरान्त पुरस्कार प्रदान करने पर विचार कर सकती है। उच्चतर श्रेणी का पदम् पुरस्कार किसी एसे व्यक्ति को प्रदान किया जा सकता है जिस उससे निम्न श्रेणी का पुरस्कार प्राप्त किये हुए पांच वर्ष बीत गये हों, अत्यधिक पात्र मामलों मे समिति द्वारा कुछ छूट दी जा सकती है।  

सभी राज्य/संघ राज्य क्षेत्र सरकारों, भारत सरकार के मंत्रालयों/विभागों भारत रत्न और पद्म विभूषण पुरस्कार प्राप्तकर्ताओं तथा उत्कृष्ट संस्थानों से हर वर्ष 1 अक्टूबर तक सिफारिशें आमंत्रित करना एक सामान्य प्रक्रिया है। मुख्यमंत्रियों, मंत्रियो, राज्यपालों तथा संसद के सदस्यों और गैर सरकारी निकायों इत्यादि की सिफरिशों को भी संज्ञान मे रखा जाता है । पुरस्कार समिति का गठन प्रतिवर्ष प्रधानमंत्री द्वारा किय जाता है। पुरस्कार समिति द्वारा कि गयी सिफारिशें प्रधानमंत्री तथा राष्ट्रपति के अनुमोदन के लिये रखी जाति हैं। पुरस्कार समिति कि सिफारिशों से हटकर कोई पुरस्कार नहीं किया जाता है।

एक वर्ष में प्रदान किये जाने वाले पुरस्कारों की कुल संख्या वर्ष में प्रदान किये जाने वाले पुरस्कारों कि कुल संख्या  (मरणोपरान्त पुरस्कार तथा विदेशियों को दिए जाने वाले पुरस्कार को छोड़कर) 120 से अधिक नहीं होनी चाहिए।

पुरस्कार विजेताओं के नाम भारत के राजपत्र मे प्रकाशित किये जाते हैं।राष्ट्रपति किसी व्यक्ति को पुरस्कार प्रदान किय जाना रद्द एवं निष्प्रभावी भी कर सकते हैं । इन पुरस्कारों की घोषणा प्रति वर्ष 26 जनवरी के अवसर पर कि जाति है। ये पुरस्कार राष्ट्रपति भवन में आयोजित समारोह मे राष्ट्रपति द्वारा प्रदान किये जाते हैं। यह समारोह सामान्यतः मार्च /अप्रैल मे आयोजित किया जाता है।      

इस अलंकरण में राष्ट्रपति के हस्ताक्षर तथ मुहर से जरी कि गयी एक सनद तथा एक तमगा भी शामिल होता है। प्रत्येक पुरस्कार विजेता के सम्बन्ध में संक्षिप्त ब्योरे वाली एक स्मारिका भी समारोह वाले दिन जारी की जाती है। पुरस्कार प्राप्त कर्ताओं को तमगे कि एक प्रतिकृति भी प्रदान की जा सकती है । जिसे वे अपनी इच्छानुसार किसि भी समारोह या राजकीय समारोह मे पहन सकते हैं। 

Economic vocabulary start from 'M'

Macroeconomic policy

Top-down policy by government and central banks, usually intended to maximise growth while keeping down inflation and unemployment. The main instruments of macroeconomic policy are changes in the rate of interest and money supply, known as monetary policy, and changes in taxation and public spending, known as fiscal policy. The fact that unemployment and inflation often rise sharply, and that growth often slows or gdp falls, may be evidence of poorly executed macro­economic policy. However, business cycles may simply be an unavoidable fact of economic life that macroeconomic policy, however well conducted, can never be sure of conquering.

Macroeconomics

The big picture: analysing economy-wide phenomena such as growth, inflation and unemployment. Contrast with microeconomics, the study of the behaviour of individual markets, workers, households and firms. Although economists generally separate themselves into distinct macro and micro camps, macroeconomic phenomena are the product of all the microeconomic activity in an economy. The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a government to deliver well-run macroeconomic policy.

Manufacturing

Making things like cars or frozen food has shrunk in importance in most developed countries during the past half century as services have grown. In the United States and the UK, the proportion of workers in manufacturing has shrunk since 1900 from around 40% to barely 20%. More than two-thirds of output in oecd countries, and up to four-fifths of employment, is now in the services sector. At the same time, manufacturing has grown in importance in developing countries.

Many people think that manufacturing somehow matters more than any other economic activity and is in some way superior to surfing the internet or cutting somebody's hair. This is prob­ably nothing more than nostalgia for times past when making things in factories was what real men did, just as 150 years ago growing things in fields was what real men did. Mostly, the shift from manufacturing to services (as with the earlier shift from agriculture to manufacturing) reflects progress into jobs that create more utility, this time for real women as well as real men, which may explain why it is happening first in richer countries.

Marginal

The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal price is how much extra a consumer must pay to buy one extra unit. Marginal utility is how much extra utility a person gets from consuming (or doing) an extra unit of something. The marginal product of labour is how much extra output a firm would get by employing an extra worker, or by getting an existing worker to put in an extra hour on the job. The marginal propensity to consume (or to save) measures by how much a household's consumption (savings) would increase if its income rose by, say, $1. The marginal tax rate measures how much extra tax you would have to pay if you earned an extra dollar.

The marginal cost (or whatever) can be very different from the average cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in microeconomics is that small incremental changes can matter enormously. In general, thinking 'at the margin' often leads to better economic decision making than thinking about the averages.

Alfred marshall, the father of neo-classical economics, based many of his theories of economic behaviour on marginal rather than average behaviour. For instance, given certain plausible assumptions, a profit-maximising firm will increase production up to the point where marginal revenue equals marginal cost. This is because if marginal revenue exceeded marginal cost, the firm could increase its profit by producing an extra unit of output. Alternatively, if marginal cost exceeded marginal revenue, the firm could increase its profit by producing fewer units of output.

In all walks of life, a basic rule of rational economic decision making is: do something only if the marginal utility you get from it exceeds the marginal cost of doing it.

Market capitalisation

The market value of a company’s shares: the quoted share price multiplied by the total number of shares that the company has issued.

Market failure

When a market left to itself does not allocate resources efficiently. Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure.

The abuse of market power, which can occur whenever a single buyer or seller can exert significant influence over prices or output.

Externalities - when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment.

Public goods, such as national defence. How much defence would be provided if it were left to the market?

Where there is incomplete or asymmetric information or uncertainty.

Abuse of market power is best tackled through antitrust policy. Externalities can be reduced through regulation, a tax or subsidy, or by using property rights to force the market to take into account the welfare of all who are affected by an economic activity. The supply of public goods can be ensured by compelling everybody to pay for them through the tax system.

Market forces

Shorthand for the pressures from buyers and sellers in a market, rather than those coming from a government planner or from regulation.

Market power

When one buyer or seller in a market has the ability to exert significant influence over the quantity of goods and services traded or the price at which they are sold. Market power does not exist when there is perfect competition, but it does when there is a monopoly, monopsony or oligopoly.

Marshall plan

Probably the most successful programme of international aid and nation building in history. It was named after general george marshall, an american secretary of state, who at the end of the second world war proposed giving aid to western europe to rebuild its war-torn economies. North America gave around 1% of its gdp in total between 1948 and 1952; most of it came from the United States and the rest from Canada. The Americans left it to the Europeans to work out the details on allocating aid, which may be why, according to most economic analyses; it achieved more success than latter day aid programmes in which most of the decisions on how the money is spent are made by the donors. The main institution through which aid was administered was the organisation for European economic co-operation (oeec), which in 1961 became the OECD. Nowadays, whenever there is a proposal for the international community to rebuild an economy damaged by war, such as iraq's in 2003, you are sure to hear the phrase 'new marshall plan'.

Mean reversion

The tendency for subsequent observations of a random variable to be closer to its mean than the current observation. For example, if the current number is 7, the average is 5, and there is mean reversion, then the next observation is likelier to be 6 than 8.

Medium term

Somewhere between short-termism, which is bad, and the long run, lies the hallowed ground of the medium term – far enough away to discourage myopic behaviour by decision makers but close enough to be meaningful. But not many governments say exactly how long they think the medium term is.

Menu costs

How much it costs to change prices. Just as a restaurant has to print a new menu when it changes the price of its food, so many other firms face a substantial outlay each time they cut or raise what they charge. Such menu costs mean that firms may be reluctant to change their prices every time there is a shift in the balance of supply and demand, so there will be sticky prices and the market for their output will be in disequilibrium. The internet may sharply reduce menu costs as it allows prices to be changed at the click of a mouse, which may improve efficiency by keeping markets more often in equilibrium.

Mercantilism

The conventional economic wisdom of the 17th century that made a partial come-back in recent years. Mercantilists feared that money would become too scarce to sustain high levels of output and employment; their favoured solution was cheap money (low interest rates). In a forerunner to the 20th-century debate between keynesians and monetarists, they were opposed by advocates of classical economics, who argued that cheap and plentiful money could result in inflation. The original mercantilists, such as john law, a scots financier (and convicted murderer), believed that a country's economic prosperity and political power came from its stocks of precious metals. To maximise these stocks they argued against free trade, favouring protectionist policies designed to minimise imports and maximise exports, creating a trade surplus that could be used to acquire more precious metal. This was contested for the classicists by adam smith and david hume, who argued that a country's wealth came not from its stock of precious metals but rather from its stocks of productive resources (land, labour, capital, and so on) and how efficiently they are used. Free trade increased efficiency by allowing countries to specialise in things in which they have a comparative advantage.

Mergers and acquisitions

When two businesses join together, either by merging or by one company taking over the other. There are three sorts of mergers between firms: horizontal integration, in which two similar firms tie the knot; vertical integration, in which two firms at different stages in the supply chain get together; and diversification, when two companies with nothing in common jump into bed. These can be a voluntary marriage of equals; a voluntary takeover of one firm by another; or a hostile takeover, in which the management of the target firm resists the advances of the buyer but is eventually forced to accept a deal by its current owners. For reasons that are not at all clear, merger activity generally happens in waves. One possible explanation is that when share prices are low, many firms have a market capitalisation that is low relative to the value of their assets. This makes them attractive to buyers. In theory, the different sorts of mergers have different sorts of potential benefits. However, the damning lesson of merger waves stretching back over the past 50 years is that, with one big ex ception - the spate of leveraged buy-outs in the United States during the 1980s - they have often failed to deliver benefits that justify the costs.

Microeconomics

The study of the individual pieces that together make an economy. Contrast with macroeconomics, the study of economy-wide phenomena such as growth, inflation and unemployment. Microeconomics considers issues such as how households reach decisions about consumption and saving, how firms set a price for their output, whether privatisation improves efficiency, whether a particular market has enough competition in it and how the market for labour works.

Minimum wage

A minimum rate of pay that firms are legally obliged to pay their workers. Most industrial countries have a minimum wage, although certain sorts of workers are often exempted, such as young people or part-timers. Most economists reckon that a minimum wage, if it is doing what it is meant to do, will lead to higher unemployment than there would be without it. The main justification offered by politicians for having a minimum wage is that the wage that would be decided by buyers and sellers in a free market would be so low that it would be immoral for people to work for it. So the minimum wage should be above the market-clearing wage, in which case fewer workers would be demanded at that wage than would be hired at the market wage. How many fewer will depend on how far the minimum wage is above the market wage?

Some economists have challenged this simple supply and demand model. Several empirical studies have suggested that a minimum wage moderately above the free-market wage would not harm employment much and could (in rare circumstances) potentially raise it. These studies are not widely accepted among economists. Whatever it does for those in work, a minimum wage cannot help the majority of the very poorest people in most countries, who typically have no job in which to earn a minimum wage.

Misery index

The sum of a country’s inflation and unemployment rates. The higher the score, the greater is the economic misery.

Mixed economy

A market economy in which both private-sector firms and firms owned by government take part in economic activity. The proportions of public and private enterprise in the mix vary a great deal among countries. Since the 1980s, the public role in most mixed economies declined as nationalisation gave way to privatisation.

Mobility

The easier it is for the factors of production to move to where they are most valuable, the more efficient the allocation of the world's scarce resources is likely to be and the faster gdp will grow. Apart from continental drift, land is immobile. Capital has long been extremely mobile within countries, and, with the rise of globalisation, it is now able to move easily around the world. Enterprise is mobile, although to what extent depends on the particular entrepreneur. Some members of the labour market zoom around the world to work; others will not move to the next town.

Capital controls are the main obstacle to capital mobility, and these have been mostly removed or reduced since 1980. The sources of labour immobility are more numerous and complex, including immigration controls, transport costs, language barriers and a reluctance to move away from family or friends. Workers are far more mobile within the United States than they are within the European Union or within individual eu countries. Some economists reckon that the willingness of workers to move to where the work is helps to explain the stronger economic performance and lower unemployment of the United States.

Can you sometimes have too much mobility? Certainly, some developing countries have suffered from hot money rushing into and then out of their markets.

In general, the possibility that a factor of production may suddenly move elsewhere can create serious economic problems. For instance, an employer may think twice about investing in training an employee if it fears that the employee may suddenly take a job with another firm. Similarly, entrepreneurs are unlikely to take the risk of pursuing a new idea if they fear that their capital may disappear at any moment, hence the importance of having access to long-term capital, such as by issuing bonds and equities.

Modelling

When economists make a number of simplified assumptions about how the economy, or some part of it, behaves, and then see what this implies in various different scenarios. Milton Friedman argued that economic models should not be judged on the basis of the validity of their assumptions, but on the accuracy of their predictions. An expert billiards player, he said, may not know the laws of physics, but acts as if he knows such laws. So his behaviour could be predicted accurately with a model that assumes he knows the laws of physics. Likewise, the behaviour of people making economic decisions may be accurately predicted by a model that assumes their goal is, say, profit maximisation, even if they are not actually conscious of this being their goal. The more complex the thing being modelled, the harder it is to get right. Economic forecasting has a poor overall track record. The more micro­economic the thing being modelled, the more likely it is that a model can be designed that will deliver accurate predictions.

Modern portfolio theory

One of the most important and influential economic theories about finance and investment. Modern portfolio theory is based upon the simple idea that diversification can produce the same total returns for less risk. Combining many financial assets in a portfolio is less risky than putting all your investment eggs in one basket. The theory has four basic premises.

Investors are risk averse.

Securities are traded in efficient markets.

Risk should be analysed in terms of an investor's overall portfolio, rather than by looking at individual assets.

For every level of risk, there is an optimal portfolio of assets that will have the highest expected returns.

All of this seems comparatively straightforward now, except perhaps the bit about efficient markets. But it was shocking when it was put forward in the early 1950s by harry Markowitz, who later won the Nobel Prize for it. According to mr Markowitz, when he explained his theory to the high priests of the chicago school, 'milton friedman argued that portfolio theory was not economics'. It is now.

Monetarism

Control the money supply, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 Keynesian policies of demand management, echoing earlier debates between mercantilism and classical economics. Monetarism is based on the belief that inflation has its roots in the government printing too much money. It is closely associated with milton milton friedman, who argued, based on the quantity theory of money, that government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. If it did this, market forces would efficiently solve the problems of inflation, unemployment and recession. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK.

Many central banks had set formal targets for money-supply growth, so every wiggle in the data was scrutinised for clues to the next move in the rate of interest. Since then, the notion that faster money-supply growth automatically causes higher inflation has fallen out of favour. The money supply is useful as a policy target only if the relationship between money and nominal gdp, and hence inflation, is stable and predictable. The way the money supply affects prices and output depends on how fast it circulates through the economy. The trouble is that its velocity of circulation can suddenly change. During the 1980s, the link between different measures of the money supply and inflation proved to be less clear than monetarist theories had suggested, and most central banks stopped setting binding monetary targets. Instead, many have adopted explicit inflation targets.

Monetary neutrality

Changes in the money supply have no effect on real economic variables such as output, real interest rates and unemployment. If the central bank doubles the money supply, the price level will double too. Twice as many dollars means half as much bang for the buck. This theory, a core belief of classical economics, was first put forward in the 18th century by David Hume. He set out the classical dichotomy that economic variables come in two varieties, nominal and real, and that the things that influence nominal variables do not necessarily affect the real economy. Today few economists think that pure monetary neutrality exists in the real world, at least in the short run. Inflation does affect the real economy because, for instance, there may be sticky prices or money illusion.

Monetary policy

What a central bank does to control the money supply, and thereby manage demand. Monetary policy involves open-market operations, reserve requirements and changing the short-term rate of interest (the discount rate). It is one of the two main tools of macroeconomic policy, the side-kick of fiscal policy, and is easier said than done well.

Money

Makes the world go round and comes in many forms, from shells and beads to gold coins to plastic or paper. It is better than barter in enabling an economy's scarce resources to be allocated efficiently. Money has three main qualities:

As a medium of exchange, buyers can give it to sellers to pay for goods and services;

As a unit of account, it can be used to add up apples and oranges in some common value;

As a store of value, it can be used to transfer purchasing power into the future.

A farmer who exchanges fruit for money can spend that money in the future; if he holds on to his fruit it might rot and no longer be useful for paying for something. Inflation undermines the usefulness of money as a store of value, in particular, and also as a unit of account for comparing values at different points in time. Hyper-inflation may destroy confidence in a particular form of money even as a medium of exchange. Measures of liquidity describe how easily an asset can be exchanged for money.

Money illusion

When people are misled by inflation into thinking that they are getting richer, when in fact the value of money is declining. Whether, and how much, people are fooled by inflation is much debated by economists. Money illusion, a phrase coined by Keynes, is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial, helping to “grease the wheels” of the economy. Because of money illusion, workers like to see their nominal wages rise, giving them the illusion that their circumstances are improving, even though in real (inflation-adjusted) terms they may be no better off. During periods of high inflation double-digit pay rises (as well as, say, big increases in the value of their homes) can make people feel richer even if they are not really better off. When inflation is low, growth in real incomes may hardly register.

Money markets

Any market where money and other liquid assets (such as treasury bills) can be lent and borrowed for between a few hours and a few months. Contrast with capital markets, where longer-term capital changes hands.

Money supply

The amount of money available in an economy. In the heyday of monetarism in the early 1980s, economists pounced upon the monthly (in some countries, even weekly) money-supply numbers for clues about future inflation. Central banks aim to manage demand by controlling the supply of money through open-market operations, reserve requirements and changing the rate of interest (to be exact, the discount rate).

One difficulty for policymakers lies in how to measure the relevant money supply. There are several different methods, reflecting the different liquidity of various sorts of money. Notes and coins are completely liquid; some bank deposits cannot be withdrawn until after a waiting period. M3 (m4 in the uk) is known as broad money, and consists of cash, current account deposits in banks and other financial institutions, savings deposits and time-restricted deposits. M1 is known as narrow money, and consists mainly of cash in circulation and current account deposits. M0 (in the UK) is the most liquid measure, including only cash in circulation, cash in banks' tills and banks' operational deposits held at the bank of England.

Although it is a poor predictor of inflation, monetary growth can be a handy leading indicator of economic activity. In many countries, there is a clear link between the growth of the real broad-money supply and that of real gdp.

Monopolistic competition

Somewhere between perfect competition and monopoly, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few firms enjoy a pure monopoly; oligopoly is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by advertising or through small differences in design. These small differences form barriers to entry. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce prices through competition. Prices are higher and output lower than under perfect competition.

Monopoly

When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. Contrast with perfect competition, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.

In practice, few monopolies are absolute, and their power to set prices or limit supply is constrained by some actual or potential near-competitors. An extreme case of this occurs when a single firm dominates a market but has no pricing power because it is in a contestable market; that is if it does not operate efficiently, a more efficient rival firm will take its entire market away. Antitrust policy can curb monopoly power by encouraging competition or, when there is a natural monopoly and thus competition would be inefficient, through regulation of prices. Furthermore, the mere possibility of ­antitrust action may encourage a monopoly to self-regulate its behaviour, simply to avoid the trouble an investigation would bring.

Monopsony

A market dominated by a single buyer. A monopsonist has the market power to set the price of whatever it is buying (from raw materials to labour). Under perfect competition, by contrast, no individual buyer is big enough to affect the market price of anything.

Moral hazard

One of two main sorts of market failure often associated with the provision of insurance. The other is adverse selection. Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

Most-favoured nation

Equal treatment, at least, in international trade. If country a grants country b the status of most-favoured nation, it means that b's exports will face tariff that are no higher (and also no lower) than those applied to any other country that a calls a most-favoured nation. This will be the most favourable tariff treatment available to imports.

Most-favoured nation treatment is one of the most important building blocks of the international trading system. The world trade organisation requires member countries to accord the most favourable tariff and regulatory treatment given to the product of any one member to the 'like products' of all other members. Before the general agreement on tariffs and trade, there was often a most-favoured nation clause in bilateral trade agreements, which helped the world move towards free trade. In the 1930s, however, there was a backlash against this, and most-favoured nations were treated less favourably. This shift pushed the world economy towards division into regional trade areas. In the United States, most-favoured nation status has to be re-ratified periodically by congress.

Multiplier

Shorthand for the way in which a change in spending produces an even larger change in income. For instance, suppose a government loosens fiscal policy, increasing net public spending by pumping an extra $10 billion into education. This has an immediate effect by increasing the income of teachers and of people who sell educational supplies or build or maintain schools. These people will in turn spend some of their extra money, putting more cash into the pockets of others, who spend some of it, and so on.

In theory, this process could continue indefinitely, in which case the multiplier would have an infinite value. In practice, most people save some of their extra income rather than spend it. How much they spend will depend on their marginal propensity to consume. The value of the multiplier can be calculated by this formula:

Multiplier = 1 / (1 - marginal propensity to consume)

If the marginal propensity to consume is 0.5 (50 cents of an extra dollar), the multiplier is 2. In practice, it is often hard to measure the multiplier effect, or to predict how it will respond to, say, changes in monetary policy or fiscal policy.