ECONOMICS THE BASICS Now in its third edition, Economics: The Basics continues to provide an engaging and topical introduction to the key issues in contemporary economics Fully updated to take into account the global recession, ongoing problems in Eurozone economies, changing patterns in world trade, housing and currency markets, it covers fundamental issues, including: how different economic systems function; the boom and bust cycle of market economies; the impact of emerging markets; how price, supply and demand interact; the role of the banking and finance industry; whether we can emerge from recession and reduce poverty; the impact of economics on the environment With a glossary of terms, suggestions for further reading and new case studies covering subjects such as the choices facing developing economies, the impact of growth on the price of natural resources and the aftermath of the financial crash, this comprehensive and accessible guide is essential reading for anyone who wants to understand how economics works Tony Cleaver is a Visiting Lecturer at the Universidad de los Andes and at el Colegio de Estudios Superiores de Administración (CESA) in Bogota, Colombia He was previously Senior Teaching Fellow in Economics at the University of Durham, UK T H E BA S I C S ACTING BELLA MERLIN CONTEMPORARY LITERATURE SUMAN GUPTA AMERICAN PHILOSOPHY NANCY STANLICK CRIMINAL LAW JONATHAN HERRING ANCIENT NEAR EAST DANIEL C SNELL CRIMINOLOGY (SECOND EDITION) SANDRA WALKLATE ANTHROPOLOGY PETER METCALF DANCE STUDIES JO BUTTERWORTH ARCHAEOLOGY (SECOND EDITION) CLIVE GAMBLE EASTERN PHILOSOPHY VICTORIA S HARRISON ART HISTORY GRANT POOKE AND DIANA NEWALL ECONOMICS (THIRD EDITION) TONY CLEAVER ARTIFICIAL INTELLIGENCE KEVIN WARWICK EDUCATION KAY WOOD THE BIBLE JOHN BARTON ENERGY MICHAEL SCHOBERT BIOETHICS ALASTAIR V CAMPBELL EUROPEAN UNION (SECOND EDITION) ALEX WARLEIGH-LACK BUDDHISM CATHY CANTWELL EVOLUTION SHERRIE LYONS THE CITY KEVIN ARCHER FILM STUDIES (SECOND EDITION) AMY VILLAREJO FINANCE (SECOND EDITION) ERIK BANKS THE OLYMPICS ANDY MIAH AND BEATRIZ GARCIA FREE WILL MEGHAN GRIFFITH PHILOSOPHY (FIFTH EDITION) NIGEL WARBURTON GENDER HILARY LIPS GLOBAL MIGRATION BERNADETTE HANLON AND THOMAS VICINIO HUMAN GENETICS RICKI LEWIS HUMAN GEOGRAPHY ANDREW JONES INTERNATIONAL RELATIONS PETER SUTCH AND JUANITA ELIAS ISLAM (SECOND EDITION) COLIN TURNER JOURNALISM STUDIES MARTIN CONBOY JUDAISM JACOB NEUSNER LANGUAGE (SECOND EDITION) R.L TRASK LAW GARY SLAPPER AND DAVID KELLY PHYSICAL GEOGRAPHY JOSEPH HOLDEN POETRY (SECOND EDITION) JEFFREY WAINWRIGHT POLITICS (FOURTH EDITION) STEPHEN TANSEY AND NIGEL JACKSON PUBLIC RELATIONS RON SMITH THE QUR’AN MASSIMO CAMPANINI RACE AND ETHNICITY PETER KIVISTO AND PAUL R CROLL RELIGION (SECOND EDITION) MALORY NYE RELIGION AND SCIENCE PHILIP CLAYTON RESEARCH METHODS NICHOLAS WALLIMAN LITERARY THEORY (THIRD EDITION) HANS BERTENS ROMAN CATHOLICISM MICHAEL WALSH LOGIC JC BEALL SEMIOTICS (SECOND EDITION) DANIEL CHANDLER MANAGEMENT MORGEN WITZEL SHAKESPEARE (THIRD EDITION) SEAN MCEVOY MARKETING (SECOND EDITION) KARL MOORE AND NIKETH PAREEK SOCIAL WORK MARK DOEL MEDIA STUDIES JULIAN MCDOUGALL SOCIOLOGY KEN PLUMMER METAPHYSICS MICHAEL REA SPECIAL EDUCATIONAL NEEDS JANICE WEARMOUTH SUBCULTURES ROSS HAENFLER THEATRE STUDIES (SECOND EDITION) ROBERT LEACH TELEVISION STUDIES TOBY MILLER WOMEN’S STUDIES BONNIE SMITH TERRORISM JAMES LUTZ AND BRENDA LUTZ WORLD HISTORY PETER N STEARNS ECONOMICS T H E BA S I C S T H I R D ED I T I O N Tony Cleaver Third edition published 2015 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2015 Tony Cleaver The right of Tony Cleaver to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe First edition published by Routledge 2004 Second edition published by Routledge 2011 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Cleaver, Tony, 1947Economics : the basics / Tony Cleaver Third edition pages cm Includes bibliographical references and index Economics I Title HB171.C655 2015 330 dc23 2014004824 ISBN: 978-1-138-02353-6 (hbk) ISBN: 978-1-138-02354-3 (pbk) ISBN: 978-1-315-76200-5 (ebk) Typeset in Bembo by Taylor & Francis Books CONTENTS A world in upheaval A choice of economic systems Prices, markets, coffee and real estate The business of supply Inflation and unemployment: boom and bust Money, banks, bubbles and crises National income, world trade and multinational enterprise Can we reduce poverty and protect the environment? 25 48 77 109 142 Glossary Index 251 271 178 216 This page intentionally left blank A WORLD IN UPHEAVAL You cannot make a lot sense of what goes on in the world without some knowledge of basic economics In my own lifetime, three major upheavals have shaken the world order to its very roots: the oil price shocks of the 1970s; the collapse of the centrally planned economies at the end of the 1980s, and now a widespread and long-lasting recession that is currently depressing the incomes of billions of people around the globe Quite apart from sudden cataclysmic shocks like these, there are also any number of other issues – some growing in importance with a slow burn, others just a dull persistent ache that never goes away – that demand our attention and understanding All have important economic dimensions: climate change, bank panics, health care, world poverty, immigration, educational reform, even overseas military engagements … the list is endless To fully understand the implications of these and many other issues requires serious, though not very difficult, economic analysis The aim of this text, dear reader, is thus to give you some insight into how some of these complex issues can be unravelled, how economics works and contributes to a balanced appraisal of controversial and contemporary affairs, and therefore how your own opinions can be better informed 266 GLOSSARY OVERHEADS The fixed costs of production PARADIGM A worldview, or set of beliefs that inform general scientific opinion PARADOX OF THRIFT The disconcerting finding that if everyone saves in an economy, everyone becomes worse off as national income falls (see fallacy of composition) PATENT An exclusive government license to supply a given product PAY-OFF MATRIX A concept in Game Theory which identifies the rewards possible to (typically) two players faced with alternative courses of action – the gains or pay-off for any one being dependent on the actions of the other PERFECT COMPETITION A market where no one producer is influential enough to determine the price of the product traded – typically because there are no barriers to entry to prevent competition PHILLIPS CURVE The empirical finding, published in 1958, that unemployment decreased as wage inflation increased (see trade-off) POLLUTION PERMITS A scheme which allows different consumers/firms/countries to trade their respective responsibilities in reaching an overall pollution target POSITIVE ECONOMICS Economics that attempts to be objectively scientific in providing testable propositions PRICE MECHANISM The way that changing prices automatically organise the allocation of resources in a market economy: signalling shortages and surpluses, giving incentive for resources to switch employments and equating demand with supply PRIVATISATION The return to private ownership of state-owned or nationalised industries PRODUCTIVITY The ratio between outputs and inputs PROFITS This is the reward for enterprise – the payment to entrepreneurs for organising production and taking the risks involved Normal profit is defined as that minimum level of reward required to keep an entrepreneur in business; any level of profits above that is a form of producer surplus that can be called GLOSSARY abnormal, supernormal or monopoly profit See also transfer earnings and economic rent PROPERTY RIGHTS For successful exchange to take place in modern market systems, it requires that clear, unequivocal, private property rights exist so that what is mine and what is yours can be established without dispute This extends not only to material goods but also to unique ideas and intellectual property rights (A tenet of new institutional economics.) PUBLIC GOODS Goods and services – such as national defence or urban street lighting – that convey sizeable external benefits but which cannot be supplied on a restricted basis to paying customers only and thus will not be produced by private enterprise (contrast with merit goods) Pure public goods are non-rivalrous (my consumption of this service does not reduce its availability to others) and nonexcludable (if supplied to me it is simultaneously supplied to others) QUALITIES OF MONEY Those characteristics a commodity must possess if it is to function as a form of money – prime amongst which is acceptability QUANTITATIVE EASING This is where the central bank directly increases the reserves of commercial banks Similar to open market operations, the central bank buys securities directly from commercial banks (not indirectly from other agents) and thus transfers cash into those commercial bank accounts, which can in turn be used to back a multiplied increase in the money supply QUASI MARKET A simulated market, usually of a public service, where at least one of the following conditions are absent: private ownership of resources, consumer choice, a market price, producer competition QUOTAS A fixed limit on the number of imports RATE OF TIME PREFERENCE The price paid on time: how much the market will compensate an owner for postponing his use of risk-less capital (contrast interest rate) REAL INCOME What your money or nominal income can buy in real goods and services Similarly, the real rate of interest is the return you can expect after inflation is accounted for 267 268 GLOSSARY RECESSION A slow down or fall in the rate of growth of an economy An imprecise and less alarmist term than slump or depression RENEWABLE RESOURCES Environmental assets reproducible within an economic time-frame RENT Commonly used to refer to the payment for land or property A surplus payment above that economically necessary RENT-SEEKING The action of economic agents to seek government favours, especially lucrative monopoly licences, to restrict competition RESERVE ASSETS RATIO The ratio of reserves to loans that financial intermediaries have created (see fractional reserve banking, monetary base and money multiplier) RETURNS TO SCALE How revenues perform in comparison to costs as the size of a business increases If total revenues increase faster than total costs as all input and outputs expand then this represents increasing returns to scale (also known as economies of scale) If revenues and costs expand at the same rate, this implies constant returns to scale If total revenue increase more slowly than total cost as production increases then this represents decreasing returns to scale (also known as diseconomies of scale) (contrast with diminishing returns) REVENUE Earnings from sales Total revenue equals the number of goods sold, times their price Average revenue equals total revenue divided by number of goods sold (it thus equals price) Marginal revenue is the addition to total revenue caused by the sale of one extra unit SAMPLE BASKET A sample of everyday consumer purchases which is used to calculate the rate of change of prices, that is, inflation SAVINGS Income that is not spent SHIFTS IN DEMAND/SUPPLY The movement of a demand/ supply curve caused by a change in some factor other than the price of the good in question SHORT TERM The time period in which at least one factor under consideration does not change GLOSSARY SIGHT DEPOSITS Those bank deposits (e.g current accounts) which can be withdrawn on sight SOCIAL COSTS External costs imposed on society in the process of producing or consuming goods and services SPECULATIVE MOTIVE The demand for money for its use in financial speculation SPOT MARKET A market where goods or services are traded for immediate (as opposed to future) delivery SUPPLY The quantity of a good or service producers are willing to supply at a given price SUPPLY-SIDE POLICIES are those designed to increase efficiency of aggregate supply They include liberalisation, deregulation, privatisation and reducing government spending and budget deficits (see neoclassical economics) SURPLUS Income exceeding expenditure (contrast deficit) SUSTAINABLE DEVELOPMENT Economic development that attempts to conserve the environment such that it provides for both current and future needs TARIFFS Taxes placed on imports TECHNOLOGY TRANSFER The passing of management or technical know-how from pioneering firms/industries/countries to those following TIME DEPOSITS Those bank deposits (e.g savings accounts) where notice must be given before they can be withdrawn without penalty TOTAL FACTOR PRODUCTIVITY The overall increase in productivity of a number of resources which is not directly attributable to any specific one TRADE-OFF Where gaining one outcome is only possible by sacrificing an alternative The loss one incurs in trading off one for the other Minimising this loss means minimising the opportunity cost 269 270 GLOSSARY TRADITION Social custom A form of organisation that relies on precedent, which is resistant to change but which lends stability and certainty to any society TRAGEDY OF THE COMMONS The degradation of a communal resource since no one user has a vested and exclusive interest in its protection TRANSACTION COSTS The cost of bringing buyers into contact with sellers and facilitating trade Where these costs are high, markets will be small, underdeveloped, inefficient or unable to function (see market failure) TRANSFER EARNINGS The level of earnings required to keep a resource in its present employment TREASURY BILLS The government’s treasury borrows money by issuing a Treasury Bill which promises to pay the purchaser a given sum, say 100, in three months’ time If you pay 99 for this now, gain a return of after one quarter and repeat the purchase again and again, you can make a profit of in a year (and so the market rate of interest is determined at per cent on risk-free government bills) UTILITY Level of satisfaction WAGES The reward for labour WASHINGTON CONSENSUS A term used to describe the neoclassical, pro-market, supply-side policies actively promoted by Washington institutions such as the International Monetary Fund and the World Bank, amongst others WORLD TRADE ORGANIZATION (WTO) The body responsible for negotiating common rules in international commerce, with the intention of reducing barriers and promoting free trade INDEX absolute advantage 193, 251 administered prices 33, 251 administrative guidance 200, 251 aggregate demand 19, 116, 122–6, 128, 139, 163, 171, 179, 240, 251 aggregate supply 116, 122, 128, 240, 251 agriculture 29–33, 195–8, 222 AIDS 99 Airbus 92, 102–4 allocation of resources 50, 77, 251 American Economics Association 126, 140 American International Group (AIG) 16 ‘animal spirits’ 5, 25, 172–4 Argentina 169, 194–6, 230, 234 austerity 18, 137, 167, 176, 188 Australia 194, 234 balance of payments (BoP) 163, 181, 184–91, 196, 214, 251–2 Bangladesh 26, 39–40, 151, 203–5 bank account 8, 43, 154, 156 bank deposits 154–5, 252 banknotes 144 Bank of England 153 banks 9–20, 50, 71–2, 91, 113–14, 131, 137; shadow 10; see also financial intermediaries barriers to entry 91–2, 94, 131, 198, 252 barter 143, 252 bazaar 42 Bear Stearns 15 beef 194 beer 64 behavioural economics 172–4, 252 Belgium 168 Benanke, Ben 186 bills 9, 15, 156; treasury 9, 116, 270 Boeing 92, 102–4 Bolivia 234 bond 9, 16, 156, 158, 161, 185–6; junk 158, 160, 260 Borneo 200 Boulding, Kenneth 38 brain drain 134, 252 brand 61, 92, 94, 252 Bretton Woods 145–6 bubble 3, 14, 67, 136–7, 142–76, 170, 172–5 272 INDEX budget 123–5, 166, 180, 252; constraint 53, 252 Buffalo Bill 38 bureaucracy 83, 232 capital 15, 78–81, 133, 147, 151, 180–1, 210, 214, 218–21, 229, 249, 252; account 184–8; human 79, 209, 223, 259; in coffee shop 80; –intensive 32, 81, 212, 252; liquid 149, 261; ownership 5, social 224; stock 41, 79, 220, 252 capital/labour ratio 81 cartel 97–8, 128, 253 cash 11, 149, 153–7 central bank 5, 131, 146, 153–7, 161–3, 165, 171, 190, 253 central planning 29, 217, 253; agriculture 33; medical services 34–5; planned economies/systems 1, 34, 36, 42 chain reaction 21, 125, 223 cheques 149, 153 Chile 138 China 6–8, 22, 37, 136, 138, 183, 212, 233, 235–6, 242 circular flow 111, 117, 120, 122, 137, 150, 179 City of London 161 Classical economics 124, 139 clientisation 41, 230, 253 climate change 240, 242 Coca-Cola 92 coffee demand 52–63; El Salvador 31; International Coffee Organisation 62; prices 63–4; shop 48–52, 80; supply 65; see also price coins 142, 144, 148 collateral 78, 151, 170, 253 collateralised debt obligation (CDO) 10–14, 162, 253 collusion 97–8, 101, 206, 253; tacit 97, 100, 253 colonies 211, 213, 233–4; colonialism 227, 235 command economies 6, 34, 36, 200, 216, 222, 235, 253; see also centrally planned economies Common Agricultural Policy (CAP) 197–8, 254 comparative advantage 191–3, 198, 228, 254 confidence 5, 70–1, 122, 137, 145–6, 152, 170–1, 173–4, 229 Congress 20 consumer equilibrium 56, 58, 254; sovereignty 217, 254; spending 49 consumption 110–14, 179–81, 185, 219, 238–40, 254 cost benefit analysis 242, 248, 254 Costner, Kevin 234 costs of production 50, 64, 66, 87, 254; average/unit 81–3; marginal 85–8; total 85–8 cowboy economy 38 credibility 43 credit crunch 13–15, 17, 19–21, 24, 60, 73, 74, 137, 153, 161, 163, 172–4, 254 credit default swap (CDS) 11, 254 crises, international 157, 169 credit rating authority 10 critical minimum size 245, 255 cross-elasticity of demand 186, 255 currency 17, 143–7, 163–5, 169, 184, 189–90; common 165–8, 171; hard/soft 147 current balance 8, 184–8 ‘cut-throat’ competition 100 cyanide 211 Dances with Wolves 234 debt 10, 17–18, 126, 148, 171; crisis 132–3, 169–72; -equity swap 134, 255; -for-nature swap 246–8, 255; government 8, 16–18, 166 decision-making systems 28–36, 216–17 deflation 110, 135, 178, 239 demand 49–61, 65–72, 146, 172, 212, 239, 244, 255; contraction INDEX 62–3; derived 52, 255; excess 35; for investment funds 114–17; mineral resources 7; monopoly 94–5; oligopoly 98–9; shift 62, 159, 260 demand management 123–4, 255 Denmark 168 depreciation 79, 164, 255; see also devaluation deregulation 20, 128, 155, 159, 161; see also liberalisation devaluation 167, 189–91, 196, 256; see also depreciation diamonds 234 diminishing marginal utility 56, 256 diminishing returns, the law of 80–1, 219–24, 229, 249, 256 direct controls 187–9, 191 discipline 146, 165, 167, 176 discount rate 157, 161–4, 256 diseconomies of scale 82–3, 26 distribution effects 194–6, 256 dividends 149, 256 Doha Round 198 dollar standard 145; see also gold dominant strategy 101, 256 duopoly 92 Durham 48, 50 ecological footprint 236–7, 256 economic development 40, 193, 204, 218, 242, 246 economic growth 19, 37, 78, 143, 151, 196, 213, 218, 229, 237, 249; see also growth theory economic imperialism 214, 256 economies of scale 82, 91, 106, 198–9, 205, 214, 240 Edison, Thomas 223 education 198, 223, 225, 233; see also human capital; merit goods efficiency 36–7, 42, 77–8, 161, 174, 200, 210, 213, 256 Efficient Market Hypothesis (EMH) 172–4, 257 elasticity see price-elasticity El Salvador 30–2 employment 19–20, 49, 80, 135–6, 138, 164; full 116, 124, 179–80, 184, 187–8 endogenous change 63 endogenous growth theory 223–4, 257 entrepreneur 80, 88, 219 environment 38, 216, 237; environmental economics 239–49 equilibrium price 43, 69, 115, 135, 137, 172, 249, 257 equity 36–7, 42, 257; intergenerational 38, 243, 260 euro 16, 165–7, 169, 176 European Central Bank (ECB) 16–17, 153, 166 European Commission 90 European Community/Union (EU) 166–7, 189, 198, 202 European Exchange Rate Mechanism (ERM) 166–8 eurozone countries 16, 18, 166, 171, 175 exchange rates 144, 146, 163–9, 190, 257 exhaustible resources 237, 143–4, 257 exogenous change/shock 63, 66, 221, 257 expectations 68, 72, 123, 130, 163–4, 171, 181, 185, 257; -augmented Phillips curve 128, 257; rational 135–7, 173–4 exports 7, 21, 163, 179–91, 202, 214; cashew nuts 227–8 externalities 199–200, 240–1, 257 Exxon 89, 93, 206 fallacy of composition 110, 116, 191, 258 ‘Fannie Mae’ (FNMA) 16 Federal Reserve 5, 153, 186 fiat money 144, 258 finance houses see banks financial instrument 156, 210, 258 273 274 INDEX financial intermediaries 114, 150, 162, 170–1, 258; see also banks first mover advantage 102 First World War 145–6, 218 fiscal policies 123, 130, 137, 166, 175, 179, 258 foreign direct investment (FDI) see investment foreign exchange markets 164, 258 foreign trade multiplier 182–3 fractional reserve banking 153, 258 France 168 franchise 203, 258 ‘Freddie Mac’ (FHLMC) 16 free goods 38, 240–1, 258 free trade 134, 178, 192, 198–9, 200–1, 210, 214, 216, 227, 229 Friedman, Milton 46, 53, 124–8, 135–6, 139, 144, 217 game theory 100–4, 258 garment industry 204–5 gas 239 general equilibrium 110, 116, 122, 258 General Motors 16 geography 233–5 Germany 8, 16–18, 21, 145, 168 Ghana 211 gilt-edged securities 15, 161 global imbalances globalisation 142, 175, 192, 208, 213 gold 143–4, 152, 235; standard 144–6, 165, 167, 211, 259; see also dollar standard Gold Coast 211 goldsmiths 144 goodwill 79 government intervention 42, 124, 130, 133, 139, 197, 229 Grameen Bank 151 Great Depression 3–5, 17, 19, 116–17, 125, 136, 167, 195 Great Leap Forward 233 Great Moderation Great Recession 3–6, 17, 20–21, 136, 161, 167, 169, 171, 175 Greece Greenspan, Alan Gross Domestic Product (GDP) 4, 5, 38, 183, 259 growth theory 218–24; see also endogenous growth theory and neoclassical growth theory haggling 43, 230, 259 harvesting costs 245 Heckscher, Eli 193 ‘hot’ money 184, 186 Household Responsibility System 233 human capital see capital, human hunter-gatherers 234 hydraulic fracking 239 hyperinflation 144–5, 259 hysteresis 259 imperfect information 241–2 imports 163, 179–191, 202, 214 impossible triangle 164, 189 incentives 19, 34, 130, 132, 199, 232–3, 238, 244 income-elastic/inelastic 117 income levels 113–22, 221; see also national income India 136, 138, 228, 235–6 indifference curves 54–6, 259 Indonesia 39–40, 170, 190 Industrial Revolution 78 inequality 20, 28, 37, 195 infant industries 193, 198–9, 228, 259 inflation 109–40, 147, 196, 259; see also deflation, hyperinflation informal sector 150–1, 259 information costs 44, 150, 259 infrastructure 194, 200, 209, 211, 260 injections 114–6, 119–20, 123, 137, 179–83, 190–1, 214, 260 innovation 10, 70, 72, 93, 106, 151, 222 INDEX institutions 29–32, 43–5, 148, 171, 229–235, 249; see also New Institutional Economics integration 92, 260; horizontal 92, 260; lateral 260; vertical 93, 206, 260 interest 9–11, 32; rate 10–15, 70, 115, 117–18, 131, 133, 148, 151, 160–1, 163–4, 171, 175, 185–7, 219, 220, 244, 260; nominal/real rate 160 interest-elastic 186 International Coffee Organisation see coffee International Monetary Fund (IMF) 21, 132–4, 227 intrinsic value 144, 149, 260 investment 78–9, 113, 115, 117–124, 152, 164, 180, 185, 208–9, 218–20, 224, 229, 260; foreign direct (FDI) 181, 202, 206–9, 208; multiplier 117–21, 263 invisible balance 184, 252 invisible hand 19, 49, 105 IOUs Italy 5, 49, 152, 168 Japan 8, 21, 170 J-curve effect 190–1, 260 joint stock company 78, 260 JPMorganChase 13 jumbo jet 102 Keynes, John Maynard 3, 5, 110, 114, 117, 122–3, 139, 158–9, 173–5 Keynesian economics 117–125, 127, 137–9, 174, 179, 260; see also New Keynesian economics ‘knowns’/‘unknowns’ 174 Korea, South 7, 170, 198–200 labour 51–2, 80, 111, 204, 209, 214 land 50, 68, 232, 236; reform 230, 233, 261; El Salvador 31 leakages 114–6, 119, 123, 150, 179–83, 190–1, 214, 261 Lehman Brothers 15–16 lender of last resort 154, 261 liberalisation 129, 136, 188, 228, 261; see also deregulation Limits to Growth 237 linkages 200, 204 liquid asset 9, 148, 162, 261 liquidity preference 158, 261 logo 79 long term 63, 105, 261; see also short term low-level equilibrium trap 119, 261 macroeconomics 110–40, 261 Madagascar 246–8 Malaysia 234 Malthus, Thomas 80 Mao Tse Tung 233 maquiladores 212, 262 marginal income tax rates 130, 262 marginal propensity to save (MPS) 120–1, 262 Market: black 29, 252; failure 18, 199–200, 224, 239–42, 262; fragmented 133, 151; free 18, 29, 46, 49, 105, 128–39, 172, 197, 200, 218–9, 229, 237–8; systems/ societies 3–4, 6, 29, 32–3, 44, 52, 74–5, 217 McDonalds 203 Meadows, D.H 237 medium of exchange 143–6, 262 mercantilism 191, 262 merit goods 225, 262 Messi, Lionel 51 Mexico 193–4, 212 micro-credit 151, 262 microeconomics 124, 139–40, 262; see also macroeconomics mining 211, 234 mixed economy 42 Mobil 206 mobility 33, 131, 139, 225, 228, 262; occupational 50, 52, 68, 262 275 276 INDEX monetarist 125, 135, 139, 262 monetary: base 154, 263; policy 17, 139–40, 161–4, 156–7, 186; union 17 money 2, 9–15, 70–2, 113, 142–76; demand 158–61; forms 142, 148–9, 152, 171; functions 146–8; measures 146–7, 154–5; multiplier 153–4, 156, 182, 263; qualities 143, 268; supply 70, 125, 130, 137, 144, 146, 153–7, 158, 161–2, 166, 171, 175, 186 monopoly 34, 90–6, 131, 210, 240, 263 monopsony 34, 228, 263 Montreal Protocol 248, moral hazard 20, 263 mortgages 10–13, 15, 68–72, 163 motor cars 238–9 Mozambique 227–8 multinational corporations (MNCs) 90, 201–14, 238, 263 Nash equilibrium 101, 263 national debt 131, 263 National Health Service (NHS) 35–6, 263 national income 34, 116–21, 123, 128, 132, 150, 164, 178–214 nationalised industries 93, 130, 264 natural rate of unemployment see unemployment natural regeneration rate 244–5 natural resources 200, 242–6 neoclassical economics 115, 124–5, 134, 139, 227–9, 264; growth theory 218–22, 264 Nestle 201, 205 Netherlands 168 Netherlands Development Corporation 247 New Classical economics 136–7, 139, 264 New Institutional Economics 229–235, 264 New Keynesian economics 134, 136, 264; see also Keynesian economics New Zealand 138 Nigeria 183, 184 nominal income 264 non-price competition 98, 264–5 non-rivalrous 223 normative economics 26, 109, 265 norms of conduct 231, 265 Northern Rock 15 North, Douglass 45, 232 Norway 168 Ohlin, Bertil 193 oil 15, 237–9; industry 205–7, 210; price shocks 1, 6, 128, 207 oligopoly 90–2, 96–107, 206, 240, 265 open market operations 156–7, 265 opportunity cost 41, 149, 158, 241, 265 opportunity set 53, 265 optimal depletion rate 243–4, 265 optimum size of firm 79, 81–3, 265 Organisation of Petroleum Exporting Countries (OPEC) 4–8, 21, 97, 128, 146, 207, 239, 265 overheads 50, 266; see also costs of production paradigm 18, 116, 121, 123–4, 127, 131–2, 133, 136, 139, 172–3, 227–9, 266 paradox of thrift 114, 266 patent 93, 202, 266 pay-off matrix 100, 266 PepsiCo 92 perfect competition 85, 218, 266 Peron, Juan Domingo 195 petrodollar recycling Phelps, Edmund 126 Phillips curve 125–7, 266 plantations 32, 234–5 pollution 201, 212, 240; permits 246, 266 INDEX POSCO 199–200 positive economics 26–8, 46, 53, 109, 122, 266 poverty 37, 80, 132, 209, 216, 233, 235, 247, 249 precautionary motive 159 price: determination 43, 67–74; of coffee 53, 56–9; mechanism 49, 52, 67, 111, 114, 115, 131, 146, 174, 229, 239–40, 266; stickiness 99; zero 35 price elasticity/inelasticity 59–61, 94, 163, 185–6, 190, 257; of supply 65–6, 71, 117, 190, 252 price-maker 85, 94 prices: of assets 6, 11, 163, 172, 174; of bonds 160, 163; competition 84; of gold 15, 143–5, 212; of houses/housing 4, 11, 13–14, 67–74, 136; of oil 61, 122, 206–7, 238–9, 244; see also oil price shocks price-taker 85 Primark 204 Prince, Charles 12 prisoner’s dilemma 100–1 privatisation 129, 130–1, 233, 266 Proctor and Gamble 90 product differentiation 92, 94 productivity 79, 191, 209, 217, 232–3, 266; average (AP) 219, 221–2, 224 profits 32, 49–50, 64, 78, 80, 84, 89, 117, 205, 210, 213, 219, 239, 266; abnormal 88, 94, 266; maximisation 85, 87, 89; normal 88, 266; oligopoly 97, 99, 105–6; perfect competition 85–9 promissory notes 152 property rights 31, 77–8, 202, 230–3, 245–6 protection/protectionism 191, 195–201 public goods 224, 240, 267 qualities of money see money quantitative easing (QE) 157, 171, 186, 267 quasi-markets 131, 268 quotas 188, 202, 268 rainforests 243 rate of interest see interest rate of time preference 219, 220, 224, 226, 244, 267 rational expectations see expectations Reagan, Ronald 128 real estate 67, 74, 173 real income 57, 159, 267 recession 6, 14, 18, 20, 52, 115, 124, 132, 137–8, 167, 171, 268; see also Great Recession regulation 20, 66 renewable resources 242–3, 244–6, 267 rent 32, 50, 267; -seeking 210, 267 research and development 202, 212, 224 reserve assets ratio 152–3, 156, 267; see also fractional reserve banking retaliation 188 returns to scale, constant 83, 268?; see also economies of scale, diseconomies of scale revenue 267; average/marginal/total 85–8, 94–6, 267 risk 10, 160, 174, 249 Romer, Paul 223, 226, 257 Royal Bank of Scotland 16 rubber 234 Russia 7, 169 sample basket 147, 268 savings 110–11, 113–24, 150, 155, 179–82, 207, 268 sclerosis 139 Second World War 4, 145–6 securities see bonds, bills; see also gilt-edged shanty towns 204 Shell 61, 206 277 278 INDEX short term 66, 105, 269; see also long term sight deposits 155, 269 silver 144, 234 Singapore 183–4, 205, 210, 230, 235 Skidelski, Robert 174 Smith, Adam 18–20, 49, 105–6, 217, 230 social benefits/returns 225 social costs 131–2, 176, 201, 269 Solow, Robert 219, 223 de Soto, Hernando 77 South Africa 205, 234 sovereignty 166, 213 Soviet Union 6, 218, 222, 230 Spain specialisation 44, 52, 78, 155, 194, 200, 230, 232 Special Purpose Vehicles (SPVs) 162 speculation 135, 162 speculative motive/demand 160–1, 185, 269 spot market 66, 239, 269 stagflation 127 standard of living 78, 132, 216, 221, 236, 243 staple theory 194 steady-state 220 steel 199–200 Stiglitz, Joe 20 Stonecipher, Harry 103 store of value 8, 147–8 sub-prime mortgage crisis 3, 73, 162, 171 sugar 234 supply 52, 64–75, 77–8, 84, 88, 146, 172, 205, 239, 269; shift 66–7, 88, 269; of savings 114–5; after tax 67 supply-side policies 128–31, 133–6, 139, 194, 227–8, 269 sustainable development 41, 242–9, 269 Sweden 168 Switzerland 168 Taiwan 230 tariff barriers 133, 188, 269 technological change/breakthrough/ progress/revolution 66, 83, 161, 221–4, 226, 229, 239 technology 10, 65, 81, 200, 202, 212, 218, 222, 249; traditional 30; transfer 204, 209, 212, 269 Thailand 7, 170 Thatcher, Margaret 128 tigers 39–40, 245 time deposit 155, 269 total currency flow 184, 191 total factor productivity 223, 270 ‘toxic assets’ 21 trade-off 41, 126, 130, 216, 241, 270 traders, wise/noise 173–4 trade surpluses/deficits 7–9, 21, 111, 116, 180–1, 185, 187, 189, 255, 269 tradition 29, 30–2, 216, 270 tragedy of the commons 245–6, 270, transactions: costs 44, 143, 230–1, 249, 270; motive 159 transfer earnings 50, 270, transmission mechanism 162–4 transport 194–5, 225, 239 Troubled Asset Relief Program 16 uncertainty 73, 174, 242 unemployment 81, 109, 140, 171, 176, 197, 228; demand-deficient 52, 255; mismatch 51, 262; natural 126, 128, 130, 135–6, 264 United Kingdom (UK) 7, 8, 17, 34–5, 37, 138, 153, 157, 168, 183; wage-inflation 125–6 United States (USA) 3–4, 12, 16, 22, 27, 37, 70, 125, 128, 138, 157, 163, 183, 184, 186, 189, 193–4, 198, 207, 211, 223, 235; housing market 6, 13–14; money markets 7–10, 12–15; trade balance Uruguay Round 198 usury 149 INDEX utilities, public 93 utility 53–7, 270; marginal 58, 240; total 53, 58 visible balance of trade 184 wages 32, 51, 111, 131, 195, 204–5, 232, 270 WalMart 203–4 Washington Consensus 132–4, 228, 270 welfare payments 130 West Indies 234 Wild West 234 World Bank 46, 132–4, 151, 199–200, 212, 227–8 World Trade Organisation (WTO) 103, 189, 192, 198, 270 World Wide Fund (WWF) for Nature 38–9, 236, 247 Yunus, Muhammed 151 279 Taylor& F n c is eBooks eBooks from Taylor & Francis^ Helping you to choose the right eBooks for your Library Add to your library's digital collection today with Taylor & Francis eBooks We have over 5,000 eBooks in the Humanities, Social Sciences, 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