- Industry: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
- Company Profile:
Private equity to help new companies grow. A valuable alternative source of finance for entrepreneurs, who might otherwise have to rely on a loan from a probably risk averse bank manager. The United States has by far the world’s biggest venture capital industry. Some economists reckon that this is why more innovative new firms have become successful there. As legend has it, with a bright idea, a garage to work in and some venture capital, anybody can create a Microsoft. However, the bursting of the dotcom bubble in 2000 threw American venture capital into a severe recession, damaging its reputation for financing profitable innovation.
Industry:Economy
One way to keep taxation fair. Vertical equity is the principle that people with a greater ability to pay should hand over more tax to the government than those with a lesser ability to pay. (See equity and horizontal equity. )
Industry:Economy
Merging with a company at a different stage in the production process, for instance, a car maker merging with a car retailer or a parts supplier. Unlike horizontal integration, it is likely to raise antitrust concerns only if one of the companies already enjoys some monopoly power, which the deal might allow it to extend into a new market.
Industry:Economy
Physical exports and imports, such as coal, computer chips and cars. Also known as merchandise trade. Contrast with invisible trade. (See balance of payments. )
Industry:Economy
The most widely accepted measure of risk in financial markets is the amount by which the price of a security swings up and down. The more volatile the price, the riskier is the security. Not least because there is no obvious alternative, economists often use past volatility to forecast the future risk of a security. However, as the saying goes, past results are not necessarily guides to future performance.
Industry:Economy
Unemployment through opting not to work, even though there are jobs available. This is the joblessness that remains when there is otherwise full employment. It includes frictional unemployment as a result of people changing jobs, people not working while they undertake job search and ¬people who just do not want to work.
Industry:Economy
The difference between basic pay and total earnings. Wage drift consists of things such as overtime payments, bonuses, profit share and performance-related pay. It usually increases during periods of strong growth and declines during an economic downturn.
Industry:Economy
The price of labor. In theory, wages ought to change so that the supply and demand in the labor market are always in equilibrium. In practice, wages are often sticky, especially in a downward direction: when demand for labor falls, wages do not fall. In this situation, the fall in demand results in higher involuntary unemployment. Trade unions may use collective bargaining to keep wages above the market-clearing rate. Furthermore, many governments impose a minimum wage that employers must pay. Firms may choose to pay above the equilibrium wage to increase the productivity of workers. Such so-called efficiency wages may make workers less likely to join another firm, so cutting the employer’s hiring and training costs. They may encourage workers to do a better job. They may also attract a higher quality of worker than wages at the market-clearing rate; better workers may have a higher reservation wage (the lowest wage for which they are willing to work) than the market-clearing equilibrium. In recent years, employers have tried to reduce wage stickiness by increasing the proportion of pay that is linked to the performance of their firm. Thus if falling demand reduces the employer’s profit the pay of its employees falls automatically, so it does not have to lay off as many workers as it otherwise would. Performance-related wages can also reduce agency costs by giving hired hands a stronger incentive to do a good job.
Industry:Economy
As people get wealthier, they consume more. This wealth effect has important consequences for monetary policy. When there is an interest rate increase, future income from assets such as equities must be discounted at a higher rate than before. As a result their owners feel poorer and spend less. A cut in interest rates has the opposite effect. Economists disagree on the wealth elasticity of consumption: how much consumer spending would rise if wealth increased by, say, 1%. Different consumers may have different wealth elasticity. If most of the increase in wealth goes to poorer people this may have a different wealth effect than if most of it went to people who are already wealthy. The source of the wealth increase may also matter. If share prices rise or interest rates fall, consumers may be slow to spend out of their increased wealth if they think the increase may be temporary. However, if they think a sharp rise in share prices is permanent and the stock market then tumbles, the result may be that consumption falls by enough to cause a recession. The wealth effect of rising house prices is particularly uncertain.
Industry:Economy
In most countries, the majority of wealth is concentrated in a fairly small number of hands. This makes a wealth tax appealing to politicians, as it should allow substantial amounts of revenue to be raised from comparatively few people, allowing the tax burden on the majority of the population to be kept down. It also appeals because it promotes meritocracy by making it harder to be born with a silver spoon in your mouth. A wealth tax reduces the disparities in wealth rather than income that are the biggest determinant of how the scales are weighted for succeeding generations. What could be better than a tax that produces lots of money for the government and strikes most voters as being extremely fair?
Alas, as critics point out, wealth taxes may cause inefficiency by discouraging wealth-creating economic activities. Moreover, the revenue collected may prove disappointing. The wealthiest people are often the most skilled at tax avoidance, not least because they can afford good tax accountants. Despite the enormous concentration of wealth in a small part of the population, on average across the OECD wealth taxes account for less than 2% of total tax revenue. A wealth tax can achieve horizontal equity and vertical equity (so that people of similar means pay the same and those with more pay more) in ways that income tax cannot. For instance, neither a poor person nor a rich person with no income would pay income tax, and only the rich person would pay the wealth tax. Wealth taxes come in two main forms. Capital transfer taxes are levied when wealth changes hands, either at death (inheritance tax) or through donation (gift tax). Annual wealth taxes are levied each year as a fraction of the taxpayer’s net worth. Some people regard capital gains tax as a wealth tax, but, strictly speaking, it is a tax on the income earned on capital, rather than a wealth tax on the capital itself.
Industry:Economy
