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  • Writer's pictureRachana Kadikar

Important Economic Concepts Pt. 2

Flat tax - a taxation system in which everyone pays the same rate of tax regardless of their income level.

Hyperinflation - Inflation is very high and accelerating. As the price of all products rises, it rapidly erodes the actual worth of the local currency. As a result, people tend to reduce their holdings in that currency in favor of more stable foreign currencies.

Neo-Classical Economics - The supply and demand model drives the production, consumption, and valuation of products and services in this approach to economics. It is based on the idea of maximizing of utility through people limited in spending income and of profits by dealing with production costs and using accessible information and factors of production to determine the worth of a thing or service.

Mercantalism - An economic policy aimed at increasing exports while reducing imports in a given economy. To achieve this aim, it advocates imperialism, taxes, and subsidies on commercial products.

Antitrust Laws - A set of federal and state laws that control the activity and formation of commercial companies, with the goal of promoting competition and preventing monopolies. Some notable laws include the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.

Austrian School of Economics - A controversial school of economic thinking centered around methodological individualism—the idea that social phenomena are solely the product of individual motivations and actions.

Rent Seeking - The attempt to enhance one's portion of current wealth without producing new wealth Rent-seeking leads to inefficient resource allocation, lower wealth generation, lost government revenue, increased income disparity, and even the possibility of national collapse.

Say's Law - The assertion that the manufacturing of one commodity generates demand for another by giving something of value that can be swapped for it. As a result, demand comes from increasing supply.

Coase Theorem - According to this theory, if trade in an externality is allowed and transaction costs are low enough, bargaining will result in a Pareto optimal solution regardless of the original property distribution. In reality, Coasean bargaining might be hampered by barriers to negotiation or poorly defined property rights.

Pigou Effect - When prices fall, employment and output rises as a result of the increase in wealth, which increases consumption as a result.

Public Choice Theory - It is a subset of positive political theory that analyzes self-interested agents such as voters, politicians, and bureaucrats, as well as their interactions, which may be represented in a variety of ways, including game theory and decision theory.

Conspicuous Consumption - Refers to the expenditure of money on luxury goods and services in order to demonstrate the economic power of one's income or acquired riches publicly. Such a public display of discretionary economic power, to a conspicuous consumer, is a method of achieving or maintaining a particular social standing.

Heterodox Economics - Any economic theory that is not part of traditional economic schools of thought, such as neoclassical economics. Institutional, evolutionary, feminist, social, post-Keynesian, ecological, Austrian, Marxist, socialist, and anarchist economics are only a few examples of heterodox economic theories.

Malthus Theory - Malthus asserts that economic growth is not a natural process. To achieve it, intentional, deliberate efforts are required. 

Stagflation - Occurs when a country's economy experiences persistently high inflation, high unemployment, and sluggish demand.

Principal-Agent Problem - When one person or entity (the agent) has the ability to make choices and conduct actions that have an influence on, another entity (the principal)  This problem arises when agents are driven to behave in their own best interests, which may be at odds with their principals'. This concept is an example of moral hazard.

Tragedy of The Commons - Individual users with unrestricted access to a resource, who are not constrained by shared social structures or formal rules that govern access and use, act independently in their own self-interest and, contrary to the common good of all users, cause resource depletion through their uncoordinated actions.

Conflict Theory - Karl Marx introduced the notion that society is divided into classes that compete for limited power and resources.

Hollowing Out - As socioeconomic inequality deepens, the middle class of a country, as well as middle-class manufacturing jobs, deteriorates.

Autarchy - A form of governance in which a single individual wields total authority.

Arbitrage - Buying and selling stocks, currencies, or commodities in multiple markets or in derivative forms at the same time in order to profit from price differences for the same item.

Adaptive Expectations - an economic theory that emphasizes past occurrences in forecasting future results.

Asymmetric Information - When one of the parties involved in a transaction has more information than the other. Because of this asymmetric information, where the seller knows more about the product being sold than the buyer, sellers can take advantage of purchasers in certain transactions, and the reverse can also occur. 

Amortization - Paying off a debt over time by making scheduled, incremental payments with interest. 

Animal Spirits - The phrase used by John Maynard Keynes in his 1936 book The General Theory of Employment, Interest, and Money to explain the instincts, inclinations, and emotions that presumably affect and drive human conduct. 

Basel 1 - The global round of discussions among central bankers that resulted in the publication of a set of minimum capital requirements for banks. In 1992, it was made a legal requirement in the Group of Ten (G-10) countries.

Basel 2 - Later, a new set of regulations known as Basel II was created with the goal of superseding the Basel I agreements. However, it recieved criticism for allowing banks to take on more forms of risk, which was blamed for contributing to the 2008 US subprime financial crisis.

Big Mac Index - The Economist publishes the Big Mac Index as an informal means of assessing purchasing power parity (PPP) between two currencies. It serves as a measure of how similar items cost in various nations due to market exchange rates.

Bounded rationality - The concept that humans make rational and logical judgments within the constraints of the knowledge we have and our mental capacity.

Bretton Woods Conference - A meeting of representatives from 44 countries held in Bretton Woods, New Hampshire, from July 1 to 22, 1944, to agree on a set of new principles for the post-World War II international monetary system. The formation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were two of the conference's key achievements.

Cartel - A collection of independent economic agents who work together to increase their earnings and gain market dominance. Cartels are generally constitutions of businesses in the same industry, and therefore an alliance of competitors. Most jurisdictions consider it anti-competitive activity and have made them illegal. Price fixing, bid rigging, and output cutbacks are some examples of cartel activity. 

Capital Controls - A country's government can employ residency-based measures like transaction taxes, other restrictions, or outright prohibitions to manage capital flows into and out of the country's capital account.

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