Dr. Pass - Economics

How successful an appreciation is in removing a payments surplus depends on the reactions of export and import volumes to the change in relative prices; that is, the PRICE ELASTICITY OF DEMAND for exports and imports. If these values are low, i.e. demand is inelastic, trade volume will not change very much and the appreciation may in fact make the surplus larger. On the other hand, if export and import demand is elastic then the change in trade volumes will operate to remove the surplus, BALANCE-OF-PAYMENTS EQUILIBRIUM will be restored if the sum of export and import elasticities is greater than unity (the MARSHALL-LERNER CONDITION). See REVALUATION for further points. Compare DEPRECIATION 1. See INTERNAL-EXTERNAL BALANCE MODEL. 2an increase in the price of an ASSET and also called capital appreciation. Assets held for long periods, such as factory buildings, offices or houses, are most likely to appreciate in value because of the effects of INFLATION and increasing site values, though the value of short-term assets like STOCKS can also appreciate. Where assets appreciate, then their REPLACEMENT COST will exceed their HISTORIC COST, and such assets may need to be revalued periodically to keep their book values in line with their market values. See DEPRECIATION 2, INFLATION ACCOUNTING.

apprenticesee TRAINING.

APRthe ‘annualized percentage rate of INTEREST’ charged on a LOAN. The APR rate will depend on the total ‘charge for credit’ applied by the lender and will be influenced by such factors as the general level of INTEREST RATES, and the nature and duration of the loan.

Where lenders relate total interest charges on INSTALMENT CREDIT loans to the original amount borrowed, this can give a misleading impression of the interest rate being charged, for as borrowers make monthly or weekly repayments on the loan, they are reducing the amount borrowed, and interest charges should be related to the lower average amount owed. For example, if someone borrows £1,000 for one year with a total credit charge of £200, the ‘simple interest’ charge on the original loan is 20%. However, if the loan terms provide for monthly repayments of £100, then at the end of the first month the borrower would have repaid a proportion of the original £1,000 borrowed and by the end of the second month would have repaid a further proportion of the original loan, etc. In effect, therefore, the borrower does not borrow £1,000 for one whole year but much less than this over the year on average , as he or she repays part of the outstanding loan. If the total credit charge of £200 were related to this much smaller average amount borrowed to show the ‘annualized percentage rate’, then this credit charge would be nearer 40% than the 20% quoted.

To make clear to the borrower the actual charge for credit and the ‘true’ rate of interest, the CONSUMER CREDIT ACT 1974 requires lenders to publish both rates to potential borrowers.

a priori adj. known to be true, independently of the subject under debate. Economists frequently develop their theoretical models by reasoning, deductively, from certain prior assumptions to general predictions.

For example, operating on the assumption that consumers behave rationally in seeking to maximize their utility from a limited income, economists’ reasoning leads them to the prediction that consumers will tend to buy more of those products whose relative price has fallen. See ECONOMIC MAN, CONSUMER EQUILIBRIUM

arbitragethe buying or selling of PRODUCTS, FINANCIAL SECURITIES or FOREIGN CURRENCIES between two or more MARKETS in order to take profitable advantage of any differences in the prices quoted in these markets. By simultaneously buying in a low-price market and selling in the high-price market a dealer can make a profit from any disparity in prices between them, though in the process of buying and selling the dealer will add to DEMAND in the low-price market and add to SUPPLY in the high-price market, so narrowing or eliminating the price disparity. See SPOT MARKET, FUTURES MARKET, COVERED INTEREST ARBITRAGE.

arbitrationa procedure for settling disputes, most notably INDUSTRIAL DISPUTES, in which a neutral third party or arbitrator, after hearing presentations from all sides in dispute, issues an award binding upon each side. Arbitration is mostly used only as a last resort when normal negotiating proceedings have failed to bring about an agreed settlement. In the UK, the ADVISORY CONCILIATION AND ARBITRATION SERVICE (ACAS) acts in this capacity. See MEDIATION, COLLECTIVE BARGAINING, INDUSTRIAL RELATIONS.

arc elasticitya rough measure of the responsiveness of DEMAND or SUPPLY to changes in PRICE, INCOME, etc. In the case of PRICE ELASTICITY OF DEMAND, it is the ratio of the percentage change in quantity demanded (Q) to the percentage change in price (P) over a price range such as P 0to P 1in Fig. 8. Arc elasticity of demand is expressed notationally as:

where P 0= original price, Q 0= original quantity, P 1= new price, Q 1= new quantity. Because arc elasticity measures the elasticity of demand ( e ) over a price range or arc of the demand curve, it is only an approximation of demand elasticity at a particular price (POINT ELASTICITY). However, the arc elasticity formula gives a reasonable degree of accuracy in approximating point elasticity when price and/or quantity changes are small. See also ELASTICITY OF DEMAND.

articles of associationthe legal constitution of a JOINT-STOCK COMPANY that governs the internal relationship between the company and its members or SHAREHOLDERS. The articles govern the rights and duties of the membership and aspects of administration of the company. They will contain, for instance, the powers of the directors, the conduct of meetings, the dividend and voting rights assigned to separate classes of shareholders, and other miscellaneous rules and regulations. See MEMORANDUM OF ASSOCIATION.

ASAsee ADVERTISING STANDARDS AUTHORITY.

ASEANsee ASSOCIATION OF SOUTHEAST ASIAN NATIONS.

Asian Pacific Economic Cooperation (APEC)a regional alliance formed in 1990 with the general objective of establishing a FREE TRADE AREA, specifically creating a free trade zone for industrialized country members by 2010 and for developing country members by 2020. There are currently 17 members of APEC: USA, Canada, Japan, China/Hong Kong, Mexico, Chile, Australia, New Zealand, Papua New Guinea, South Korea, Taiwan, Thailand, Philippines, Brunei, Malaysia, Singapore and Indonesia. The USA, Canada and Mexico are also members of the NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA), and Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand are also members of the ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN). See TRADE INTEGRATION.

ask pricesee BID PRICE.

Fig. 8 Arc elasticity.See entry.

assetan item or property owned by an individual or a business that has a money value. Assets are of three main types: (a) physical assets, such as plant and equipment, land, consumer durables (cars, washing machines, etc);

(b) financial assets, such as currency, bank deposits, stocks and shares;

(c) intangible assets, such as BRAND NAMES, KNOW-HOW and GOODWILL. See INVESTMENT, LIQUIDITY, BALANCE SHEET, LIABILITY.

asset-growth maximizationa company objective in the THEORY OF THE FIRM that is used as an alternative to the traditional assumption of PROFIT MAXIMIZATION. Salaried managers of large JOINT-STOCK COMPANIES are assumed to seek to maximize the rate of growth of net assets as a means of increasing their salaries, power, etc., subject to maintaining a minimum share value, so as to avoid the company being taken over with the possible loss of jobs. In Fig. 9, the rate of growth of assets is shown on the horizontal axis, and the ratio of the market value of company shares to the book value of company net assets (the share-valuation ratio) on the vertical axis. The valuation curve rises at first, as increasing asset growth increases share value but beyond growth rate (G) excessive retention of profits to finance growth will reduce dividend payments to shareholders and depress share values. Managers will tend to choose the fastest growth rate (G*), which does not depress the share valuation below the level (V 1) at which the company risks being taken over. See also MANAGERIAL THEORIES OF THE FIRM, FIRM OBJECTIVES, DIVORCE OF OWNERSHIP FROM CONTROL, PRINCIPAL-AGENT THEORY.