Economics A-Z terms beginning with N

  1. 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.

  2. NAIRU

    The non-accelerating-inflation rate of unemployment (see NATURAL RATE OF UNEMPLOYMENT).

  3. Nash equilibrium

    An important concept in GAME THEORY, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a 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.

  4. 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.

  5. 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 (see BALANCED BUDGET, FISCAL POLICY and GOLDEN RULE). 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.

  6. National income

    Shorthand for everything that is produced, earned or spent in a country (see GDP and GNP).

  7. 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.

  8. 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.

  9. 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.

  10. 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 (see POVERTY TRAP), 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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 that 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.

  15. New growth theory

    See GROWTH.

  16. 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 (see NAFTA).

  17. 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.

  18. 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.

  19. 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.

  20. 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.

  21. Normal goods

    When average INCOME increases, the DEMAND for normal goods increases, too. The opposite of INFERIOR GOODS.

  22. 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.

  23. Null hypothesis

    A statement that is being put to the test. In ECONOMETRICS, economists often start with a null hypothesis that a particular variable equals a particular number, 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.

Essential Economics

Essential Economics book cover

Economics A-Z is adapted from "Essential Economics", by Matthew Bishop - Bloomberg Press; Economist Books.

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