Terms From The ECONOMIST

OECD: It was formed in 1961,the Organisation for Economic Co-operation and Development, a Paris-based club for industrialised countries, building on the Organisation for European Economic Co-operation (OEEC), which had been established under the MARSHALL PLAN. By 2003, its membership had risen to 30 countries, from an original 20. Together, OECD countries produce two-thirds of the world’s goods and services.

Okun's law: A description of what happens to unemployment when the rate of growth of GDP changes, based on empirical research by Arthur Okun (1928–80). It predicts that if GDP grows at around 3% a year, the jobless rate will be unchanged.

Oligopoly: When a few firms dominate a market. Often they can together behave as if they were a single monopoly, perhaps by forming a cartel.

OPEC: The Organisation of Petroleum Exporting Countries, a cartel set up in 1960 that wrought havoc in industrialised countries during the 1970s and early 1980s by forcing up oil prices.

Open economy: An economy that allows the unrestricted flow of people, capital, goods and services across its borders.

Open-market operations: Central Banks buying and selling securities in the open market, as a way of controlling interest rates or the growth of the money supply. By selling more securities, they can mop up surplus money; buying securities adds to the money supply. The securities traded by central banks are mostly Government Bonds and Treasury Bills, although they sometimes buy or sell commercial securities.

Opportunity cost: The true cost of something is what you give up to get it. This includes not only the money spent in buying the something, but also the economic benefits that you did without because you bought.

Outsourcing: Shifting activities that used to be done inside a firm to an outside company, which can do them more cost-effectively.

Paris club: The name given to the arrangements through which countries reschedule their official debt; that is, money borrowed from other governments rather than banks or private firms.

Perfect competition: The most competitive market imaginable. Perfect COMPETITION is rare and may not even exist. It is so competitive that any individual buyer or seller has a negligible impact on the market price. Products are homogeneous. Information is perfect. Everybody is a price taker. Firms earn only normal profit, the bare minimum profit necessary to keep them in business. If firms earn more than that the absence of barriers to entry means that other firms will enter the market and drive the price level down until there are only normal profits to be made. Output will be maximised and price minimised.

Plaza accord: On September 22nd 1985, finance ministers from the world's five biggest economies - the United States, Japan, West Germany, France and the UK - announced the Plaza Accord at the eponymous New York hotel. Each country made specific promises on economic policy: the United States pledged to cut the federal deficit, Japan promised a looser monetary policy and a range of financial-sector reforms, and Germany proposed tax cuts. All countries agreed to intervene in currency markets as necessary to get the dollar down.

Positive economics: Economics that describes the world as it is, rather than trying to change it. The opposite of Normative Economics, which suggests policies for increasing economic welfare.

Price elasticity: A measure of the responsiveness of demand to a change in price. If demand changes by more than the price has changed, the good is price-elastic. If demand changes by less than the price, it is price-inelastic.

Probability: How likely something is to happen, usually expressed as the ratio of the number of ways the outcome may occur to the number of total possible outcomes for the event.

Profit: In economic theory, profit is the reward for risk taken by enterprise, the fourth of the factors of production – what is left after all other costs, including rent, wages and interest. Put simply, profit is a firm’s total revenue minus total cost.

Protectionism: Opposition to free trade. Although intended to protect a country’s economy from foreign competitors, it usually makes the protected country worse off than if it allowed international trade to proceed without hindrance from trade barriers such as quotas and tariffs.

Purchasing Power Parity: A method for calculating the correct value of a currency, which may differ from its current market value. It is helpful when comparing living standards in different countries, as it indicates the appropriate exchange rate to use when expressing incomes and prices in different countries in a common currency. PPP is the exchange rate that equates the price of a basket of identical traded goods and services in two countries.