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Economic Terms

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Gambler's Fallacy

Is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future, or that, if something happens less frequently than normal during some period, it will happen more frequently in the future.

The reason why it is called the gambler's fallacy is that often individuals fall for the this mistake when gambling. For instance many individuals believe that if they are flipping a coin and the previous ten flips all landed on heads, then there is a greater than 50% chance of a tails popping up in the eleventh flip. But of course, this is incorrect because each flip of a coin is independant from the last one so the history of flips has no influence on the next flip. The same logic can be applied to a roulette wheel.


Game Theory

The study of strategic decision making by using mathematical models to illustrate the conflict and cooperation between rational decision makers (players). It is a useful concept to be able to predict the equilibrium condition for interdependant decision making.


Game-Theoretic Situation

Is a situation where player's in a game do have to take into account the reactions of rival firms when setting their own strategic variable i.e. high level of interdependency between firms. Therefore firms need to reason strategically and form expectations about others' decisions when deciding their own course of action. These situations can be predicted and solved using game theory.

Below highlights three examples of firms in which would be classed a game theoretic situation i.e. rivals in the UK supermarket industry have to consider the pricing strategies of rivals and therefore game theory is a useful concept to analyse these types of situations. The most common examples of this are markets that are charactrised by a high degree of interdependency such as oligopolies.

 


General model

An economic model that explains economic activity using a wide range of variables.

Giffen good

A good where a rise in price actually leads to an increase in demand.

Below is a diagram to illustrate the good's demand curve. In this instance the curve has a positive slope and therefore is upward sloping due to the positive relationship between the two variables: price and quantity demanded. It is extremely rare for a good to have this positive relationship between price and quantity demanded and in most cases is just an empirical theory rather than a form of relatiy. But on example of a giffen good in the real world is basic food stapes in times of economic crises. The idea is that if an individual/family is struggiling financially and the price of the basic food essentials increase, these individuals end up purchasing more of this essential food item as they can't afford more expensive food items in its place despite the price of the essential good.


Giffen goods

A good where a rise in price actually leads to an increase in demand.

Below is a diagram to illustrate the good's demand curve. In this instance the curve has a positive slope and therefore is upward sloping due to the positive relationship between the two variables: price and quantity demanded. It is extremely rare for a good to have this positive relationship between price and quantity demanded and in most cases is just an empirical theory rather than a form of relatiy. But on example of a giffen good in the real world is basic food stapes in times of economic crises. The idea is that if an individual/family is struggiling financially and the price of the basic food essentials increase, these individuals end up purchasing more of this essential food item as they can't afford more expensive food items in its place despite the price of the essential good.


Gilt Edged Security

A contract issued by the Government in return for a loan (from individuals or institutions) which entitles the holder to fixed annual interest payments (coupons) for the duration of the loan and to repayment of the loan at the end of the contract period. They are called gilt edged as the government originally issued paper notes with gilded edges to confirm ownership.

Gilt yield

The cash value of annual gilt coupon payments divided by the market value of the gilt. The yield varies over time in line with changes in the market value of the gilt (this changes continuously in response to changes in market demand and supply). The current yield of existing gilts at any time will determine the rate at which governments may borrow new money.

Gini Coefficient

A statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the Lorenz Curve.

Below is a diagram to illustrate how to calculate the coefficient.The Gini Coefficient is a measure of statistical dispersion intended to represent the income distribution of a nation's residents. The Gini Coefficient is computed by dividing the area between the 45o line and the lorenz curve by the area under the 45o line. This index has a measure between 0 and 1. The closer the Gini Coefficient is to 1 the more unequal the distribution of income for a country is.

For instance if the Gini Coefficient rises this means that the index is moving closer to 1 and as a result the income distribution for a country is worsening, increasing the level of income inequality. Graphically this would be represented by an outwards shift of the Lorenz Curve as the richer part of the population hold the highest proprtion of national income. This is traditionally what has happened in the UK economy when we expereicned the recent double-dip recession that widened the gap between the highest and lowest earners.


Glass-Steagall Act - 1933

This was an act introduced after the uncertainties and volatilities of the stock market crash in the late 1920's. It introduced lots of individual forms of regulation to strengthen the financial sector.

It introduced deposit insurance for all depositors up to a pre-determined level. It also prevented financial institutions from merging with one another and as a result commerical and investment banks consolidating and forming a financial conglomerate like Citi Group.


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