What is the Keynesian Multiplier? The Keynesian Multiplier is an economic theory that asserts that an increase in private consumption expenditure, investment expenditure, or net government spending (gross government spending – government tax revenue) raises the total Gross Domestic Product (GDP) by more than the amount of the increase. Therefore, if private consumption expenditure increases…
What is the Zero Lower Bound? The Zero Lower Bound refers to the belief that interest rates cannot be lowered beyond zero. Traditionally, central banks used monetary policy to manipulate the interest rate in the economy to meet their fiscal objective(s). Therefore, the banks would lower the interest rate during a recession (to promote investment)…
What is Conspicuous Consumption? Conspicuous consumption is the act of displaying ostentatious wealth to gain status and reputation in society. The theory was first discussed by American economist and sociologist Thorstein Veblen in his book, “The Theory of the Leisure Class,” in 1899. In his book, Veblen says that the need to consume goods in…
What is Currency? Currency refers to money, that which is used as a medium of exchange for goods and services in an economy. Before the concept of currency was introduced, goods and services were exchanged for other goods and services under the barter system. Bartering made it quite difficult to accurately determine the value of…
What is the Law of One Price (LOOP)? The Law of One Price (sometimes referred to as LOOP) is an economic theory that states that the price of identical goods in different markets must be the same after taking the currency exchange into consideration (i.e., if the prices are expressed in the same currency). The…
What is Capital Flight? In economics, capital flight is a phenomenon characterized by large outflows of assets and/or capital from a country due to some events, resulting in negative economic consequences to that country. Additionally, the term can be referred to as the rapid withdrawal of assets and capital from certain regions or cities within…
What is a Free Market? A free market is a type of economic system that is controlled by the market forces of supply and demand, as opposed to one regulated by government controls. It is opposite on the spectrum to a command economy, where a central government agency plans the factors of production and use…
What is Market Power? Market power is a measure of the ability of a company to successfully influence the pricing of its products or services in the overall marketplace. Factors influencing Market Power 1. Number of competitors in a market For a company to hold extensive market power in the industry in which it operates,…
What is an Industry? An industry – or sector – is the whole of all economic activities by companies, people, and organizations involved in the production of goods and services for a particular field. Industries are usually categorized by the goods and services they produce. For example, the pizza industry is made up of all…
What are the Different Types of Interest? The three types of interest include simple (regular) interest, accrued interest, and compounding interest. When money is borrowed, usually through the means of a loan, the borrower is required to pay the interest agreed upon by the two parties. Simple (Regular) Interest Simple or regular interest is the…
