Terms beginning with D

DE SOTO, HERNANDO | DEADWEIGHT COST/LOSS | DEBT | DEBT FORGIVENESS | DEBT-EQUITY RATIO | DEFAULT | DEFICIT | DEFLATION | DEMAND | DEMAND CURVE | DEMOGRAPHICS | DEPOSIT INSURANCE | DEPRECIATION | DEPRESSION | DEREGULATION | DERIVATIVES | DEVALUATION | DEVELOPING COUNTRIES | DEVELOPMENT ECONOMICS | DIMINISHING RETURNS | DIRECT TAXATION | DISCOUNT RATE | DISCOUNTED CASHFLOW | DISECONOMIES OF SCALE | DISEQUILIBRIUM | DISINFLATION | DISINTERMEDIATION | DIVERSIFICATION | DIVIDEND | DIVISION OF LABOUR | DOLLARISATION | DOMINANT FIRM | DUMPING

• DE SOTO, HERNANDO
• A Peruvian economist who advocates establishing formal property rights for the poor to help them rapidly escape from poverty. In books such as The Other Path and The Mystery of Capital, he argued that, in developing countries, CAPITALISM will thrive in the LONG RUN only if legal systems change so that most of the people feel that the law is on their side. One of the best ways to achieve this is to give full legal protection to the de facto property rights that are observed informally by the poor, such as when a community recognises that a certain family is entitled to occupy a particular piece of land.
• According to his research, carried out in several countries with his think tank, the Institute for Liberty and Democracy, such informal property rights cover ASSETS (notably land and housing) worth many billions of dollars. Informal systems of property rights usually make such assets "dead CAPITAL", meaning that it is hard to use them as COLLATERAL for a loan, which might be used to start a business, for example. He argues with that an efficient, inclusive legal system preceded rapid development in every rich country and that bringing these rights into the formal legal system of poor, developing countries will unleash this hitherto dead capital and spur growth. His ideas have been much talked about but little acted upon.
• DEADWEIGHT COST/LOSS
• The extent to which the value and impact of a tax, tax relief or SUBSIDY is reduced because of its side-effects. For instance, increasing the amount of tax levied on workers’ pay will lead some workers to stop working or work less, so reducing the amount of extra tax to be collected. However, creating a tax relief or subsidy to encourage people to buy life insurance would have a deadweight cost because people who would have bought insurance anyway would benefit.
• DEBT
• “Neither a borrower nor a lender be,” wrote Shakespeare in “Hamlet”. Actually, the availability of DEBT, and the willingness to take it on, is a crucial ingredient of economic GROWTH, because it allows individuals, FIRMS and GOVERNMENTS to make investments they would not otherwise be able to afford. The PRICE of debt is INTEREST. Until recently, lending was an activity dominated by BANKS (although mortgages for individuals buying their homes have long been available from special housing SAVINGS institutions). Since the 1960s, debt has become increasingly available from other sources. Companies have sold trillions of dollars worth of BONDS to investors in the FINANCIAL MARKETS. Individuals have been able to borrow with credit cards, and for those who have nowhere else to turn there are pawn shops and loan sharks, which charge very high rates of interest. Total private-sector debt in 2003 was around 150% of GDP in the United States, compared with less than 100% in 1928. In most countries, by far the biggest single borrower is the state, through the NATIONAL DEBT.
• DEBT FORGIVENESS
• Cancelling or rescheduling a borrower’s debts to lessen the pain of the DEBT burden. Debt forgiveness is increasingly viewed as the best way to relieve the financial problems facing poorer countries. Some of these countries have to pay so much in INTEREST each year to foreign lenders that they have little MONEY left to spend on the long-term solutions to their POVERTY, such as educating their workers and building a modern INFRASTRUCTURE. In 1998 the WORLD BANK calculated that around 40 of the world’s poorest countries had an “unsustainably high” debt burden: the present value of their total debts was more than 220% of their EXPORTS.
• Debt forgiveness has potential drawbacks. For instance, there is a risk of MORAL HAZARD. If countries that borrow too much are let off their financial obligations, poor countries may feel they have nothing to lose by borrowing as much as they can. This is why policymakers often argue that debt forgiveness should come with a CONDITIONALITY clause, for instance, a requirement that countries have a track record of implementing economic reforms designed to prevent a repeat of the errors that first created the need for debt forgiveness. This is the approach taken by the World Bank's HIPC (highly indebted poor country) initiative, launched in 1996 and expanded in 1999. However, by 2003, only eight of the 38 poor countries eligible under the programme had made enough progress in reform to have some debt forgiven.
• DEBT-EQUITY RATIO
• See CAPITAL STRUCTURE.
• DEFAULT
• Failure to fulfil the terms of a loan agreement. For example, a borrower is in default if he or she does not make scheduled INTEREST payments on a loan or fails to pay off the loan at the agreed time. Judging the likelihood of default is a crucial part of pricing a loan. Interest rates are set so that, on AVERAGE , a portfolio of loans will be profitable to the CREDITOR , even if some individual loans are loss-making as a result of borrowers defaulting.
• DEFICIT
• In the red – when more MONEY goes out than comes in. A BUDGET deficit occurs when PUBLIC SPENDING exceeds GOVERNMENT revenue. A current account deficit occurs when EXPORTS and inflows from private and official TRANSFERS are worth less than IMPORTS and transfer outflows (see BALANCE OF PAYMENTS).
• DEFLATION
• Since 1930 it has been the norm in most developed countries for AVERAGE PRICES to rise year after year. However, before 1930 deflation (falling prices) was as likely as INFLATION. On the eve of the first world war, for example, prices in the UK, overall, were almost exactly the same as they had been at the time of the great fire of London in 1666.
• Deflation is a persistent fall in the general price level of goods and SERVICES. It is not to be confused with a decline in prices in one economic sector or with a fall in the INFLATION rate (which is known as DISINFLATION).
• Sometimes deflation can be harmless, perhaps even a good thing, if lower prices lift real INCOME and hence spending power. In the last 30 years of the 19th century, for example, consumer prices fell by almost half in the United States, as the expansion of railways and advances in industrial technology brought cheaper ways to make everything. Yet annual real GDP GROWTH over the period averaged more than 4%.
• Deflation is dangerous, however, more so even than inflation, when it reflects a sharp slump in DEMAND, excess CAPACITY and a shrinking MONEY SUPPLY, as in the Great DEPRESSION of the early 1930s. In the four years to 1933, American consumer prices fell by 25% and real GDP by 30%. Runaway deflation of this sort can be much more damaging than runaway inflation, because it creates a vicious spiral that is hard to escape. The expectation that prices will be lower tomorrow may encourage consumers to delay purchases, depressing demand and forcing FIRMS to cut prices by even more. Falling prices also inflate the real burden of DEBT (that is, increase real INTEREST rates) causing BANKRUPTCY and BANK failure. This makes deflation particularly dangerous for economies that have large amounts of corporate debt. Most serious of all, deflation can make MONETARY POLICY ineffective: nominal interest rates cannot be negative, so real rates can get stuck too high.
• DEMAND
• One of the two words economists use most; the other is SUPPLY. These are the twin driving forces of the market economy. Demand is not just about measuring what people want; for economists, it refers to the amount of a good or service that people are both willing and able to buy. The DEMAND CURVE measures the relationship between the PRICE of a good and the amount of it demanded. Usually, as the price rises, fewer people are willing and able to buy it; in other words, demand falls (but see GIFFEN GOODS, NORMAL GOODS and INFERIOR GOODS). When demand changes, economists explain this in one of two ways. A movement along the demand curve occurs when a price change alters the quantity demanded; but if the price were to go back to where it was before, so would the amount demanded. A shift in the demand curve occurs when the amount demanded would be different from what it was previously at any chosen price, for example, if there is no change in the market price, but demand rises or falls. The slope of the demand curve indicates the ELASTICITY of demand. For approaches to modelling demand see REVEALED PREFERENCE.
• Policymakers seek to manipulate aggregate demand to keep the economy growing as fast as is possible without pushing up INFLATION. Keynesians try to manage demand through FISCAL POLICY; monetarists prefer to use the MONEY SUPPLY. Neither approach hasbeen especially successful in practice, particularly when attempting to manage short-term demand through FINE TUNING.
• DEMAND CURVE
• A graph showing the relationship between the price of a good and the amount of DEMAND for it at different PRICES. (See also SUPPLY CURVE.)
• DEMOGRAPHICS
• People, and the statistical study of them. In the 200 years since Thomas Malthus forecast that POPULATION GROWTH would result in mass starvation, dire predictions based on demographic trends have come to be taken with a pinch of salt. Even so, demography does matter. In developed countries, economists have studied the impact of the post-war “baby-boomer” population bulge as it has grown older. In the 1980s, as the bulge dominated the workforce, it may have contributed to a sharp, if temporary, rise in UNEMPLOYMENT in many countries. Boomers starting to save for retirement may have increased DEMAND for SHARES, so fuelling the BULL stockmarket of the 1990s; as they retire and sell their shares for spending MONEY, they may cause a long BEAR market. Furthermore, as they become elderly and retire, health-care spending and retirement pensions are likely to eat up a growing share of GDP. To the extent that these are provided by the state, this will mean increasing PUBLIC SPENDING and higher taxes. But whether they are provided by the state or by the private sector, the ageing of baby-boomers will impose a growing financial burden on the younger workers that have to support them (see REPLACEMENT RATE). Economists have tried to measure the extent of this burden using GENERATIONAL ACCOUNTING, which looks at the amount of wealth transferred from one generation to another over the lifetimes of the members of each generation.
• Economists have also developed many different theories to explain why populations grow and why the fertility rate slowed sharply, to below the replacement rate, in many developed countries during the 1990s. One explanation is based on the notion that people have children so that there is somebody to look after them in old age. Fertility rates fell because the state increasingly looked after retired people, and infant mortality rates were lower so fewer births were required to ensure that there were some children around in the parental dotage. Also, with a lower PROBABILITY of a child dying, it paid the parents to have fewer children and to channel their energy and resources into maximising the HUMAN CAPITAL of the few. Alternatively, it may have had something to do with an important INNOVATION: the cheap and easy availability of reliable contraception.