• ILO
• Short for International Labour Organisation, founded in 1919 as part of the Treaty of Versailles, which created the League of Nations. In 1946, it became the first specialised agency of the UN. Based in Geneva, it formulates international LABOUR standards, setting out desired minimum rights for workers: freedom of association; the right to organise and engage in collective bargaining; equality of opportunity and treatment; and the abolition of forced labour. It also compiles international labour statistics. One reason for its formation was the hope that international labour standards would stop countries using lower standards to gain a COMPETITIVE ADVANTAGE. From the 1980s onwards, the ILO approach came under attack as attention turned to the costs of high labour standards, notably slower economic GROWTH. Universal minimum labour standards might also work against FREE TRADE. Imposing rich-country labour standards on poorer countries might help keep the rich rich and the poor poor.
• IMF
• Short for International Monetary Fund, referee and, when the need arises, rescuer of the world’s FINANCIAL SYSTEM. The IMF was set up in 1944 at BRETTON WOODS, along with the WORLD BANK, to supervise the newly established fixed EXCHANGE RATE system. After this fell apart in 1971–73, the IMF became more involved with its member countries’ economic policies, doling out advice on FISCAL POLICY and MONETARY POLICY as well as microeconomic changes such as PRIVATISATION, of which it became a forceful advocate. In the 1980s, it played a leading part in sorting out the problems of DEVELOPING COUNTRIES’ mounting DEBT. More recently, it has several times co-ordinated and helped to finance assistance to countries with a currency crisis.
• The Fund has been criticised for the CONDITIONALITY of its support, which is usually given only if the recipient country promises to implement IMF-approved economic reforms. Unfortunately, the IMF has often approved “one size fits all” policies that, not much later, turned out to be inappropriate. It has also been accused of creating MORAL HAZARD, in effect encouraging governments (and FIRMS, BANKS and other investors) to behave recklessly by giving them reason to expect that if things go badly the IMF will organise a bail-out. Indeed, some financiers have described an INVESTMENT in a financially shaky country as a “moral-hazard play” because they were so confident that the IMF would ensure the safety of their MONEY, one way or another. Following the economic crisis in Asia during the late 1990s, and again after the crisis in Argentina early in this decade, some policymakers argued (to no avail) for the IMF to be abolished, as the absence of its safety net would encourage more prudent behaviour all round. More sympathetic folk argued that the IMF should evolve into a global LENDER OF LAST RESORT.
• IMPERFECT COMPETITION
• See MONOPOLISTIC COMPETITION and OLIGOPOLY.
• IMPORTS
• Purchases of foreign goods and SERVICES; the opposite of EXPORTS.
• INCOME
• The flow of MONEY to the FACTORS OF PRODUCTION: WAGES to LABOUR; PROFIT to ENTERPRISE and CAPITAL; INTEREST also to capital; RENT to LAND. Wages left for spending after paying taxes is known as disposable INCOME. For countries, see NATIONAL INCOME.
• INCOME EFFECT
• A change in the DEMAND for a good or service caused by a change in the INCOME of consumers rather than, say, a change in consumer tastes. Contrast with SUBSTITUTION EFFECT.
• INCOME TAX
• A much-loathed method of TAXATION based on earnings. It was first collected in 1797 by the Dutch Batavian Republic. In the UK it was introduced in 1799 as a “temporary” measure to finance a war against Napoleon, abolished in 1816 and reintroduced, forever, in 1842. In most countries, people do not pay it until their INCOME exceeds a minimum threshold, and richer people pay a higher rate of income tax than poorer people. Since the 1980s, the unpopularity with voters of high rates of income tax and concern that high rates discourage valuable economic activity have led many governments to reduce income-tax rates. However, this has not necessarily reduced the amount of total revenue collected in income tax (see LAFFER CURVE). Nor do governments that have reduced income tax rates always cut other sorts of taxes; on the contrary, they have often increased them sharply to make up for any revenue lost as a result of lower rates of income tax.
• INCUMBENT ADVANTAGE
• The importance of being there already. FIRMS that are in a market can have a significant COMPETITIVE ADVANTAGE over aspiring entrants to that market, for instance, through having the opportunity to erect barriers to entry. (See FIRST-MOVER ADVANTAGE.)
• INDEX NUMBERS
• Economists love to compile indices aggregating lots of individual data, so they can analyse broad trends in the behaviour of an economy. INFLATION is measured by an index of consumer (retail) PRICES. There are indices of all sorts of things that are bought and sold of which perhaps the best known are share price indices like the Dow Jones Industrial Average or FTSE-100. The main challenges in compiling an index are what, exactly, to include in it and what weight to give the different things that are included. A particularly tricky question is how to change an index over time. Measures of inflation are based on the price of a basket of things bought by a typical consumer. As the quality and choice of products in the basket change over time, the inflation index ought to take this into account. How, exactly, is much debated.
• INDEXATION
• Keeping pace with INFLATION. In many countries, WAGES, pensions, UNEMPLOYMENT benefits and some other sorts of INCOME are automatically raised according to recent movements in the consumer PRICE index. This allows these different sorts of income to retain their value in REAL TERMS.
• INDIFFERENCE CURVE
• A curve that joins together different combinations of goods and SERVICES that would each give the consumer the same amount of satisfaction (UTILITY). In other words, consumers are indifferent to which of the combinations they get.
• INDIRECT TAXATION
• Taxes that do not come straight out of a person’s pay packet or ASSETS, or out of company PROFIT. For example, a CONSUMPTION tax, such as VALUE-ADDED tax (see EXPENDITURE TAX). Contrast with DIRECT TAXATION, such as INCOME TAX. Indirect taxation has become increasingly popular with politicians because it may be less noticeable to people paying it than income tax and is harder to avoid paying.
• INELASTIC
• When the SUPPLY or DEMAND for something is insensitive to changes in another variable, such as PRICE. (See ELASTICITY.)
• INEQUALITY
• Does economic GROWTH create more or less equality? Do unequal societies grow more or less slowly than equal ones? Economists have debated these questions for as long as anyone can remember. One problem is to agree which sort of inequality matters: equality of outcome (that is, INCOME) or of opportunity? Another is how then to measure it. Equality of opportunity, which, in theory, should make a difference to growth, because it is about giving people the chance to make the most of their HUMAN CAPITAL, is probably beyond the ability of statisticians to analyse rigorously. The most often used measure of income inequality is the GINI COEFFICIENT.
• The evidence suggests that extreme poverty is more likely to slow growth than income inequality itself. This is because very poor people cannot buy the education they need to enable them to become richer and their children may be forced to forgo schooling in order to work for money.
• Economic growth has generally reduced inequality within a country. This has been partly as a result of redistributive tax and benefits systems, which have become so significant that they may now be causing slower growth in some countries. The availability of WELFARE benefits may have discouraged unemployed people from seeking out a better job; and the high taxes needed to pay for the benefits may have discouraged some wealthy people from working as hard as they would have done under a friendlier tax regime. However, the NEW ECONOMY may see inequality in rich countries widen again, thanks to its alleged WINNER-TAKES-ALL distribution of financial rewards.
• INFERIOR GOODS
• Products that are less in demand as consumers get richer. For NORMAL GOODS, DEMAND increases as consumers have more to spend.
• INFLATION
• Rising PRICES, across the board. Inflation means less bang for your buck, as it erodes the purchasing power of a unit of currency. Inflation usually refers to CONSUMER PRICES, but it can also be applied to other prices (wholesale goods, WAGES, ASSETS, and so on). It is usually expressed as an annual percentage rate of change on an INDEX NUMBER. For much of human history inflation has not been an important part of economic life. Before 1930, prices were as likely to fall as rise during any given year, and in the long run these ups and downs usually cancelled each other out. By contrast, by the end of the 20th century, 60-year-old Americans had seen prices rise by over 1,000% during their lifetime. The most spectacular period of inflation in industrialised countries took place during the 1970s, partly as a result of sharp increases in oil prices implemented by the OPEC CARTEL. Although these countries have mostly regained control over inflation since the 1980s, it continued to be a source of serious problems in many DEVELOPING COUNTRIES.
• Inflation would not do much damage if it were predictable, as everybody could build into their decision making the prospect of higher prices in future. In practice, it is unpredictable, which means that people are often surprised by price increases. This reduces economic efficiency, not least because people take fewer risks to minimise the chances of suffering too severely from a PRICE SHOCK. The faster the rate of inflation, the harder it is to predict future inflation. Indeed, this uncertainty can cause people to lose confidence in a currency as a store of value. This is why HYPER-INFLATION is so damaging.
• Most economists agree that an economy is most likely to function efficiently if inflation is low. Ideally, MACROECONOMIC POLICY should aim for stable prices. Some economists argue that a low level of inflation can be a good thing, however, if it is a result of INNOVATION. New products are launched at high prices, which quickly come down through COMPETITION. Most economists reckon that DEFLATION (falling AVERAGE prices) is best avoided.
• To keep inflation low you need to know what causes it. Economists have plenty of theories but no absolutely cast-iron conclusions. Inflation, Milton FRIEDMAN once said, “is always and everywhere a monetary phenomenon”. Monetarists reckon that to stabilise prices the rate of GROWTH of the MONEY SUPPLY needs to be carefully controlled. However, implementing this has proven difficult, as the relationship between measures of the money supply identified by monetarists and the rate of inflation has typically broken down as soon as policymakers have tried to target it. ¬KEYNESIAN economists believe that inflation can occur independently of monetary conditions. Other economists focus on the importance of institutional factors, such as whether the INTEREST RATE is set by politicians or (preferably) by an independent CENTRAL BANK, and whether that central bank is set an INFLATION TARGET.
• Is there a relationship between inflation and the level of UNEMPLOYMENT? In the 1950s, the PHILLIPS CURVE seemed to indicate that policymakers could trade off higher inflation for lower unemployment. Later experience suggested that although inflating the economy could lower unemployment in the short run, in the long run you ended up with unemployment at least as high as before and rising inflation as well. Economists then came up with the idea of the NAIRU (non-accelerating inflation rate of unemployment), the rate of unemployment below which inflation would start to accelerate. However, in the late 1990s, in both the United States and the UK, the unemployment rate fell well below what most economists thought was the NAIRU yet inflation did not pick up. This caused some economists to argue that technological and other changes wrought by the NEW ECONOMY meant that inflation was dead. Traditionalists said it was merely resting.
• INFLATION TARGET
• The goal of MONETARY POLICY in many countries is to ensure that INFLATION is neither too high nor too low. It became fashionable during the 1990s to set a country's CENTRAL BANK an explicit rate of inflation to target. By 1998, some 54 central banks had an inflation target, compared with just eight at the end of 1990, the year in which New Zealand's Reserve Bank became the first to be set a target. In most industrialised countries, the target, or, typically, the mid-point of a target range, for consumer-price inflation is between 1% and 2.5%. The reason it is not zero is that official price indices overstate inflation, and that the countries would prefer a little inflation to any DEFLATION.
• Monetary poilcy takes time to have an impact. So central banks usually base their policy changes on a forecast of inflation, not its current rate. If forecast inflation in two years' time, say, is above the target, INTEREST RATES are raised. If it is below target, rates are cut.
• Why have an inflation target? Setting an inflation target usually goes hand-in-hand with allowing a central bank considerable discretion in setting policy, so TRANSPARENCY in its decision-making is vital and is therefore usually increased as part of the process of adopting a target. More fundamentally, by making it easier to judge whether policy is on track, an inflation target makes it easier to hold a central bank to account for its performance. The pay of central bankers can be designed to reward them for achieving the target. But some central bankers argue that an inflation target restricts their policy flexibility too much, which is one reason why the world's most powerful central bank, America's FEDERAL RESERVE, has argued (so far successfully) against having one