Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

NAFTA:	See North American Free Trade Agreement.
NAIRU:	The acronym NAIRU refers to the non-accelerating-inflation rate of unemployment, which is, according to natural rate theory, the lowest rate of unemployed workers a country can maintain in the long run. See also natural rate theory and natural rate of unemployment.
naked short sell:	A naked short sell is an illegal transaction in which the short seller is not “covered” (has not borrowed) the financial instrument being promised for future delivery. See also short and short sell.
NASDAQ:	Computerized systems established by the National Association of Securities Dealers to facilitate trade by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks. Unlike the AMEX and the NYSE, the NASDAQ (once an acronym for the National Association of Securities Dealers Automated Quotation system) does not have a physical trading floor that brings together buyers and sellers. Instead, all trading on the NASDAQ exchange is done over a network of computers and telephones.
Nash equilibrium:	A Nash equilibrium is a strategy combination in game theory where no player has a net incentive to change unless other players change.
national banks:	National banks are banks chartered by the Comptroller of the Currency that must be members of the Federal Reserve System.
National Bureau of Economic Research:	The National Bureau of Economic Research (NBER) was founded in 1920 by the American institutionalist Wesley Clair Mitchell, and it is a private, nonprofit, nonpartisan research organization. The NBER sponsors economic research and collects and analyzes mountains of economic data. The authority of the NBER is widely recognized in identifying phases of business cycles, especially the beginnings and ends of recessions.
national debt:	National debt is the value of government bonds in the hands of the public or foreigners.
national income:	National income (NI) is a measure of economic activity computed by summing all resource incomes. Thus, NI equals the sum of wages and salaries, rents, interest, and corporate and noncorporate business incomes.
National Labor Relations Board:	The National Labor Relations Board (NLRB) is a federal agency that regulates and enforces collective bargaining agreements between companies and unions, and certifies elections of bargaining representatives.
nationalism:	Nationalism is a strong preference for aspects of one’s own country over attributes of other countries. Nationalism is often the foundation for advocating buying products made “at home” [“Buy American”] instead of importing.
nationalization:	Nationalization is the change from private ownership of companies and businesses to governmental (collective) ownership and control. Contrast with privatization.
natural barriers to entry:	A natural barrier to entry is a significant barrier that confronts potential competitors and results from the nature of the economic good or from the cost structure inherent in its production. See also artificial barriers to entry and legal barriers to entry.
natural monopoly:	A natural monopoly is the lone seller in a market in which only one firm can most efficiently produce an economic good. This occurs when a production process is characterized by enormous fixed costs and relatively small variable costs. A natural monopoly emerges through rivalrous processes if market demand is small relative to the economies of scale.
natural rate of interest:	Variants of neoclassical macroeconomic theory identify the natural rate of interest as the “real” rate of interest that is consistent with savers’ internal rates of discount (time preferences for consumption) and the expected rate of return on investment in new capital. See also natural rate theory.
natural rate of output:	The natural rate of output is synonymous with “full-employment output” and “potential output”. This is the level of national income and gross domestic product towards which the economy gravitates in the long run. It can be identified as the output level associated with the vertical segment of a Long Run Aggregate Supply (LRAS) curve. See also natural rate theory.
natural rate of unemployment:	According to new classical macroeconomic theory, the natural rate of unemployment is the long run rate consistent with accurately predicted inflation. See also natural rate theory.
natural rate theory:	Natural rate theory is the notion that the economy is inherently stable and that output, unemployment, and real interest will coincide with their “natural rates” in the long run. According to this theory, Aggregate Supply and all “real” variables are ultimately independent of Aggregate Demand, and traditional Keynesian policy goals are unattainable because attempts to drive down unemployment or real interest rates more than can be reconciled with people’s preferences are self‑defeating in the long run. This theory is based on the classical assumption that, in the long run, Aggregate Demand affects only the price level, with effects on real variables beinge transitory, resulting only from “money illusion” or inaccurate expectations about the price level. See also neutrality of money, inflationary expectations, efficient markets, quantity theory of money, and real business cycle theory.
natural resources:	A country's natural resources (or natural endowments) include a favorable climate, fertile land, and the abundance of ores and minerals. The term “natural resources” is a synonym for the traditional economic category of land. See also land.
natural rights theory:	Natural rights theory is the idea that that many human rights are so basic to being human that government cannot ethically abridge them. This theory developed as an extension of natural law theory, which holds that certain human rights are granted by God. Natural rights theory developed out of thinking during the enlightenment era by such social contract philosophers as John Locke, whose version of natural rights theory pivoted on the labor theory of value as an ethical foundation for property rights. Advocates of natural rights theory need not be religious in a conventional sense. The Americans Samuel Adams, Thomas Jefferson, and Thomas Paine were significant natural rights theorists. Examples of natural rights are stated in the first ten Amendments of the US Constitution (the “Bill of Rights”). More recent thinkers whose ideas have hinged on a natural rights approach include Mohandas Gandhi, Albert Einstein, and Martin Luther King.
necessity:	Air, water, food, clothing and shelter are widely recognized as necessities without which life cannot be sustained. But the specific characteristics of such items vary greatly. Most items now termed “necessities” are actually culturally rather than biologically determined. The term is often applied to items that far exceed biological minimums; individuals may have become habituated to such “necessities” as color TVs or automobiles, but such things are not absolutely necessary for survival.
need:	An absolute need would be a specific quantity of a specific good for which an individual would be willing to pay any price, however high, if the individual could afford the good at all. The minimum amounts of food, clothing, and shelter required for a razor-edge survival are arguably needs, but the term is often used to refer to culturally determined and ambiguous norms of “need.”
needs standard:	A needs standard for distributing (or redistributing) income or wealth is the view that income should be largely distributed in accord with people’s needs. The Marxist slogan, “From each according to ability, to each according to needs,” was actually first written by Louis Blanc, an early radical French journalist.
negative externality:	A negative externality exists when a market activity imposes costs on third parties not directly involved in any decision about the exchange.
negative income taxes:	Negative income tax plans (NITs) represent attempts to reconcile equity and efficiency considerations in resolving the problems posed by income inequality and poverty; the negative income tax plan maintains incentives for recipients to work to earn additional income.
negative relationship:	A negative relationship is function for which an increase in the value of one variable is associated with a decrease in the value of the other variable. A graph of a negative relationship is negatively sloped—an increase in the x variable (the run) yields a corresponding decrease in the y variable (the rise). See also positive relationship.
negative sum game:	A negative sum game is an economic activity in which the total losses to all participants outweigh the gains to the “winners”, if any. War, for example, is a negative-sum game.
neoclassical macroeconomics:	Neoclassical macroeconomics is a systematic study of the functioning of a market economy which concluded that, in the long run, a market economy will achieve equilibrium at a full employment level of GDP, assuming the validity of Say’s Law and the flexibility of wages, prices, and interest rates.
neoclassical production functions:	A production function is neoclassical if inputs can be substituted for each other, and the amount of output does not rigidly depend on a specified minimum amount of one input for some given amount of another. In a neoclassical production function, increasing the amount of any single input usually (in region 2 of a production function) generates an increase in output. Contrast with input-output analysis and fixed coefficient production.
neoclassical theory:	The transition from classical economics to neoclassical economics is usually acknowledged to have started in the 1830s, when some economists began to use calculus to mathematically formalize economic theory. This resulted in the emphasis on decisionmaking at the margin, or marginalism. However, the terms classical economics and neoclassical economics are sometimes used as synonyms, especially when the reference is to aspects of macroeconomics.
neoliberalism:	Neoliberalism is a social philosophy that emphasizes market solutions to economic problems as efficient, but also favors civil liberties and “social justice” in the form of land reform and/or relatively generous transfer programs. Most neoliberals also favor globalization and the elimination of tariffs and other barriers to free international trade. See also liberal.
nepotism:	Nepotism is a principal-agent problem in which an agent with the power to determine the recipient of a contract (e.g., employment) favors the decisionmaker’s relatives. See also favoritism.
net cash flow:	The net cash flow of a firm or household is equal to the difference between the inflow of receipts minus the outflow of payments.
net domestic product:	Net domestic product (NDP) is the net annual value of capital goods, commodities and services produced in the economy after adjusting for the fact that we have used up productive capacity; equals GDP minus depreciation; also equals national income (NI) plus indirect business taxes. See also Net National Product.
net exports:	Net exports [X – M] equal a countries exports minus its imports.
net investment:	Net investment equals gross investment minus depreciation and, in the aggregate, measures net additions to an economy’s capital stock or productive capacity.
net national product:	Net national product (NNP) is the net value of commodities and services produced by resources owned by the citizens of a country after adjusting for the fact that we have used up productive capacity; equals Gross National Product minus depreciation; also roughly equals National Income (NI) plus indirect business taxes.
net present value:	Net present value is the discounted present value of an expected income stream minus the current price of the asset that generates the income stream. A positive net present value is a signal that an investment will yield a surplus across time. See also capitalization and present value.
net revenue:	Net revenue is the revenue remaining after a firm has paid the out-of-pocket costs of its inputs and such indirect taxes as sales taxes. Deducting direct taxes [e.g., corporate income taxes] from net revenue yields the after-tax income of a firm.
net worth:	Net worth is the difference in value between the assets and liabilities of an individual, family, or business firm.
network externality:	Network externalities (or external increasing returns) exist when the more widely a technology is used, the lower is the cost of using the technology and the greater the productivity associated with its use. All else equal, the technology with the largest network of users (measured by economic import) will tend to grow at the expense of its rivals, because switching costs on users who wish to migrate to an alternative technology tend to be the highest. Consequently, firms that control the dominant technology often accumulate significant market power. The QWERTY (“standard”) keyboard is an example of a technology that is dominant, not because of its intrinsic elegance or power, but rather, because it became the norm over 100 years ago, when typewriters became common. Once you’ve learned the QWERTY keyboard, switching is a vexing and costly process. The dominance of Microsoft’s Windows software, for example, is attributable in part to the fact that computer users often want to share files, and the simplest way to accomplish this is to usually to use the same operating system. See also hysterisis and path dependence.
neutral tax:	Imposition of a neutral tax distorts neither consumer buying patterns nor the methods used by firms in the conduct of their business; in other words, the imposition of a neutral tax does not distort relative prices by inducing substitution effects.
neutrality of money:	A key result of the quantity theory of money, efficient markets, and such related new classical macroeconomic theories as natural rate theory is that in the long run, the money supply is “neutral,” which means that it affects only the price level. The quantity theory of money posits precise proportionality between the money supply and the price level. Thus, in the long run, a neutral supply of money does not affect the composition or level of total output, nor does it affect the “natural rates” of output, unemployment or “real” interest rates. See also efficient markets, quantity theory of money, and real business cycle theory.
neuroeconomics:	Neuroeconomics is the study of how brain circuitry affects perceptions and decisions. Rationality and forward looking considerations in economic decisionmaking (Homo economicus) tends to reflect activity of the prefrontal cortex, while emotional or instinctual reactions to prospects of immediate sensual pleasures or perceived unfairness or imminent danger tends to reflect activity in the insular cortex or other primitive parts of the brain.
new classical macroeconomics:	New classical macroeconomics is a collection of modern theories that extend classical and neoclassical theories of competitive markets and which usually supports laissez faire macroeconomic policies. See also efficient markets, rational expectations, natural rate theory, and real business cycles.
New Deal	After being elected in 1933, Franklin D. Roosevelt persuaded the Congress to enact a series of programs collectively called “The New Deal.” An “Alphabet Soup” of new federal agencies was intended to “prime the pump” to lift the U.S. out of the Great Depression and to prevent future financial calamities. Such acts included the Works Project Administration (WPA), Civilian Conservation Corps (CCC), Social Security, the Securities and Exchange Commission, and numerous other regulatory agencies.
new economy:	The “new economy” is the label many people apply to the sector of the economy that deals with such emerging technologies as computerization, telecommunications, and the Internet. The provision of sophisticated services is emphasized, in contrast to “the old economy”, the label some pundits apply to commodity production, the industrial sector, or the “rust belt.”
new growth theory:	Prior to the 1980s, the theory of economic growth relied primarily on changes in the amounts of resources as a source of growth, emphasizing especially the accumulation of capital made possible by saving, which meant deferring consumption. Many specialists in economic growth and development also emphasized robust Keynesian-style aggregate demand policies as vital for economic growth, and technology was assumed exogenous. The “new” theory of economic growth focuses increasingly on technological change as an endogenous response to incentives for entrepreneurs, and emphasizes heavy investment in research and development [R&D] as the key determinant of economic growth and development. Much of “new growth theory” is an echo and an elaboration of ideas first stated in Joseph Schumpeter’s 1911 work, The Theory of Economic Development. New growth theory is sympathetic to the notion that elements of imperfect competition are essential for an economy to innovate and grow because growth is stimulated when producers and innovators seek monopoly profits.
new industrial organization:	The “new industrial organization” (new I-O) began to emerge in the 1960s and deemphasizes the numbers and relative sizes of competitors in an industry, instead stressing (a) how economic interactions can be closely modeled with game theory, (b) how asymmetric information among transactors shapes business decisions and market structures, and (c) how strategies develop in response to the specifics of different competitive environments. Contrast to the more traditional structure-conduct-performance (SCP) approach.
new institutionalism:	The new institutionalism emphasizes synergies and feedbacks that determine how conventions (e.g., corporate culture) and laws and regulations are shaped by incentive structures internal to organizations, and interdependencies between such organizations as firms, government, and non-government organizations (NGOs). In contrast, standard economic theory largely ignores the internal dynamics of organizations, and views individual decisionmakers as the prime movers in a society.
new Keynesian economics:	New Keynesian economics blends traditional Keynesian insights with more elements of classical macroeconomic theory. New Keynesians continue to emphasize the problem of unemployment, to stress quantity rather than price adjustments to macroeconomic disturbances, and to focus on efficiency wages and other impediments to perfect wage-price flexibility. However, far more than traditional Keynesians, new Keynesians accept the notion that changes in the money supply are important in explaining both inflation and recession, and most are less “activist” in their approaches to macroeconomic policymaking. Contrast with new classical macroeconomics.
new trade theory:	The term new trade theory refers to extensions of traditional trade theory to consider how international transactions, market efficiencies, and the global distribution of income are affected by government policies, by the behavior of non-governmental organizations, monopolistically competitive and oligopolistic firms, by externalities and imperfections in information, and by alternative multinational agreements. Insights from game theory and recent advances in the economics of information are also increasingly brought to bear in analyses of the structure, volume, and impact of international trade.
New York Stock Exchange:	The New York Stock Exchange (NYSE) was established in 1792, and is located at 11 Wall Street in New York, NY. It is the largest securities exchange in the United States. The facility includes a huge trading pit in which securities are traded by public outcry.
newly industrializing countries:	Newly industrializing countries (NICs) are countries with increasingly globalized economies that have begun developing rapidly after long periods of relative dormancy. NICs include India, Indonesia, Singapore, Malaysia, Thailand, and China.
NGO:	The acronym NGO stands for non-government organization. See voluntary sector.
niche market:	A niche market is small, specialized market inhabited by a single firm or small number of firms that operate on a small scale. Barriers to entry may be significant relative to the total size of the market because most niche products or services lack mainstream popularity. Consequently, niche markets fail to attract huge firms as competitors. Examples of niche markets include custom-tied flies for trout fishing, “how-to” books for prospective harmonica players, or backgammon sets for tournament players.
night watchman state:	A night watchman state is an economy in which government follows laissez faire policies, being limited to protecting property rights by e.g., enforcing contracts and providing police services and national defense.
nihilism:	Nihilism is the firm belief that faith can be rejected as a pathway to truth. This is paradoxical because faith is s a firm belief about something for which there is no proof. Contrast with pragmatism.
nirvana:	The Hindu concept of nirvana is held up as the ultimate state of perfection. The achievement of nirvana occurs when an individual lacks further wants or desires. Thus, scarcity is no longer relevant when nirvana is achieved, which is inconsistent with the standard economic theory that human nature makes it impossible for anyone to ever be completely satisfied in every possible way.
nirvana fallacy:	Public choice theorists define the nirvana fallacy to be the idea that ideal government policies can perfectly correct for any failure of the market system. Public choice theorists identify predictable failures of collective (governmental) decisionmaking that preclude ever implementing ideal policies.
noise trader:	A noise trader is a financial investor who trades on the basis of hunches or casual empiricism instead of careful analysis of in-depth information. Noise trades can contribute liquidity to a market and may enable more informed traders to generate income based on more careful analyses of more detailed or special information. Contrast with market fundamentalism.
nominal exchange rate:	The price of one currency (Euros) in terms of another (dollars). Adjusting the nominal exchange rate for relative purchasing power yields the real exchange rate.
nominal GDP:	Nominal GDP is gross domestic product (GDP) measured in current prices. See also real GDP.
nominal price:	The nominal price (also known as the absolute price) of a good is its price stated in monetary terms. See also relative price.
nominal rate of interest:	The nominal rate of interest is the average annual percentage monetary premium paid for the use of borrowed funds. The nominal interest rate is treated as the opportunity cost of money in most Keynesian models. See also interest rates, real rate of interest, liquidity preference, and Fisher effect.
nominal values:	The current dollar values of economic variables.
noncollusive strategy:	Noncollusive strategy refers to oligopolistic scheming that is informal, but consciously cooperative.