adaptive expectations (of inflation) the idea that EXPECTATIONS of the future rate of INFLATION are based on the inflationary experience of the recent past. As a result, once under way, inflation feeds upon itself with, for example, trade unions demanding an increase in wages in the current pay round, which takes into account the expected future rate of inflation which, in turn, leads to further price rises. See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE, INFLATIONARY SPIRAL, RATIONAL EXPECTATIONS, HYPOTHESIS, ANTICIPATED INFLATION, TRANSMISSION MECHANISM.
‘adjustable peg’ exchange-rate system a form of FIXED EXCHANGE-RATE SYSTEM originally operated by the INTERNATIONAL MONETARY FUND, in which the EXCHANGE RATES between currencies are fixed (pegged) at particular values (for example, £1 = $3), but which can be changed to new fixed values should circumstances require it. For example, £1 = $2, the re-pegging of the pound at a lower value in terms of the dollar (DEVALUATION); or £1 = $4, the re-pegging of the pound at a higher value in terms of the dollar (REVALUATION).
adjustment mechanism a means of correcting balance of payments disequilibriums between countries. There are three main ways of removing payments deficits or surpluses:
(a) external price adjustments;
(b) internal price and income adjustments;
(c) trade and foreign-exchange restrictions. See BALANCE-OF-PAYMENTS EQUILIBRIUM for further elaboration.
While conventional balance of payments theory emphasizes the role of monetary adjustments (e.g. EXCHANGE RATE devaluations/depreciations) in the removal of payments imbalances, a crucial requirement in this process is for there to be a real adjustment in terms of industrial efficiency and competitiveness. An example will reinforce this point. Let us assume that, because UK goods are more expensive, the UK imports more manufactured goods from Japan than it exports manufactures to Japan. Since each country has its own separate domestic currency, this deficit manifests itself as a monetary phenomenon – the UK runs a balance of payments deficit with Japan, and vice-versa. Superficially, this situation can be remedied by, for example, an external price adjustment: currency devaluation/depreciation of the pound and currency revaluation/appreciation of the yen.
But price differences in the domestic prices of manufactured goods themselves reflect differences between countries in terms of their real economic strengths and weaknesses, that is, causality can be presumed to run from the real aggregates to the monetary aggregates and not the other way round: a country has a strong, appreciating currency because it has an efficient and innovative real economy; a weak currency reflects a weak economy. Simply devaluing the currency does not mean that there will be an improvement in real efficiency and competitiveness overnight. Focusing attention on the monetary aggregates tends to mask this fundamental truth. Thus, if the UK and Japan were to establish an economic union in which, as provided for by the European Union’s Economic and Monetary Union (EMU) arrangements, their individual domestic currencies would be replaced by a single currency, then, in conventional balance of payments terms, the UK’s deficit would disappear.
Or does it? It does so in monetary terms but not in real terms, that is, the disequilibrium manifests itself not in terms of cross-border (external) foreign currency flows but as an internal problem of regional imbalance. The ‘leopard has changed its spots’ – a balance of payments problem has become a regional problem, with the UK region of the customs union experiencing lower industrial activity rates, lower levels of real income and higher rates of unemployment compared with the French region. To redress this imbalance in real terms requires an improvement in the competitiveness of the UK region’s existing industries and the establishment of new industries by inward investment. For example, within the UK itself the decline of iron and steel production in Wales has been partly offset by the establishment of consumer appliance and electronics industries by American and Japanese multinational companies. See EURO, REGIONAL POLICY.
adjustment speed the rate at which MARKETS adjust to changing economic circumstances. Adjustment speeds will tend to vary between different types of market. For example, in the case of the FOREIGN EXCHANGE MARKET, the exchange rate of a currency will tend to adjust rapidly to EXCESS SUPPLY or EXCESS DEMAND for it. A similar rapid response tends to characterize COMMODITY MARKETS and MONEY MARKETS, with commodity prices and INTEREST RATES changing quickly as supply or demand conditions warrant. Product markets (see PRICE SYSTEM) tend to adjust more slowly because the prices of products are usually fixed administratively and are generally changed infrequently in response to major supply or demand changes. Finally, some commodity markets, in particular the LABOUR MARKET, tend to adjust more slowly still because wages tend to be fixed through longer-term collective bargaining arrangements. See WAGE STICKINESS.
administered price 1 a price for a PRODUCT that is set by an individual producer or group of producers. In PERFECT COMPETITION, characterized by many very small producers, the price charged is determined by the interaction of market demand and market supply, and the individual producer has no control over this price. By contrast, in an OLIGOPOLY and a MONOPOLY, large producers have considerable discretion over the prices they charge and can, for example, use some administrative formula like FULL-COST PRICING to determine the particular price charged. A number of producers may combine to administer the price of a product by operating a CARTEL or price-fixing agreement.
2 a price for a product, or CURRENCY, etc., that is set by the government or an international organization. For example, an individual government or INTERNATIONAL COMMODITY AGREEMENT may fix the prices of agricultural produce or commodities such as tin to support producers’ incomes; under an internationally managed FIXED EXCHANGE-RATE SYSTEM, member countries establish fixed values for the exchange rates of their currencies. See PRICE SUPPORT, PRICE CONTROLS.
administrator see INSOLVENCY ACT 1986.
ad valorem tax a TAX that is levied as a percentage of the price of a unit of output. See SPECIFIC TAX, VALUE-ADDED TAX.
advances see LOANS.
adverse selection the tendency for people to enter into CONTRACTS in which they can use their private information to their own advantage and to the disadvantage of the less informed party to the contract. For example, an insurance company may charge health insurance premiums based upon the average risk of people falling ill, but people with poorer than average health will be keener to take out health insurance while people with better than average health will tend not to take out such health insurance, so that the insurance company loses money because the high risk part of the population is over-represented among its clients.
Adverse selection results directly from ASYMMETRY OF INFORMATION available to the parties to a contract or TRANSACTION. Where there is hidden information that is private and unobservable to other parties to a transaction, the presence of hidden information or even the suspicion of hidden information may be sufficient to hinder parties from entering into transactions.
advertisement a written or visual presentation in the MEDIA of a BRAND of a good or service that is used both to ‘inform’ prospective buyers of the product’s attributes and to ‘persuade’ them to purchase it in preference to competing brands. Advertisements are usually featured as part of an ‘advertising campaign’ involving a series of presentations of the brand in the media over a run of weeks, months or even years that is designed to reinforce the ‘image’ of the brand, thereby expanding sales of the product and establishing BRAND LOYALTY. See ADVERTISING.
advertising a means of stimulating demand for a product and establishing strong BRAND LOYALTY. Advertising is one of the main forms of PRODUCT DIFFERENTIATION competition and is used both to inform prospective buyers of a brand’s particular attributes and to persuade them that the brand is superior to competitors’ offerings.
