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ECB

See EUROPEAN CENTRAL BANK.

Econometrics

Mathematics and sophisticated computing applied to ECONOMICS. Econometricians crunch data in search of economic relationships that have STATISTICAL SIGNIFICANCE. Sometimes this is done to test a theory; at other times the computers churn the numbers until they come up with an interesting result. Some economists are fierce critics of theory-free econometrics.

Economic and monetary union

In January 1999, 11 of the 15 countries in the EUROPEAN UNION merged their national currencies into a single European currency, the EURO. This decision was motivated partly by politics and partly by hoped-for economic benefits from the creation of a single, integrated European economy. These benefits included currency stability and low INFLATION, underwritten by an independent EUROPEAN CENTRAL BANK (a particular boon for countries with poor inflation records, such as Italy and Spain, but less so for traditionally low-inflation Germany). Furthermore, European businesses and individuals stood to save from handling one currency rather than many. Comparing PRICES and WAGES across the euro zone became easier, increasing COMPETITION by making it easier for companies to sell throughout the euro-zone and for consumers to shop around.

Forming the single currency also involved big risks, however. Euro members gave up both the right to set their own INTEREST rates and the option of moving exchange rates against each other. They also agreed to limit their budget deficits under a stability and growth pact. Some economists argued that this loss of flexibility could prove costly if their economies did not behave as one and could not easily adjust in other ways. How well the euro-zone functions will depend on how closely it resembles what economists call an OPTIMAL CURRENCY AREA. When the euro economies are not growing in unison, a common MONETARY POLICY risks being too loose for some and too tight for others. If so, there may need to be large TRANSFERS of funds from regions doing well to those doing badly. But if the effects of shocks persist, fiscal transfers would merely delay the day of reckoning; ultimately, WAGES or people (or both) would have to shift.

In its first few years,the euro fell sharply against the dollar, though it recovered during late 2002. Sluggish growth in some European economies led to intense pressure for interest rate cuts, and to the stability and growth pact being breached, though not scrapped. Even so, by 2003 12 countires had adopted the euro, with the expectation of more to follow after the enlargement of the EU to 25 members in 2004.

Economic indicator

A statistic used for judging the health of an economy, such as GDP per head, the rate of UNEMPLOYMENT or the rate of INFLATION. Such statistics are often subject to huge revisions in the months and years after they are first published, thus causing difficulties and embarrassment for the economic policymakers who rely on them.

Economic man

At the heart of economic theory is homo economicus, the economist's model of human behaviour. In traditional CLASSICAL ECONOMICS and in NEO-CLASSICAL ECONOMICS it was assumed that people acted in their own self-interest. Adam SMITH argued that society was made better off by everybody pursuing their selfish interests through the workings of the INVISIBLE HAND. However, in recent years, mainstream economists have tried to include a broader range of human motivations in their models. There have been attempts to model ALTRUISM and CHARITY. BEHAVIOURAL ECONOMICS has drawn on psychological insights into human behaviour to explain economic phenomena.

Economies of scale

Bigger is better. In many industries, as output increases, the AVERAGE cost of each unit produced falls. One reason is that overheads and other FIXED COSTS can be spread over more units of OUTPUT. However, getting bigger can also increase average costs (diseconomies of scale) because it is more difficult to manage a big operation, for instance.