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NAFTA

Short for North American Free-Trade Agreement. In 1993, the United States, Mexico and Canada agreed to lower the barriers to trade among the three economies. The formation of this regional TRADE AREA was opposed by many politicians in all three countries. In the United States and Canada, in particular, there were fears that NAFTA would result in domestic job losses to cheaper locations in Mexico. In the early years of the agreement, however, most studies found that the economic gains far outweighed any costs.

Nash equilibrium

An important concept in GAME THEORY, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist.

Nation building

Creating a country that works out of one that does not - because the old order has collapsed (as in the former Soviet Union), or been destroyed by war (Iraq), or never really functioned in the first place (Afghanistan). To transform a failed country can involve establishing order through the rule of law and creating legitimate government and other effective social institutions, as well as a credible currency and a functioning market economy. Nation building is rarely easy, and often fiendishly difficult, especially where there are deep ethnic, religious or political divisions in the population or the country has no history of ever functioning effectively. Outside expertise, such as from the world bank, and money (as in, most famouly, the Marshall Plan) can help, but they are no guarantee of success.

National debt

The total outstanding borrowing of a country's GOVERNMENT (usually including national and local government). It is often described as a burden, although public DEBT may have economic benefits (see BALANCED BUDGET, FISCAL POLICY and GOLDEN RULE). Certainly, debt incurred by one generation may become a heavy burden for later generations, especially if the MONEY borrowed is not invested wisely. The national debt is a total of all the money ever raised by a government that has yet to be paid off; this is very different from an annual public-sector budget DEFICIT. In 1999, the American government celebrated a huge budget surplus, yet the country still had a national debt equal to nearly half its GDP.

Nationalisation

When a GOVERNMENT takes ownership of a private-sector business. Nationalisation was a fashionable part of the mix in countries with a MIXED ECONOMY between 1945 and 1980, after which the PRIVATISATION of state-owned FIRMS became increasingly popular. The amount of public ownership in different countries has always varied considerably. Nationalisation has taken place for various reasons, ranging from socialist ideology to attempts to remedy examples of MARKET FAILURE.

The performance of nationalised firms has often, but not always, been poor compared with their private-sector counterparts. State-owned businesses often enjoy a legally protected MONOPOLY, and the lack of COMPETITION means the firms face little pressure to be efficient. Politicians often interfere in important management decisions, making it harder to take unpopular actions on pay, factory closures and job cuts, particularly when there are strong public-sector trade UNIONS and a union-friendly government. Politically imposed financial constraints may also force public-sector firms to underinvest. Although privatisation has not been universally beneficial, on balance it has increased economic EFFICIENCY.

Natural monopoly

When a MONOPOLY occurs because it is more efficient for one firm to serve an entire market than for two or more FIRMS to do so, because of the sort of ECONOMIES OF SCALE available in that market. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water. One firm can do the job at a lower AVERAGE cost per customer than two firms with competing networks of pipes. Monopolies can arise unnaturally by a firm acquiring sole ownership of a resource that is essential to the production of a good or service, or by a government granting a firm the legal right to be the sole producer. Other unnatural monopolies occur when a firm is much more efficient than its rivals for reasons other than economies of scale. Unlike some other sorts of monopoly, natural monopolies have little chance of being driven out of a market by more efficient new entrants. Thus REGULATION of natural monopolies may be needed to protect their captive consumers.