Economics A-Z terms beginning with S

  1. Safe harbour

    Protection from the rough seas of REGULATION. Laws and regulations often include a safe harbour clause that sets out the circumstances in which otherwise regulated FIRMS or individuals can do something without regulatory oversight or interference.

  2. Satisficing

    Settling for what is good enough, rather than the best that is possible. This may occur in any situation in which decision makers are trying to pursue more than one goal at a time. CLASSICAL ECONOMICS and NEO-CLASSICAL ECONOMICS assume that individuals, FIRMS and GOVERNMENTS try to achieve the OPTIMUM, best possible outcome from their decisions. Satisficing assumes they decide for each goal a level of achievement that would be good enough and try to find a way to achieve all of these sub-optimal goals at once. This approach to decision making is commonplace in behavioural economics. It can be regarded as a realist's theory of how decisions are taken. The concept was invented by Herbert Simon (1916-2001), a Nobel ­prize-winning economist, in his book, Models of Man, in 1957.

  3. Savings

    Any INCOME that is not spent. Ultimately, savings are the source of INVESTMENT in an economy, although domestic savings may be supplemented by CAPITAL from foreign savers or themselves be invested abroad.

    In an economic sense, savings include purchases of SHARES or other financial SECURITIES. However, many official measures of a country's savings ratio--total savings expressed as a percentage of total income--leave out such financial transactions. At times when the demand for financial securities is unusually high, this can give a misleading impression of how much saving is taking place.

    How much individuals save varies significantly among different age groups (see LIFE-CYCLE HYPOTHESIS) and nationalities. Everywhere, people of all ages save more as their income rises. The supply of savings rises when INTEREST rates rise; a rise in interest rates causes DEMAND for funds to invest to fall; a rise in demand for investment funds may cause interest rates, and thus the COST OF CAPITAL, to rise. The level of savings is also influenced by changes in wealth (see WEALTH EFFECT) and by TAXATION policies.

  4. Say's law

    SUPPLY creates its own DEMAND. So argued a French economist, Jean-Baptiste Say (1767-1832), and many classical and neo-classical economists since. KEYNES argued against Say, making the case for the use of FISCAL POLICY to boost demand if there is not enough of it to produce FULL EMPLOYMENT.

  5. Scalability

    The ease with which the SUPPLY of an economic product or process can be expanded to meet increased DEMAND. Recent technological advances have led some economists to talk about the growing importance of instant scalability. For example, once a piece of software has been written it can be made available in an instant over the Internet to unlimited numbers of users for almost no cost. This potentially allows a new product to enter and win market share far more quickly than ever before, intensifying COMPETITION and perhaps accelerating the process of creative destruction (see SCHUMPETER).

  6. Scarcity

    Supplies of the FACTORS OF PRODUCTION are not unlimited. This is why choices have to be made about how best to use them, which is where ECONOMICS comes in. MARKET FORCES operating through the PRICE MECHANISM usually offer the most efficient way to allocate scarce resources, with GOVERNMENT planning playing at most a minor role. Scarcity does not imply POVERTY. In economic terms, it means simply that needs and wants exceed the resources available to meet them, which is as common in rich countries as in poor ones.

  7. Scenario analysis

    Testing your plans against various possible scenarios to see what might happen should things not go as you hope. Scenario analysis is an important technique in RISK MANAGEMENT, helping FIRMS and especially financial institutions to ensure that they do not take on too much RISK. Its usefulness does of course depend on risk managers coming up with the right scenarios.

  8. Schumpeter, Joseph

    After growing up in the Austro-Hungarian empire, in which he worked as an itinerant lawyer, Joseph Schumpeter (1883-1950) became an academic in 1909. He was appointed Austrian minister of finance in 19
    19, presiding over a period of HYPER-INFLATION. He then became president of a small Viennese BANK, which collapsed. He returned to academia in Bonn in 1925 and in the 1930s joined the faculty of Harvard.

    In 1911, while teaching at Czernowitz (now in Ukraine), he wrote the Theory of Economic Development. In this he set out his theory of entrepreneurship, in which GROWTH occurred, usually in spurts, because COMPETITION and declining PROFIT inspired ENTREPRENEURS to innovate. This developed into a theory of the trade cycle (see BUSINESS CYCLE), and into a notion of dynamic competition characterised by his phrase 'creative destruction'. In CAPITALISM, he argued, there is a tendency for FIRMS to acquire a degree of MONOPOLY power. At this point, competition no longer takes place through the PRICE MECHANISM but instead through INNOVATION. Perhaps because monopolies often become lazy, successful innovation may come from new entrants to a market, who take it away from the incumbent, thus blowing 'gales of creative destruction' through the economy. Eventually, the new entrants grow fat on their monopoly profits, until the next gale of creative destruction blows them away.

    Ever controversial, and often wrong, in his 1942 book, CAPITALISM, SOCIALISM AND DEMOCRACY, he predicted the downfall of capitalism at the hands of an intellectual elite. He is associated with both AUSTRIAN ECONOMICS and, arguably as founding father, EVOLUTIONARY ECONOMICS.

  9. SDR

    Short for special drawing rights. Created in 1967, the SDR is the IMF's own currency. Its value is based on a portfolio of widely used currencies.

  10. Search costs

    The cost of finding what you want. The economic cost of buying something is not simply the PRICE you pay. Finding what you want and ensuring that it is competitively priced can be expensive, be it the financial cost of physically getting to a marketplace or the OPPORTUNITY COST of time spent fact-finding. Search costs mean that people often take decisions without all the relevant INFORMATION, which can result in inefficiency. Technological changes such as the internet may sharply reduce search costs, and thus lead to more efficient decision making.

  11. Seasonally adjusted

    There are seasonal patterns in many economic activities; for instance, there is less construction in winter than in summer, and spending in shops soars as Christmas approaches. To reveal underlying trends, statistics reflecting only part of the year are often adjusted to iron out seasonal variations.

  12. Second-best theory

    As we do not live in a perfect world, how useful are economic theories based on the assumption that we do? Second-best theory, set out in 1956 by Richard Lipsey and Kelvin Lancaster (1924-99), looks at what happens when the assumptions of an economic model are not fully met. They found that in situations where not all the conditions are met, the second-best situation - that is, meeting as many of the other conditions as possible - may not result in the OPTIMUM solution. Indeed, reckoned Lipsey and Lancaster, in general, when one optimal equilibrium condition is not satisfied all of the other equilibrium conditions will change.

    Potentially, the second-best equilibrium may be worse than a new equilibrium brought about by GOVERNMENT intervention, either to restore equilibrium to the market that is in DISEQUILIBRIUM, or to move the other markets away from their second-best conditions.

    Economists have seized on this insight to justify all sorts of interventions in the economy, ranging from taxing certain goods and subsidising others to restricting FREE TRADE. Whenever there is MARKET FAILURE, second-best theory says it is always possible to design a government policy that would increase economic WELFARE. Alas, the history of government intervention suggests that although the second best may be improved on in theory, in practice second best is often least worst.

  13. Secondary market

    A market in second-hand FINANCIAL INSTRUMENTS. BONDS and SHARES are first sold in the primary market, for instance, through an initial public offering. After that, their new owners often sell them in the secondary market. The existence of liquid secondary markets can encourage people to buy in the primary market, as they know they are likely to be able to sell easily should they wish.

  14. Securities

    Financial contracts, such as BONDS, SHARES or DERIVATIVES, that grant the owner a stake in an ASSET. Such securities account for most of what is traded in the FINANCIAL MARKETS.

  15. Securitisation

    Turning a future cashflow into tradable, BOND-like SECURITIES. Creating such ASSET-backed securities became a lucrative business for financial FIRMS during the 1990s, as they invented new securities based on cashflow ranging from future mortgage and credit-card payments to BANK loans, movie revenue and even the royalties on songs by David Bowie (so-called Bowie-bonds). Securitisation has many benefits, at least in­theory. Issuers gain instant access to MONEY for which they would otherwise have to wait months or years, and they can shed some of the RISK that their expected revenue will not materialise. By selling securitised loans, investment banks are able to finance their customers without tying up large amounts of CAPITAL. Investors can hold a new sort of asset, less risky than unsecured bonds, giving them the risk-reducing benefit of DIVERSIFICATION. But there are dangers. The future cashflow underlying the securities may flow earlier or later than promised, or not at all.

  16. Seignorage

    Traditionally, the PROFIT rulers made from allowing metals to be turned into coins. Now it refers in a loosely defined way to the power of a country whose notes and coins are held by another country as a RESERVE CURRENCY.

  17. Seller's market

    A market in which the seller seems to have the upper hand and so can charge a higher PRICE than in a BUYER'S MARKET.

  18. Seniority

    The order in which CREDITORS are entitled to be repaid. In the event of a BANKRUPTCY, senior DEBT must be paid off before junior debt. Because junior debt has a lower chance of being repaid than senior debt, it carries more RISK, and thus typically pays a higher YIELD.

  19. Sequencing

    Shorthand for implementing economic reforms in the right order. In recent years, this has become a hot topic in development economics. Some economists argue that introducing the right policies alone is not enough to revive a malfunctioning economy; reforms must be implemented in the right sequence. Thus they debate when in the reform process there should be, say, privatisation of state enterprises, and in which order, or the lifting of capital controls or other trade barriers. Other economists dispute whether there is a right sequence.

  20. Services

    Products of economic activity that you can’t drop on your foot, ranging from hairdressing to websites. In most countries, the share of economic activity accounted for by services rose steadily during the 20th century at the expense of AGRICULTURE and MANUFACTURING. More than two-thirds of OUTPUT in OECD countries, and up to four-fifths of employment, is now in the services sector.

  21. Shadow price

    The true economic PRICE of an activity: the OPPORTUNITY COST. Shadow prices can be calculated for those goods and SERVICES that do not have a market price, perhaps because they are set by GOVERNMENT. Shadow pricing is often used in COST-BENEFIT ANALYSIS, where the whole purpose of the analysis is to capture all the variables involved in a decision, not merely those for which market prices exist.

  22. Shareholder value

    Putting shareholders first; the notion that all business activity should aim to maximise the total value of a company’s SHARES. Some critics argue that concentrating on shareholder value will be harmful to a company’s other STAKEHOLDERS, such as employees, suppliers and customers.


    Financial SECURITIES, each granting part ownership of a company. In return for risking their CAPITAL by giving it to the company’s management to develop the business, shareholders get the right to a slice of whatever is left of the firm’s revenue after it has met all its other obligations. This money is paid as a DIVIDEND, although most companies retain some of their residual revenue for INVESTMENT purposes. Shareholders have voting rights, including the right to vote in the election of the company’s board of directors. Shares are also known as equities. They can be traded in the public FINANCIAL MARKETS or held as PRIVATE EQUITY.

  24. Sharpe ratio

    A rough guide to whether the rewards from an INVESTMENT justify the RISK, invented by Bill Sharpe, a winner of the NOBEL PRIZE FOR ECONOMICS and co-creator of the CAPITAL ASSET PRICING MODEL. You simply divide the past RETURN on the investment (less the RISK-FREE RATE) by its STANDARD DEVIATION, the simplest measure of risk. The higher the Sharpe ratio is the better, that is, the greater is the return per unit of risk. However, as it is a backward-looking measure, based on what an investment has done in the past, the Sharpe ratio does not guarantee similar performance in future.

  25. Shock

    An unexpected event that affects an economy (see ASYMMETRIC SHOCK).

  26. Short-termism

    Doing things that make you better off in the short-run but worse off in the end. After the bursting of the stockmarket bubble and the failure of Enron at the start of the 2000s, much like during the 1980s, accusations of short-termism were often made against the stockmarket-focused CAPITALISM of the United States and the UK. During the bubble, it was claimed, investors had become too focused on short-term profits and changes in share prices, and failed to probe deeply enough into long-term performance. As a result, managers did things that made their profits look as good as possible in the short run, often to the detriment of their company's long-term health. Indeed, many firms engaged in misleading and even fraudulent accounting practices to inflate short-term profits. In the 1980s and early 1990s, the complaint took a slightly different form, and was arguably less convincing, namely that short-termism caused lower levels of INVESTMENT by businesses than in countries where the stockmarket was less important, such as Germany and Japan.

  27. Shorting

    Selling a SECURITY, such as a SHARE, that you do not currently own, in the expectation that its PRICE will fall by the time the security has to be delivered to its new owner. If the price does fall, you can buy the security at the lower price, deliver it to whoever you sold it to and make a PROFIT. The RISK is that the price rises, leaving you with a loss.

  28. Signalling

    A solution to one of the biggest sources of MARKET FAILURE: ASYMMETRIC INFORMATION. Often the biggest problem facing sellers is how to convince buyers that what they are selling is as good as they say it is. This problem arises in situations where the qualities of the thing being sold cannot be observed easily by buyers, who thus fear that sellers may be conning them. In such situations, an answer may be for sellers to do something that shows they mean what they say about quality. This something is what economists call signalling.

    Going to a leading university might be worth far more for what it signals to prospective employers about your abilities than for what you learn as a student. Likewise, the fact that a firm is willing to spend a lot of MONEY ADVERTISING its product may say far more about what it thinks of the product than any information included in the actual ad. To be useful, signals must impose more costs on those who use them to send false messages than any gains to be had from lying.

  29. Simple interest

    INTEREST calculated only on the initial amount ­borrowed or invested. Contrast with COMPOUND INTEREST.

  30. Smith, Adam

    The founder of ECONOMICS as we know it. Born in Kirkcaldy, Fife, Adam Smith (1723-90) was educated at Glasgow and Oxford, and in 1751 became professor of logic at Glasgow University. Eight years later he made his name by publishing the THEORY OF MORAL SENTIMENTS. His 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, is the bible of CLASSICAL ECONOMICS. He emphasised the role of specialisation (the DIVISION OF LABOUR), TECHNICAL PROGRESS and CAPITAL INVESTMENT as the main engines of economic GROWTH. Above all, he stressed the importance of the INVISIBLE HAND, the way in which self-interest pursued in free markets leads to the most efficient use of economic resources and makes everybody better off in the process.

  31. Social benefits/costs

    The overall impact of an economic activity on the WELFARE of society. Social benefits/costs are the sum of private benefits/costs arising from the activity and any EXTERNALITIES.

  32. Social capital

    The amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be. Yet, curiously, one of the best-known books to address the role of social capital, "Bowling Alone", by Robert Putnam of Harvard University, pointed out that Americans were far less likely to be members of community organisations, clubs or associations in the 1990s than they were in the 1950s. He illustrated his thesis by charting the decline of bowling leagues. Yet the American economy has gone from strength to strength. This has led some economists to question whether social capital is really as important as the theory suggests, and others to argue that membership of bowling leagues and other community organisations is simply not a good indicator of the amount of social capital in a country.

  33. Social market

    The name given to the economic arrangements devised in Germany after the second world war. This blended market CAPITALISM, strong LABOUR protection and union influence, and a generous WELFARE state. The phrase has also been used to describe attempts to make capitalism more caring, and to the use of market mechanisms to increase the EFFICIENCY of the social functions of the state, such as the education system or prisons. More broadly, it refers to the study of the different social institutions underpinning every market economy.

  34. Socialism

    The exact meaning of socialism is much debated, but in theory it includes some collective ownership of the means of production and a strong emphasis on equality, of some sort.

  35. Soft currency


  36. Soft dollars

    The value of research services that brokerage companies provide “free” to INVESTMENT managers in exchange for the investment managers’ business. Economists disagree on whether or not such hidden payments are economically inefficient.

  37. Soft loan

    A loan provided at below the market INTEREST RATE. Soft loans are used by international agencies to encourage economic activity in DEVELOPING COUNTRIES and to support non-commercial activities.

  38. Sovereign risk

    The RISK that a GOVERNMENT will default on its DEBT or on a loan guaranteed by it.

  39. Speculation

    An attitude to INVESTMENT that is often criticised. According to critics, speculation involves buying or selling a financial ASSET with the aim of making a quick PROFIT. This is contrasted with long-term investment, in which an asset is retained despite short-term fluctuations in its value. Speculators actually play a valuable role in FINANCIAL MARKETS as their appetite for frequent buying and selling provides LIQUIDITY to the markets. This benefits longer-term investors, too, as it enables them to get a good PRICE when they do eventually sell.

  40. Speculative motive

  41. Spot price

    The PRICE quoted for a transaction that is to be made on the spot, that is, paid for now for delivery now. Contrast spot markets with FORWARD CONTRACTS and futures markets, where payment and/or delivery will be made at some future date. Also contrast with long-term contracts, in which a price is agreed for repeated transactions over an extended time period and which may not involve immediate payment in full.

  42. Spread

    The difference between one item and another. A much used term in FINANCIAL MARKETS. Examples are the differences between:

    the bid (what a dealer will pay) and ask or offer (what a dealer will sell for) PRICE of a share or other SECURITY;

    the price an underwriter pays for an issue of BONDS from a company and the price the underwriter charges the public;

    the YIELD on two different bonds.

  43. Stabilisation

    GOVERNMENT policies intended to smooth the economic cycle, expanding DEMAND when UNEMPLOYMENT is high and reducing it when INFLATION threatens to increase. Doing this by FINE TUNING has mostly proved harder than KEYNESIAN policymakers expected, and it has become unfashionable. However, the use of automatic stabilisers remains widespread. For instance, social handouts from the state usually increase during tough times, and taxes increase (FISCAL DRAG), boosting government revenue, when the economy is growing.

  44. Stability and Growth Pact

    Budgetary rules agreed to by Euro Zone countries as a condition of joining the euro. The pact stipulates that all the countries will run a balanced budget in normal times. A government that runs a fiscal deficit bigger than 3% of GDP must take swift corrective action. And if any country breaches the 3% limit for more than three years in a row, it becomes liable to fines of billions of euros. The pact was supposed to be a powerful political symbol that euro-using countries would not cheat each other. However, Portugal became the first country to break the deficit limit by notching up 4.1% in 2001. When, in 2002, France and Germany also exceeded the 3% limit, some EU members were outraged and others lobbied for the pact to be modified or even scrapped.

  45. Stagflation

    Term coined in the 1970s for the twin economic problems of STAGNATION and rising INFLATION. Until then, these two economic blights had not appeared simultaneously. Indeed, policymakers believed the message of the PHILLIPS CURVE: that UNEMPLOYMENT and inflation were alternatives.

  46. Stagnation

    A prolonged RECESSION, but not as severe as a DEPRESSION.

  47. Stakeholders

    All the parties that have an interest, financial or otherwise, in a company, including shareholders, CREDITORS, bondholders, employees, customers, management, the community and GOVERNMENT. How these different interests should be catered for, and what to do when they conflict, is much debated. In particular, there is growing disagreement between those who argue that companies should be run primarily in the interests of their shareholders, in order to maximise shareholder value, and those who argue that the wishes of shareholders should sometimes be traded off against those of other stakeholders.

  48. Standard deviation

    A measure of how far a variable moves over time away from its AVERAGE (mean) value.

  49. Standard error

    A measure of the possible error in a statistical estimate.

  50. Statistical significance

    There are lies, damned lies and statistics, said Benjamin Disraeli, a British prime minister. Certainly, even if the result of number crunching is statistically significant, it does not actually mean it is true. But it does mean it is much more likely to be true than false. Statistical significance means that the PROBABILITY of getting that result by chance is low. The most commonly used measure of statistical significance is that there must be a 95% chance that the result is right and only a 1 in 20 chance of the result occurring randomly.

  51. Sterilised intervention

    When a GOVERNMENT or CENTRAL BANK buys or sells some of its RESERVES of foreign currency this can affect the country’s MONEY SUPPLY. Selling reserves decreases the supply of the domestic currency; buying reserves increases the domestic money supply. Governments or central banks can sterilise (that is, cancel out) this effect of foreign exchange intervention on the money supply by buying or selling an equivalent amount of SECURITIES. For example, if the GOVERNMENT increases reserves by buying foreign currency the domestic money supply will increase, unless it sells securities such as TREASURY BILLS to mop up the extra DEMAND.

  52. Sticky prices

    Petrol-pump PRICES do not change every time the oil price changes, and holiday prices and standard hotel rates are fixed for months. Sticky prices are slow to change in response to changes in SUPPLY or DEMAND. As a result there is, at least temporarily, DISEQUILIBRIUM in the market. The causes of stickiness include MENU COSTS, inadequate information, consumers' dislike of frequent price changes and long-term contracts with fixed prices. Prices change only when the cost of leaving them unchanged exceeds the expense of adjusting them. In FINANCIAL MARKETS, prices move all the time because the cost of quoting the wrong price can be huge. In other industries, the penalty may be much less severe. Small disequilibria in, say, the pricing of hotel rooms will not make much difference. So hotel prices are often sticky.

  53. Stochastic process

    A process that exhibits random behaviour. For instance, Brownian motion, which is often used to describe changes in SHARE prices in an EFFICIENT MARKET (the RANDOM WALK), is a stochastic process.

  54. Stocks

    Another term for SHARES. What are called ordinary shares in the UK are known as common stock in the United States. It is also another word for inventories of goods held by a firm to meet future DEMAND.

  55. Stress-testing

    A process for exploring how a portfolio of ASSETS and/or liabilities would fare in extreme adverse conditions. A useful tool in RISK MANAGEMENT.

  56. Structural adjustment

    A programme of policies designed to change the structure of an economy. Usually, the term refers to adjustment towards a market economy, under a programme approved by the IMF and/or WORLD BANK, which often supply structural adjustment funds to ease the pain of transition. Such policies are much criticised in the developing world, sometimes with good reason.

  57. Structural unemployment

    The hardest sort of UNEMPLOYMENT to cure because it is caused by the structure of an economy rather than by changes in the economic cycle. Contrast with cyclical unemployment, which can, in theory if not always in practice, be cut without sparking INFLATION by stimulating faster economic GROWTH. Structural unemployment can be reduced only by changing the economic structures causing it, for instance, by removing rules that limit LABOUR MARKET FLEXIBILITY.

  58. Subsidy

    MONEY paid, usually by GOVERNMENT, to keep PRICES below what they would be in a free market, or to keep alive businesses that would otherwise go bust, or to make activities happen that otherwise would not take place. Subsidies can be a form of PROTECTIONISM by making domestic goods and SERVICES artificially competitive against IMPORTS. By distorting markets, they can impose large economic costs.

  59. Substitute goods

    Goods for which an increase (or fall) in DEMAND for one leads to a fall (or increase) in demand for the other – Coca-Cola and Pepsi, perhaps.

  60. Substitution effect

    When the PRICE of petrol falls people buy more of it. There are two reasons.

    The INCOME EFFECT: cheaper petrol means that real purchasing power rises, so consumers have more to spend on everything, including petrol.

    The substitution effect: petrol has become cheaper relative to everything else, so people switch some of their CONSUMPTION out of goods that are now relatively more expensive and buy more petrol instead.

  61. Sunk costs

    When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed, for example, spending on ADVERTISING or researching a product idea. They can be a barrier to entry. If potential entrants would have to incur similar costs, which would not be recoverable if the entry failed, they may be scared off.

  62. Supply

    One of the two words economists use most, along with DEMAND. These are the twin driving forces of the market economy. Supply is the amount of a good or service available at any particular PRICE. The law of supply is that, other things remaining the same, the quantity supplied will increase as the price increases. The actual amount supplied will be determined, ultimately, by what the market price is, which depends on the amount demanded as well as what suppliers are willing to produce. What suppliers are willing to supply depends on several things:

    the cost of the FACTORS OF PRODUCTION;


    the price of other goods and SERVICES (which, if high enough, might tempt the supplier to switch production to those products); and

    the ability of the supplier accurately to forecast demand and plan production to make the most of the opportunity.

  63. Supply curve

    A graph of the relationship between the PRICE of a good and the amount supplied at different prices. (See also DEMAND CURVE.)

  64. Supply-side policies

    Increasing economic GROWTH by making markets work more efficiently. In the 1980s, Ronald Reagan and Margaret Thatcher championed supply-side policies as they attacked KEYNESIAN DEMAND management. Pumping up demand without making markets work better would simply lead to higher INFLATION; economic growth would increase only when markets were able to operate more freely. Thus they pursued policies of DEREGULATION, LIBERALISATION and PRIVATISATION and encouraged FREE TRADE. To reduce UNEMPLOYMENT, they tried to increase the EFFICIENCY of the jobs market by cutting the rate of INCOME TAX and attacking legal and other impediments to LABOUR MARKET FLEXIBILITY. The results of these programmes are much debated. In particular, the belief, apparently supported by the LAFFER CURVE, that cutting tax rates would increase tax revenue did not always stand up well to real-world testing. Even so, it is now recognised that supply-side reforms are a crucial element in an effective economic policy.

  65. Sustainable growth

    A term much used by environmentalists, meaning economic GROWTH that can continue in the long term without non-renewable resources being used up or pollution becoming intolerable. Mainstream economists use the term, too, to describe a rate of growth that an economy can sustain indefinitely without causing a rise in INFLATION.

  66. Swap

  67. Systematic risk

    The RISK that remains after DIVERSIFICATION, also known as market risk or undiversifiable risk. It is systematic risk that determines the RETURN earned on a well-diversified portfolio of ASSETS.

  68. Systemic risk

    The RISK of damage being done to the health of the FINANCIAL SYSTEM as a whole. A constant concern of BANK regulators is that the collapse of a single bank could bring down the entire financial system. This is why regulators often organise a rescue when a bank gets into financial difficulties. However, the expectation of such a rescue may create a MORAL HAZARD, encouraging banks to behave in ways that increase systemic risk. Another concern of regulators is that the ­RISK MANAGEMENT methods used by banks are so similar that they may increase systemic risk by creating a tendency for crowd behaviour. In particular, problems in one market may cause banks in general to liquidate positions in other markets, causing a vicious cycle of LIQUIDITY being withdrawn from the financial system as everybody rushes for the emergency exit at once. (See CAPITAL ASSET PRICING MODEL.)

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