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dawn raid a situation in which a potential TAKEOVER bidder for a company buys a substantial shareholding in the target company at current market prices, often through intermediaries (to disguise the identity of the bidder). This shareholding can then be used as a platform for a full takeover bid for all the shares at a stated offer price. See TAKEOVER BID, CITY CODE.

deadweight loss the reduction in CONSUMERS’ SURPLUS and PRODUCERS’ SURPLUS that results when the output of a product is restricted to less than the optimum efficient level that would prevail under PERFECT COMPETITION. Fig. 36 shows the demand and supply curves for a product, and their interaction establishes the equilibrium market price OP. At this price, consumers’ surplus is shown as the diagonally shaded area ABP and producers’ surplus as the vertically shaded area APO. If output is restricted from OQ to OQ₁, then the price paid by consumers would rise to OP₁ and consumers’ surplus would be reduced by the amount ACE, while the price received by producers would fall to OP₂ and producers’ surplus would be reduced by the amount ADE.

Deadweight loss is particularly likely to occur in markets dominated by MONOPOLY suppliers who restrict output in order to keep prices high.

dear money see TIGHT MONEY.

Fig. 36 Deadweight loss. See entry.

death rate the number of people in a POPULATION who die per thousand per year. In 2004, for example, the UK death rate was 10 people per 1,000 of the population. The difference between this rate and the BIRTH RATE is used to calculate the rate of growth of the population of a country over time. The death rate tends to decline as a country attains higher levels of economic development. See DEMOGRAPHIC TRANSITION.

debentures a means of financing companies through fixed-interest LOANS secured against company ASSETS.

In some cases the company may offer a specific asset, such as a particular machine, as security for the loan; in other cases lenders are offered security by means of a general claim against all company assets in the event of default. See LOAN CAPITAL.

debt an amount of money owed by a person, firm or government (the borrower) to a lender. Debts arise when individuals, etc., spend more than their current income or when they deliberately plan to borrow money to purchase specific goods, services or ASSETS (houses, financial securities, etc.). Debt contracts provide for the eventual repayment of the sum borrowed and include INTEREST charges for the duration of the loan. An individual’s debt can include MORTGAGES, INSTALMENT CREDIT, BANK LOANS and OVERDRAFTS; a firm’s debt can include fixed-interest DEBENTURES, LOANS, BILLS OF EXCHANGE and bank loans and overdrafts; a government’s debt can take the form of long-term BONDS and short-term TREASURY BILLS (see NATIONAL DEBT). See PUBLIC SECTOR BORROWING REQUIREMENT. See also INTERNATIONAL DEBT.

debt capital see LOAN CAPITAL.

debt financing the financing of firms’ and governments’ deficits by the issue of FINANCIAL SECURITIES such as short-dated company BILLS OF EXCHANGE and government TREASURY BILLS, and, in the case of government, longer-term BONDS. See PUBLIC SECTOR BORROWING REQUIREMENT.

debtor a person or business that owes money to individuals or firms for goods, services or raw materials that they have bought but for which they have not yet paid (trade debtors) or because they have borrowed money. Debtors are also termed ‘accounts receivable’. See CREDITORS, DEBT, CREDIT CONTROL, WORKING CAPITAL, BAD DEBT.

debtor nation a country that has had more invested in it than it has invested abroad. A debtor nation has to pay out more interest and dividends on investments made in the country than it receives, with a consequent deficit in its BALANCE OF PAYMENTS. Many DEVELOPING COUNTRIES are debtor nations. Compare CREDITOR COUNTRY.

debt servicing the cost of meeting INTEREST payments and regular contractual repayments of principal on a LOAN along with any administration charges borne by the BORROWER.

decentralization the diffusion of economic decision-making to many different decision-makers rather than concentrating such decision-making centrally. In an economy this is achieved by the adoption of the PRICE SYSTEM, which devolves decisions to individual consumers and suppliers. In a firm, decentralization involves delegating authority to make decisions ‘down the line’ to particular divisions and departments. See PRIVATE ENTERPRISE ECONOMY, M-FORM ORGANIZATION.

decision tree a graphical representation of the decision-making process in relation to a particular economic decision. The decision tree illustrates the possibilities open to the decision-maker in choosing between alternative strategies. It is possible to specify the financial consequence of each ‘branch’ of the decision tree and to gauge the PROBABILITY of particular events occurring that might affect the consequences of the decisions made. See RISK AND UNCERTAINTY.

decreasing returns to scale see DISECONOMIES OF SCALE.

decreasing returns to the variable-factor input see DIMINISHING RETURNS.

deferred compensation payment schemes that pay lower wages during the early years of employment in an organization and higher wages in subsequent years. With deferred compensation schemes, a worker’s remuneration increases with seniority and experience, which tend to improve the worker’s efficiency within the organization. Such compensation schemes tend to reduce labour turnover and reduce SHIRKING. See PAY.

deficiency payment see INCOME SUPPORT.

deficit see BUDGET DEFICIT, BALANCE OF PAYMENTS.

deficit financing see BUDGET DEFICIT, PUBLIC SECTOR BORROWING REQUIREMENT.

deflation a reduction in the level of NATIONAL INCOME and output usually accompanied by a fall in the general price level (DISINFLATION).

A deflation is often deliberately brought about by the authorities in order to reduce INFLATION and to improve the BALANCE OF PAYMENTS by reducing import demand. Instruments of deflationary policy include fiscal measures (e.g. tax increases) and monetary measures (e.g. high interest rates). See MONETARY POLICY, FISCAL POLICY.

deflationary gap or output gap the shortfall in total spending (AGGREGATE DEMAND) at the FULL EMPLOYMENT level of national income (POTENTIAL GROSS NATIONAL PRODUCT). Because of a deficiency in spending, some of the economy’s resources lie idle and ACTUAL GROSS NATIONAL PRODUCT is below that of potential GNP. To counteract this deficiency in spending, the authorities can use FISCAL POLICY and MONETARY POLICY to expand aggregate demand. See Fig. 37. See also DEFLATION, REFLATION, INFLATIONARY GAP.

DEFRA see DEPARTMENT FOR THE ENVIRONMENT, FOOD AND RURAL AFFAIRS.

deindustrialization a sustained fall in the proportion of national output accounted for by the industrial and manufacturing sectors of the economy, a process that is often accompanied by a decline in the number of people employed in industry (compare INDUSTRIALIZATION).

There is a well-established trend in advanced economics for the industrial sector to grow more slowly than the service sector, as shown in Fig. 38. For the UK, the share of industry in GDP fell from 43% in 1960 to 29% in 2002, while the share of services increased from 54% to 70%. Over the same period, employment in industry in the UK fell from 11.8 million in 1960 to 3.7 million in 2003.

Fig. 37 Deflationary gap. (a) The AGGREGATE SUPPLY SCHEDULE is drawn as a 45-degree line because businesses will offer any particular level of output only if they expect total spending (aggregate demand) to be just sufficient to sell all of that output. However, once the economy reaches the full employment level of national income (OY₁), then actual output cannot expand further and at this level of output the aggregate supply schedule becomes vertical. (b) Alternatively, aggregate supply can be depicted in terms of the various levels of real national income supplied at each price level. Again, once the economy reaches the full employment level of real national income, the aggregate supply schedule becomes vertical. In both (a) and (b), if aggregate demand is at a low level (AD₁), then actual output (OY) will be determined by the intersection of AD₁ and the aggregate supply schedule at point A; this output (OY) is less than potential output (OY₁), leaving an output gap. An output gap can be removed by the authorities by expanding aggregate demand to the full employment level of aggregate demand (AD₂) where actual output (determined by the intersection of AD₂ and the aggregate supply schedule at point B) corresponds with potential GNP.

Changes in sector shares may simply reflect changes in the pattern of final demand for goods and services over time, and as such may be considered a ‘natural’ development associated with a maturing economy. On the other hand, deindustrialization that stems from supply-side deficiencies (high costs, an overvalued exchange rate, lack of investment and innovation) which put a country at a competitive disadvantage in international trade (see IMPORT PENETRATION) is a more serious matter. In this case, deindustrialization often brings with it a fall in national output, rising unemployment and balance of payments difficulties.

The extent of deindustrialization in the UK was even more marked in the early 1980s because of Britain’s artificially high exchange rate, bolstered by UK oil exports, which caused Britain to lose overseas markets. See STRUCTURE OF INDUSTRY, STRUCTURAL UNEMPLOYMENT.

Fig. 38 Deindustrialization. The distribution of gross national product shows how the industrial sector in advanced economics grows more slowly than the service sector. The figures for industry include those for manufacturing. Source: World Development Report, World Bank, 2004.

delivered pricing the charging of a PRICE for a product that includes the cost of transporting the product from the manufacturer to the customer. The delivered prices quoted by a manufacturer might accurately reflect the actual costs of transportation to different areas, or alternatively, discriminatory prices might be used to cross-subsidize areas in order to maximize sales across the country. See BASING POINT PRICE SYSTEM.

delivery note a document sent by a supplier to a customer at the time when products are supplied that itemizes the physical quantities of product supplied. Thereafter an INVOICE is usually sent to the customer showing the money value of products supplied. Compare STATEMENT OF ACCOUNT.

demand or effective demand the WANT, need or desire for a product backed by the money to purchase it. In economic analysis, demand is always based on ‘willingness and ability to pay’ for a product, not merely want or need for the product. CONSUMERS’ total demand for a product is reflected in the DEMAND CURVE. Compare SUPPLY.

demand curve a line showing the relationship between the PRICE of a PRODUCT or FACTOR OF PRODUCTION and the quantity DEMANDED per time period, as in Fig. 39.

Most demand curves slope downwards because (a) as the price of the product falls, consumers will tend to substitute this (now relatively cheaper) product for others in their purchases; (b) as the price of the product falls, this serves to increase their real income, allowing them to buy more products (see PRICE EFFECT, INCOME EFFECT, SUBSTITUTION EFFECT). In a small minority of cases, however, products can have an UPWARD-SLOPING CURVE.

The slope of the demand curve reflects the degree of responsiveness of quantity demanded to changes in the product’s price. For example, if a large reduction in price results in only a small increase in quantity demanded (as would be the case where the demand curve has a steep slope) then demand is said to be price inelastic (see PRICE-ELASTICITY OF DEMAND).

The demand curve interacts with the SUPPLY CURVE to determine the EQUILIBRIUM MARKET PRICE. See DEMAND FUNCTION, DEMAND CURVE (SHIFT IN), DIMINISHING MARGINAL UTILITY, MARGINAL REVENUE PRODUCT.

Fig. 39 Demand curve. Demand is the total quantity of a good or service that buyers are prepared to purchase at a given price. Demand is always taken to be effective demand, backed by the ability to pay, and not just based on want or need. The typical market demand curve slopes downwards from left to right, indicating that as price falls more is demanded (that is, a movement along the existing demand curve). Thus, if price falls from OP₁ to OP₂, the quantity demanded will increase from OQ₁ to OQ₂.

demand curve (shift in) a movement of the DEMAND CURVE from one position to another (either left or right) as a result of some economic change other than price. A given demand curve is always drawn on the CETERIS PARIBUS assumption that all the other factors affecting demand (income, tastes, etc.) are held constant. If any of these changes, however, then this will bring about a shift in the demand curve. For example, if income increases, the demand curve will shift to the right, so that more is now demanded at each price than formerly. See Fig. 40. See also DEMAND FUNCTION, INCOME-ELASTICITY OF DEMAND.

Fig. 40 Demand curve (shift in). An increase in income shifts the demand curve D₁D₁ to D₂D₂, increasing the quantity demanded from OQ₁, to OQ₂. The magnitude of this shift depends upon the INCOME ELASTICITY OF DEMAND for the product.

demand deposit see BANK DEPOSIT, COMMERCIAL BANK.

demand elasticity see ELASTICITY OF DEMAND.

demand for a factor input see DERIVED DEMAND.

demand function a form of notation that links the DEPENDENT VARIABLE, quantity demanded (Qd), with various INDEPENDENT VARIABLES that determine quantity demanded such as product price (P), income (Y), prices of substitute products (Ps), advertising (A), etc.:

Qd = f(P, Y, Ps, A, etc)

Changes in any of these independent variables will affect quantity demanded, and if we wish to investigate the particular effect of any one of these variables upon quantity demanded, then we could (conceptually) hold the influence of the other independent variables constant (CETERIS PARIBUS), whilst we focus upon the particular effects of that independent variable. See DEMAND CURVE, DEMAND CURVE (SHIFT IN).

demand management or stabilization policy

The control of the level of AGGREGATE DEMAND in an economy, using FISCAL POLICY and MONETARY POLICY to moderate or eliminate fluctuations in the level of economic activity associated with the BUSINESS CYCLE. The general objective of demand management is to ‘fine-tune’ aggregate demand so that it is neither deficient relative to POTENTIAL GROSS NATIONAL PRODUCT (thereby avoiding a loss of output and UNEMPLOYMENT) nor overfull (thereby avoiding INFLATION).

An unregulated economy will tend to go through periods of depression and boom as indicated by the continuous line in Fig. 41. Governments generally try to smooth out such fluctuations by stimulating aggregate demand when the economy is depressed and reducing aggregate demand when the economy is over-heating. Ideally, the government would wish to manage aggregate demand so that it grows exactly in line with the underlying growth of potential GNP, the dashed line in Fig. 41, exactly offsetting the amplitude of troughs and peaks of the business cycle.

Two main problems exist, however:

(a) the establishment of the correct timing of such an INJECTION or WITHDRAWAL;

(b) the establishment of the correct magnitude of an injection or withdrawal into the economy (to counter depressions and booms). With perfect timing and magnitude, the economy would follow the trend line of potential GNP.

A number of stages are involved in applying a stabilization policy as shown in the figure. For example, at time period zero the onset of a recession/depression would be reflected in a downturn in economic activity, although delays in the collection of economic statistics means that it is often time period 1 before data becomes available about unemployment rates, etc. Once sufficient data is to hand, the authorities are able to diagnose the nature of the problem (time period 2) and to plan appropriate intervention, such as tax cuts or increases in government expenditure (time period 3). At time period 4, the agreed measures are then implemented, although it may take some time before these measures have an effect on CONSUMPTION, INVESTMENT, IMPORTS, etc. (see MULTIPLIER). If the timing of these activities is incorrect, then the authorities may find that they have stimulated the economy at a time when it was already beginning to recover from recession/depression, so that their actions have served to exacerbate the original fluctuation (dotted line 1 in Fig. 41). The authorities could also exacerbate the fluctuation (dotted line 1) if they get the magnitudes wrong by injecting too much purchasing power into the economy, creating conditions of excess demand.

If the authorities can get the timing and magnitudes correct, then they should be able to counterbalance the effects of recession/depression and follow the path indicated as dotted line 2 in Fig. 41. Reducing the intensity of the recession in this way requires the authorities to FORECAST accurately the onset of recession some time demand management ahead, perhaps while the economy is still buoyant (time period 6). On the basis of these forecasts, the authorities can then plan their intervention to stimulate the economy (time period 7), activate these measures (time period 8), so that these measures begin to take effect and stimulate the economy as economic activity levels fall (time period 9).

Much government action is inaccurate in timing because of the institutional and behavioural complexities of the economy. Where the government has not been successful in adequately eradicating such peaks and troughs in the business cycle, it is frequently accused of having stop-go policies (see STOP-GO CYCLE), that is, of making injections into a recovering economy, which then ‘overheats’, and subsequently withdrawing too much at the wrong time, ‘braking’ too hard.

Demand management represents one facet of government macroeconomic policy, other important considerations being SUPPLY-SIDE policies, which affect the rate of growth of potential GNP, and EXCHANGE RATE policies, which affect the competitiveness of internationally traded goods and services. See DEFLATIONARY GAP, INFLATIONARY GAP, EQUILIBRIUM LEVEL OF NATIONAL INCOME, AUTOMATIC (BUILT-IN) STABILIZERS, INTERNAL-EXTERNAL BALANCE MODEL, PUBLIC FINANCE, BUDGET.

Fig. 41 Demand management. The management of aggregate demand in an economy.

demand-pull inflation a general increase in prices caused by a level of AGGREGATE DEMAND in excess of the supply potential of the economy. At full employment levels of output (POTENTIAL GROSS NATIONAL PRODUCT), excess demand bids up the price of a fixed real output (see INFLATIONARY GAP). According to MONETARISM, excess demand results from too rapid an increase in the MONEY SUPPLY. See INFLATION, QUANTITY THEORY OF MONEY, COST-PUSH INFLATION.

demand schedule a table listing various prices of a product and the specific quantities demanded at each of these prices. The information provided by a demand schedule can be used to construct a DEMAND CURVE showing the price-quantity demanded relationship in graphical form.

demand theory see THEORY OF DEMAND.

demerger the break-up of a company, often originally formed through a MERGER, into two (or more) separate companies. This is most easily achieved when the original businesses comprising the merger have continued to be run as separate divisions of the enlarged group. In this case, for example, the A-B company could be split into separate quoted companies, A and B, with the company’s existing shareholders being given shares in both companies. Thus, unlike a DIVESTMENT (the sale of a division to outside interests) or a MANAGEMENT BUY-OUT (the sale of a division to its existing management), initially at least the companies continue to be owned by their existing shareholders.

A demerger may occur because the merged company has failed to perform up to expectations because of internal conflicts of management, or may result from a rethink of the company’s BUSINESS STRATEGY favouring a concentration on ‘core’ businesses.

Fig. 42 Demographic transition. The levelling-off of the rate of population growth during a country’s economic development.

demographic transition a POPULATION cycle that is associated with the ECONOMIC DEVELOPMENT of a country. In underdeveloped countries (i.e. subsistence agrarian economics), BIRTH RATES and DEATH RATES are both high, so there is very little change in the overall size of the population. With economic development (i.e. INDUSTRIALIZATION), INCOME PER HEAD begins to rise and there is a fall in the DEATH RATE (through better nutrition, sanitation, medical care, etc.), which brings about a period of rapid population growth. Provided ECONOMIC GROWTH is consistently greater than the increase in population, income per head continues to expand and eventually serves to reduce the BIRTH RATE (small families become the ‘norm’ in society as people seek to preserve their growing affluence). At this point, population growth slows down and may eventually level off. See Fig. 42.

Most advanced industrial countries have gone through a demographic transition of the kind described above and are today characterized by both low birth and death rates and slow-growing populations. See POPULATION TRAP, DEVELOPING COUNTRY.

denationalization see PRIVATIZATION.

demography the study of human POPULATIONS, including their total size, population changes over time as determined by changes in BIRTH RATES, DEATH RATES and MIGRATION; the age and sex distribution of populations and their geographical and occupational distributions. Statistical data on populations is compiled from CENSUSES of population and records of births, See DEMOGRAPHIC TRANSITION.

Department for Education and Skills (DfES) the UK government department responsible for administering the government’s general educational programmes, including schools, colleges and universities, and vocational training schemes. The Department for Education and Skills replaced part of the former Department for Education and Employment in 2001. The emphasis in education is one of providing young people with a basic general education through schools, followed by further education opportunities at colleges and universities, with a commitment thereafter to ‘lifetime learning’ so as to equip people with the necessary basic and vocational skills to be able to adapt to the changing needs of the workplace. This is augmented by more specialized vocational schemes to match up people’s educational capabilities with the practical requirements of specific work tasks through ‘on-the-job-training’ (see TRAINING) and the provision of courses designed to teach people new skills (e.g. computer programming courses). See LEARNING AND SKILLS COUNCIL.

Department for International Development (DFID) the UK government department responsible for administering the government’s policies of promoting sustainable development and reducing poverty in DEVELOPING COUNTRIES. The DFID itself provides ECONOMIC AID and works with various multilateral institutions such as the WORLD BANK and the United Nations to provide financial and technical aid to poor countries.

Department for the Environment, Food and Rural Affairs (DEFRA) the UK body responsible for government policies on agriculture, horticulture, fisheries and the food chain; POLLUTION issues relating to waste and recycling; the enhancement and protection of the countryside, waterways and flood defence, hunting, and rural development issues. See ENVIRONMENT AGENCY.

Department for Transport the UK government department responsible for administering government policies relating to the roads, railways, aviation and shipping.

Department for Work and Pensions (DWP) the UK government department responsible for administering the government’s employment and social security programmes. The DWP was formed in 2001 from parts of the former Department of Social Security and Department for Education and Employment and the Employment Service.

The department assists UNEMPLOYED people of working age into employment, helps employers to fill VACANCIES and provides financial support to persons unable to help themselves through ‘back-to-work’ programmes.

The DWP also administers the SOCIAL SECURITY BENEFITS system, paying state pensions, sickness benefit, child support and the JOBSEEKERS ALLOWANCE.

In 2002 the former Benefits Agency and the Employment Service were replaced by the JOBCENTRE PLUS network (responsible for helping people to find jobs and paying benefits to people of working age) and the Pension Service (responsible for paying state pensions).

Regarding employment, a particular concern of the Department is to instil in people a culture of employment as being the norm but at the same time playing down the negative aspects of unemployment. This more positive approach is reflected in the work of the DWP’s agency Jobcentre Plus and its nationwide network of JOB CENTRES, the introduction of the jobseekers allowance as a replacement for unemployment benefit and the NEW DEAL programme aimed at reducing youth unemployment and long-term unemployment amongst older workers.

The DWP is also responsible for conducting the fact-finding LABOUR FORCE SURVEY, which provides data on conditions in the labour market, for overseeing the application of the UK’s EMPLOYMENT LAWS, and for implementing employee rights’ regulations issued by the European Union (see, for example, the WORKING TIME REGULATION).

Department of Health (DoH) the UK government department responsible for administering the National Health Service.

Department of Social Security see DEPARTMENT FOR WORK AND PENSIONS.

department store a large RETAIL OUTLET. Department stores may be under single-shop ownership or run as a multiple CHAIN STORE business. Unlike most other retailers, who tend to specialize in relatively narrow ranges of products, the essential characteristic of a department store is the great variety of products it stocks: ‘everything under one roof’. See RETAILER, DISTRIBUTION CHANNEL.

Department of Trade and Industry (DTI) the UK government office that is primarily responsible for implementing and administering the government’s industrial and trade policies. A particular concern at the DTI is the promotion of greater efficiency through an INDUSTRIAL POLICY programme that includes support for new business start-ups, consultancy services for small firms, research and development, and technology transfer. In the past, the DTI has been required by governments to involve itself in the rationalization of declining industries and support for ‘failing’ firms, but at the present time the emphasis is very much on fostering greater ‘enterprise’ by business itself with a minimum of direct state intervention. See SMALL BUSINESS SERVICE, BUSINESS LINK.

The DTI is responsible for the operation of REGIONAL POLICY, vetting applications for regional selective assistance by firms investing in ASSISTED AREAS. The DTI works closely with the OFFICE OF FAIR TRADING in matters affecting COMPETITION POLICY; the DTI regulates the formation of companies and their conduct, through the COMPANY REGISTRAR, and is responsible for issuing licences to deposit-taking institutions and authorizing dealers in stocks and shares, etc. (see FINANCIAL SERVICES ACT 1986). Finally, the DTI plays a prominent part in the running of the UK’s overseas trade and investment affairs, representing the country’s interests at international (WORLD TRADE ORGANIZATION) and regional levels (EUROPEAN UNION). The DTI is important in the promotion of exports and foreign investment through the TRADE PARTNERS network and related back-up facilities and services including the EXPORT CREDIT GUARANTEE DEPARTMENT.

dependent variable a variable that is affected by some other variable in a model. For example, the demand for a product (the dependent variable) will be influenced by its price (the INDEPENDENT VARIABLE). It is conventional to place the dependent variable on the left-hand side of an EQUATION. See DEMAND FUNCTION, SUPPLY FUNCTION.

deposit account or time account or savings account an individual’s or company’s account at a COMMERCIAL BANK into which the customer can deposit cash or cheques and from which he or she can draw out money subject to giving notice to the bank. Deposit accounts (unlike CURRENT ACCOUNTS, which are used to finance day-to-day transactions) are mainly held as a form of personal and corporate SAVING and used to finance irregular ‘one-off’ payments. INTEREST is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time. Unlike with a current account, cheques cannot generally be drawn against deposit accounts. See BANK DEPOSIT.

Fig. 43 Depreciation. (a) A depreciation of the pound against the dollar. (b)The effect of depreciation on export and import prices.

depreciation

1 a fall in the value of a CURRENCY against other currencies under a FLOATING EXCHANGE-RATE SYSTEM, as shown in Fig. 43 (a). A depreciation of a currency’s value makes IMPORTS (in the local currency) more expensive and EXPORTS (in the local currency) cheaper, thereby reducing imports and increasing exports, and so assisting in the removal of a BALANCE OF PAYMENTS deficit. For example, as shown in Fig. 43 (b), if the pound-dollar exchange rate depreciates from £1.60 to £1.40, then this would allow British exporters to reduce their prices by a similar amount, thus increasing their price competitiveness in the American market (although they may choose not to reduce their prices by the full amount of the depreciation in order to boost profitability or devote more funds to sales promotion, etc.) By the same token, the depreciation serves to raise the sterling price of American products imported into Britain, thereby making them less price-competitive than British products in the home market.

In order for a currency depreciation to ‘work’, four basic conditions must be satisfied:

(a) how successful the depreciation is depends on the reactions of export and import volumes to the change in relative prices, i.e. the PRICE ELASTICITY OF DEMAND for exports and imports. If these volumes are low, i.e. demand is inelastic, trade volumes will not change much and the depreciation may in fact worsen the situation. On the other hand, if export and import demand is elastic then the change in trade volume will improve the payments position. Balance-of-payments equilibrium will be restored if the sum of export and import elasticities is greater than unity (the MARSHALL-LERNER CONDITION);

(b) on the supply side, resources must be available, and sufficiently mobile, to be switched from other sectors of the economy into industries producing exports and products that will substitute for imports. If the economy is fully employed already, domestic demand will have to be reduced and/or switched by deflationary policies to accommodate the required resource transference;

(c) over the longer term, ‘offsetting’ domestic price, rises must be contained. A depreciation increases the cost of essential imports of raw materials and foodstuffs, which can push up domestic manufacturing costs and the cost of living. This in turn can serve to increase domestic prices and money wages, thereby necessitating further depreciations to maintain price competitiveness;

(d) finally, a crucial requirement in underpinning the ‘success’ of the above factors and in maintaining long-run equilibrium is for there to be a real improvement in the country’s industrial efficiency and international competitiveness. (See ADJUSTMENT MECHANISM entry for further discussion.) See BALANCE-OF-PAYMENTS EQUILIBRIUM, INTERNAL-EXTERNAL BALANCE MODEL, PRICE ELASTICITY OF SUPPLY. Compare APPRECIATION 1.

2 the fall in the value of an ASSET during the course of its working life. Also called amortization. The condition of plant and equipment used in production deteriorates over time, and these items will eventually have to be replaced. Accordingly, a firm is required to make financial provision for the depreciation of its assets.

Depreciation is an accounting means of dividing up the historic cost of a FIXED ASSET over a number of accounting periods that correspond with the asset’s estimated life. The depreciation charged against the revenue of successive time periods in the PROFIT-AND-LOSS ACCOUNT serves to spread the original cost of a fixed asset, which yields benefits to the firm over several trading periods. In the period end BALANCE SHEET, such an asset would be included at its cost less depreciation deducted to date. This depreciation charge does not attempt to calculate the reducing market value of fixed assets, so that balance sheets do not show realization values.

Depreciation formulas base the depreciation charge on the HISTORIC COST of fixed assets. During a period of INFLATION, however, it is likely that the REPLACEMENT COST of an asset is likely to be higher than its original cost. Thus, prudent companies need to make provision for higher replacement costs of fixed assets. See INFLATION ACCOUNTING, CAPITAL CONSUMPTION, APPRECIATION 2.

depressed area an area of a country suffering from industrial decline, resulting in an UNEMPLOYMENT rate that is significantly higher, and a level of INCOME PER HEAD that is significantly lower, than the national average. This situation can be tackled by REGIONAL POLICIES aimed at encouraging new firms and industries to locate in the area by offering them financial and other assistance. See ASSISTED AREA.

depression a phase of the BUSINESS CYCLE characterized by a severe decline (slump) in the level of economic activity (ACTUAL GROSS NATIONAL PRODUCT). Real output and INVESTMENT are at very low levels and there is a high rate of UNEMPLOYMENT. A depression is caused mainly by a fall in AGGREGATE DEMAND and can be reversed provided that the authorities evoke expansionary FISCAL POLICY and MONETARY POLICY. See DEFLATIONARY GAP, DEMAND MANAGEMENT.

deregulation the removal of controls over economic activity that have been imposed by the government or some other regulatory body (for example, an industry trade association). Deregulation may be initiated either because the controls are no longer seen as necessary (for example, the ending of PRICE CONTROLS to combat inflation) or because they are overly restrictive, preventing companies from taking advantage of business opportunities; for example, the ending of most FOREIGN EXCHANGE CONTROLS by the UK in 1979 was designed to liberalize overseas physical and portfolio investment.

Deregulation has assumed particular significance in the context of recent initiatives by the UK government to stimulate greater competition by, for example, allowing private companies to compete for business in areas (such as local bus and parcel services) hitherto confined to central government or local authority operators. See COMPETITIVE TENDERING.

Conversely, government initiatives can be seen to have promoted regulation insofar as, for example, the PRIVATIZATION of nationalized industries has in some cases led to greater regulation of their activities via the creation of regulatory agencies (such as Ofgas in the case of the gas industry and Oftel in the case of the telecommunications industry) to ensure that the interests of consumers are protected.

derivative a financial instrument such as an OPTION or SWAP the value of which is derived from some other financial asset (for example, a STOCK or SHARE) or indices (for example, a price index for a commodity such as cocoa). Derivatives are traded on the FUTURES MARKETS and are used by businesses and dealers to ‘hedge’ against future movements in share, commodity, etc., prices and by speculators seeking to secure windfall profits. See LONDON INTERNATIONAL FINANCIAL FUTURES EXCHANGE (LIFFE), STOCK EXCHANGE.

derived demand the DEMAND for a particular FACTOR INPUT or PRODUCT that is dependent on there being a demand for some other product. For example, the demand for labour to produce motor cars is dependent on there being a demand for motor cars in the first place; the demand for tea cups is dependent on there being a demand for tea. See MARGINAL REVENUE PRODUCT, FACTOR MARKETS, COMPLEMENTARY PRODUCTS.

deseasonalized data see TIME SERIES ANALYSIS.

design rights the legal ownership by persons or businesses of original designs of the shape or configuration of industrial products. In the UK, the COPYRIGHT, DESIGNS AND PATENTS ACT 1988 gives protection to the creators of industrial designs against unauthorized copying for a period of ten years after the first marketing of the product.

Fig. 44 Devaluation. A devaluation of the pound against the dollar.

devaluation an administered reduction in the EXCHANGE RATE of a currency against other currencies under a FIXED EXCHANGE-RATE SYSTEM; for example, the lowering of the UK pound (£) against the US dollar ($) from one fixed or ‘pegged’ level to a lower level, say from £1 = $3 to £1 = $2, as shown in Fig. 44. Devaluations are resorted to by governments to assist in the removal of a BALANCE OF PAYMENTS DEFICIT. The effect of a devaluation is to make IMPORTS (in the local currency) more expensive, thereby reducing import demand, and EXPORTS (in the local currency) cheaper, thereby acting as a stimulus to export demand. Whether or not a devaluation ‘works’ in achieving balance of payments equilibrium, however, depends on a number of factors, including: the sensitivity of import and export demand to price changes, the availability of resources to expand export volumes and replace imports and, critically over the long term, the control of inflation to ensure that domestic price rises are kept in line with or below other countries’ inflation rates. (See DEPRECIATION 1 for further discussion of these matters.) Devaluations can affect the business climate in a number of ways but in particular provide firms with an opportunity to expand sales and boost profitability. A devaluation increases import prices, making imports less competitive against domestic products, encouraging domestic buyers to switch to locally produced substitutes. Likewise, a fall in export prices is likely to cause overseas customers to increase their demand for the country’s exported products in preference to locally produced items and the exports of other overseas producers. If the pound, as in our example above, is devalued by one-third, then this would allow British exporters to reduce their prices by a similar amount, thus increasing their price competitiveness in the American market. Alternatively, they may choose not to reduce their prices by the full amount of the devaluation in order to increase unit profit margins and provide additional funds for advertising and sales promotion, etc. Compare REVALUATION. See INTERNAL-EXTERNAL BALANCE MODEL.

developed country an economically advanced country the economy of which is characterized by large industrial and service sectors, high levels of gross national product and INCOME PER HEAD. See Fig. 51. See STRUCTURE OF INDUSTRY, DEVELOPING COUNTRY, ECONOMIC DEVELOPMENT.

developing country or less developed country or underdeveloped country or emerging country or Third World country a country characterized by low levels of GROSS NATIONAL PRODUCT and INCOME PER HEAD. See Fig. 51. Such countries are typically dominated by a large PRIMARY SECTOR thatproduces a limited range of agricultural and mineral products and in which the majority of the POPULATION exists at or near subsistence levels, producing barely enough for their immediate needs, thus being unable to release the resources required to support a large urbanized industrial population. The term ‘developing’ indicates that, as seen by most such countries, the way to improve their economic fortunes is to diversify the industrial base of the economy by, in particular, establishing new manufacturing industries and by adopting the PRICE SYSTEM. To facilitate an increase in urban population necessary for INDUSTRIALIZATION, a nation may either IMPORT the necessary commodities from abroad with the FOREIGN EXCHANGE earned from the EXPORT of the (predominantly) primary goods, or it can attempt to improve its own agriculture. With appropriate ECONOMIC AID from industrialized countries and the ability and willingness on the part of a developing country, the transition into a NEWLY INDUSTRIALIZED COUNTRY could be made.

Certain problems do exist, however. For instance, increases in real income that are achieved need to be maintained, which means keeping population numbers in check. Illiteracy and social customs for large families tend to work against governmental efforts to increase the STANDARD OF LIVING of its citizens. Also, most of the foreign exchange earned by such countries is by exporting, mainly commodities (see INTERNATIONAL TRADE). See ECONOMIC DEVELOPMENT, STRUCTURE OF INDUSTRY, DEMOGRAPHIC TRANSITION, POPULATION TRAP, INTERNATIONAL COMMODITY AGREEMENTS, UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, INTERNATIONAL DEBT.

development area an area of the country formerly designated under UK REGIONAL POLICY (for example, the Northeast and South Wales) as qualifying for financial and other assistance in order to promote industrial regeneration. Development Areas reconfigured (in 2002) as ‘Tier 1 ASSISTED AREAS’ under a joint UK/EUROPEAN UNION regional policy programme. Development/Tier 1 areas are characterized by UNEMPLOYMENT rates that are significantly higher, and levels of INCOME PER HEAD that are significantly lower, than the national average. To remedy this situation, the usual practice is to encourage the establishment of new firms, the expansion of existing firms and the establishment of new industries by offering a variety of investment incentives: investment grants and allowances, tax write-offs, rent- and rate-free (or reduced) factories, etc.

In the UK, firms investing in the assisted areas are offered REGIONAL SELECTIVE ASSISTANCE, which is given on a discretionary basis to cover capital and training costs for projects that meet specified job-creation criteria.

development economics the branch of economics that seeks to explain the processes by which a DEVELOPING COUNTRY increases in productive capacity, both agricultural and industrial, in order to achieve sustained ECONOMIC GROWTH.

Much work in development economics has focused on the way in which such growth can be achieved, for instance, the question of whether agriculture ought to be developed in tandem with industry, or whether leading industries should be allowed to move forward independently, so encouraging all other sectors of society. Another controversial question is whether less developed countries are utilizing the most appropriate technology. Many economists argue for intermediate technology as most appropriate rather than very modern plants initially requiring Western technologists and managers to run them. Socio-cultural factors are also influential in attempting to achieve take-off into sustained economic growth. See ECONOMIC DEVELOPMENT, INFANT INDUSTRY.

differentiated product see PRODUCT DIFFERENTIATION.

differentiation competition strategy see COMPETITIVE STRATEGY.

diffusion the process whereby INNOVATIONS are accepted and used by firms and consumers through imitation, licensing agreements or sale of products and patents.

diminishing average returns see DIMINISHING RETURNS.

diminishing marginal rate of substitution see MARGINAL RATE OF SUBSTITUTION.

diminishing marginal returns see DIMINISHING RETURNS.

diminishing marginal utility a principle that states that as an individual consumes a greater quantity of a product in a particular time period, the extra satisfaction (UTILITY) derived from each additional unit will progressively fall as the individual becomes satiated with the product. See Fig. 45.

The principle of diminishing MARGINAL UTILITY can be used to explain why DEMAND CURVES for most products are downward sloping, since if individuals derive less satisfaction from successive units of the product they will only be prepared to pay a lower price for each unit.

Demand analysis can be conducted only in terms of diminishing marginal utility if CARDINAL UTILITY measurement is possible. In practice, it is not possible to measure utility precisely in this way, so demand curves are now generally constructed from INDIFFERENCE CURVES, which are based upon ORDINAL UTILITY. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE.

diminishing returns the law in the SHORT-RUN theory of supply of diminishing marginal returns or variable factor proportions that states that as equal quantities of one VARIABLE FACTOR INPUT are added into the production function (the quantities of all other factor inputs remaining fixed), a point will be reached beyond which the resulting addition to output (that is, the MARGINAL PHYSICAL PRODUCT of the variable input) will begin to decrease, as shown in Fig. 46.

As the marginal physical product declines, this will eventually cause AVERAGE PHYSICAL PRODUCT to decline as well (diminishing average returns). The marginal physical product changes because additional units of the variable factor input do not add equally readily to units of the fixed factor input.

Fig. 45 Diminishing marginal utility. To a hungry man the utility of the first slice of bread consumed will be high (O₂) but as his appetite becomes satiated, successive slices of bread yield smaller and smaller amounts of satisfaction; for example, the fifth slice of bread yields only O_b of additional utility.

At a low level of output, marginal physical product rises with the addition of more variable inputs to the (underworked) fixed input, the extra variable inputs bringing about a more intensive use of the fixed input.

Fig. 46 Diminishing returns. The rise and fall of units of output as units of variable factor input are added to the production function.

Eventually, as output is increased, an optimal factor combination is attained at which the variable and fixed inputs are mixed in the most appropriate proportions to maximize marginal physical product. Thereafter, further additions of variable inputs to the (now overworked) fixed input leads to a less than proportionate increase in output so that marginal physical product declines. See RETURNS TO THE VARIABLE FACTOR INPUT.

direct cost the sum of the DIRECT MATERIALS COST and DIRECT LABOUR COST of a product. Direct cost tends to vary proportionately with the level of output. See VARIABLE COST.

direct debit see COMMERCIAL BANK.

direct investment any expenditure on physical ASSETS such as plant, machinery and stocks. See INVESTMENT.

directive (bank) an instrument of MONETARY POLICY involving the control of bank lending as a means of regulating the MONEY SUPPLY. If, for example, the monetary authorities wish to lower the money supply, they can ‘direct’ the banks to reduce the total amount of loan finance made available to personal and corporate borrowers. A reduction in bank lending can be expected to lead to a multiple contraction of bank deposits and, hence, a fall in the money supply. See BANK DEPOSIT CREATION.

direct labour 1 that part of the labour force in a firm that is directly concerned with the manufacture of a good or the provision of a service. Contrast INDIRECT LABOUR.

2 workers employed directly by local or central government to perform tasks rather than contracting out such tasks to private-sector companies. For example, a local authority might employ its own permanent construction workers to repair council houses rather than putting such repair work out to local firms. See VARIABLE COST, PRIVATIZATION.

direct marketing see DIRECT SELLING.

direct materials raw materials that are incorporated in a product. Compare INDIRECT MATERIALS. See VARIABLE COST.

direct selling/marketing a method of selling and buying goods and services that enables a supplier to sell direct to the final customer without the need for traditional ‘middlemen’ – wholesalers and retailers. Direct selling can be undertaken through catalogues (see MAIL ORDER) or by ‘clip-out’ coupons in newspapers, but increasingly it is being undertaken by telephone sales (e.g. telephone banking and insurance) and through e-commerce (INTERNET sales). Direct selling can provide firms with an effective means of tapping into a mass market; it can reduce BARRIERS TO ENTRY so that some small firms can offer their products alongside big-name companies; and by eliminating the ‘middleman’, selling costs and prices can be lowered, conferring COMPETITIVE ADVANTAGE. Apart from lower prices, another attraction for customers is the convenience of being able to ‘shop’ from home rather than having to visit a retail outlet.

direct tax a TAX levied by the government on the income and wealth received by individuals (households) and businesses in order to raise revenue and as an instrument of FISCAL POLICY. Examples of a direct tax are INCOME TAX, NATIONAL INSURANCE CONTRIBUTIONS, CORPORATION TAX and WEALTH TAX.

Direct taxes are incurred on income received, unlike indirect taxes, such as value-added taxes, that are incurred when income is spent. Direct taxes are progressive, insofar as the amount paid varies according to the income and wealth of the taxpayer. By contrast, INDIRECT TAX is regressive, insofar as the same amount is paid by each tax-paying consumer regardless of his or her income. See TAXATION, PROGRESSIVE TAXATION, REGRESSIVE TAXATION.

dirty float the manipulation by the monetary authorities of a country’s EXCHANGE RATE under a FLOATING EXCHANGE-RATE SYSTEM, primarily in order to gain a competitive advantage over trade partners. Thus, the authorities could intervene in the FOREIGN EXCHANGE MARKET to stop the exchange rate from otherwise appreciating (see APPRECIATION 1) in the face of market forces or, alternatively, they could deliberately engineer a DEPRECIATION of the exchange rate. See BEGGAR-MY-NEIGHBOUR POLICY.

discount 1 a deduction from the published LIST PRICE of a good or service allowed by a supplier to a customer. The discount could be offered for prompt payment in cash (cash discount) or for bulk purchases (trade discount). Trade discounts may be given to enable suppliers to achieve large sales volumes, and thus ECONOMICS OF SCALE, or may be used as a competitive stratagem to secure customer loyalty, or may be given under duress to large, powerful buyers. See AGGREGATED REBATE, BULK BUYING.

2 the sale of new STOCKS and SHARES at a reduced price. In the UK, this involves the issue of a new share at a price below its nominal value. In other countries where shares have no nominal value it involves the sale of new shares below their current market price.

3 the purchase of a particular company’s issued stock or share at a price below the average market price of those of other companies operating in the same field. The price is lower because investors feel less optimistic about that company’s prospects.

4 a fall in the prices of all stocks and shares in anticipation of a downturn in the economy.

5 the purchase of a BILL OF EXCHANGE, TREASURY BILL or BOND for less than its nominal value. Bills and bonds are redeemable at a specific future date at their face value. The original purchaser will buy the bill or bond for less than its nominal or face value (at a discount). The discount between the price that he pays and the nominal value of the bill or bond represents interest received on the loan made against the security of the bill or bond. If the owner of the bill or bond then wishes to sell it prior to maturity (rediscount it), then he will have to accept less than its nominal value (although more than he paid for it). The difference between the original price that he paid and the price received will depend largely upon the length of time before maturity. For example, if a bond with a nominal value of £1,000 redeemable in one year’s time were bought for £900, then the £100 discount on redemption value represents an interest rate of £1,000/900 = 11.1% on the loan.

6 the extent to which a foreign currency’s market EXCHANGE RATE falls below its ‘official’ exchange rate under a FIXED EXCHANGE RATE SYSTEM.