CAPITAL ACCUMALATION AND WEALTH BUILDING

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Contents
Articles
Black market Business cycle Capital (economics) Capital accumulation Capital asset China Collective investment scheme Credit (finance) Dollar hegemony Dollarization Fixed capital Fordism Foreign exchange market Grey market HarrodDomar model Human capital Investment Islamic banking Jensen's alpha Means of production Modigliani Risk-Adjusted Performance Monetary hegemony Mutual fund Organizational capital Portfolio (finance) Profit (accounting) Real versus nominal value (economics) Royalties Sharpe ratio Sortino ratio Soviet Union State capitalism Stock Tax haven 1 10 19 21 34 35 78 86 88 89 92 93 100 111 117 119 126 128 140 141 143 145 149 158 160 161 162 165 193 195 196 223 231 238

Treynor ratio United States Treasury security Upside potential ratio Value added Wealth management

249 250 257 258 260

References
Article Sources and Contributors Image Sources, Licenses and Contributors 265 272

Article Licenses
License 275

Black market

Black market
A 'black market' is a market in goods or services which operates outside the formal one(s) supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services, e.g. "the black market in bush meat" or the state jurisdiction "the black market in China". Although markets in the regular economy are not given a "white" attribute, markets that have borderline status are called "grey". Worldwide, the underground economy is estimated to provide 1.8 billion jobs.[1]

Background
The literature on the underground economy has avoided a common usage and has instead offered a plethora of appellations including: Black market on graffiti. Kharkov, 2008 subterranean; hidden; grey; shadow; informal; clandestine; illegal; unobserved; unreported; unrecorded; second; parallel and black.[2] This profusion of vague labels attests to the confusion of a literature attempting to explore a largely un-chartered area of economic activity. There is no single underground economy, there are many. These underground economies are omnipresent, existing in market oriented as well as in centrally planned nations, be they developed or developing. Those engaged in underground activities circumvent, escape or are excluded from the institutional system of rules, rights, regulations and enforcement penalties that govern formal agents engaged in production and exchange. Different types of underground activities are distinguished according to the particular institutional rules that they violate. Four specific underground economies can be identified: 1. 2. 3. 4. the illegal economy, the unreported economy, the unrecorded economy, and the informal economy.

The "illegal economy" consists of the income produced by those economic activities pursued in violation of legal statutes defining the scope of legitimate forms of commerce. Illegal economy participants engage in the production and distribution of prohibited goods and services, such as drug trafficking, arms trafficking, and prostitution. The "unreported economy" consists of those economic activities that circumvent or evade the institutionally established fiscal rules as codified in the tax code. A summary measure of the unreported economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the unreported economy is the "tax gap", namely the difference between the amount of tax revenues due the fiscal authority and the amount of tax revenue actually collected. In the U.S. unreported income is estimated to be $2 trillion resulting in a "tax gap" of $450$500 billion.[3] The "unrecorded economy" consists of those economic activities that circumvent the institutional rules that define the reporting requirements of government statistical agencies. A summary measure of the unrecorded economy is the amount of unrecorded income, namely the amount of income that should (under existing rules and conventions) be recorded in national accounting systems (e.g. National Income and Product Accounts) but is not. Unrecorded income is a particular problem in transition countries that switched from a socialist accounting system to UN standard

Black market national accounting. New methods have been proposed for estimating the size of the unrecorded (non-observed) economy.[4] But there is still little consensus concerning the size of the unreported economies of transition countries.[5] The "informal economy" comprises those economic activities that circumvent the costs and are excluded from the benefits and rights incorporated in the laws and administrative rules covering property relationships, commercial licensing, labor contracts, torts, financial credit and social security systems. A summary measure of the informal economy is the income generated by economic agents that operate informally.[6] [7]

Pricing
Goods acquired illegally take one of two price levels: They may be cheaper than legal market prices. The supplier does not have to pay for production costs or taxes. This is usually the case in the underground economy. Criminals steal goods and sell them below the legal market price, but there is no receipt, guarantee, and so forth. They may be more expensive than legal market prices. The product is difficult to acquire or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as some drugs, their prices can be vastly inflated over the costs of production. Black markets can form part of border trade near the borders of neighboring jurisdictions with little or no border control if there are substantially different tax rates, or where goods are legal on one side of the border but not on the other. Products that are commonly smuggled like this include alcohol and tobacco. However, not all border trade is illegal.

Consumer issues
No government, no global nonprofit, no multinational enterprise can seriously claim to be able to replace the 1.8 billion jobs created by the economic underground. In truth, the best hope for growth in most emerging economies lies in the shadows. Global Bazaar, Scientific American
[1]

Even when the underground market offers lower prices, consumers still have an incentive to buy on the legal market when possible, because: They may prefer legal suppliers, as they are easier to contact and can be held accountable for faults; In some[8] jurisdictions, customers may be charged with a criminal offense if they knowingly participate in the black economy, even as a consumer; They may feel in danger of being hurt while making the deal; They may have a moral dislike of black marketing; In some jurisdictions (such as England and Wales), consumers in possession of stolen goods will have them taken away if they are traced, even if they did not know they were stolen. Though they themselves commit no offense, they are still left with no goods and no money back. This risk makes some averse to buying goods that they think may be from the underground market, even if in fact they are legitimate (for example, items sold at a car boot sale). However, in some situations, consumers can actually be in a better situation when using black market services, particularly when government regulations and monopolies hinder what would otherwise be a legitimate competitive service. For example: Unlicensed taxicabs. In Baltimore, it has been reported that many consumers actively prefer illegal taxis, citing that they are more available, convenient, and priced fairly.[9]

Black market

Traded goods and services

Largest black markets Estimated annual market value (Billion USD) 796 142 108 100 [10] [10] [10] [10]

Total Marijuana Prostitution Counterfeit technology products

Counterfeit pharmaceutical drugs 75[10] Prescription drugs Cocaine Opium and heroin Web Video piracy Software piracy Cigarette smuggling 73 70 65 60 53 50 [10] [10] [10] [10] [10] [10]

In developed countries, some examples of underground economic activities include:

Transportation providers
Where taxicabs, buses, and other transportation providers are strictly regulated or monopolized by government, a black market typically flourishes to provide transportation to poorly served or overpriced communities. In the United States, some cities restrict entry to the taxicab market with a medallion system that is, taxicabs must get a special license and display it on a medallion in the vehicle. This has led to a market in Carpooling/illegal taxicab operation, although in most jurisdictions it is not illegal to sell the medallions.

Illegal drugs
From the late 19th and early 20th centuries, many countries began to ban the keeping or using of some recreational drugs, such as the United States' war on drugs. Many people nonetheless continue to use illegal drugs, and a black market exists to supply them. Despite law enforcement efforts to intercept them, demand remains high, providing a large profit motive for organized criminal groups to keep drugs supplied. The United Nations has reported that the retail market value of illegal drugs is $321.6 billion USD.[11] Although law enforcement officers do capture a small proportion of the illegal drugs, the high and very stable demand for such drugs ensures that black market prices will simply rise in response to the decrease in supplyencouraging new distributors to enter the market. Many drug legalization activists draw parallels between the illegal drug trade and the Prohibition of alcohol in the United States in the 1920s. In the United Kingdom, it is not illegal to take drugs, but it is illegal to possess them. This can lead to the unintended consequence that those in possession may swallow the evidence; once in the body they are committing no crime.

Black market

Prostitution
Prostitution is illegal or highly regulated in most countries across the world. These places form a classic study of the underground economy, because of consistent high demand from customers, relatively high pay, but labor intensive and low skilled work, which attracts a continual supply of workers. While prostitution exists in almost every country, studies show that it tends to flourish more in poorer countries, and in areas with large numbers of unattached men, such as around military bases.[12] Prostitutes in the black market generally operate with some degree of secrecy, sometimes negotiating prices and activities through codewords and subtle gestures. In countries such as the Netherlands, where prostitution is legal but regulated, illegal prostitutes exist whose services are offered cheaper without regard for the legal requirements or procedures health checks, standards of accommodation, and so on. In other countries such as Nicaragua where legal prostitution is regulated, hotels may require both parties to identify themselves, to prevent the rise of child prostitution.

Weaponry
The legislatures of many countries forbid or restrict the personal ownership of weapons. These restrictions can range from small knives to firearms, either altogether or by classification (e.g. caliber, automation, etc.), and explosives. The black market supplies the demands for weaponry that can not be obtained legally, or may only be obtained legally after obtaining permits and paying fees. This may be by smuggling the arms from countries where they were bought legally or stolen, or by stealing from arms manufacturers within the country itself, using insiders. In cases where the underground economy is unable to smuggle firearms, they can also satisfy requests by gunsmithing their own firearms. Those who may buy this way include criminals, those who wish to use them for illegal activities, and collectors. In England and Wales some kinds of arms designed for shooting animals may be kept at home but must be registered with the local police force and kept in a locked cabinet. Some people buy on the black market if they would not meet the conditions for registration for example if they have a record of committing a criminal offense, however minor. In some jurisdictions, collectors may legally keep antique weapons. Sometimes they must be disarmed (incapable of being fired); but sometimes they are so ineffective by modern standards that they are allowed to be kept intact. For example a blunderbuss or cannon is hardly likely to be used for a drive-by shooting.

Alcohol and tobacco

It has been reported that smuggling one truckload of cigarettes from a low-tax US state to a high-tax state can lead to a profit of up to $2 million.[13] The low-tax states are generally the major tobacco producers, and have come under enormous criticism for their reluctance to increase taxes. North Carolina eventually agreed to raise its taxes from 5 cents to 35 cents per pack of 20 cigarettes, although this remains far below the national average.[14] But South Carolina has so far refused to follow suit and raise taxes from seven cents per pack (the lowest in the USA).[15] In the UK it has been reported that "27% of cigarettes and 68% of roll your own tobacco [is] purchased on the black market".[16] Booze cruise In the UK, the booze cruise a day-trip ferry to continental Europe simply to get alcohol and tobacco at lower tax rates is still very popular. Its popularity varies on the Euro to Sterling exchange rate, and the relative tax rates between the different countries. Some people do not even bother to get off the boat; they buy their stock on board and sail straight back. Ferry companies offer extremely low fares, in the expectation that they will make the money up in sales on the boat. The same system exists for boats between Liverpool and Dublin, Ireland.

Black market Providing the goods are for personal consumption, "booze cruises" are entirely legal. Because there are no customs restrictions between European Union countries it is not strictly a black market, but closer to a grey market. The UK and Ireland are both European Union members and are both in a Common Travel Area so there are neither customs nor passport checks between the two countries. There is however a thriving black market in goods, rubbing tobacco in particular, which have avoided the payment of excise duty. This is partly supplied by "booze cruises".

Copyrighted media
Street vendors in countries where there is scant enforcement of copyright law, particularly in Asia and Latin America, often sell deeply discounted copies of films, music CDs, and computer software such as video games, sometimes even before the official release of the title. A determined counterfeiter with a few hundred dollars can make copies that are digitally identical to an original and suffer no loss in quality; innovations in consumer DVD and CD writers and the widespread availability of cracks on the Internet for most forms of copy protection technology make this cheap and easy to do. This has proved very difficult for copyright holders to combat through the law courts, because the operations are distributed and widespread there is no "Mr. Big". Since digital information can be duplicated repeatedly with no loss of quality, and distributed electronically at little to no cost, the effective underground market value of media is zero, differentiating it from nearly all other forms of underground economic activity. The issue is compounded by widespread indifference to enforcing copyright law, both with governments and the public at large. To steal a car is seen as a crime in most people's eyes, but to obtain illicit copies of music or a game is not.[17] Yet, the preceding comparison, although common, is not truly analogous. Automobile theft results in an item being removed from the owner with the ownership transferred to a second party. Media piracy is a crime of duplication, with no physical property being stolen. Copyright infringement law goes as far as to deem illegal "mix-tapes" and other such material copied to tape or disk. Copyright holders typically attest the act of theft to be in the profits forgone to the pirates. However, this makes the unsubstantiated assumption that the pirates would have bought the copyrighted material if it had not been available through file sharing or other means. Many artists and film producers have accepted the role of piracy in media distribution.[18] The spread of material through file sharing is a major source of publicity for artists and has been shown to build fan bases that may be more inclined to see the performer live (live performances make up the bulk of successful artists' revenues[19] ).

Currency
Money itself is traded on the black market. This may happen for one or more of several reasons: The government sets ("pegs") the local currency at some arbitrary level to another currency that does not reflect its true market value. A government makes it difficult or illegal for its citizens to own much or any foreign currency. The government taxes exchanging the local currency with other currencies, either in one direction or both (e.g. foreigners are taxed to buy local currency, or residents are taxed to buy foreign currency) The currency is counterfeit. The currency has been acquired illegally and need to be laundered before the money can be used.[20] A government may officially set the rate of exchange of its currency with that of other currencies typically the US dollar. When it does, it is often pegged at an exchange rate that is artificially low that is, below what would be the market value if it were a floating currency. Others in possession of the foreign currency, for example expatriate workers, will sell the foreign currency to buy local currency at higher exchange rates than they can get officially. In situations of financial instability and inflation, citizens may substitute a foreign currency for the local currency. The U.S. dollar is viewed as a relatively stable and safe currency and is often used abroad as a second currency. At the present time, $340 billion dollars, roughly 37 percent[21] of all U.S. currency is believed to be circulating

Black market abroad.[22] The widespread substitution of U.S. currency for local currency is known as defacto dollarization, and has been observed in transition countries [23] and in some Latin American countries.[24] Some countries, such as Ecuador, abandoned their local currency and now use US dollars, essentially for this reason, a process known as de jure dollarization. See also the example of the Ghanaian cedi from the 1970s and 1980s. If foreign currency is difficult or illegal for local citizens to acquire, they will pay a premium to acquire it. U.S. currency is viewed as a relatively stable store of value and since it does not leave a paper trail, it is also a convenient medium of exchange for both illegal transactions and for unreported income (tax evasion) both in the U.S and abroad.[25]

Fuel
In the EU it is not illegal for a person or business to buy fuel in one EU state for their own use in another, but as with other goods the tax will generally be payable by the final customer at the physical place of making the purchase. Between the Republic of Ireland and Northern Ireland there has often been a black market in petrol and diesel.[26] [27] The direction of smuggling can change depending on the variation of the taxes and the exchange rate between the Euro and Pound Sterling; indeed sometimes diesel will be smuggled in one direction and petrol the other. In some countries diesel fuel for agricultural vehicles or domestic use is taxed at a much lower rate than that for other vehicles. This is known as dyed fuel, because a coloured dye is added so it can be detected if used in other vehicles (e.g. a red dye in the UK, a green dye in Ireland). Nevertheless, the saving is attractive enough to make a black market in agricultural diesel. In 2007 it was estimated that 350 million was not gained in potential revenue this way in the UK.[28]

Appearance and disappearance

If an economic good is illegal but not seen by many in society as particularly harmful, such as alcohol under prohibition in the United States, the black market prospers. Black marketeers can reinvest profits in diverse legal or illegal activities, well beyond the original source of profit. Some, for example in the marijuana-trade debate, argue for removing the underground markets by making illegal products legal. This would, in their view: decrease the illegal cashflow, thus making the performance of other, potentially more harmful, activities financially harder allow quality and safety controls on the traded goods, thus reducing harm to consumers let the goods be taxed, providing a source of revenue free up court time and prison space and save taxpayer money.

Modern examples
Wars
Black markets flourish in most countries during wartime. States that are engaged in total war or other large-scale, extended wars must necessarily impose restrictions on home use of critical resources that are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity.[29] One source of black-market meat under wartime rationing was by farmers declaring fewer domestic animal births to the Ministry of Food than actually happened. Another in Britain was supplies from the USA, intended only for use in USA army bases on British land, but leaked into the local native British black market.

Black market During the Vietnam war, soldiers would spend Military Payment Certificates on maid service and sexual entertainment, thus supporting their partners and their families. If the Vietnamese civilian wanted something that was hard to get, he would buy it at double the price from one of the soldiers, who had a monthly ration card and thus had access to the military stores. The transactions ran through the on-base maids to the local populace. Although these activities were illegal, only flagrant or large-scale black-marketeers were prosecuted by the military.

Indian black-money
Further information: Indian black money,Indian Economy#Corruption,andCorruption in India The black money market situation in India is epidemical. India currently tops the list for illegal monies in the entire world with almost US$1,456 billion in Swiss banks (USD 1.4 trillion approximately) in the form of unaccounted money.[30] According to the data provided by the Swiss Banking Association, India has more black money than the rest of the world combined.[31] [32] Indian Swiss bank account assets are worth 13 times (1300%) the countrys national debt, and, if this black money is brought back to the country, India has the potential to become one of the richest countries in the world.[33]

Prohibition in the United States

Alcohol A classic example of creating a black market is the Prohibition of alcohol during the 1920s in the United States. Many organized crime syndicates took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sale. Most people did not think drinking alcohol was particularly harmful nor that its buyers and sellers should be treated like common criminals. So illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol. This lasted until repeal of Prohibition. Although Prohibition ended in 1933, there are still some parallels today with evasion of the drinking age of 21 in the United States, which is high compared to other industrialized countries and three years above the age of majority in nearly all states. Like Prohibition, this law is widely (but more covertly) disobeyed as well. Though social sources of supply predominate for underage drinkers, some bars and stores knowingly serve and sell to those who are underage, and some may even make deals with local police. Many college towns especially have a vast network of fraternities and sororities (and others) that run what can be considered modern-day speakeasies in their houses, in which age is irrelevant. Since the substance in question, alcohol, is legal for those over 21, it can be considered more of a gray market than a black market. Smoking This effect is seen similarly today, when jurisdictions pass bans on smoking in bars and restaurants. In these jurisdictions, smokeasies arise which allow smoking despite the legal prohibition. In a sense the owner is not a black marketeer since he is not necessarily selling tobacco, but he profits by the sale of other goods on his premises (typically alcohol). This phenomenon is very prevalent in many US state jurisdictions with smoking bans, including California,[34] Philadelphia,[36] [37] Utah,[38] Seattle,[39] Ohio,[40] and Washington, D.C..[41]
[35]

Black market

Further reading
Breusch, Trevor. Estimating the Underground Economy using MIMIC Models [42]. Ideas.repec. Retrieved 2005. Feige, Edgar L. (1989 and 2007). The Underground Economies:Tax Evasion and Information Distortion [43]. Cambridge: Cambridge University Press. pp.378. ISBN0-521-26230-5. Feige, Edgar L. (July, 1990). "Defining And Estimating Underground And Informal Economies: The New Institutional Economics Approach" [44]. World Development. Elsevier, 18 (7): 9891002. Schneider, Friedrich; Enste, Dominik H. (2000). "Shadow Economies: Size, Causes, and Consequences". Journal of Economic Literature (American Economic Association) 38 (1): 77114. JSTOR2565360..

References
[1] Neuwirth, Robert (September 2011). "Global Bazaar: Street Markets and Shantytowns Forge the World's Urban Future Shantytowns, favelas and jhopadpattis turn out to be places of surprising innovation" (http:/ / www. scientificamerican. com/ article. cfm?id=global-bazaar). Scientific American: 5663. . [2] http:/ / ideas. repec. org/ p/ wpa/ wuwpdc/ 0312003. html "Defining And Estimating Underground And Informal Economies: The New Institutional Economics Approach",World Development, Vol 18, No 7, 1990. [3] http:/ / ideas. repec. org/ p/ pra/ mprapa/ 29672. html and http:/ / ideas. repec. org/ p/ pra/ mprapa/ 19564. html [4] OECD (2002) Measuring the Non-Observed Economy A Handbook, Paris France. [5] Feige, Edgar L. & Urban, Ivica, 2008. "Measuring underground (unobserved, non-observed, unrecorded) economies in transition countries: Can we trust GDP?," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 287-306, June. [6] De Soto, Hernando, The Other Path: The Invisible Revolution in the Third World. Harper and Row, New York, 1989 [7] Portes, Alejandro and Saskia Sassen-Koob, Making it underground: Comparative material on the informal sector in western market economies." American Journal of Sociology. July, 1987, 93(1): pp.30-61. [8] https:/ / lagen. nu/ dom/ nja/ 1985s444 [9] Christina Royster-Hemb (21 April 2004), "Feature: A Baltimore Way of Life" (http:/ / www. citypaper. com/ news/ story. asp?id=6264), citypaper.com, , retrieved 2009-05-11 [10] Black Market Products Index (http:/ / www. havocscope. com/ indexes/ ) at Havocscope (http:/ / www. havocscope. com/ about/ ). Retrieved on April 17, 2010. (Calculated by adding up the various black market activities that are currently being monitored (http:/ / www. havocscope. com/ products/ ranking/ )) [11] (http:/ / www. unodc. org/ unodc/ en/ world_drug_report_2005. html) [12] Journal of Political Economy, "A Theory of Prostitution" February 16, 2001 (http:/ / the-idea-shop. com/ papers/ prostitution. pdf) [13] Horiwitz, Sari (8 June 2004), "Cigarette Smuggling Linked to Terrorism" (http:/ / www. washingtonpost. com/ wp-dyn/ articles/ A23384-2004Jun7. html), The Washington Post: A04, , retrieved 11 May 2009 [14] North Carolina's Cigarette Tax Increase Is A Small Step In The Right Direction But Kids and Taxpayers Will Miss Benefits of Greater Increase (Campaign for Tobacco-Free Kids) (http:/ / tobaccofreekids. org/ Script/ DisplayPressRelease. php3?Display=861) [15] The Tax Foundation State Sales, Gasoline, Cigarette, and Alcohol Tax Rates by State, 2000-2008 (http:/ / www. taxfoundation. org/ research/ show/ 245. html) [16] Scottish Grocers' Federation (2009-02-25). "Illegal Cigarettes Partnership Must Address All Aspects of Black Market" (http:/ / www. scottishshop. org. uk/ site/ Home/ EB076AB4-678F-4125-96ED-61B7BCF87114. html). . Retrieved 2009-03-23. [17] Charles W. Moore. "Is music piracy stealing?" (http:/ / www. applelinks. com/ mooresviews/ pirate. shtml). . Retrieved 2009-03-15. [18] http:/ / torrentfreak. com/ documentary-filmmaker-supports-bittorrent-uploader-090514/ [19] http:/ / boingboing. net/ 2009/ 11/ 13/ labels-may-be-losing. html [20] "PBS Frontline: Drug Wars: Special Reports: the black peso money laudering system" (http:/ / www. pbs. org/ wgbh/ pages/ frontline/ shows/ drugs/ special/ blackpeso. html). . [21] Edgar L. Feige "New Estimates of U.S. Currency Abroad, the Underground Economy, and the Tax Gap Crime, Law and Social Change (2011) Forthcoming [22] Federal Reserve Flow of Funds Z.1 Table 204. http:/ / www. federalreserve. gov/ releases/ z1/ current/ [23] Edgar L. Feige, "Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries" , Comparative Economic Studies, September, 2003, Vol. 45 #3 pp. 358-383. [24] E.L.Feige et al. "Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility", in Dean, Salvatore and Willett (eds.) The Dollarization Debate, Oxford Press, 2003. [25] Cebula and Feige (2011),"Americas Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S" http:/ / ideas. repec. org/ p/ pra/ mprapa/ 29672. html [26] Tom Peterkin, Ireland Correspondent (31 Jan 2006). "IRA fuel smuggling 'drove oil giants to abandon Ulster'" (http:/ / www. telegraph. co. uk/ news/ uknews/ 1509280/ IRA-fuel-smuggling-drove-oil-giants-to-abandon-Ulster. html). The Daily Telegraph (London). . Retrieved 26 March 2009.

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[27] "Fuel smuggling down say customs" (http:/ / news. bbc. co. uk/ 1/ hi/ northern_ireland/ 1311445. stm). Belfast: BBC. 3 May 2001. . Retrieved 26 March 2009. [28] "Red diesel abuse costs UK millions" (http:/ / www. whatcar. com/ news-article. aspx?NA=229086). What Car? (Haymarket Group). 7 November 2007. . Retrieved 26 March 2009. [29] The Home Front (facsimile ed.). London: Imperial War Museum. July 1945. ISBN1-904-897-11-8. [30] http:/ / www. thehindubusinessline. in/ 2010/ 08/ 13/ stories/ 2010081350370900. htm [31] http:/ / ibnlive. in. com/ news/ govt-to-reveal-stand-on-black-money-on-jan-25/ 141423-3. html [32] http:/ / www. currentnewsindia. com/ nation-news/ govt-to-reveal-stand-on-black-money-on-jan-25. html [33] http:/ / www. emirates247. com/ news/ world/ tehelka-says-manorma-group-has-account-2011-02-12-1. 355118 [34] "California's Ban to Clear Smoke Inside Most Bars," The New York Times, December 31, 1997 (http:/ / query. nytimes. com/ gst/ fullpage. html?sec=travel& res=9C00EFD61331F932A05751C1A961958260) [35] "The Land of Smoke-Easies, $500 Barfs," The San Francisco Chronicle, May 15, 1998 (http:/ / www. sfgate. com/ cgi-bin/ article. cgi?file=/ chronicle/ archive/ 1998/ 05/ 15/ MN80568. DTL) [36] "'Smoke-easys' ignore the tobacco ban", Philadelphia Inquirer, March 27, 2007 (http:/ / www. philly. com/ philly/ columnists/ 20070326_Stu_Bykofsky___Smoke-easys_ignore_the_tobacco_ban. html) [37] "Smoke-easies", Fort Wayne News-Sentinel, March 28, 2007 (http:/ / blogs. fortwayne. com/ opening_arguments/ 2007/ 03/ smokeeasies. html) [38] "Everyone Head for the Smoke-Easy," Utah Statesman, December 12, 2006 (http:/ / www. utahstatesman. com/ news/ 2006/ 12/ 06/ Opinion/ Column. Everyone. Head. For. The. smokeEasy-2524825. shtml) [39] "Smokers find refuge in secret nicotine dens", Seattlepi.com, May 31, 2006 (http:/ / www. seattlepi. com/ local/ 272211_smokeeasy31. html) [40] "smoke-easies, altoid tins, blue moon, janis joplin and vivid imaginations" Yellow Is The Color Blog (http:/ / yellowisthecolor. wordpress. com/ 2007/ 03/ 28/ smoke-easies-altoid-tins-blue-moon-janis-joplin-and-vivid-imaginations/ ) [41] "Smoke-easies offer cover from puff police; Aficionados just want a place to light up, relax," The Washington Times, November 20, 2003 [42] http:/ / 129. 3. 20. 41/ eps/ em/ papers/ 0507/ 0507003. pdf [43] http:/ / books. google. com/ books?hl=en& lr=& id=G93eU0FgQqEC& oi=fnd& pg=PR9& dq=Underground+ economies+ feige& ots=5cnfmowcGx& sig=fUxgZi99BofvbbUe7B_Mha-_gps#v=onepage& q& f=false [44] http:/ / ideas. repec. org/ p/ wpa/ wuwpdc/ 0312003. html

External links
Havocscope Black Markets - Database and statistics on black market activities (http://www.havocscope.com/) Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe (http://www.assemblee-nationale.fr/rap-info/i2311-51. asp#P1089_155970) by French MPs Vincent Peillon and Arnaud Montebourg, third section on "Luxembourg's political dependency toward the financial sector: the Clearstream affair" (pp.83111 on PDF version) The Underground Economy from National Center for Policy Analysis (http://www.ncpa.org/ba/ba273.html) (1998) Going Underground: America's Shadow Economy by Jim McTague (http://www.frontpagemag.com/Articles/ ReadArticle.asp?ID=16532) (2005) The Underground Economy: Global Evidence of Its Size and Impact (http://oldfraser.lexi.net/publications/ books/underground/) (1997) The Effects of a Black Market Using Supply and Demand (http://economics.about.com/od/demand/ss/ black_market.htm) Economist, 11 August 2010, A lengthening shadow: Shadow economies have grown since the financial crisis began (http://www.economist.com/node/16784402)

Business cycle

10

Business cycle
The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).[1] Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.

History
Theory
The first systematic exposition of periodic economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'conomie politique by Jean Charles Lonard de Sismondi.[2] Prior to that point classical economics had either denied the existence of business cycles,[3] blamed them on external factors, notably war,[4] or only studied the long term. Sismondi found vindication in the Panic of 1825, which was the first unarguably internal economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption, caused in particular by wealth inequality. They advocated government intervention and socialism, respectively, as the solution. This work did not generate interest among classical economists, though underconsumption theory developed as a heterodox branch in economics until being systematized in Keynesian economics in the 1930s. Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer,[5] and similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus. Periodic crises in capitalism formed the basis of the theory of Karl Marx, who further claimed that these crises were increasing in severity and, on the basis of which, he predicted a communist revolution. He devoted hundreds of pages of Das Kapital to crises.

Classification by periods
Economic Waves series (see Business cycles) Cycle/Wave Name Kitchin inventory Juglar fixed investment Years 35 711

Kuznets infrastructural investment 1525 Kondratiev wave 4560

In 1860, French economist Clement Juglar identified the presence of economic cycles 8 to 11 years long, although he was cautious not to claim any rigid regularity.[6] Later, Austrian economist Joseph Schumpeter argued that a Juglar cycle has four stages: (i) expansion (increase in production and prices, low interests rates); (ii) crisis (stock exchanges crash and multiple bankruptcies of firms occur); (iii) recession (drops in prices and in output, high interests rates); (iv) recovery (stocks recover because of the fall in prices and incomes). In this model, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices.

Business cycle In the mid-20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers:[7] the Kitchin inventory cycle of 35 years (after Joseph Kitchin);[8] the Juglar fixed investment cycle of 711 years (often identified as 'the' business cycle); the Kuznets infrastructural investment cycle of 1525 years (after Simon Kuznets); the Kondratiev wave or long technological cycle of 4560 years (after Nikolai Kondratiev).[9]

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Interest in these different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles.[10]

Occurrence
There were frequent crises in Europe and America in the 19th and first half of the 20th century, specifically the period 18151939, starting from the end of the Napoleonic wars in 1815, which was immediately followed by the Post-Napoleonic depression in the United Kingdom (181530), and culminating in the Great Depression of 192939, which led into World War II. See Financial crisis: 19th century for listing and details. The first of these crises not associated with a war was the Panic of 1825. Business cycles in the OECD after World War II were generally more restrained than the earlier business cycles, particularly during the Golden Age of Capitalism (1945/501970s), and the period 19452008 did not experience a global downturn until the Late-2000s recession. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government's budget also helped mitigate the cycle even without conscious action by policy-makers. In this period the economic cycle at least the problem of depressions was twice declared dead; first in the late 1960s, when Phillips curve was seen as being able to steer the economy which was followed by stagflation in the 1970s, which discredited the theory, secondly in the early 2000s, following the stability and growth in the 1980s and 1990s in what came to be known as The Great Moderation which was followed by the Late-2000s recession. Notably, in 2003, Robert Lucas, in his presidential address to the American Economic Association, declared that the "central problem of depression-prevention [has] been solved, for all practical purposes."[11] Note however that various regions have experienced prolonged depressions, most dramatically the economic crisis in former Eastern Bloc countries following the end of the Soviet Union in 1991; for several of these countries the period 19892010 has been an ongoing depression, with real income still lower than in 1989.

Identifying
In 1946, economists Arthur F. Burns and Wesley C. Mitchell provided the now standard definition of business cycles in their book Measuring Business Cycles:[12] Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own. According to A. F. Burns:[13]

Economic activity in the US 19542005

Business cycle

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Business cycles are not merely fluctuations in aggregate economic activity. The critical feature that distinguishes them from the commercial convulsions of earlier centuries or from the seasonal and other short term variations of our own age is that the fluctuations are widely diffused over the economyits industry, its commercial dealings, and its tangles of finance. The economy of the western world is a system of closely interrelated parts. He who would understand business cycles must master the workings of an economic system organized largely in a network of free enterprises searching for profit. The problem of how business cycles come about is therefore inseparable from the problem of how a capitalist economy functions.

Deviations from the long term growth trend US 19542005

In the United States, it is generally accepted that the National Bureau of Economic Research (NBER) is the final arbiter of the dates of the peaks and troughs of the business cycle. An expansion is the period from a trough to a peak, and a recession as the period from a peak to a trough. The NBER identifies a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production".[14]

Spectral analysis of business cycles

Recent research employing spectral analysis has confirmed the presence of Kondratiev waves in the world GDP dynamics at an acceptable level of statistical significance.[15] [16] Korotayev et al. also detected shorter business cycles, dating the Kuznets to about 17 years and calling it the third harmonic of the Kondratiev, meaning that there are three Kuznets cycles per Kondratiev.

Cycles or fluctuations?
In recent years economic theory has moved towards the study of economic fluctuation rather than a 'business cycle'[17] though some economists use the phrase 'business cycle' as a convenient shorthand. For Milton Friedman calling the business cycle a "cycle" is a misnomer, because of its non-cyclical nature. Friedman believed that for the most part, excluding very large supply shocks, business declines are more of a monetary phenomenon.[18] Rational expectations theory leads to the efficient-market hypothesis, which states that no deterministic cycle can persist because it would consistently create arbitrage opportunities.[19] Much economic theory also holds that the economy is usually at or close to equilibrium. These views led to the formulation of the idea that observed economic fluctuations can be modeled as shocks to a system. In the tradition of Slutsky, business cycles can be viewed as the result of stochastic shocks that on aggregate form a moving average series. However, the recent research employing spectral analysis has confirmed the presence of business (Juglar) cycles in the world GDP dynamics at an acceptable level of statistical significance.[15]

Explaining
The explanation of fluctuations in aggregate economic activity is one of the primary concerns of macroeconomics. The main framework for explaining such fluctuations is Keynesian economics. In the Keynesian view, business cycles reflect the possibility that the economy may reach short-run equilibrium at levels below or above full employment. If the economy is operating with less than full employment, i.e., with high unemployment, Keynesian theory states that monetary policy and fiscal policy can have a positive role to play in smoothing the fluctuations of the business cycle.

Business cycle There are a number of alternative heterodox economic theories of business cycles, largely associated with particular schools or theorists. There are also some divisions and alternative theories within mainstream economics, notably real business cycle theory and credit-based explanations such as debt deflation and the financial instability hypothesis.

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Exogenous vs. endogenous

Within mainstream economics, the debate over external (exogenous) versus internal (endogenous) causes of the economic cycle is centuries long, with the classical school (now neo-classical) arguing for exogenous causes and the underconsumptionist (now Keynesian) school arguing for endogenous causes. These may also broadly be classed as "supply-side" and "demand-side" explanations: supply-side explanations may be styled, following Say's law, as arguing that "supply creates its own demand", while demand-side explanations argue that effective demand may fall short of supply, yielding a recession or depression. This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimal government policy or regulation (laissez faire), as absent these external shocks, the market functions, while proponents of endogenous causes of crises such as Keynesians largely argue for larger government policy and regulation, as absent regulation, the market will move from crisis to crisis. This division is not absolute some classicals (including Say) argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while Austrian School economists argue against government involvement as only worsening crises, despite believing in internal causes. The view of the economic cycle as caused exogenously dates to Say's law, and much debate on endogeneity or exogeneity of causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the "general glut" debate. Until the Keynesian revolution in mainstream economics in the wake of the Great Depression, classical and neoclassical explanations (exogenous causes) were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected. There has been some resurgence of neoclassical approaches in the form of real business cycle (RBC) theory. The debate between Keynesians and neo-classical advocates was reawakened following the recession of 2007. Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes. Contrarily, in the heterodox tradition of Jean Charles Lonard de Sismondi, Clement Juglar, and Marx the recurrent upturns and downturns of the market system are an endogenous characteristic of it.[20] The 19th century school of Underconsumptionism also posited endogenous causes for the business cycle, notably the paradox of thrift, and today this previously heterodox school has entered the mainstream in the form of Keynesian economics via the Keynesian revolution.

Keynesian
According to Keynesian economics, fluctuations in aggregate demand cause the economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles. However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks. Paul Samuelson's "oscillator model"[21] is supposed to account for business cycles thanks to the multiplier and the accelerator. The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output (multiplier), and is determined by aggregate demand (accelerator).

Business cycle In the Keynesian tradition, Richard Goodwin accounts for cycles in output by the distribution of income between business profits and workers wages. The fluctuations in wages are almost the same as in the level of employment (wage cycle lags one period behind the employment cycle), for when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high unemployment, wages tend to fall. According to Goodwin, when unemployment and business profits rise, the output rises.

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Credit/debt cycle
One alternative theory is that the primary cause of economic cycles is due to the credit cycle: the net expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle. A primary theory in this vein is the debt deflation theory of Irving Fisher, which he proposed to explain the Great Depression. A more recent complementary theory is the Financial Instability Hypothesis of Hyman Minsky, and the credit theory of economic cycles is often associated with Post-Keynesian economics such as Steve Keen. Post-Keynesian economist Hyman Minsky has proposed a explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis. In an expansion period, interest rates are low and companies easily borrow money from banks to invest. Banks are not reluctant to grant them loans, because expanding economic activity allows business increasing cash flows and therefore they will be able to easily pay back the loans. This process leads to firms becoming excessively indebted, so that they stop investing, and the economy goes into recession. While credit causes have not been a primary theory of the economic cycle within the mainstream, they have gained occasional mention, such as (Eckstein & Sinai 1986), cited approvingly by (Summers 1986).

Real business cycle theory

Within mainstream economics, Keynesian views have been challenged by real business cycle models in which fluctuations are due to technology shocks. This theory is most associated with Finn E. Kydland and Edward C. Prescott, and more generally the Chicago school of economics (freshwater economics). They consider that economic crisis and fluctuations cannot stem from a monetary shock, only from an external shock, such as an innovation. There were great increases in productivity, industrial production and real per capita product throughout period from 18701890 that included the Long Depression and two other recessions.[22] [23] See:Long depression#Myth of the Long Depression There were also significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by overcapacity and market saturation.[24] [25] Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline. The effect of technological progress can be seen by the purchasing power of an average hour's work, which has grown from $3 in 1900 to $22 in 1990, measured in 2010 dollars.[26] There were similar increases in real wages during the 19th century. See: Productivity improving technologies (historical) A table of innovations and long cycles can be seen at: Kondratiev wave#Modern modifications of Kondratiev theory Carlota Perez blames "financial capital" for excess speculation, which she claims is likely to occur in the "frenzy" stage of a new technology, such as the 19982000 computer, internet, dot.com mania and bust. Perez also says excess speculation is likely to occur in the mature phase of a technological age.[27] RBC theory has been categorically rejected by a number of mainstream economists in the Keynesian tradition, such as (Summers 1986) and Paul Krugman.

Business cycle

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Politically-based business cycle

Another set of models tries to derive the business cycle from political decisions. The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high. The replacement, Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when unemployment is too high, being replaced by Party A. The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on election day.[28] The political business cycle theory is strongly linked to the name of Micha Kalecki[29] who argued that no democratic government under capitalism would allow the persistence of full employment [This sentence is confusing, and the reference given does not support this statement. Please clarify and correct the reference], so that recessions would be caused by political decisions. Persistent full employment would mean increasing workers' bargaining power to raise wages and to avoid doing unpaid labor, potentially hurting profitability. (He did not see this theory as applying under fascism, which would use direct force to destroy labor's power.) In recent years, proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-electionand make the citizens pay for it with recessions afterwards.

Marxist economics
For Marx the economy based on production of commodities to be sold in the market is intrinsically prone to crisis. In the heterodox Marxian view profit is the major engine of the market economy, but business (capital) profitability has a tendency to fall that recurrently creates crises, in which mass unemployment occurs, businesses fail, remaining capital is centralized and concentrated and profitability is recovered. In the long run these crises tend to be more severe and the system will eventually fail.[30] Some Marxist authors such as Rosa Luxemburg viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one. Indeed a number of modern authors have tried to combine Marx's and Keynes's views. Others have contrarily emphasized basic differences between the Marxian and the Keynesian perspective: while Keynes saw capitalism as a system worth maintaining and susceptible to efficient regulation, Marx viewed capitalism as a historically doomed system that cannot be put under societal control.[31]

Austrian school
Economists of the heterodox Austrian school argue that business cycles are primarily caused by excessive creation of bank credit or fiduciary media which is encouraged by central banks when they set interest rates too low, especially when combined with the practice of fractional reserve banking. The expansion of the money supply causes a "boom" in which resources are misallocated due to falsified interest rate signals, which then leads to the "bust" as the market self-corrects, the malinvestments are liquidated, and the money supply contracts. One of the primary critiques of Austrian business cycle theory is the observation that the United States suffered recurrent economic crises in the 19th century, most notably the Panic of 1873, prior to the establishment of a U.S. central bank in 1913. Adherents, such as the historian Thomas Woods argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with Austrian Business Cycle Theory.

Business cycle

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Georgism
Henry George identifies land price fluctuations as the primary cause of most business cycles.[32] The theory is generally ignored in most of today's discussions of the subject[33] despite the fact that the two great economic contractions of the last 100 years (19291933 and 2008??) both involved speculative real estate bubbles. George observed that one of the factors that is absolutely necessary for all production land has an inherent tendency to rise in price on an exponential basis as the economy grows. The reason for this is that the quantity of land (the stock of locations and natural resources) is fixed, while its quality is improved due to improvements such as transportation infrastructures and economic development of the surroundings. Investors see this tendency as the economy grows and they buy land ahead of the boom areas, withholding it from use in order to take advantage of its increased value in the future. Because housing and commercial real estate provide collateral for a large portion of lending, there is a tendency for real estate prices to rise faster than the rate of inflation in business cycle upswings. Speculation in land concentrates profits in landholders and diverts economic resources to speculation in land, squeezing profits away from production that has to occur on this land. In effect, land speculation creates a built-in supply shock, that squeezes the economy just as economic output increases. This is a systemic retardation of the economy, placing a sharp brake on further economic expansion. This shock to the economy occurs as long as there is land speculation, creating an underlying tendency toward inflation and recession late in the growth phase of the business cycle. Land speculation, according to George, is always the cause of economic downturns. There are any number of contributing causes; things like oil price shocks, consumer confidence crises, international trade fluctuations, natural disasters but none of these things creates the underlying weakness. Land speculation slows the economy in two ways. It increases production costs by making land in general more expensive (shifting the AS curve upward) as well as decreasing productivity by denying access to the best locations, shifting the AS curve to the left and lowering "potential output".[34] The recent housing bubble offers some validation to George's theory and has created great distortions around the world. In the U.S. the bubble caused extreme regional differences in land prices, creating uncompetitive business conditions due to higher wages and taxes. State (CA, IL) and local governments in many of these high cost areas are suffering large budget shortfalls as businesses close or relocate to low cost areas such as the Atlanta, GA region, which has low land prices and was a leader in economic growth for the last several decades. The Wisconsin Business School publishes an on line database with building cost and land values for 46 U.S. metro areas.[35]

Mitigating
Most social indicators (mental health, crimes, suicides) worsen during economic recessions. As periods of economic stagnation are painful for the many who lose their jobs, there is often political pressure for governments to mitigate recessions. Since the 1940s, following the Keynesian revolution, most governments of developed nations have seen the mitigation of the business cycle as part of the responsibility of government, under the rubric of stabilization policy. Since in the Keynesian view, recessions are caused by inadequate aggregate demand, when a recession occurs the government should increase the amount of aggregate demand and bring the economy back into equilibrium. This the government can do in two ways, firstly by increasing the money supply (expansionary monetary policy) and secondly by increasing government spending or cutting taxes (expansionary fiscal policy). By contrast, some economists, notably New classical economist Robert Lucas, argue that the welfare cost of business cycles are very small to negligible, and that governments should focus on long-term growth instead of stabilization. However, even according to Keynesian theory, managing economic policy to smooth out the cycle is a difficult task in a society with a complex economy. Some theorists, notably those who believe in Marxian economics, believe that

Business cycle this difficulty is insurmountable. Karl Marx claimed that recurrent business cycle crises were an inevitable result of the operations of the capitalistic system. In this view, all that the government can do is to change the timing of economic crises. The crisis could also show up in a different form, for example as severe inflation or a steadily increasing government deficit. Worse, by delaying a crisis, government policy is seen as making it more dramatic and thus more painful. Additionally, since the 1960s neoclassical economists have played down the ability of Keynesian policies to manage an economy. Since the 1960s, economists like Nobel Laureates Milton Friedman and Edmund Phelps have made ground in their arguments that inflationary expectations negate the Phillips curve in the long run. The stagflation of the 1970s provided striking support for their theories, defying the simple Keynesian prediction that recessions and inflation cannot occur together. Friedman has gone so far as to argue that all the central bank of a country should do is to avoid making large mistakes, as he believes they did by contracting the money supply very rapidly in the face of the Wall Street Crash of 1929, in which they made what would have been a recession into the Great Depression.

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Notes
[1] O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.57, 310. ISBN0-13-063085-3. . [2] Over Production and Under Consumption (http:/ / www. economictheories. org/ 2008/ 11/ over-production-and-under-consumption. html), ScarLett, History Of Economic Theory and Thought [3] Batra, R. (2002). "Economics in Crisis: Severe and Logical Contradictions of Classical, Keynesian, and Popular Trade Models". [4] http:/ / www. thefreemanonline. org/ featured/ classical-economists-good-or-bad/ [5] Charles Dunoyer and the Emergence of the Idea of an Economic Cycle (http:/ / hope. dukejournals. org/ cgi/ content/ abstract/ 41/ 2/ 271), Rabah Benkemoune, History of Political Economy 2009 41(2):271295; DOI:10.1215/00182702-2009-003 [6] M. W. Lee, Economic fluctuations. Homewood, IL, Richard D. Irwin, 1955 [7] Schumpeter, J. A. (1954). History of Economic Analysis. London: George Allen & Unwin. [8] Kitchin, Joseph (1923). "Cycles and Trends in Economic Factors". Review of Economics and Statistics (The MIT Press) 5 (1): 1016. doi:10.2307/1927031. JSTOR1927031. [9] Kondratieff, N. D.; Stolper, W. F. (1935). "The Long Waves in Economic Life". Review of Economics and Statistics (The MIT Press) 17 (6): 105115. doi:10.2307/1928486. JSTOR1928486. [10] http:/ / www. albany. edu/ ~bd445/ Eco_301/ Slides/ Business_Cycle_Notes_(Print). pdf [11] Fighting Off Depression, New York Times, http:/ / www. nytimes. com/ 2009/ 01/ 05/ opinion/ 05krugman. html [12] A. F. Burns and W. C. Mitchell, Measuring business cycles, New York, National Bureau of Economic Research, 1946. [13] A. F. Burns, Introduction. In: Wesley C. Mitchell, What happens during business cycles: A progress report. New York, National Bureau of Economic Research, 1951 [14] "US Business Cycle Expansions and Contractions" (http:/ / www. nber. org/ cycles. html). NBER. . Retrieved 2009-02-20. [15] See, e.g. Korotayev, Andrey V., & Tsirel, Sergey V. A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 20082009 Economic Crisis (http:/ / www. escholarship. org/ uc/ item/ 9jv108xp). Structure and Dynamics. 2010. Vol.4. #1. P.3-57. [16] Spectral analysis is a mathematical technique that is used in such fields as electrical engineering for analyzing electrical circuits and radio waves to deconstruct a complex signal to determine the main frequencies and their relative contribution. Signal analysis is usually done with equipment. Data analysis is done with special computer software. [17] Mankiw, Gregory (1989). "Real Business Cycles: A New Keynesian Perspective". The Journal of Economic Perspectives (JSTOR) 3 (3): 7990. ISSN0895-3309. JSTOR1942761. [18] Milton and Rose D. Friedman, Two Lucky People,(Chicago, Illinois: University of Chicago Press, 1998) p. 50. On that page Milton Friedman admits to "skepticism about whether there is indeed an economic phenomenon justifying the designation`cycle,' or whether the economic fluctuations glorified by that title are not merely reactions to a series of random shocks, along the lines of a famous 1927 article by Eugen Slutsky."

Friedman, Milton; Anna Jacobson Schwartz (1993). A Monetary History of the United States, 18671960. Princeton: Princeton University Press. pp.678
[20] Mary S. Morgan, The History of Econometric Ideas, Cambridge University Press, 1991. [21] Samuelson, P. A., 1939, Interactions between the multiplier analysis and the principle of acceleration, Review of Economic Statistics 21, 7578 [22] Wells, David A. (1890). Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society (http:/ / books. google. com/ ?id=2V3qF4MWh_wC& printsec=frontcover& dq=RECENT+ ECONOMIC+ CHANGES+ AND+ THEIR+

Business cycle
EFFECT+ ON+ DISTRIBUTION+ OF+ WEALTH+ AND+ WELL+ BEING+ OF+ SOCIETY+ WELLS#v=onepage& q& f=false). New York: D. Appleton and Co.. ISBN0543724743. . [23] Rothbard, Murray (2002). History of Money and Banking in the United States (http:/ / mises. org/ books/ historyofmoney. pdf). Ludwig Von Mises Inst. ISBN0945466331. . [24] Wells, David A. (1890). Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society (http:/ / books. google. com/ ?id=2V3qF4MWh_wC& printsec=frontcover& dq=RECENT+ ECONOMIC+ CHANGES+ AND+ THEIR+ EFFECT+ ON+ DISTRIBUTION+ OF+ WEALTH+ AND+ WELL+ BEING+ OF+ SOCIETY+ WELLS#v=onepage& q& f=false). New York: D. Appleton and Co.. ISBN0543724743. .Opening line of the Preface. [25] Beaudreau, Bernard C. (1996). Mass Production, the Stock Market Crash and the Great Depression. New York, Lincoln, Shanghi: Authors Choice Press. [26] Lebergott, Stanley (1993). Pursuing Happiness: American Consumers in the Twentieth Century. Princeton, NJ: Princeton University Press. pp.a:Adapted from Fig. 9.1. ISBN0-691-04322-1. [27] [ |Perez, Carlota (http:/ / www. carlotaperez. org)] (2002). Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. UK: Edward Elgar Publishing Limited. ISBN1843763311. [28] Allan Drazen, 2008. "political business cycles," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. (http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_P000112& edition=current& q=Political business cycle& topicid=& result_number=4) William D. Nordhaus, 1989:2. "Alternative Approaches to the Political Business Cycle," Brookings Papers on Economic Activity, p p. 1 (http:/ / www. jstor. org/ pss/ 2534461)-68. [29] Michal Kalecki, 18991970. (http:/ / cepa. newschool. edu/ het/ profiles/ kalecki. htm) [30] Henryk Grossmann Das Akkumulations- und Zusammenbruchsgesetz des kapitalistischen Systems (Zugleich eine Krisentheorie), Hirschfeld, Leipzig, 1929 [31] Paul Mattick, Marx and Keynes: The Limits of Mixed Economy, Boston, Porter Sargent, 1969 [32] George, Henry. (1881). Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth; The Remedy. Kegan Paul (reissued by Cambridge University Press, 2009; ISBN 978-1-108-00361-2) [33] Hansen, Alvin H. Business Cycles and National Income. New York: W. W. Norton & Company, 1964, p 39 [34] Quote from Henry George on real causes of business cycles (http:/ / www. henrygeorge. org/ charts/ hgonbust. htm) [35] Wisconsin School of Business & The Lincoln Institute of Land Policy (Updated Quarterly). "Land Prices for 46 Metro Areas" (http:/ / www. lincolninst. edu/ subcenters/ land-values/ metro-area-land-prices. asp).

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References
From (2008) The New Palgrave Dictionary of Economics, 2nd Edition: Christopher J. Erceg. "monetary business cycle models (sticky prices and wages)." Abstract. (http:/ / www. dictionaryofeconomics.com/article?id=pde2008_M000403&q=monetary business%) Christian Hellwig. "monetary business cycles (imperfect information)." Abstract. (http:/ / www. dictionaryofeconomics.com/article?id=pde2008_M000375&q=information&topicid=&result_number=5) Ellen R. McGrattan "real business cycles." Abstract. (http:/ / www. dictionaryofeconomics. com/ articleid=pde2008_R000047&q=real business cycles&topicid=&result_number=1) Eckstein, Otto; Allen Sinai (1990). "1. The Mechanisms of the Business Cycle in the Postwar Period" (http:// books.google.com/?id=P2f-icI-fM0C&pg=PA39). In Robert J. Gordon. The American Business Cycle: Continuity and Change. University of Chicago Press. ISBN9780226304533. Summers, Lawrence H. (1986). "Some Skeptical Observations on Real Business Cycle Theory" (http://www. minneapolisfed.org/research/QR/QR1043.pdf). Federal Reserve Bank of Minneapolis Quarterly Review 10 (Fall): 2327.

Capital (economics)

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Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process. Capital is distinct from land in that capital must itself be produced by human labor before it can be a factor of production. At any moment in time, total physical capital may be referred to as the capital stock, a usage different from the same term applied to a business entity. In a fundamental sense, capital consists of any produced thing that can enhance a person's power to perform economically useful work - a stone or an arrow is capital for a caveman who can use it as a hunting instrument, and roads are capital for inhabitants of a city. Capital is an input in the production function. Homes and personal autos are not capital but are instead durable goods because they are not used in a production effort. In Marxian economics, capital is used to buy something only in order to sell it again to realize a financial profit, and for Marx capital only exists within the process of economic exchangeit is wealth that grows out of the process of circulation itself and forms the basis of the economic system of capitalism.[1]

In narrow and broad uses

In classical and neoclassical economics, capital is one of four factors of production. The others are land, labour and organization, entrepreneurship, or management. Goods with the following features are capital: It can be used in the production of other goods (this is what makes it a factor of production). It was produced, in contrast to "land", which refers to naturally occurring resources such as geographical locations and minerals. It is not used up immediately in the process of production unlike raw materials or intermediate goods. (The significant exception to this is depreciation allowance, which like intermediate goods, is treated as a business expense.) These distinctions of convenience have carried over to contemporary economic theory.[2] [3] There was the further clarification that capital is a stock. As such, its value can be estimated at a point in time, say December 31. By contrast, investment, as production to be added to the capital stock, is described as taking place over time ("per year"), thus a flow. Earlier illustrations often described capital as physical items, such as tools, buildings, and vehicles that are used in the production process. Since at least the 1960s economists have increasingly focused on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles. Human development theory describes human capital as being composed of distinct social, imitative and creative elements: Social capital is the value of network trusting relationships between individuals in an economy. Individual capital, which is inherent in persons, protected by societies, and trades labour for trust or money. Close parallel concepts are "talent", "ingenuity", "leadership", "trained bodies", or "innate skills" that cannot reliably be reproduced by using any combination of any of the others above. In traditional economic analysis individual capital is more usually called labour. Further classifications of capital that have been used in various theoretical or applied uses include: Financial capital, which represents obligations, and is liquidated as money for trade, and owned by legal entities. It is in the form of capital assets, traded in financial markets. Its market value is not based on the historical accumulation of money invested but on the perception by the market of its expected revenues and of the risk entailed.

Capital (economics) Public capital, which encompasses the aggregate body of government-owned assets that are used to promote private industry productivity, including highways, railways, airports, water treatment facilities, telecommunications, electric grids, energy utilities, municipal buildings, public hospitals and schools, police, fire protection, courts and still others. Natural capital, which is inherent in ecologies and protected by communities to support life, e.g., a river that provides farms with water. Spiritual capital, which refers to the power, influence and dispositions created by a person or an organizations spiritual belief, knowledge and practice. In part as a result, separate literatures have developed to describe both natural capital and social capital. Such terms reflect a wide consensus that nature and society both function in such a similar manner as traditional industrial infrastructural capital, that it is entirely appropriate to refer to them as different types of capital in themselves. In particular, they can be used in the production of other goods, are not used up immediately in the process of production, and can be enhanced (if not created) by human effort. There is also a literature of intellectual capital and intellectual property law. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for patent, copyright (creative or individual capital), and trademark (social trust or social capital) instruments. Capital (all types collectively) is often the tool that is leveraged in order to build wealth both personal and corporate.

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In classical economics and beyond

Some thinkers, such as Werner Sombart and Max Weber, locate the concept of capital as originating in double-entry bookkeeping, which is thus a foundational innovation in capitalism, Sombart writing in "Medieval and Modern Commercial Enterprise" that:[4] The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping. Capital can be defined as that amount of wealth which is used in making profits and which enters into the accounts." Within classical economics, Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguished fixed capital from circulating capital. The former designated physical assets not consumed in the production of a product (e.g. machines and storage facilities), while the latter referred to physical assets consumed in the process of production (e.g. raw materials and intermediate products). For an enterprise, both were types of capital. Karl Marx adds a distinction that is often confused with David Ricardo's. In Marxian theory, variable capital refers to a capitalist's investment in labor-power, seen as the only source of surplus-value. It is called "variable" since the amount of value it can produce varies from the amount it consumes, i.e., it creates new value. On the other hand, constant capital refers to investment in non-human factors of production, such as plant and machinery, which Marx takes to contribute only its own replacement value to the commodities it is used to produce. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant. Investment or capital accumulation, in classical economic theory, is the production of increased capital. Investment requires that some goods be produced that are not immediately consumed, but instead used to produce other goods as a means of production. Investment is closely related to saving, though it is not the same. As Keynes pointed out, saving involves not spending all of one's income on current goods or services, while investment refers to spending on a specific type of goods, i.e., capital goods. The Austrian economist Eugen von Bhm-Bawerk maintained that capital intensity was measured by the roundaboutness of production processes. Since capital is defined by him as being goods of higher-order, or goods used to produce consumer goods, and derived their value from them, being future goods.

Capital (economics)

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Further reading
Boldizzoni, F. (2008). "chapters 4-8". Means and ends: The idea of capital in the West, 1500-1970. New York: Palgrave Macmillan. Hennings, K.H. (1987). "Capital as a factor of production". The New Palgrave: A Dictionary of Economics. v. 1. pp.32733.

References
[1] (http:/ / marxists. org/ glossary/ terms/ c/ a. htm#capital) Definition of Capital on Marxists.org [2] Paul A. Samuelson and William D. Nordhaus (2004). Economics, 18th ed., [3] Glossary of Terms, "Capital (capital goods, capital equipment." Deardorff's Glossary of International Economics, Capital. (http:/ / www-personal. umich. edu/ ~alandear/ glossary/ c. html#capital) [4] Lane, Frederic C; Riemersma, Jelle, eds (1953). Enterprise and Secular Change: Readings in Economic History. R. D. Irwin. p.38. (quoted in "Accounting and rationality" (http:/ / www. dse. unive. it/ summerschool/ course2007/ accounting and rationality. pdf))

Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money (whether in the form of profit, rent, interest, royalties, capital gain or some other kind of return). Human capital may also be seen as a form of capital: investment in one's personal abilities, such as through education, to improve their function and therefore capital accumulation (wealth) in a market economy.[1] This activity forms the basis of the economic system of capitalism, where economic activity is structured around the accumulation of capital (investment in production in order to realize a financial profit).

Definition
The definition of capital accumulation is subject to controversy and ambiguities, because it could refer to a net addition to existing wealth, or to a redistribution of wealth. If more wealth is produced than there was before, a society becomes richer; the total stock of wealth increases. But if some accumulate capital only at the expense of others, wealth is merely shifted from A to B. In principle, it is possible that a few people or organisations accumulate capital and grow richer, although the total stock of wealth of society decreases.But it should be noticed that capital may increase by increasing the total wealth of society but few people grow richer while most of the people grow comparatively poorer. That is actually the tendency of the capital accumulation discovered by Marx.[2] Most often, capital accumulation involves both a net addition and a redistribution of wealth, which may raise the question of who really benefits from it most. In economics, accounting and Marxian economics, capital accumulation is often equated with investment of profit income or savings, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation (see below). But capital accumulation can refer variously to real investment in tangible means of production. financial investment in assets represented on paper, yielding profit, interest, rent, royalties, fees or capital gains. investment in non-productive physical assets such as residential real estate or works of art that appreciate in value. "human capital accumulation", i.e., new education and training increasing the skills of the (potential) labour force which can increase earnings from work.

Non-financial and financial capital accumulation is usually needed for economic growth, since additional production usually requires additional funds to enlarge the scale of production. Smarter and more productive organization of

Capital accumulation production can also increase production without increased capital. Capital can be created without increased investment by inventions or improved organization that increase productivity, discoveries of new assets (oil, gold, minerals, etc.), the sale of property, etc. In modern macroeconomics and econometrics the term capital formation is often used in preference to "accumulation", though the United Nations Conference on Trade and Development (UNCTAD) refers nowadays to "accumulation". The term is occasionally used in national accounts.

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The measurement of accumulation

Accumulation can be measured as the monetary value of investments, the amount of income that is reinvested, or as the change in the value of assets owned (the increase in the value of the capital stock). Using company balance sheets, tax data and direct surveys as a basis, government statisticians estimate total investments and assets for the purpose of national accounts, national balance of payments and flow of funds statistics. Usually the Reserve Banks and the Treasury provide interpretations and analysis of this data. Standard indicators include Capital formation, Gross fixed capital formation, fixed capital, household asset wealth, and foreign direct investment. Organisations such as the International Monetary Fund, UNCTAD, the World Bank Group, the OECD, and the Bank for International Settlements used national investment data to estimate world trends. The Bureau of Economic Analysis, Eurostat and the Japan Statistical Office provide data on the USA, Europe and Japan respectively. Other useful sources of investment information are business magazines such as Fortune, Forbes, The Economist, Business Week, etc., and various corporate "watchdog" organisations and non-governmental organization publications. A reputable scientific journal is the Review of Income & Wealth. In the case of the USA, the "Analytical Perspectives" document (an annex to the yearly budget) provides useful wealth and capital estimates applying to the whole country.

HarrodDomar model
In macroeconomics, following the HarrodDomar model, the savings ratio ( ) and the capital coefficient ( ) are regarded as critical factors for accumulation and growth, assuming that all saving is used to finance fixed investment. The rate of growth of the real stock of fixed capital ( ) is:

where

is the real national income. If the capital-output ratio or capital coefficient ( is equal to the rate of growth of . This is determined by

) is constant, the rate

of growth of

(the ratio of net fixed investment or

saving to ) and . A country might for example save and invest 12% of its national income, and then if the capital coefficient is 4:1 (i.e. $4 billion must be invested to increase the national income by 1 billion) the rate of growth of the national income might be 3% annually. However, as Keynesian economics points out, savings do not automatically mean investment (as liquid funds may be hoarded for example). Investment may also not be investment in fixed capital (see above). Assuming that the turnover of total production capital invested remains constant, the proportion of total investment which just maintains the stock of total capital, rather than enlarging it, will typically increase as the total stock increases. The growth rate of incomes and net new investments must then also increase, in order to accelerate the growth of the capital stock. Simply put, the bigger capital grows, the more capital it takes to keep it growing and the more markets must expand.

Capital accumulation

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Marxian concept of capital accumulation

In Karl Marx's economic theory, capital accumulation refers to the operation whereby profits are reinvested increasing the total quantity of capital. Capital is viewed by Marx as expanding value, that is, in other terms, as a sum of money that is transformed into a larger sum of money. (Capitalism is this money-making activity, although Marxists often equate capitalism with the capitalist mode of production). Here, capital is defined essentially as economic or commercial asset value in search of additional value or surplus-value. This requires property relations which enable objects of value to be appropriated and owned, and trading rights to be established. According to Marx, capital accumulation has a double origin, namely in trade and in expropriation, both of a legal or illegal kind. The reason is that a stock of capital can be increased through a process of exchange or "trading up" but also through directly taking an asset or resource from someone else, without compensation. David Harvey calls this accumulation by dispossession. Marx does not discuss gifts and grants as a source of capital accumulation, nor does he analyze taxation in detail. Nowadays the tax take is often so large (i.e., 25-40% of GDP) that some authors refer to state capitalism. This gives rise to a proliferation of tax havens to evade tax liability. The continuation and progress of capital accumulation depends on the removal of obstacles to the expansion of trade, and this has historically often been a violent process. As markets expand, more and more new opportunities develop for accumulating capital, because more and more types of goods and services can be traded in. But capital accumulation may also confront resistance, when people refuse to sell, or refuse to buy (for example a strike by investors or workers, or consumer resistance). What spurs accumulation is competition; in business, if you don't go forward, you go backward, and unless the law prevents it, the strong will exploit the weak. In general, Marx's critique of capital accumulation is that the human chase after wealth and self-enrichment leads to inhuman consequences. The enrichment of some is at the expense of the immiseration of others, and competition becomes brutal. The basis of it all is the exploitation of the labour effort of others. When the "economic cake" expands, this may be obscured because all can gain from trade. But when the "economic cake" shrinks, then capital accumulation can only occur by taking income or assets from other people, other social classes, or other nations. The point is that to exist, capital must always grow, and to ensure that it will grow, people are prepared to do almost anything. The hypothetical system of socialism would succeed capitalism as the dominant mode of production when the accumulation of capital can no longer sustain itself due to falling rates of profit in real production relative to increasing productivity. A socialist economy would not base production on the accumulation of capital, but would instead base production and economic activity on the criteria of satisfying human needs - that is, production would be carried out directly for use.

Concentration and centralization

According to Marx, capital has the tendency for concentration and centralization the hands of richest capitalists. Marx explains: "It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals.... Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many.... The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages.... It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish."[3]

Capital accumulation

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The rate of accumulation

In Marxian economics, the rate of accumulation is defined as (1) the value of the real net increase in the stock of capital in an accounting period, (2) the proportion of realised surplus-value or profit-income which is reinvested, rather than consumed. This rate can be expressed by means of various ratios between the original capital outlay, the realised turnover, surplus-value or profit and reinvestments (see, e.g., the writings of the economist Michal Kalecki). Other things being equal, the greater the amount of profit-income that is disbursed as personal earnings and used for consumptive purposes, the lower the savings rate and the lower the rate of accumulation is likely to be. However, earnings spent on consumption can also stimulate market demand and higher investment. This is the cause of endless controversies in economic theory about "how much to spend, and how much to save". In a boom period of capitalism, the growth of investments is cumulative, i.e. one investment leads to another, leading to a constantly expanding market, an expanding labor force, and an increase in the standard of living for the majority of the people. In a stagnating, decadent capitalism, the accumulation process is increasingly oriented towards investment on military and security forces, real estate, financial speculation, and luxury consumption. In that case, income from value-adding production will decline in favour of interest, rent and tax income, with as a corollary an increase in the level of permanent unemployment. As a rule, the larger the total sum of capital invested, the higher the return on investment will be. The more capital one owns, the more capital one can also borrow and reinvest at a higher rate of profit or interest. The inverse is also true, and this is one factor in the widening gap between the rich and the poor. Ernest Mandel emphasized that the rhythm of capital accumulation and growth depended critically on (1) the division of a society's social product between "necessary product" and "surplus product", and (2) the division of the surplus product between investment and consumption. In turn, this allocation pattern reflected the outcome of competition among capitalists, competition between capitalists and workers, and competition between workers. The pattern of capital accumulation can therefore never be simply explained by commercial factors, it also involved social factors and power relationships.

The circuit of capital accumulation from production

Strictly speaking, capital has accumulated only when realised profit income has been reinvested in capital assets. But the process of capital accumulation in production has, as suggested in the first volume of Marx's Das Kapital, at least 7 distinct but linked moments: The initial investment of capital (which could be borrowed capital) in means of production and labor power. The command over surplus-labour and its appropriation. The valorisation (increase in value) of capital through production of new outputs. The appropriation of the new output produced by employees, containing the added value. The realisation of surplus-value through output sales. The appropriation of realised surplus-value as (profit) income after deduction of costs. The reinvestment of profit income in production.

All of these moments do not refer simply to an "economic" or commercial process. Rather, they assume the existence of legal, social, cultural and economic power conditions, without which creation, distribution and circulation of the new wealth could not occur. This becomes especially clear when the attempt is made to create a market where none exists, or where people refuse to trade. In fact Marx suggests that the original or primitive accumulation of capital often occurs through violence, plunder, slavery, robbery, extortion and theft. He argues that the capitalist mode of production requires that people must be forced to work in value-adding production for someone else, and for this purpose, they must be cut off from sources of income other than selling their labor power.

Capital accumulation

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Simple and expanded reproduction

In volume 2 of Das Kapital, Marx continues the story and shows that, with the aid of bank credit, capital in search of growth can more or less smoothly mutate from one form to another, alternately taking the form of money capital (liquid deposits, securities, etc.), commodity capital (tradeable products, real estate etc.), or production capital (means of production and labor power). His discussion of the simple and expanded reproduction of the conditions of production offers a more sophisticated model of the parameters of the accumulation process as a whole. At simple reproduction, a sufficient amount is produced to sustain society at the given living standard; the stock of capital stays constant. At expanded reproduction, more product-value is produced than is necessary to sustain society at a given living standard (a surplus product; the additional product-value is available for investments which enlarge the scale and variety of production. The bourgeois claim there is no economic law according to which capital is necessarily re-invested in the expansion of production, that such depends on anticipated profitability, market expectations and perceptions of investment risk. Such statements only explain the subjective experiences of investors and ignore the objective realities which would influence such opinions. As Marx states in Vol.2, simple reproduction only exists if the variable and surplus capital realized by Dept. 1 - producers of means of production- exactly equals that of the constant capital of Dept. 2, producers of articles of consumption (pg 524). Such equilibrium rests on various assumptions, such as a constant labor supply (no population growth). Accumulation does not imply a necessary change in total magnitude of value produced but can simply refer to a change in the composition of an industry (pg. 514). Ernest Mandel introduced the additional concept of contracted economic reproduction, i.e. reduced accumulation where business operating at a loss outnumbers growing business, or economic reproduction on a decreasing scale, for example due to wars, natural disasters or devalorisation. Balanced economic growth requires that different factors in the accumulation process expand in appropriate proportions. But markets themselves cannot spontaneously create that balance, in fact what drives business activity is precisely the imbalances between supply and demand: inequality is the motor of growth. This partly explains why the worldwide pattern of economic growth is very uneven and unequal, even although markets have existed almost everywhere for a very long time. Some people argue that it also explains government regulation of market trade and protectionism.

Capital accumulation as social relation

"Accumulation of capital" sometimes also refers in Marxist writings to the reproduction of capitalist social relations (institutions) on a larger scale over time, i.e., the expansion of the size of the proletariat and of the wealth owned by the bourgeoisie. This interpretation emphasizes that capital ownership, predicated on command over labor, is a social relation: the growth of capital implies the growth of the working class (a "law of accumulation"). In the first volume of Das Kapital Marx had illustrated this idea with reference to Edward Gibbon Wakefield's theory of colonisation: "...Wakefield discovered that in the Colonies, property in money, means of subsistence, machines, and other means of production, does not as yet stamp a man as a capitalist if there be wanting the correlative the wage-worker, the other man who is compelled to sell himself of his own free-will. He discovered that capital is not a thing, but a social relation between persons, established by the instrumentality of things. Mr. Peel, he moans, took with him from England to Swan River, West Australia, means of subsistence and of production to the amount of 50,000. Mr. Peel had the foresight to bring with him, besides, 3,000 persons of the working-class, men, women, and children. Once arrived at his destination, Mr. Peel was left without a servant to make his bed or fetch him water from the river. Unhappy Mr. Peel, who provided for everything except the export of English modes of production to Swan River!"

Capital accumulation "Das Kapital", vol.1, ch. 33 [4] In the third volume of Das Kapital, Marx refers to the "fetishism of capital" reaching its highest point with interest-bearing capital, because now capital seems to grow of its own accord without anybody doing anything. In this case, "The relations of capital assume their most externalised and most fetish-like form in interest-bearing capital. We have here , money creating more money, self-expanding value, without the process that effectuates these two extremes. In merchant's capital, , there is at least the general form of the capitalistic movement, although it confines itself solely to the sphere of circulation, so that profit appears merely as profit derived from alienation; but it is at least seen to be the product of a social relation, not the product of a mere thing. (...) This is obliterated in , the form of interest-bearing capital. (...) The thing (money, commodity, value) is now capital even as a mere thing, and capital appears as a mere thing. The result of the entire process of reproduction appears as a property inherent in the thing itself. It depends on the owner of the money, i.e., of the commodity in its continually exchangeable form, whether he wants to spend it as money or loan it out as capital. In interest-bearing capital, therefore, this automatic fetish, self-expanding value, money generating money, are brought out in their pure state and in this form it no longer bears the birth-marks of its origin. The social relation is consummated in the relation of a thing, of money, to itself. Instead of the actual transformation of money into capital, we see here only form without content." "Das Kapital", vol.1, ch. 24 [5]

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Psychology, sociology and ethics of capital accumulation

There have been numerous psychological and sociological studies of the motivations of investment behaviour by individuals. Most of these suggest that the propensity to accumulate capital is associated with qualities such as an intelligent understanding of property ownership, a positive attitude towards money, the ability to seize a money-making opportunity, and a desire to acquire more wealth. Like so many things human, some theorists regard these qualities as innate and genetic qualities, while others regard them as learned through social experience; some theorists think that both biological and social factors are involved. However, even if a strong motivation for enrichment or social improvement exists, the business, government, legal, climate, local culture or social instability may prevent this motivation from being realised. Hernando de Soto for example argues that the reason why poor countries are poor is mainly because of the absence of a legal-cultural infrastructure of "asset management" and of formalised and enforced private property rights. Many systems seemed designed to keep a small minority in power so they can consume more. This power minority takes advantage of the common peopleconsuming much more than they produce. One popular argument in this respect remains the vicious cycle of poverty: the poor are poor because they are poor. Critics of this argument object it is an uninformative and unhelpful tautology. Greed and desire can play a very important role in capital accumulation, but are not a necessary requirement. Indeed according to Max Weber's study of capitalism and the Protestant ethic, frugality, sobriety, deferred consumption and saving were among the key values of the rising bourgeoisie in the age of the Reformation. Some economic historians (e.g., David Landes, Gregory Clark (economist)) refer to national psychology and argue that some nations or cultures (e.g., Europe) are inherently better equipped for capital accumulation, due to cultural habits, customs and values. Other economic historians (e.g. Paul A. Baran) have argued that psychological factors explain very little, because a nation which previously had a low level of accumulation can suddenly "take off". In that case, the causes must be sought in the prevailing social relations. Controversies about the ethics of accumulation have occurred ever since commercial trade began. If informal and formal prostitution is regarded as the oldest profession, the first ethical debate about accumulation must have

Capital accumulation occurred tens of thousands of years ago at the very least. The problem is that trade or market forces do not create any particular morality of their own, beyond the requirement to meet contractual obligations that settle transactions. Some forms of trade may be accepted, others rejected, but there exists no general moral principle for this which can be derived from the trade itself. A good contemporary illustration of this problem is the gigantic increase in total reported crime and the grey economy or shadow economy after the deregulation of world markets from the 1980s, and the marketisation of the USSR and China. But ancient philosophers and theologians already knew about the problem, which is why they were intensely preoccupied with the politics of the rule of law and its enforcement. The main ethical questions concern which routes to wealth are morally justifiable, and what entitles individuals and groups to appropriate amounts of wealth, in particular wealth which they have not themselves created. The medieval economists invented theories of a just price and the moral debate surfaces again these days, e.g., in the controversies about fair trade, imperialism and Islamic banking. Neo-liberal theory emphasises that a "good" person is one who creates new wealth by deferring consumption or improving production, while socialis] theory says a "good" person should be forced to share their wealth however accumulated. The most popular moral theories are similar to that of John Rawls. Karl Marx illustrated his analysis with sarcastic comments about Christian accumulation; some forms of accumulation were believed to be compatible with Jesus Christ, while others were not; some forms of accumulation were forgiven by God afterwards, others were not. Martin Luther for example raged against usury and extortion. Marxism-Leninism is hostile to all private property and market activity. It must be kept in mind that the "private property" that Marx refers to is the ownership of the means of production by a generally small elite of wealthy entrepreneurs. The proletariat, or laborer, is inferior to all aspects of productionincluding labor, the products or services made, and revenue; and therefore the division of labor and its products must be equally redistributed to avoid the control and degradation of an unknown bourgeoisie. But because capital accumulation does not presuppose any particular or specific "moral system", accumulation can also continue regardless of any particular morality advocated by popes, presidents, queens, journalists, pop stars, business tycoons or anybody else. All that is required is (1) the ability to own assets and trade in them and (2) sufficient income beyond subsistence and (3) the will to defer consumption to be able to accumulate capital.

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Different forms of capital accumulation

Essentially, in capitalism the production of output depends on the accumulation of capital. The propensity to invest in production therefore depends a lot on expectations of profitability and sales volume, and on perceptions of market risk. If production stops being profitable, or if sales drop sharply, or if there is social instability, capital will exit more and more from the sphere of production. Or if it cannot or does not, rationalisation investments will be undertaken, to amalgamate unprofitable enterprises into profitable units. As a corollary, capital accumulation may be the accumulation of production capital (industrial assets), or the accumulation of money capital (financial assets), or the accumulation of commodity capital (products, real estate etc. which can be traded). But irrespective of whether the additional capital value (or surplus-value happens to take the form of profit, interest, rent, or some kind of tax impost or royalty income, what drives the accumulation process is the perpetual search for more surplus-value, for added value as such. This requires a constant supply of a labor force which can conserve and add value to inputs and capital assets, and thus create a higher value. Normally, the socio-economic compulsion to work for a living in capitalist society is legally enforced and regulated by the statee, for example through workfare and strict conditions for receiving an unemployment benefit.

Capital accumulation Although capital accumulation does not necessarily require production, ultimately the basis for it is value-adding production which makes net additions to the stock of wealth. Capital can accumulate by shifting the ownership of assets from one place to another, but ultimately the total stock of assets must increase. Other things being equal, if production fails to grow sufficiently, the level of debt will increase, ultimately causing a breakdown of the accumulation process when debtors cannot pay creditors. Capital accumulation does not necessarily require trade either, although capital presupposes trade, and the ability to exchange goods for money. The reason is that wealth can be amassed through illegal or legalised expropriation (robbery, plunder, theft, piracy, slavery, embezzlement, fraud and so on). However, a continuous and cumulative accumulation process always presupposes that capital ownership is secure. Consequently, military and police forces have typically been necessary for capital accumulation on a larger scale, to protect property. In medieval society, typically the bourgeoisie could not protect its capital assets permanently from attacks, which meant that the accumulation process was interrupted, and remained limited in scope. Today however, capitalists can own billions of dollars worth of assets which are well-protected against crime (see the annual Merrill-Lynch survey of the world's wealthy). With the aid of private banking it is easier to obscure or hide the wealth that one owns.

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Regime of accumulation
Both the Regulation School of French Marxist economists, inspired by the original writings of Michel Aglietta and developed by Robert S. Boyer, as well as the American social structure of accumulation school founded by the economists Samuel Bowles and David Gordon have emphasized that the processes of capital accumulation occur within a social regime of accumulation. In other words, a specific political and socio-economic environment is required that enables sustained investment and economic growth. This environment is created partly by state policy, but partly by also by technological innovations, changes in popular culture, commercial developments, the media, and so on. An example of such a regime often cited here is that of Fordism, named after the enterprise of Henry Ford. As the pattern of accumulation changes, the regime of accumulation also changes. Similar ideas also surface in institutional economics. The main insight here is that market trade cannot flourish without regulation by a legal system plus the enforcement of basic moral conduct and private property by the state. But the regime of accumulation responds to the total experience of living in capitalist society, not just market trade.

Environmental criticisms
The environmental criticism of capital accumulation focuses on four main ideas. Firstly, there is the problem of externalities. This means that public or privately owned industry incurs costs, including environmental and health costs, which are not charged or priced. This happens for example when effluents are discharged on land, water or in the air, which can cause pollution or despoilation of terrains. In recognition of this, environmental taxes are sometimes imposed. Secondly, commercial activities which may be rational from the point of view of a narrow public or private enterprise may not be rational from the point of view of the larger society, or from the point of view of the biosphere, especially when they involve the destruction of natural habitats of flora and fauna, pollution and entropy. Because a natural resource happens to be a freely available good (for example fish in the open sea), it may be over utilized by either public or private enterprises. Or, a lot of energy may be wasted producing and transporting a good to the consumer. Or, the disturbance of subsistence economics by commerce may cause overpopulation by not controlling population by starvation. Thirdly, goods and services may be produced for public or private profit in ways which are directly or indirectly harmful to human life, either because of the nature of the use-value involved, or because of the techniques used to produce them, or because they encourage consumer habits with harmful effects.

Capital accumulation Finally, business and cultural ethics may often not be reconcilable with some human ethics or good environmental ethics. This means for example that the imputation of a price to an environmental cost, or imposing an environment tax may be insufficient as a policy, because some things which have value simply have no price. Nowadays environmental concerns are an essential part of so-called socially responsible business and corporate governance. However, opinion is divided about whether a capitalist market economy can be ecologically sustainable. Some argue that the experience of wide spread environmental destruction in the Soviet Union and China proves that state socialism or command economy can be ecologically worse than capitalism. Today [2005] some environmentalists consider capitalism, or the "free market system" as it is usually called, incapable of complying with the basic requisites of a sustainable and respectful habitation of planet earth. A major problem, inherent in some free market production dynamics, is the constant desire to constantly expand production. In this particular regard, critics point to the penchant to plan in short-term cycles, and with a narrow concern about the fortunes of only a single country, firm or business entity, thereby ignoring the cumulative effect brought to bear on the biosphere by the entire production system. In the 1970s, some environmentalists argued for a policy of'"zero economic growth" in "affluent" Western societies. However, when a long recession began in that decade, halving economic growth rates, most people became more concerned about mass unemployment. Thus, the proponents of zero growth lost popularity. Nowadays, the popular concept is sustainable economic development or growth. But interpretations of what that means can differ wildly. One difficulty is that predictions of future resource scarcity are usually based on extrapolation from the past, "assuming present trends will continue", but they may not.

29

Capital accumulation and risk

Most capital accumulation involves risk, because capital is committed to an investment without perfect certainty of future earnings. A capital asset could gain value, but it could also lose value in the future. Owners of capital (investors) therefore typically diversify their investment portfolio, and try to minimise the risks involved in investments by every possible means. In the course of two centuries of capital accumulation based on industrialisation the intensive economising and exploitation of human labour, and technological innovation, the value of the assets that are invested in has become very large the markets traded in extend around the globe the deregulation of markets has increased the level of market uncertainty the volume of speculative capital has grown enormously the banking industry dominates the ownership of capital assets.

This has led to an enormous expansion of the insurance industry and of the profession of risk management. As a corollary, this powerfully stimulates the construction of mathematical models which aim to assess how probable it is that particular "risky events" will occur. Some sociologists such as Frank Furedi claim that an exaggerated and unhealthy preoccupation or anxiety about risks has infiltrated the whole of modern society. Speculation - making money from price differentials or price fluctuations - is justified as follows: "The roles of speculators in a market economy are to absorb risk and to add liquidity to the marketplace by risking their own capital for the chance of monetary reward." However, speculation often also occurs with borrowed capital. In this case, capital is borrowed at a low rate of interest, and reinvested at a higher return.

Capital accumulation

30

Capital accumulation and military wars

Wars typically causes the diversion, destruction and creation of capital assets as capital assets are both destroyed or consumed and diverted to types of production needed to fight the war. Many assets are wasted and in some few cases created specifically to fight a war. War driven demands may be a powerful stimulus for the accumulation of capital and production capability in limited areas and market expansion outside the immediate theatre of war. Often this has induced laws against perceived and real war profiteering. War destruction can be illustrated by looking at World War II. Industrial war damage was heaviest in Japan, where 1/4 of factory buildings and 1/3 of plant & equipment were destroyed; 1/7 of electric power-generating capacity was destroyed and 6/7 of oil refining capacity. The Japanese merchant fleet lost 80% of their ships. In Germany in 1944, when air attacks were heaviest, 6.5% of machine tools were damaged or destroyed, but around 90% were later repaired. About 10% of steel production capacity was lost. In Europe, the United States and the Soviet Union enormous resources were accumulated and ultimately dissipated as planes, ships tanks, etc. were built and then lost or destroyed. Germany's total war damage was estimated at about 17.5% of the pre-war total capital stock by value, i.e., about 1/6. In the Berlin area alone, there were 8 million refugees lacking basic necessities. In 1945, less than 10% of the railways were still operating. 2395 rail bridges were destroyed and a total of 7500 bridges, 10,000 locomotives and more than 100,000 goods wagons were destroyed. Less than 40% of the remaining locomotives were operational. However, by the first quarter of 1946 European rail traffic, which was given assistance and preferences (by western appointed military governors) for resources and material as an essential asset, regained its prewar operational level. At the end of the year, 90% of Germany's railway lines were operating again. In retrospect, the rapidity of infrastructure reconstruction appears astonishing. Initially, in May 1945, newly installed U.S. President Harry S. Truman's directive had been that no steps would be taken towards economic rehabilitation of Germany. In fact, the initial industry plan of 1946 prohibited production in excess of half of the 1938 level; the iron and steel industry was allowed to produce only less than a third of pre-war output. These plans were rapidly revised and better plans were instituted. In 1946, over 10% of Germany's physical capital stock (plant & equipment) was also dismantled and confiscated, most of it going to the USSR. By 1947, industrial production in Germany was at 1/3 of the 1938 level, and industrial investment at about 1/2 the 1938 level. The first big strike wave in the Ruhr occurred in early 1947 - it was about food rations and housing, but soon there were demands for nationalisation. The U.S. appointed military Governor (Newman) however stated at the time that he had the power to break strikes by withholding food rations. The clear message was: "no work, no eat". As the military controls in Western Germany were nearly all relinquished and the Germans were allowed to rebuild their own economy with Marshal Plan aid things rapidly improved. By 1951, German industrial production had overtaken the prewar level. The Marshall Aid funds were important, but, after the currency reform (which permitted German capitalists to revalue their assets) and the establishment of a new political system, much more important was the commitment of the USA to rebuilding German capitalism and establishing a free market economy and government, rather than keeping Germany in a weak position. Initially, average real wages remained low, lower even than in 1938, until the early 1950s, while profitability was unusually high. So the total investment fund, aided by credits, was also high, resulting in a high rate of capital accumulation which was nearly all reinvested in new construction or new tools. This was called the German economic miracle or "Wirtschaftswunder".[6] In the United States in World War II the large investments in industrial plant necessitated by the war brought some advantages; but the costs of dead, waste and debt would have never been under taken by any rational government for the slight advantages. In modern times, it has often been possible to rebuild physical capital assets destroyed in wars completely within the space of about 10 years, except in cases of severe pollution by chemical warfare or other kinds of irreparable devastation. However, damage to human capital has been much more devastating, in terms of fatalities (in the case of

Capital accumulation World War II, about 55 million deaths), permanent physical disability, enduring ethnic hostility and psychological injuries which have effects for at least several generations.

31

New developments in capital accumulation

New trends in capital accumulation include: financialisation (the extraordinarily strong growth of the international financial markets. This is trade in financial claims to current and future income. As a corollary, the proportion of national income which consists of interest income and rentier income increases. The International Swaps and Derivatives Association reported in September 2006 that the outstanding nominal value of swaps and derivatives at the end of June 2006 was $283 trillion nearly ten times the combined GDP of the US, Canada, the EU, Japan, and China; or ten times the value of total US home equity (each being valued at about $34 trillion). According to Standard & Poor's, world stock market capitalization is about $41 trillion. Of total swaps and derivatives, some $26 trillion was in the fastest growing area, credit default swaps. Modern information technology makes it possible to engage in very complex investment projects and shift funds extremely quickly from one placement to another in space and time. This increases the rotation speed of capital and raises the profit rate, but can also increase potential financial risks. the growing controversies about intellectual property rights and the protection (or security) of ideas which can make money for the owner. Increasingly, the basic conditions necessary for a good, service or idea to become a tradeable commodity are theoretically defined. ongoing privatisation of assets which were previously under public ownership. The IMF estimates suggest that in two decades since 1985 more than $2 trillion US dollars (in 2005 values) worth of state assets were privatised worldwide. Typically, these assets also rise sharply in value within a few years, because they involve enterprises occupying monopoly positions (e.g., utilities) which thus provide guaranteed profits. If profits dry up in the private sector, capitalists acquire public assets paid for by all citizens, with the argument that if they run them, supply will be more efficient. The enormous increase in capital gains from rising property values in the richer countries, especially in the |housing market. US tax data for fiscal 2000 showed that realised capital gains in the USA peaked at an estimated $644.3 billion worth of income while US GDP in 2000 was at US$9,817.0 billion, in other words realised capital gains assessed for tax purposes were equal to 6.5% of GDP at that point (total capital gains would be larger). Yet GDP, being a measure of value added in production, does not even include this "hidden" personal and business income. A growing proportion of capital assets which is not productively invested (overcapitalisation), together with an increase in the amount of consumer debt and liabilities. Some observers see the cause as being an increase in the gap between rich and poor, which causes only sluggish demand growth. "Debt management" has become a distinct and profitable business. The crisis of numerous pension funds providing a large amount of investment capital, which are alleged to be badly managed. An international "competition of currency values" strongly influenced by speculative capital, which has a big effect on the pattern of international trade. The magnitudes involved can be gauged, e.g., from the currency conversion ratios used to establish purchasing power parity (PPP). For example, India's GDP valued at PPP becomes five times larger. This tends to stimulate counter-trade. The acceleration of the concentration and centralisation of capital internationally in very large corporations. The Fortune Magazine "Global 500" largest corporations in 2004 employed more people than the whole workforce of Germany. The after-tax profit volume of the Fortune Global 500 was said to be $731 billion, the combined asset value was $60.8 trillion, gross income (revenues) $14.8 trillion, and stockholders equity $6.8 trillion. For comparison, world GDP in 2004 was valued at $40.9 trillion (World Bank).

Capital accumulation The Merrill lynch/CapGemini World Wealth Report 2005 covering High Net Worth Individuals (HNWI) claims the fortunes of the world's millionaires and billionaires grew strongly in 2004, increasing by 8.2% to US$30.8 trillion in one year. Driven by North America & AsiaPacific, this represents "the highest growth of HNWI wealth in more than three years". Dollarisation - more US currency now circulates outside the US than inside it, and some countries such as Ecuador and El Salvador have adopted the US dollar as national currency. "Dollar hegemony" is maintained by large Asian, Arab and European investments in the United States. the tendency for corporate investment to orient towards activities which secure good short-term returns for shareholders. This is called "value-based management". Most corporate executive officers (CEO's) cite profitability as their prime concern. an increasing preoccupation with the conditions for extending credit, and with all sorts of risk factors. World markets are increasingly sensitive to events and disturbances which might cause social instability or panics. the declining overall significance of business start-ups, in the sense of enterprises creating new products and services, rather than being just tax-shelters or secondary employment (whether this is a permanent trend remains to be seen). the growth of criminal (or illegal) accumulation as measured by crime reports, including business crime and corruption such as fraud, embezzlement, money laundering, insider trading, smurfing and theft, but also prostitution, forced labour, slavery, war plunder etc. The volume of illegal international transactions is now said to be around $1 trillion a year, equal to the GDP of Spain or Canada. National Geographic has reported there are about 27 million slaves in the world. International Labour Organization estimates of forced labor are a little over a dozen million. There are possibly 70 million people involved around the world in prostitution of one form or another. But there are many more, employed or unemployed, in "intermediate" positions. Traditional sociological categories may not describe their situation accurately, but a growing "underclass" (which may not be an accurate label) is a policy concern for many governments. the most ignored aspect is the changing structure of the international workforce in its totality, specifically the number employed by specific employment status and by income, in different sectors. But just as Marx's Law of Accumulation predicted, the working class has grown enormously within 2 centuries. Deon Filmer estimated that 2,474 million people participated in the worldwide non-domestic labour force in the mid-1990s. Of these around a fifth, 379 million people, worked in industry, 800 million in services, and 1,074 million in agriculture. The majority of workers in industry and services were wage & salary earners - 58 percent of the industrial workforce and 65 percent of the services workforce. But a big portion were self-employed or involved in family labour. Filmer suggests the total of employees worldwide in the 1990s was about 880 million, compared with around a billion working on own account on the land (mainly peasants), and some 480 million working on own account in industry and services. tax havens. Hides 8 trillion.

32

Capital accumulation

33

References
[1] [2] [3] [4] [5] [6] (http:/ / marxists. org/ glossary/ terms/ c/ a. htm#capital) Definition of Capital on Marxists.org Karl MARX. "Das Kapital, ch.25" (http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch25. htm). . Retrieved July 7, 2011. (http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch25. htm) "Das Kapital", vol.1, ch. 25 http:/ / www. marxists. org/ archive/ marx/ works/ 1867-c1/ ch33. htm http:/ / www. marxists. org/ archive/ marx/ works/ 1894-c3/ ch24. htm Armstrong, Glyn & Harrison 1984

A few references to works of theory

Michel Aglietta, A Theory of Capitalist Regulation. Elmar Altvater, Gesellschaftliche Produktion und konomische Rationalitt; Externe Effekte und zentrale Planung im Wirtschaftssystem des Sozialismus. Samir Amin, Accumulation on a world scale. Philip Armstrong, Andrew Glyn and John Harrison, Capitalism since World War II. Paul A. Baran, The Political Economy of Growth. Gregory Clark (economist) A Farewell to Alms: A Brief Economic History of the World. P. Groenewegen (ed.), Economics and ethics.London: Routledge 1996. Henryk Grossman, The Law of Accumulation and Collapse of the Capitalist System. Andre Gunder Frank, World accumulation, 1492 - 1789. New York 1978 Rudolf Hilferding, Finance Capital. Rosa Luxemburg, The Accumulation of Capital. Ernest Mandel, Marxist Economic Theory. Karl Marx, Das Kapital Vol. 1, Part 7 and Vol. 2, Part 3. Seymour Melman, Profits without production. Michael Perelman, Steal this Idea: the Corporate Confiscation of Creativity. Joan Robinson, Essays in the Theory of Economic Growth. Harry Rothman, Murderous providence; A study of pollution in industrial societies. Vaclav Smil, China's Environmental Crisis: An Inquiry into the Limits of National Development. Armonk: M.E. Sharpe, 1992. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Manual Velzquez, Business Ethics: Concepts and Cases. William J. Bernstein, The Birth of Plenty: How the Modern World of Prosperity was Launched. Deon Filmer, Estimating the World at Work, a background report for World Bank's World Development Report 1995 (Washington DC, 1995). Willem van Schendel and Itty Abraham (eds), Illicit Flows and Criminal Things. States, Borders, and the Other Side of Globalization. Bloomington, Indiana University Press, 2005; ISBN 0-253-34669-X Joshua S. Goldstein, War and economic History (http://www.joshuagoldstein.com/jgeconhi.htm)

External links
Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden 1800-2000 by Rodney Edvinsson (http://www.diva-portal.org/diva/getDocument?urn_nbn_se_su_diva-378-1__fulltext.pdf) David Harvey, Reading Marx's Capital (http://davidharvey.org), Reading Marxs Capital - Class 11, Chapter 25, The General Law of Capitalist Accumulation (http://davidharvey.org/2008/08/capital-class-11/) (video lecture)

Capital asset

34

Capital asset
The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways. In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assets, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an asset is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the asset will produce. With the further assumption that people agree on the probability distribution of future cash flows, it is possible to have an objective Capital asset pricing model. Even without the assumption of agreement, it is possible to set rational limits on capital asset value.[1] In governmental accounting, it is defined as any asset used in operations with an initial useful life extending beyond one reporting period.[2] Generally, government managers have a "stewardship" duty to maintain capital assets under their control. See International Public Sector Accounting Standards for details. In some income tax systems, gains and losses from capital assets are treated differently than other income. Sale of non-capital assets, such as inventory or stock of goods held for sale, generally is taxed in the same manner as other income. Capital assets generally include those assets outside the daily scope of business operations, such as investment or personal assets. The United States system defines a capital asset by exclusion.[3] Capital assets include all assets except inventory of supplies or property held for sale (including subdivided real estate), depreciable property used in a business, accounts or notes receivable, certain commodities derivatives and hedging items, and certain copyrights and similar property held by the creator of the property. The United Kingdom has an even broader definition.[4]

Non-technical and ambiguous usage

A well-known financial accounting textbook[5] advises that the term be avoided except in tax accounting because it is used in so many different senses, not all of them well-defined. For example it is often used as a synonym for fixed assets[6] or for investments in securities.[5] A common non-technical usage occurs when people ask that employees or the environment or something else be treated as a capital asset. In this context it means something managers have a responsibility to maintain, and to report changes in value as gains or losses.[7] Capital assets should not be confused with the capital a financial institution is required to hold. This capital is computed from the right-hand side of the balance sheet while assets are found on the left-hand side.[5]

References
[1] Eugene F. Fama and Merton H. Miller, The Theory of Finance, Holt Rinehart and Winston (1974). [2] Governmental Accounting Standards Board Statement No. 34, Basic Financial Statementsand Managements Discussion and Analysisfor State and Local Governments, paragraph 19. [3] 26 USC 1221 (http:/ / www. law. cornell. edu/ uscode/ html/ uscode26/ usc_sec_26_00001221----000-. html). Also see the discussion of capital gains and losses in IRS Publication 550 (http:/ / www. irs. gov/ publications/ p550/ ch04. html#en_US_publink100010476). [4] See HMRC discussion of assets liable to capital gains tax (http:/ / www. hmrc. gov. uk/ cgt/ intro/ when-to-pay. htm). [5] Clyde P. Stickney and Roman L. Weil, Financial Accounting, p. 622. [6] John Owen Edward Clark, Dictionary of International Accounting Terms, p. 98 [7] David F. Robinson, "Human asset accounting", Long Range Planning, v. 7, i. 1, February 1974, Pp. 58-60.

China

35

China
People's Republic of China Zhnghu Rnmn Gnghgu

Anthem: "March of the Volunteers" (Pinyin: "Yyngjn Jnxngq")

Capital Largest city Official language(s) Recognised regionallanguages Official written language Official script Ethnic groups Demonym Government

Beijing 3955N 11623E Shanghai

[1] [2]

Modern Standard Mandarin [3] (or Putonghua) Mongolian, Tibetan, Uyghur, Zhuang, and various others Vernacular Chinese Simplified Chinese 91.51% Han; Chinese Single-party state, [5] nominal communist state [a] Hu Jintao Wen Jiabao
[4] [3]

55 recognised minorities

- -

President Premier

China

36
CongressChairman ConferenceChairman CPCGeneralSecretary Legislature Establishment Wu Bangguo Jia Qinglin Hu Jintao National People's Congress

- - -

- - -

Unification of China under the Qin Dynasty Republic established People's Republic of China proclaimed Area

221 B.C.E 1 January 1912 1 October 1949

Total

9,640,821km2[b] or 9,671,018km[b](3rd/4th) 3704427sqmi 2.8 Population

[c]

Water(%)

- -

2010census Density

1,339,724,852
2

[4]

(1st)

139.6/km (53rd) 363.3/sqmi 2011estimate

GDP(PPP) - - GDP (nominal) - - Gini(2007) HDI(2010) Currency Time zone Date formats Total Per capita Total Per capita

$11.316 trillion $8,394

[6]

[6]

(2nd)

(91th)

2011estimate $6.988 trillion $5,184 41.5

[6] [6]

(2nd)

(90th)

[7] [8]

0.663

(medium)(89th)

Chinese yuan (renminbi) () (CNY) China Standard Time (UTC+8) yyyy-mm-dd or yyyymd (CE; CE-1949) right, except for Hong Kong & Macau CN .cn[c] . +86[c]
[10] [9]

Drives on the ISO3166code Internet TLD Calling code

a. Simple characterizations of the political structure since the 1980s are no longer possible.

b. 9598086 km2 ( sqmi) excludes all disputed territories. 9640821 km2 ( sqmi) Includes Chinese-administered area (Aksai Chin and Trans-Karakoram Tract, both territories claimed by India), [11] Taiwan is not included. c. Information for mainland China only. Hong Kong, Macau, and territories under the jurisdiction of the Republic of China (Taiwan) are excluded.

China
i China /tan/ (Chinese: /; pinyin: Zhnggu/Zhnghu; see also Names of China), officially the People's Republic of China (PRC), is the most populous state in the world, with over 1.3billion citizens. Located in East Asia, the country covers approximately 9.6million square kilometres (3.7million square miles). It is the world's second-largest country by land area,[12] and the third- or fourth-largest in total area, depending on the [13] definition of total area.

37

The People's Republic of China is a single-party state governed by the Communist Party of China (CPC).[14] The PRC exercises jurisdiction over 22 provinces, five autonomous regions, four directly-controlled municipalities (Beijing, Tianjin, Shanghai, and Chongqing), and two mostly self-governing[15] special administrative regions (SARs), Hong Kong and Macau. Its capital city is Beijing.[16] The PRC also claims as a 23rd province the island of Taiwan, which is controlled by the Government of the Republic of China (ROC). This claim of Taiwan is controversial and related to the complex political status of Taiwan and the unresolved Chinese Civil War. Chinas landscape is vast and diverse, with forest steppes and the Gobi and Taklamakan deserts occupying the arid north and northwest near Mongolia and Central Asia, and subtropical forests being prevalent in the wetter south near Southeast Asia. The terrain of western China is rugged and elevated, with the towering Himalaya, Karakorum, Pamir and Tian Shan mountain separating China from South and Central Asia. The worlds apex, Mt. Everest (8,848 m), and second-highest point, K2 (8,611 m), lie on China's borders, respectively, with Nepal and Pakistan. The countrys lowest and the worlds third-lowest point, Lake Ayding (-154 m), is located in the Turpan Depression. The Yangtze and Yellow Rivers, the third- and sixth-longest in the world, flow from the desolate Tibetan Plateau to the densely-populated eastern seaboard. Chinas coastline along the Pacific Ocean is 14500 kilometres (9000mi) long (the 11th-longest in the world), and is bounded by the Bohai, Yellow, East and South China Seas. The ancient Chinese civilizationone of the world's earliestflourished in the fertile basin of the Yellow River in the North China Plain.[17] China's political system was based on hereditary monarchies, known as dynasties, beginning with the Xia (approx. 2000 BC) and lasting almost 4,000 years, until the end of the Qing Dynasty in 1912. Since the Qin Dynasty (not to be confused with Qing Dynasty) first united China in 221 BC, the country has been divided and reunited numerous times in history. The Republic of China (ROC), founded in 1912 after the overthrow of the Qing, ruled the Chinese mainland until 1949. In the 1946-1949 phase of the Chinese Civil War, the Chinese Communists defeated the Chinese Nationalists (Kuomintang) on the mainland and established the People's Republic of China in Beijing on October 1, 1949. The Kuomintang relocated the ROC government to Taiwan with its capital in Taipei. The ROC's jurisdiction is now limited to Taiwan, Penghu, Kinmen, Matsu and several outlying islands. Since then, the People's Republic of China and the Republic of China (subsequently became known as "Taiwan") have remained in dispute over the sovereignty of China and the political status of Taiwan, mutually claiming each other's territory and competing for international diplomatic recognition. In 1971, the PRC gained admission to United Nations and took the Chinese seat as a permanent member of the U.N. Security Council. The PRC is also a member of numerous formal and informal multilateral organizations, including the WTO, APEC, BRIC, the Shanghai Cooperation Organisation and the G-20. As of September 2011, all but 23 countries have recognized the PRC as the sole legitimate government of China. Since the introduction of market-based economic reforms in 1978, China has become the world's fastest-growing major economy,[18] and the world's largest exporter and second-largest importer of goods. As of 2011, it is the world's second-largest economy, after the United States, by both nominal GDP and purchasing power parity (PPP).[19] On per capita terms, however, China ranked only 91st by nominal GDP and 94th by GDP (PPP) in 2010, according to the IMF. China is a recognized nuclear weapons state and has the world's largest standing army, with the second-largest defense budget. In 2003, China became the third nation in the world, after the Soviet Union and the United States, to independently launch a successful manned space mission. China has been characterized as a potential superpower by a number of academics,[20] military analysts,[21] and public policy and economics analysts.[22]

China

38

Etymology
China Chinese name SimplifiedChinese: TraditionalChinese: Literal meaning: Middle Kingdom [23] [24]

Transliterations Gan - Romanization: Kejia - Romanization: Dung24 Gued2 Tung-koet

Mandarin - HanyuPinyin: Min - HokkienPOJ: - Min DongBUC: Wu - Romanization: Yue - Jyutping: Zung1 gwok3 Tson koh Tiong-kok Dng-guk Zhnggu

- YaleRomanization: Jnggwok
People's Republic of China Alternative Chinese name SimplifiedChinese: TraditionalChinese:

China

39

Transliterations Gan - Romanization: Chungfa Ninmin Khungfokoet Hakka - Romanization: Dung24 fa11 ngin11 min11 kiung55 fo11 gued2 Mandarin - HanyuPinyin: Zhnghu Rnmn Gnghgu Min - HokkienPOJ: - Min DongBUC: Tiong-ha jn-bn king-h-kok Dng-hu ng-mng Gng-hu-guk Wu - Romanization: Tson gho zin min gon ghu koh Yue - Jyutping: Zung1 waa4 jan4 man4 gung6 wo4 gwok3

- YaleRomanization: Jngwh Yhnmhn Guhngwhgwok

Mongolian name Mongolian:

Tibetan name Tibetan:

krung hwa mi dmangs spyi mthun rgyal khab

Transliterations - Wylie:

- ZangwenPinyin: Zhunghua Mimang Jitun Gyalkab

Uyghur name Uyghur:

Zhuang name Cunghvaz Yinzminz Gunghozgoz

Zhuang:

The word "China" is derived from Cin (), a Persian name for China popularized in Europe by the account of the 13th-century explorer Marco Polo.[25] [26] The first recorded use in English dates from 1555.[27] The Persian word is, in turn, derived from the Sanskrit word Cna (),[28] which was used as a name for China as early as AD 150.[29] There are various scholarly theories regarding the origin of this word. The traditional theory, proposed in the 17th century by Martino Martini, is that "China" is derived from "Qin" (), the westernmost of the Chinese kingdoms during the Zhou Dynasty, or from the succeeding Qin Dynasty (221 206 BC).[30] In the Hindu scriptures Mahbhrata[31] and Manusmti (Laws of Manu), the word Cna is used to refer to a country located in the Tibetan-Burman borderlands east of India.[32]

China In China, common names for the country include Zhnggu (Chinese: ; literally "Middle Kingdom") and Zhnghu (Chinese: ). The official name of China changed with each dynasty or with each new government. The term Zhongguo appeared various ancient texts such as the Classic of History,[33] and in earlier times the term was used in various senses. In pre-imperial times, it was often as a cultural concept to distinguish the Huaxia from the barbarians. Sometimes Zhongguo, which can be either singular or plural, referring to the group of states in the central plain. The Chinese were not unique in regarding their country as "central", since other civilizations had the same view.[34]

40

History
Prehistory
Archaeological evidence suggests that the earliest hominids in China date from 250,000 to 2.24 million years ago.[35] [36] A cave in Zhoukoudian (near present-day Beijing) has fossils dated at somewhere between 300,000 to 780,000 years.[37] [38] [39] The fossils are of Peking Man, an example of Homo erectus who used fire. The earliest evidence of a fully modern human in China comes from Liujiang County, Guangxi, where a cranium has been found and dated at approximately 67,000 years old. Controversy persists over the dating of the Liujiang remains (a partial skeleton from Minatogawa in Okinawa).[40] [41]

Early dynastic rule

Chinese tradition names the first dynasty Xia, but it was considered mythical until scientific excavations found early Bronze Age sites at Erlitou in Henan Province in 1959.[42] Archaeologists have since uncovered urban sites, bronze implements, and tombs in locations cited as Xia's in ancient historical texts, but it is impossible to verify that these remains are of the Xia without written records from the period.

Jade deer ornament made during the first historical Chinese dynasty, the Shang, 17th to 11th Century BC.

The first Chinese dynasty that left historical records, the loosely feudal Shang (Yin), settled along the Yellow River in eastern China from the 17th to the 11th century BC. The Oracle bone script of the Shang Dynasty represent the oldest forms of Chinese writing found and the direct ancestor of modern Chinese characters used throughout East Asia. The Shang were invaded from the west by the Zhou, who ruled from the 12th to the 5th century BC, until their centralized authority was slowly eroded by feudal warlords. Many independent states eventually emerged out of the weakened Zhou state, and continually waged war with each other in the Spring and Autumn Period, only occasionally deferring to the Zhou king. By the time of the Warring States Period, there were seven powerful sovereign states, each with its own king, ministry and army.

Some of the thousands of life-size Terracotta Warriors of the Qin Dynasty, ca. 210 BC.

China

41

Imperial China
The first unified Chinese state was established by Qin Shi Huang of the Qin state in 221 BC. Qin Shi Huang proclaimed himself the "First Emperor" (), and imposed many reforms throughout China, notably the forced standardization of the Chinese language, measurements, length of cart axles, and currency. The Qin Dynasty lasted only fifteen years, falling soon after Qin Shi Huang's death, as its harsh legalist and authoritarian policies led to widespread rebellion.[43] [44] The subsequent Han Dynasty ruled China between 206 BC and 220 AD, and created a lasting Han cultural identity among its populace that extends to the present day.[43] [44] The Han Dynasty expanded the empire's territory considerably with military campaigns reaching Korea, Vietnam, Mongolia and Central Asia, and also helped establish the Silk Road in Central Asia. China was for a large part of the last two millennia the world's largest economy.[45] However, in the later part of the Qing Dynasty, China's economic development began to slow and Europe's rapid development during and after the Industrial Revolution enabled it to surpass China. After Han's collapse, another period of disunion followed, including the highly chivalric period of the Three Kingdoms.[46] Independent Chinese states of this period such as Wu opened diplomatic relations with Japan,[47] introducing the Chinese writing system there. In 580 AD, China was reunited under the Sui.[48] However, the Sui Dynasty was short-lived after a failure in the Goguryeo-Sui Wars (598614) weakened it.[49] [50] Under the succeeding Tang and Song dynasties, Chinese technology and culture reached its zenith.[51] The Tang Empire was at its height of power until the middle of the 8th century, when the An Shi Rebellion destroyed the prosperity of the empire.[52] The Song Dynasty was the first government in world history to issue paper money and the first Chinese polity to establish a permanent standing navy.[53] Between the 10th and 11th centuries, the population of China doubled in size. This growth came about through expanded rice cultivation in central and southern China, and the production of abundant food surpluses.

10th11th century Longquan celadon porcelain pieces from Zhejiang province, during the Song Dynasty

Within its borders, the Northern Song Dynasty had a population of some 100 million people. The Song Dynasty was a culturally rich period for philosophy and the arts. Landscape art and portrait painting were brought to new levels of maturity and complexity after the Tang Dynasty, and social elites gathered to view art, share their own, and trade precious artworks. Philosophers such as Cheng Yi and Chu Hsi reinvigorated Confucianism with new commentary, infused Buddhist ideals, and emphasized a new organization of classic texts that brought about the core doctrine of Neo-Confucianism. In 1271, the Mongol leader and fifth Khagan of the Mongol Empire Kublai Khan established the Yuan Dynasty, with the last remnant of the Song Dynasty falling to the Yuan in 1279. Before the Mongol invasion, Chinese dynasties reportedly had approximately 120 million inhabitants; after the conquest was completed in 1279, the 1300 census reported roughly 60 million people.[54] A peasant named Zhu Yuanzhang overthrew the Mongols in 1368 and founded the Ming Dynasty.[55] Ming Dynasty thinkers such as Wang Yangming would further critique and expand Neo-Confucianism with ideas of individualism and innate morality that would have tremendous impact on later Japanese thought. Chosun Korea also became a nominal vassal state of Ming China and adopted much of its Neo-Confucian bureaucratic structure.

Along the River During the Qingming Festival; daily life of people from the Song period at the capital, Bianjing, today's Kaifeng.

China Under the Ming Dynasty, China had another golden age, with one of the strongest navies in the world, a rich and prosperous economy and a flourishing of the arts and culture. It was during this period that Zheng He led explorations throughout the world, possibly reaching America. During the early Ming Dynasty China's capital was moved from Nanjing to Beijing. In 1644 Beijing was sacked by a coalition of rebel forces led by Li Zicheng, a minor Ming official turned leader of the peasant revolt. The last Ming Chongzhen Emperor committed suicide when the city fell. The Manchu Qing Dynasty then allied with Ming Dynasty general Wu Sangui and overthrew Li's short-lived Shun Dynasty, and subsequently seized control of Beijing, which became the new capital of the Qing Dynasty.

42

Late dynastic rule

The Qing Dynasty, which lasted until 1912, was the last dynasty in China. In the 19th century the Qing Dynasty adopted a defensive posture towards European imperialism, even though it engaged in imperialistic expansion into Central Asia. At this time China awoke to the significance of the rest of the world, the West in particular. As China opened up to foreign trade and missionary activity, opium produced by British India was forced onto Qing China. Two Opium Wars with Britain weakened the Emperor's control. European imperialism proved to be disastrous for China:The Arrow War (18561860) [2nd Opium War] saw another disastrous defeat for China. The subsequent passing of the humiliating Treaty of Tianjin in 1856 and the Beijing Conventions of 1860 opened up more of the country to foreign penetrations and more ports for their vessels. Hong Kong was ceded over to the British. Thus, the "unequal treaties system" was established. Heavy indemnities had to be paid by China, and more territory and control were taken over by the foreigners.Busky, Donald F. (2002). " Communism in History and Theory. Greenwood Publishing Group, p.2. The weakening of the Qing regime, and the apparent humiliation of the unequal treaties in the eyes of the Chinese people had several consequences. One consequence was the Taiping Civil War, which lasted from 1851 to 1862. It was led by Hong Xiuquan, who was partly influenced by an idiosyncratic interpretation of Christianity. Hong believed himself to be the son of God and the younger brother of Jesus. Although the Qing forces were eventually victorious, the civil war was one of the bloodiest in human history, costing at least 20 million lives (more than the total number of fatalities in the World War I), with some estimates of up to two hundred million. Other costly rebellions followed the Taiping Rebellion, such as the Punti-Hakka Clan Wars (185567), Nien Rebellion (18511868), Miao Rebellion (185473), Panthay Rebellion (18561873) and the Dungan revolt (18621877).[57]
[58]

These rebellions resulted in an estimated loss of several million lives each and led to disastrous results for the economy and the countryside.[59] [60] [61] The flow of British opium hastened the empire's decline. In the 19th century, the age of colonialism was at its height and the great Chinese Diaspora began. About 35 million overseas Chinese live in Southeast Asia today.[62] The famine in 187679 claimed between 9 and 13 million lives in northern China.[63] From 108 BC to 1911 AD, China experienced 1,828 famines,[64] or one per year, somewhere in the empire.[65]

While China was wracked by continuous war, Meiji Japan succeeded in rapidly modernizing its military and set its sights on Korea and Manchuria. At the request of the Korean emperor, the Chinese government sent troops to aid in suppressing the Tonghak Rebellion in 1894. However, Japan also sent troops to Korea, leading to the First Sino-Japanese War, which resulted in Qing China's loss of influence in the Korean Peninsula as well as the cession of Taiwan to Japan.

A corner tower of the Forbidden City at night; the palace was the residence for the imperial family from the reign of the Yongle Emperor of the Ming Dynasty in the 15th century until the fall of the Qing Dynasty in 1912.

China Following this series of defeats, a reform plan for the empire to become a modern Meiji-style constitutional monarchy was drafted by the Guangxu Emperor in 1898, but was opposed and stopped by the Empress Dowager Cixi, who placed Emperor Guangxu under house arrest in a coup d'tat. Further destruction followed the ill-fated 1900 Boxer Rebellion against westerners in Beijing. By the early 20th century, mass civil disorder had begun, and calls for reform and revolution were heard across the country. The 38-year-old Emperor Guangxu died under house arrest on 14 November 1908, suspiciously just a day before Cixi's own death. With the throne empty, he was succeeded by Cixi's handpicked heir, his two year old nephew Puyi, who became the Xuantong Emperor. Guangxu's consort became the Empress Dowager Longyu. In another coup de'tat, Yuan Shikai overthrew the last Qing emperor, and forced empress Dowager Longyu to sign the abdication decree as regent in 1912, ending two thousand years of imperial rule in China. She died, childless, in 1913.

43

Republic of China (1912-1949)

On 1 January 1912, the Republic of China was established, heralding the end of the Qing Dynasty. Sun Yat-sen of the Kuomintang (the KMT or Nationalist Party) was proclaimed provisional president of the republic. However, the presidency was later given to Yuan Shikai, a former Qing general, who had ensured the defection of the entire Beiyang Army from the Qing Empire to the revolution. In 1915, Yuan proclaimed himself Emperor of China but was forced to abdicate and return the state to a republic when he realized it was an unpopular move, not only with the population but also with his own Beiyang Army and its commanders. After Yuan Shikai's death in 1916, China was politically fragmented, with an internationally recognized but virtually powerless national government seated in Beijing. Warlords in various regions exercised actual control over their respective territories. In the late 1920s, the Kuomintang, under Chiang Kai-shek, was able to reunify the country under its own control, moving the nation's capital to Nanjing and implementing "political tutelage", an intermediate stage of political development outlined in Sun Yat-sen's program for transforming China into a modern, democratic state. Effectively, political tutelage meant one-party rule by the Kuomintang. The Second Sino-Japanese War (19371945) (part of World War II) forced an uneasy alliance between the Nationalists and the Communists as well as causing around 20 million Chinese civilian deaths.[66] The Japanese 'three-all policy' in north China "kill all, burn all and destroy all", was one example of wartime atrocities committed on a civilian population.[67] With the surrender of Japan in 1945, China emerged victorious but financially drained. The continued distrust between the Nationalists and the Communists led to the resumption of the Chinese Civil War. In 1947, constitutional rule was established, but because of the ongoing Civil War many provisions of the ROC constitution were never implemented in mainland China.

China

44

1949 to present
Major combat in the Chinese Civil War ended in 1949 with the Communist Party of China in control of mainland China, and the Kuomintang (KMT) retreating to Taiwan, reducing the ROC territory to only Taiwan and surrounding islands. On 1 October 1949, Mao Zedong proclaimed the People's Republic of China.[68] "Communist China" and "Red China" were two common names for the PRC.[69] The economic and social plan known as the Great Leap Forward resulted in an estimated 45million deaths.[70] In 1966, Mao and his allies launched the Cultural Revolution, which would last until Mao's death a decade later. The Cultural Revolution, motivated by power struggles within the Party and a fear of the Soviet Union, led to a major upheaval in Chinese society. In 1972, at the peak of the Sino-Soviet split, Mao and Zhou Enlai met Richard Nixon in Beijing to establish relations with the United States. In the same year, the PRC was admitted to the United Nations in place of the Republic of China for China's membership of the United Nations, and permanent membership of the Security Council.

Chairman Mao Zedong proclaiming the establishment of the People's Republic in 1949.

After Mao's death in 1976 and the arrest of the Gang of Four, blamed for the excesses of the Cultural Revolution, Deng Xiaoping quickly wrested power from Mao's anointed successor Hua Guofeng. Although he never became the head of the party or state himself, Deng was in fact the Paramount Leader of China at that time, his influence within the Party led the country to significant economic reforms. The Communist Party subsequently loosened governmental control over citizens' personal lives and the communes were disbanded with many peasants receiving multiple land leases, which greatly increased incentives and agricultural production. This turn of events marked China's transition from a planned economy to a mixed economy with an increasingly open market environment, a system termed by some[71] "market socialism", and officially by the Communist Party of China "Socialism with Chinese characteristics". The PRC adopted its current constitution on 4 December 1982. The death of pro-reform official Hu Yaobang helped to spark the Tiananmen Square protests of 1989, during which students and others campaigned for several months, speaking out against corruption and in favour of greater political reform, including democratic rights and freedom of speech. However, they were eventually put down on 4 June when PLA troops and vehicles entered and forcibly cleared the square, resulting in numerous casualties. This event was widely reported and brought worldwide condemnation and sanctions against the government.[72] [73] The "Tank Man" incident in particular became famous. CPC General Secretary, President Jiang Zemin and Premier Zhu Rongji, both former mayors of Shanghai, led post-Tiananmen PRC in the 1990s. Under Jiang and Zhu's ten years of administration, the PRC's economic performance pulled an estimated 150million peasants out of poverty and sustained an average annual gross domestic product growth rate of 11.2%.[74] [75] The country formally joined the World Trade Organization in 2001. Although the PRC needs economic growth to spur its development, the government has begun to worry that rapid economic growth has negatively impacted the country's resources and environment. Another concern is that certain sectors of society are not sufficiently benefiting from the PRC's economic development; one example of this is the wide gap between urban and rural areas. As a result, under current CPC General Secretary, President Hu Jintao and Premier Wen Jiabao, the PRC has initiated policies to address these issues of equitable distribution of resources, but the outcome remains to be seen.[76] More than 40million farmers have been displaced from their land,[77] usually for economic development, contributing to the 87,000 demonstrations and riots across China in 2005.[78] For much of the PRC's population, living standards have seen extremely large improvements, and freedom continues to expand, but political controls remain tight and rural areas poor.[79]

China

45

Geography

A map showing the topography of China.

Longsheng Rice Terrace in Guangxi.

The Li River in Guangxi.

Political geography
The People's Republic of China is the second-largest country in the world by land area after Russia[12] and is either the third- or fourth-largest by total area, after Russia, Canada and, depending on the definition of total area, the United States.[80] China's total area is generally stated as approximately 9600000 km2 ( sqmi).[81] . Specific area figures range from unknown operator: u','unknown operator: u','unknown operator: u',' (unknown operator: u'strong'unknown operator: u','sqmi) of Encyclopdia Britiannica[82] , to 9596961 km2 ( sqmi) of U.N. Demographic Yearbook[83] , to 9596961 km2 ( sqmi) of CIA World Factbook[84] and 9640011 km2 ( sqmi) that includes Aksai Chin and the Trans-Karakoram Tract, which are controlled by China and claimed by India.[85] None of the aforementioned total area figures includes the 1000 square kilometres (386.1sqmi) of territory ceded to the PRC by the Tajikistan following the ratification of a Sino-Tajik border agreement by the Tajik Parliament on January 12, 2011.[86] According to Encyclopdia Britannica, the total area of the United States, at 9522055 km2 ( sqmi), is slightly smaller than China. In the CIA Factbook, until the coastal waters of the Great Lakes was added to the United States' total area in 1996, China's total area was also greater than that of the United States.[87] China has the longest land borders in the world, measuring 22117km (13743mi) from the mouth of the Yalu River to the Gulf of Tonkin. China borders 14 nations, more than any other country except Russia, which also borders 14. China extends across much of the East Asian continent bordering Vietnam, Laos, and Burma in Southeast Asia; India, Bhutan, Nepal and Pakistan,[88] in South Asia; Afghanistan, Tajikistan, Kyrgyzstan and Kazakhstan in Central Asia; a small section of Russian Altai and Mongolia in Inner Asia; and the Russian Far East and North Korea in Northeast Asia. Additionally, China shares maritime boundaries with South Korea, Japan, Vietnam and the Phillippines. The PRC and the Republic of China (Taiwan) make mutual claims over each other's territority and the frontier between areas under their respective control is closest near the islands of Kinmen and Matsu, off the Fujian coast, but otherwise run through the Taiwan Strait. The PRC and ROC assert identical claims over the entirety of the Spratly Island in the South China Sea, and the southern-most extent of these claims reach Zengmu Ansha (James Shoal), which would

China form a maritime frontier with Malaysia.

46

Landscape and climate

Mount Everest in Tibet.

The South China Sea coast at Hainan. Jiuzhaigou Valley in Sichuan.

The territory of China lies between latitudes 18 and 54 N, and longitudes 73 and 135 E. The country's vast size gives it a wide variety of landscapes. In the east, along the shores of the Yellow Sea and the East China Sea, there are extensive and densely populated alluvial plains, while on the edges of the Inner Mongolian plateau in the north, broad grasslands are visible. Southern China is dominated by hill country and low mountain ranges, while the central-east hosts the deltas of China's two major rivers, the Yellow River and the Yangtze River. Other major rivers include the Xi, Mekong, Brahmaputra and Amur. To the west, major mountain ranges, most notably the Himalayas, and high plateaus feature among the more arid landscapes of the north, such as the Taklamakan and the Gobi Desert. China's highest point, Mt. Everest (8848m), lies on the Sino-Nepalese border. The country's lowest point is the dried lake bed of Ayding Lake (-154m) in the Turpan Depression. A major environmental issue in China is the continued expansion of its deserts, particularly the Gobi Desert, which is currently the world's fifth-largest desert.[89] [90] Although barrier tree lines planted since the 1970s have reduced the frequency of sandstorms, prolonged drought and poor agricultural practices have resulted in dust storms plaguing northern China each spring, which then spread to other parts of East Asia, including Korea and Japan. According to China's environmental watchdog, Sepa, China is losing a million acres (4,000km) per year to desertification.[91] Water quality, erosion, and pollution control have become important issues in China's relations with other countries. Melting glaciers in the Himalayas could potentially lead to water shortages for hundreds of millions of people.[92] China's climate is mainly dominated by dry seasons and wet monsoons, which lead to a pronounced temperature differences between winter and summer. In the winter, northern winds coming from high-altitude areas are cold and dry; in summer, southern winds from coastal areas at lower altitudes are warm and moist. The climate in China differs from region to region because of the country's extensive and complex topography.

China

47

Biodiversity
One of 17 megadiverse countries,[93] China lies in two of the world's major ecozones: the Palearctic and the Indomalaya. In the Palearctic zone, mammals such as the horse, camel, tapir, and jerboa can be found. Among the species found in the Indomalaya region are the Leopard Cat, bamboo rat, treeshrew, and various monkey and ape species. Some overlap exists between the two regions due to natural dispersal and migration; deer, antelope, bears, wolves, pigs, and numerous rodent species can all be found in China's diverse climatic A giant panda photographed in Sichuan. and geological environments. The famous giant panda is found only in a limited area along the Yangtze River. China suffers from a continuing problem with trade in endangered species, although there are now laws to prohibit such activities. China also hosts a variety of forest types. Cold coniferous forests predominate in the north of the country, supporting animal species such as moose and the Asiatic black bear, along with over 120 bird species. Moist conifer forests can have thickets of bamboo as an understorey, replaced by rhododendrons in higher montane stands of juniper and yew. Subtropical forests, which dominate central and southern China, support as many as 146,000 species of flora. Tropical and seasonal rainforests, though confined to Yunnan and Hainan Island, contain a quarter of all the plant and animal species found in China.

Environment
China suffers from severe environmental deterioration and pollution.[94] While regulations such as the 1979 Environmental Protection Law are fairly stringent, enforcement of them is poor, as they are frequently disregarded by local communities or governments in favour of rapid economic development. Leading Chinese environmental campaigner Ma Jun has warned of the danger that water pollution poses to Chinese society. According to the Chinese Ministry of Water Resources, roughly 300million Chinese are drinking unsafe water. This crisis is compounded by the perennial problem of water shortages, with 400 out of 600 cities reportedly short of drinking water.[95] [96]

Wind turbines in Xinjiang. The Dabancheng project is Asia's largest wind farm.

However, China is the world's leading investor in renewable energy technologies. with $34.6billion invested in 2009 alone.[97] [98] China produces more wind turbines and solar panels than any other country,[99] and renewable energy projects, such as solar water heating, are widely pursued at the local level.[100] By 2009, over 17% of China's energy was derived from renewable sources - most notably hydroelectric power plants, of which China has a total installed capacity of 197 GW.[101]

China

48

Politics
The PRC is regarded by several political scientists as one of the world's five last remaining Communist states (along with Vietnam, North Korea, Laos, and [103] [104] Cuba),[102] but simple characterizations of PRC's political structure since the 1980s are no longer possible.[10] The PRC government has been variously described as communist and socialist, but also as authoritarian, with heavy restrictions remaining in many areas, most notably on the Internet, the press, freedom of assembly, The State organs of the People's Republic of China. reproductive rights, and freedom of religion.[105] Its current political/economic system has been termed by its leaders as "Communism with Chinese characteristics". Compared to its closed-door policies until the mid-1970s, the liberalization of the PRC has resulted in the administrative climate being less restrictive than before. The PRC is far different from liberal democracy or social democracy that exists in most of Europe or North America, and the National People's Congress (highest state body) has been described as a "rubber stamp" body.[106] The PRC's incumbent President is Hu Jintao who is also the General Secretary of the Communist Party of China and his Premier is Wen Jiabao who is also a member of the CPC Politburo Standing Committee. The country is ruled by the Communist Party of China (CPC), whose power is enshrined in China's constitution.[107] The political system is very decentralized[108] with limited democratic processes internal to the party and at local village levels, although these experiments have been marred by corruption. There are other political parties in the PRC, referred to in China as democratic parties, which participate in the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC). There have been some moves toward political liberalization, in that open contested elections are now held at the village and town levels,[109] [110] and that legislatures have shown some assertiveness from time to time. However, the Party retains effective control over government appointments: in the absence of meaningful opposition, the CPC wins by default most of the time. Political concerns in the PRC include lessening the growing gap between rich and poor and fighting corruption within the government leadership.[111]
The Great Hall of the People in Beijing, where the National People's Congress convenes.

The level of support to the government action and the management of the nation is among the highest in the world, with 86% of people who express satisfaction with the way things are going in their country and with their nation's economy according to a 2008 Pew Research Center survey.[112]

China

49

Administrative divisions
The People's Republic of China has administrative control over 22 provinces, and considers Taiwan to be its 23rd province, although Taiwan is currently administered by the Republic of China, which disputes the PRC's claim.[113] China also has five autonomous regions, each with a designated minority group; four municipalities; and two Special Administrative Regions, which enjoy a degree of political autonomy. These 22 provinces, five autonomous regions, and four municipalities can be collectively referred to as "mainland China", a term which usually excludes the Special Autonomous Regions of Hong Kong and Macau.

Foreign relations
The PRC has diplomatic relations with 171 countries and maintains embassies in 162.[114] Its legitimacy is disputed by the Republic of China and a few other countries; it is thus the largest and wealthiest state with limited recognition. Sweden was the first western country to establish diplomatic relations with the People's Republic on 9 May 1950.[115] In 1971, the PRC replaced the Republic of China as the sole representative of China in the United Nations and as one of the five permanent members of the United Nations Security Council.[116] The PRC was also a former member and leader of the Non-Aligned Movement, and still considers itself an advocate for developing countries.[117]

Hu Jintao with former US President George W. Bush in 2006.

Under its interpretation of the One-China policy, the PRC has made it a precondition to establishing diplomatic relations that the other country acknowledges its claim to Taiwan and severs official ties with the government of the

China Republic of China. PRC officials have protested on numerous occasions when foreign countries have made diplomatic overtures to Taiwan,[118] especially in the matter of armament sales.[119] Political meetings between foreign government officials and the 14th Dalai Lama are also opposed by the PRC, as it considers Tibet to be formally part of China.[120] Much of China's current foreign policy is reportedly based on the Five Principles of Peaceful Coexistence of Zhou Enlai non-interference in other states' affairs, non-aggression, peaceful coexistence, equality and mutual benefits. China's foreign policy is also driven by the concept of "harmony without uniformity", which encourages diplomatic relations between states despite ideological differences. This policy has led China to support states that are regarded as dangerous or repressive by Western nations, such as Zimbabwe, North Korea, and Iran.[121] Conflicts with foreign countries have occurred at times in China's recent history, particularly with the United States; for example, the US bombing of the Chinese embassy in Belgrade during the Kosovo conflict in May 1999 and the US-China spy plane incident in April 2001. The PRC's foreign relations with many Western nations suffered for a time following the military crackdown on the Tiananmen Square protests of 1989, although in recent years China has improved its diplomatic links with the West.[122] [123] Trade relations In recent decades, the PRC has played an increasing role in calling for free trade areas and security pacts amongst its Asia-Pacific neighbors. In 2004, the PRC proposed an entirely new East Asia Summit (EAS) framework as a forum for regional security issues, pointedly excluding the United States.[124] The EAS, which includes ASEAN Plus Three, India, Australia and New Zealand, held its inaugural summit in 2005. The PRC is also a founding member of the Shanghai Cooperation Organisation (SCO), along with Russia and the Central Asian republics. In 2000, the U.S. Congress approved "permanent normal trade relations" (PNTR) with China, allowing Chinese exports in at the same low tariffs as goods from most other countries.[125] Both Bill Clinton and George W. Bush asserted that free trade would gradually open China to democratic reform.[126] Bush was furthermore an advocate of China's entry into the World Trade Organization (WTO).[127] China has a significant trade surplus with the United States, its most important export market.[128] In the early 2010s, U.S. politicians argued that the Chinese yuan was significantly undervalued, giving China an unfair trade advantage.[129] Sinophobic attitudes often target Chinese minorities and nationals living outside of China. Sometimes, such anti-Chinese attitudes turn violent, as occured during the 13 May Incident in Malaysia in 1969 and the Jakarta riots of May 1998 in Indonesia, in which more than 2,000 people died.[130] In recent years, a number of anti-Chinese riots and incidents have also occurred in Africa and Oceania.[131] [132] Anti-Chinese sentiment is often rooted in socio-economics.[133] Sino-Japanese relations The relationship between China and Japan has been strained at times by Japan's perceived refusal to acknowledge its wartime past to the satisfaction of the PRC. Revisionist comments made by prominent Japanese officials and some Japanese history textbooks regarding the 1937 Rape of Nanking have been a focus of particular controversy. Sino-Japanese relations warmed considerably after Shinzo Abe became the Prime Minister of Japan in September 2006, and a joint historical study conducted by the PRC and Japan released a report in 2010 which pointed toward a new consensus on the issue of World War 2-era atrocities.[134] However, in the early 2010s, relations cooled once more, with Japan accusing China of withholding its reserves of valuable rare earth elements.[135]

50

China Territorial disputes China has been involved in a number of international territorial disputes, mostly resulting from the legacy of unequal treaties imposed on China during the historical period of New Imperialism. Since the 1990s, the PRC has been entering negotiations to resolve its disputed land borders, usually by offering concessions and accepting less than half of the disputed territory with each party. The PRC's only remaining land border disputes are a disputed border with India and an undefined border with Bhutan. China is additionally involved in more minor multilateral disputes over the ownership of several small islands in the East and South China Seas.[136] China and the developing world China is heavily engaged, both politically and economically, with numerous nations in the developing world. Most notably, the PRC has started a policy of wooing African nations for trade and bilateral co-operation.[137] [138] Xinhua, China's official news agency, states that there are no less than 750,000 Chinese nationals working or living in Africa.[139] China has furthermore strengthened its ties with larger developing economies, becoming the largest trading partner of Brazil[140] and building strategic links with Argentina.[141] Emerging superpower China is regularly cited as a potential new superpower, with certain commentators pointing out that its rapid economic progress, military might, very large population, and increasing international influence could see it attain a prominent global role in the 21st century. Others, however, warn that economic bubbles and demographic imbalances could slow China's growth as the century progresses.[142] [143] [144] [145] [146]

51

Sociopolitical issues and reform

The Chinese democracy movement, social activists, and some members of the Communist Party of China have all identified the need for social and political reform. While economic and social controls have been greatly relaxed in China since the 1970s, political freedom is still tightly restricted. The Constitution of the People's Republic of China states that the "fundamental rights" of citizens include freedom of speech, freedom of the press, the right to a fair trial, freedom of religion, universal suffrage, and property rights. However, in practice, these provisions do not afford significant protection against criminal prosecution by the State.[147] [148] [149] As the Chinese economy expanded following Deng Xiaoping's 1978 reforms, tens of millions of rural Chinese who have moved to the cities[150] find themselves treated as second-class citizens by China's hukou household registration system, which controls state benefits.[151] Property rights are often poorly protected, and eminent domain land seizures have had a disproportionate effect on poorer peasants.[150] In 2003, the average Chinese farmer paid three times more taxes than the average urban dweller, despite having one-sixth of the annual income.[151] However, a number of rural taxes have since been reduced or abolished, and additional social services provided to rural dwellers.[152] [153] [154] Censorship of political speech and information, most notably on the Internet,[155] is openly and routinely used in China to silence criticism of the government and the ruling Communist Party.[156] [157] In 2005, Reporters Without Borders ranked the PRC 159th out of 167 states in its Annual World Press Freedom Index, indicating a very low level of perceived press freedom.[158] The government has suppressed demonstrations by organizations that it considers a potential threat to "social stability", as was the case with the Tiananmen Square protests of 1989. The Communist Party has had mixed success in controlling information: a powerful and pervasive media control system faces equally strong market forces, an increasingly educated citizenry, and technological and cultural changes that are making China more open to the wider world, especially on environmental issues.[159] [160] However, attempts are still made by the Chinese government to control public access to outside information, with online searches for politically sensitive material being blocked by the so-called Great Firewall.[161]

China A number of foreign governments and NGOs routinely criticize the PRC's human rights record, alleging widespread civil rights violations, including systematic use of lengthy detention without trial, forced confessions, torture, mistreatment of prisoners, and restrictions of freedom of speech, assembly, association, religion, the press, and labor rights.[162] China executes more people than any other country, accounting for 72% of the world's total in 2009, though it is not the largest executioner per capita.[163] The PRC government has responded to foreign criticism by arguing that the notion of human rights should take into account a country's present level of economic development, and focus more on the people's rights to subsistence and development in poorer countries.[164] The rise in the standard of living, literacy, and life expectancy for the average Chinese in the last three decades is seen by the government as tangible progress made in human rights.[165] Efforts in the past decade to combat deadly natural disasters, such as the perennial Yangtze River floods, and work-related accidents are also portrayed in China as progress in human rights for a still largely poor country.[164] The PRC government remains divided over the issue of political reform. Some high-ranking politicians have spoken out in favor reforms, while others remain more conservative. In 2010, Premier Wen Jiabao stated that the PRC needs "to gradually improve the democratic election system so that state power will truly belong to the people and state power will be used to serve the people." Despite his status, Wen's comments were later censored by the government.[166] As the social, cultural and political consequences of economic growth and reform become increasingly manifest, tensions between the conservatives and reformists in the Communist Party are sharpening. Zhou Tianyong, the vice director of research of the Central Party School, argues that gradual political reform as well as repression of those pushing for overly rapid change over the next thirty years will be essential if China is to avoid an overly turbulent transition to a democratic, middle-class-dominated polity.[167] [168] Some Chinese look back to the upheavals of the Cultural Revolution, and fear chaos if the Communist Party should lose control of the domestic situation.

52

Military
With 2.3million active troops, the People's Liberation Army (PLA) is the largest military in the world, commanded by the Central Military Commission (CMC).[169] The PLA consists of the People's Liberation Army Ground Force (PLAGF), the People's Liberation Army Navy (PLAN), the People's Liberation Army Air Force (PLAAF), and a strategic nuclear force known as the Second Artillery Corps. The A PLAAF Chengdu J-10 fighter aircraft. official announced budget of the PLA for 2009 was $70billion. However, the United States government has claimed that China does not report its real level of military spending, which is allegedly much higher than the official budget. The Defense Intelligence Agency estimated that the real Chinese military budget for 2008 was between US$105 billion and US$150billion.[170] According to SIPRI, China's military expenditure in 2010 totalled US$114.3 billion (808 billion yuan).[171] As a recognised nuclear weapons state, China is considered both a major regional military power and an emerging military superpower.[172] China is the only member of the UN Security Council to have limited power projection capabilities.[173] To offset this, it has begun developing power projection assets, such as aircraft carriers, and has established a network of foreign military relationships that has been compared to a string of pearls. The PRC has made significant progress in modernizing its military since the early 2000s. It has purchased state-of-the-art Russian fighter jets, such as the Sukhoi Su-30s, and has also produced its own modern fighters, most notably the Chinese J-10s and the J-11s.[174] China is furthermore engaged in developing an indigenous stealth aircraft, the Chengdu J-20.[175] [176]

China China has also acquired and improved upon the Russian S-300 surface-to-air missile system, which is considered to be among the most effective aircraft-intercepting systems in the world.[177] Russia has since produced the next-generation S-400 Triumf system, with China reportedly having spent $500million on a downgraded export version of it.[178] A number of indigenous missile technologies have also been developed - in 2007, China conducted a successful test of an anti-satellite missile,[179] and its first indigenous land-attack cruise missile, the CJ-10, entered service in 2009. The PRC's armored and rapid-reaction forces have furthermore been updated with enhanced electronics and targeting capabilities. In recent years, much attention has been focused on building a navy with blue-water capabilities.[180] In August 2011, China's first aircraft carrier, the refurbished Soviet vessel Varyag, began sea trials.[181] Little information is available regarding the motivations supporting China's military modernization. A 2007 report by the US Secretary of Defense notes that "China's actions in certain areas increasingly appear inconsistent with its declaratory policies".[182] For its part, China claims it maintains an army purely for defensive purposes.[183] On 13 March 2011, the PLAN missile frigate Xuzhou was spotted off the coast of Libya, marking the first time in history a Chinese warship sailed into the Mediterranean. The entrance into the Mediterranean was part of a humanitarian mission to rescue PRC nationals from the 2011 Libyan civil war, though analysts such as Fareed Zakaria viewed the mission as an attempt to increase the PRC's global military presence.[184]

53

Economy
From its founding in 1949 until late 1978, the People's Republic of China was a Soviet-style centrally planned economy, without private businesses or capitalism. To propel the country towards a modern, industrialized communist society, Mao Zedong instituted the Great Leap Forward in the early 1960s, although this had decidedly mixed economic results.[185] Following Mao's death in 1976 and the consequent end of the Cultural Revolution, Deng Xiaoping and the new Chinese leadership began to reform the economy and move towards a more market-oriented mixed economy under one-party rule. The Shanghai Stock Exchange building in Collectivization of the agriculture was dismantled and farmlands were Shanghai's Lujiazui financial district. privatized to increase productivity. In 1978, China and Japan began normalized diplomatic relations, and China started borrowing money from Japan in soft loans. Since 1978, Japan has been China's most significant foreign donor. Modern-day China is mainly characterised as having a market economy based on private property ownership,[186] [187] and is one of the leading examples of state capitalism.[188] [189] Under the post-Mao market reforms, a wide variety of small-scale private enterprises were encouraged, while the government relaxed price controls and promoted foreign investment. Foreign trade was focused upon as a major vehicle of growth, leading to the creation of Special Economic Zones (SEZs), first in Shenzhen and then in other Chinese cities. Inefficient state-owned enterprises (SOEs) were restructured by introducing western-style management systems, with unprofitable ones being closed outright, resulting in massive job losses. By the latter part of 2010, China was reversing some of its economic liberalization initiatives, with state-owned companies buying up independent businesses in the steel, auto and energy industries.[190]

China

54

Since economic liberalization began in 1978, the PRC's investment- and export-led[191] economy has grown 90 times bigger[192] and is the fastest growing major economy in the world.[193] According to IMF that PRC's annual average GDP growth for the period of 20012010 was 10.5 percent and predicted to grow with 9.5 percent for the period of 20112015. From 2007 to 2011, China's economic growth rate was equivalent to all of the G7 countries' growth combined.[194] According to the Global Growth Generators index announced by Citigroup in February 2011, China has a very high 3G growth rating.[195] As of September 2011, China has the world's second largest nominal GDP, at 39.8trillion yuan (US$6.05trillion),[196] although its GDP per capita of US$4,300 is still low, and puts the PRC behind roughly a hundred countries in In 1978, Deng Xiaoping initiated the global GDP per capita rankings.[6] China's primary, secondary, and tertiary PRC's market-oriented reforms. industries contributed 10.6%, 46.8%, and 42.6% respectively to its total GDP in 2009. If PPP is taken into account, the PRC's economy is again second only to the US, at $10.085 trillion, corresponding to $7,518 per capita.[197] The PRC is the fourth-most-visited country in the world, with 50.9million inbound international visitors in 2009.[198] It is a member of the WTO and is the world's second largest trading power behind the US, with a total international trade value of US$2.21trillion US$1.20trillion in exports (#1) and US$1.01trillion in imports (#2). Its foreign exchange reserves have reached US$2.85trillion at end of 2010, an increase of 18.7 percent over the previous year, making its reserves by far the world's largest.[199] [200] The PRC owns an estimated $1.6trillion of US securities.[201] The PRC, holding US$1.16 trillion in US Treasury bonds,[202] is the largest foreign holder of US public debt.[203] [204] China is the world's third-largest recipient of inward FDI, attracting US$92.4billion in 2008 alone,[205] and China increasingly invests abroad, with a total outward FDI of US$52.2billion in 2008 making it the world's sixth-largest outward investor.[206] In 2010, China's inward FDI was $106 billion, marking a 16% increase over 2009.[207]

China is the world's second largest economy (IMF, 2010).

The PRC's success has been primarily due to manufacturing as a low-cost producer. This is attributed to a combination of cheap labor, good infrastructure, relatively high productivity, favorable government policy, and a possibly undervalued exchange rate. The latter has been sometimes blamed for the PRC's huge trade surplus (US$262.7billion in 2007)[208] and has become a major source of dispute between the PRC and its major trading partners the US, EU, and Japan despite the yuan having been de-pegged and having risen in value by 20% against the US dollar since 2005.[209]

China

55 The state still dominates in strategic "pillar" industries (such as energy and heavy industries), but private enterprise (composed of around 30million private businesses)[210] has expanded enormously; in 2005, it accounted for anywhere between 33%[211] to 70%[212] of national GDP, while the OECD estimate for that year was over 50%[213] of China's national output, up from 1% in 1978.[214] Its stock market in Shanghai, the SSE, has raised record amounts of IPOs and its benchmark Shanghai Composite index has doubled since 2005. SSE's market capitalization reached US$3trillion in 2007, making it the

Foreign currency reserves and gold minus external debt, based on 2010 data from CIA Factbook.

world's fifth largest exchange. China now ranks 29th in the Global Competitiveness Index[216] and ranked 135th among the 179 countries measured in the Index of Economic Freedom.[217] 46 Chinese companies made the list in the 2010 Fortune Global 500 (Beijing alone with 30).[218] Measured using market capitalization, four of the world's top ten most valuable companies are Chinese. Some of these include first-ranked PetroChina, third-ranked Industrial and Commercial Bank of China (the world's most valuable bank), fifth-ranked China Mobile (the world's most valuable telecommunications company) and seventh-ranked China Construction Bank.[219]

Nanjing Road in Shanghai is one of the world's [215] busiest shopping streets.

Although a middle-income country by Western standards, the PRC's rapid growth has pulled hundreds of millions of its people out of poverty since 1978. Today, about 10% of the Chinese population live below the poverty line of US$1 per day (down from 64% in 1978), while life expectancy has increased to 73 years. More than 93% of the population is literate,[220] compared to only 20% in 1950.[221] Urban unemployment declined to 4 percent in China by the end of 2007, although true overall unemployment may be as high as 10%.[222] China's middle-class population (defined as those with annual income of at least US$17,000) has reached more than 100million as of 2011,[223] while the number of super-rich individuals worth more than 10million yuan (US$1.5million) is estimated to be 825,000, according to Hurun Report.[224] Based on the Hurun rich list, the number of US dollar billionaires in China doubled from 130 in 2009 to 271 in 2010, giving China the world's second-highest number of billionaires.[225] China's retail market was worth RMB 8.9 trillion (US$1.302 trillion) in 2007, and is growing at 16.8% annually.[226] China is also now the world's second-largest consumer of luxury goods behind Japan, with 27.5% of the global share.[227] The PRC's growth has been uneven, with some geographic regions growing faster than others, and a pronounced urban-rural income gap contributing to a national Gini coefficient of 46.9%. Development has been mainly concentrated in the heavily urbanised eastern coastal regions, while the remainder of the country has lagged behind. To counter this, the government has promoted development in the western, northeastern, and central regions of China. The Chinese economy is highly energy-intensive and inefficient on average, industrial processes in China use 20%100% more energy than similar ones in OECD countries.[228] China became the world's largest energy consumer in 2010,[229] but still relies on coal to supply about 70% of its energy needs.[230] Coupled with lax environmental regulations, this has led to massive water and air pollution, leaving China with 20 of the world's 30 most polluted cities.[228] Consequently, the government has promised to use more renewable energy, planning to make renewables constitute 30% of China's total energy production by 2050.[231] In 2010, China became the largest wind energy provider in the

China world, with a total installed wind power capacity of 41.8 GW.[232] In January 2011, Russia began scheduled oil shipments to China, pumping 300,000 barrels of oil per day via the Eastern Siberia Pacific Ocean oil pipeline.[233]

56

Science and technology

History of science and technology in China

Inventions Discoveries

By era
Han Dynasty Tang Dynasty Song Dynasty People's Republic of China Present-day China

Ancient Chinese inventors were responsible for pioneering a vast number of technologies. These included papermaking, woodblock printing and movable type printing, the early lodestone and needle compass, gunpowder, toilet paper, early seismological detectors, matches, pound locks, the double-action piston pump, blast furnace and cast iron, the iron plough, the multi-tube seed drill, the suspension bridge,[234] natural gas as fuel, the differential gear for the South Pointing Chariot, the hydraulic-powered armillary sphere, the hydraulic-powered trip hammer, the mechanical chain drive, the mechanical belt drive, the raised-relief map, the propeller, the crossbow, the cannon, the rocket, and the multistage rocket. Chinese astronomers were among the first to record observations of a supernova. Chinese mathematics evolved independently of Greek mathematics and is therefore of great interest in the history of mathematics. Moreover, the Chinese were keen on documenting all of their technological achievements, such as in the Tiangong Kaiwu encyclopedia written by Song Yingxing (15871666). Despite its earlier sophistication, China's grasp of science and technology had fallen behind that of Europe by the 17th century. Political, social and cultural reasons have been given for this, although recent historians focus more on economic causes, such as the high level equilibrium trap. Since the beginning of Deng Xiaoping's market reforms, China has grown increasingly connected to the global economy and information sphere, and the government has placed a heavy emphasis on the development of science and technology. After the Sino-Soviet split of the 1960s and '70s, China started to develop its own nuclear weapons and delivery systems, successfully detonating its first surface nuclear test in 1964 at Lop Nur. A natural outgrowth of this was a satellite launching program, which culminated in 1970 with the launching of Dong Fang Hong I, the first Chinese satellite. This made the PRC the fifth nation to independently launch a satellite. China has the world's second largest research and development budget, and invested over $136billion in science and technology in 2006, an increase of

China more than 20% over 2005.[235] Stem cell research and gene therapy, which some in the Western world see as controversial, face minimal regulation in China. China has an estimated 926,000researchers, second only to the 1.3million in the United States.[236] In 1992, the Shenzhou manned spaceflight program was authorized.[237] After four unmanned tests, Shenzhou 5 was launched on 15 October 2003, using a Long March 2F launch vehicle and carrying Chinese astronaut Yang Liwei, making the PRC the third country to put a human being into space through its own endeavors.[238] In 2008, China successfully completed the Shenzhou 7 mission, making it the third country to have the capability to conduct a spacewalk. In 2007, the PRC successfully sent the Chang'e spacecraft, to orbit and explore the moon as part of their Chinese Lunar Exploration Program. In September 2011, the first Chinese space station module, Tiangong 1, was successfully launched, marking the first step in a decade-long project to construct a large manned space station.[239] China furthermore has plans to achieve a lunar landing by the 2020s, and is considering a manned mission to Mars.[240] China is also actively developing its software, semiconductor and energy industries, including renewable energies such as hydroelectric, wind and solar power.[241] In an effort to reduce pollution from coal-burning power plants, China has been pioneering the deployment of pebble bed nuclear reactors, which run cooler and safer than conventional nuclear reactors, and have potential applications for the hydrogen economy.[242] In 2010, China developed Tianhe-IA, for a time the world's fastest supercomputer, at the National Supercomputing Center of Tianjin.[243] China also operates the Nebulae supercomputer, which was also among the world's top 10 supercomputers in 2010.[244]

57

Communications
China currently has the most cellphone users in the world, with over 800million users as of July 2010.[245] It also has the world's largest number of internet and broadband users.[246] By December 2010, China had around 457 million internet users, an increase of 19% over the previous year, and by the end of March 2011 the number of internet users had reached 477 million.[247] [248] [249] According to China Internet Network Information Center (CNNIC), China's average internet connection speed is 100.9 kbit/s, less than half of the global average of 212.5 kbit/s.[250] China Telecom and China Unicom, the country's two largest broadband providers, accounted for 20% of global broadband subscribers, whereas the world's ten largest broadband service providers combined accounted for 39% of the world's broadband customers. China Telecom alone serves 55 million broadband subscribers, while China Unicom serves more than 40 million. The massive rise in internet use in China continues to fuel rapid broadband growth, whereas the world's other major broadband ISPs operate in the mature markets of the developed world, with high levels of broadband penetration and rapidly slowing subscriber growth.[251]

China

58

Transport
Transportation in mainland China has been prioritised by the government in recent decades, and has undergone intense state-led development since the late 1990s. The national road network has been massively expanded through the creation of a network of expressways, known as the National Trunk Highway System (NTHS). By 2011, China's expressways had reached a total length of 74000km (46000 mi), second only to the road network of the United States.[252] China possesses the worlds longest high-speed rail network, with over 4618mi (7432km) of service routes. Of these, 601mi (967km) serve trains with top speeds of 220mph (350km/h).[253] Private car ownership is growing rapidly, with China surpassing the United States as the largest automobile market in the world in 2009, with total car sales of over 13.6million.[254] Domestic air travel has also increased significantly, but remains too expensive for most. Long-distance transportation is dominated by railways and charter bus systems. Railways are the vital carrier in China; they are monopolized by the state, divided into various railway bureaux in different regions. Due to huge demand, the system is regularly subject to overcrowding, particularly during holiday seasons, such as Chunyun during the Chinese New Year. Rapid transit systems are also rapidly developing in China's major cities, in the form of networks of underground or light rail systems. Hong Kong has one of the most developed transport systems in the world, while Shanghai has a high-speed maglev rail line connecting the city to its main international airport, Pudong International Airport.
A high-speed maglev train leaving Pudong International Airport, Shanghai.

G5 Expressway near exit 10, outside Beijing. There are 74,000km (45,980 mi) of divided expressways in China, making the expressway network just 1,000 miles shorter than the US Interstate Highway System.

Demographics
As of July 2010, the People's Republic of China has an estimated total population of 1,338,612,968. About 21% of the population (145,461,833 males; 128,445,739 females) are 14 years old or younger, 71% (482,439,115 males; 455,960,489 females) are between 15 and 64 years old, and 8% (48,562,635 males; 53,103,902 females) are over 65 years old. The population growth rate for 2006 was 0.6%.[255] By end of 2010, the proportion of mainland Chinese people aged 14 or younger was 16.60%, while the number aged 60 or older grew to 13.26%, giving a total proportion of 29.86% dependents. The proportion of the population of workable age was thus around 70%.[256]

With a population of over 1.3 billion and dwindling natural resources, the PRC is very concerned about its population growth and has attempted, with mixed results,[257] to implement a strict family planning policy. The government's goal is one child per family, with exceptions for ethnic minorities and a degree of flexibility in rural areas. It is hoped that population growth in China will stabilize in the early decades of the 21st century, though some projections estimate a population of anywhere between 1.4billion and 1.6billion by 2025. China's family planning minister has indicated that the

A population density map of the People's Republic of China. The eastern, coastal provinces are much more densely populated than the western interior.

China one-child policy will be maintained until at least 2020.[258] The one-child policy is resisted, particularly in rural areas, because of the need for agricultural labour and a traditional preference for boys (who can later serve as male heirs). Families who breach the policy often lie during the census.[259] Official government policy opposes forced sterilization or abortion, but allegations of coercion continue as local officials, who are faced with penalties for failing to curb population growth, may resort to forcible measures, or manipulation of census figures. The decreasing reliability of PRC population statistics since family planning began in the late 1970s has made Population of China from 1949 to 2008. evaluating the effectiveness of the policy difficult.[259] Data from the 2010 census implies that the total fertility rate may now be around 1.4.[260] The government is particularly concerned with the large imbalance in the sex ratio at birth, apparently the result of a combination of traditional preference for boys and family planning pressure, which led to a ban on using ultrasound devices in an attempt to prevent sex-selective abortion. According to the 2010 census, there were 118.06 boys born for every 100 girls, which is 0.53 points lower than the ratio obtained from a population sample survey carried out in 2005.[261] However, the gender ratio of 118.06 is still beyond the normal range of around 105 percent, and experts warn of increased social instability should this trend continue.[262] For the population born between the years 1900 and 2000, it is estimated that there could be 35.59 million fewer females than males.[263] Other demographers argue that perceived gender imbalances may arise from the underreporting of female births.[264] [265] [266] [267] A recent study suggests that as many as three million Chinese babies are hidden by their parents every year.[267] According to the 2010 census, males accounted for 51.27 percent of the population, while females made up 48.73 percent of the total in 2010.[261]

59

Ethnic groups
Ethnic composition (2000) Han Zhuang Manchu Hui Miao Uyghur Tujia Other 91,59% 1.28% 0.84% 0.78% 0.71% 0.66% 0.63% 3,51%
[268]

The PRC officially recognizes 56 distinct ethnic groups, the largest of which are the Han Chinese, who constitute about 91.51% of the total population.[269] The Han Chinese outnumber the minority groups in every province, municipality and autonomous region except Tibet and Xinjiang, and are descended from ancient Huaxia tribes living along the Yellow River. Ethnic minorities account for about 8.49% of the population of China, according to the 2010 census.[269] Compared with the 2000 population census, the Han population increased by 66,537,177 persons, or 5.74%, while the population of the 55 national minorities combined increased by 7,362,627 persons, or 6.92%.[269]

China The 2010 census recorded a total of 593,832 foreign citizens living in China. The largest such groups were from South Korea (120,750), the United States (71,493) and Japan (66,159).[270]

60

Languages
Most languages in China belong to the Sino-Tibetan language family, spoken by 29 ethnicities. There are also several major linguistic groups within the Chinese language itself. The most spoken varieties are Mandarin (spoken by over 70% of the population), Wu (includes Shanghainese), Yue (includes Cantonese and Taishanese), Min (includes Hokkien and Teochew), Xiang, Gan, and Hakka. Non-Sinitic languages spoken widely by ethnic minorities include Zhuang, Mongolian, Tibetan, Uyghur, Hmong and Korean.[271] Standard Mandarin, a variety of Mandarin based on the Beijing dialect, is the official national language of China and is used as a lingua franca between people of different linguistic backgrounds. Classical Chinese was the written standard in China for thousands of years, and allowed for written communication between speakers of various unintelligible languages and dialects in China. Written vernacular Chinese, or baihua, is the written standard based on the Mandarin dialect and first popularized in Ming Dynasty novels. It was adopted with significant modifications during the early 20th century as the national standard. Classical Chinese is still part of the high school curriculum and is thus intelligible to some degree to many Chinese. Since its promulgation by the government in 1956, Simplified Chinese characters have become the official standardized written script used to write the Chinese language within mainland China, supplanting the use of Traditional Chinese characters used earlier there.

Urbanization
Since 2000, China's cities have expanded at an average rate of 10% annually. The country's urbanization rate increased from 17.4% to 46.8% between 1978 and 2009, a scale unprecedented in human history.[272] Between 150 and 200million migrant workers work part-time in the major cities, returning home to the countryside periodically with their earnings.[273] [274] Today, the People's Republic of China has dozens of cities with one million or more long-term residents, including the three global cities of Beijing, Hong Kong, and Shanghai. The figures in the table below are from the 2008 census, and are only estimates of the urban populations within administrative city limits; a different ranking exists when considering the total municipal populations (which includes suburban and rural populations). The large "floating populations" of migrant workers make conducting censuses in urban areas difficult;[275] the figures below do not include the floating population, only long-term residents.
Leading Urban Centers of the People's Republic of China

China

61
Rank Core City Shanghai Beijing Hong Kong Tianjin Wuhan Guangzhou Shenzhen Shenyang Chongqing Nanchang Nanjing Harbin Division Shanghai Municipality Beijing Municipality Hong Kong SAR Tianjin Municipality Hubei Province Guangdong Province Guangdong Province Liaoning Province Chongqing Municipality Jiangxi Province Jiangsu Province Heilongjiang Province Urban Population 9,495,701 7,296,962 6,985,200 5,066,129 6,660,000 4,154,808 4,000,000 3,981,023 3,934,239 3,790,000 2,822,117 2,672,069 2,620,357 2,588,987 2,341,203 2,223,170 2,118,087 1,932,612 1,917,204 1,905,403 1,867,365 Prefecture Population 18,542,200 17,430,000 6,985,200 11,500,000 9,100,000 15,000,000 8,615,500 7,500,000 31,442,300 4,990,184 8,004,000 8,499,000 9,630,000 10,500,000 11,300,000 7,400,000 6,200,000 7,000,000 6,300,000 3,413,800 8,000,000 Region East North South North South Central South South Northeast Southwest East East Northeast North Northwest Southwest Northeast Northeast East East North East Chongqing Beijing

Shanghai

1 2 3 4 5

Hong Kong

Tianjin

Guangzhou

Nanjing

Shenzhen

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Shijiazhuang Hebei Province Xi'an Chengdu Changchun Dalian Hangzhou Jinan Taiyuan Qingdao Shaanxi Province Sichuan Province Jilin Province Liaoning Province Zhejiang Province Shandong Province Shanxi Province Shandong Province

2008 Estimated - suburban and rural area excluded on urban population

Education
In 1986, China set the long-term goal of providing compulsory nine-year basic education to every child. As of 2007, there were 396,567 primary schools, 94,116 secondary schools, and 2,236 higher education institutions in the PRC.[276] In February 2006, the government advanced its basic education goal by pledging to provide completely free nine-year education, including textbooks and fees.[277] Free compulsory education in China consists of elementary school and middle school, which lasts for 9 years (ages 615); almost all children in urban areas continue with three years of high school.

Tsinghua University in Beijing.

As of 2007, 93.3% of the population over age 15 are literate.[255] In 2000, China's literacy rate among 15-to-24-year-olds was 98.9% (99.2% for males and 98.5% for females).[278] In March 2007, the Chinese government declared education a national "strategic priority"; the central budget for national scholarships was tripled between 2007 and 2009, and 223.5billion yuan (US$28.65billion) of extra state funding was allocated between

China 2007 and 2012 to improve compulsory education in rural areas.[279] In 2009, Chinese students from Shanghai achieved the world's best results in mathematics, science and literacy, as tested by the Programme for International Student Assessment (PISA), a worldwide evaluation of 15-year-old school pupils' scholastic performance.[280] The quality of Chinese colleges and universities varies considerably across the country. The consistently top-ranked universities in mainland China are:[281] [282] Beijing: Peking University, Tsinghua University, Renmin University of China, Beijing Normal University Shanghai: Fudan University, Shanghai Jiao Tong University, Tongji University, East China Normal University Harbin: Harbin Institute of Technology Tianjin: Nankai University, Tianjin University Xi'an: Xi'an Jiaotong University Nanjing: Nanjing University Hefei: University of Science and Technology of China Hangzhou: Zhejiang University Wuhan: Wuhan University Guangzhou: Sun Yat-sen University (aka Zhongshan University)

62

Health
The Ministry of Health, together with its counterparts in the provincial health bureaux, oversees the health needs of the Chinese population.[283] An emphasis on public health and preventive medicine has characterized health policy since the early 1950s. At that time, the Communist Party started the Patriotic Health Campaign, which was aimed at improving sanitation and hygiene, as well as treating and preventing several diseases. Diseases such as cholera, typhoid and scarlet fever, which were previously rife in China, were nearly eradicated by the campaign. After Deng Xiaoping began instituting economic reforms in 1978, the health of the Chinese public improved rapidly due to better nutrition, although many of the free public health services provided in the countryside disappeared along with the People's Communes. Healthcare in China became mostly privatised, and experienced a significant rise in quality. The national life expectancy at birth rose from about 35 years in 1949 to 73.18 years in 2008,[284] [285] and infant mortality decreased from 300 per thousand in the 1950s to around 23 per thousand in 2006.[39] [286] Malnutrition as of 2002 stood at 12% of the population, according to United Nations FAO sources.[287] Despite significant improvements in health and the construction of advanced Western-style medical facilities, China has several emerging public health problems, such as respiratory illnesses caused by widespread air pollution[288] and hundreds of millions of cigarette smokers,[289] [290] a possible future HIV/AIDS epidemic, and an increase in obesity among urban youths.[291] [292] China's large population and densely-populated cities have led to serious disease outbreaks in recent years, such as the 2003 outbreak of SARS, although this has since been largely contained.[293] Estimates of excess deaths in China from environmental pollution (apart from smoking) are placed at 760,000 people per annum from air and water pollution (including indoor air pollution).[294] In 2007, China overtook the United States as the world's biggest producer of carbon dioxide.[295] Some 90% of China's cities suffer from some degree of water pollution,[296] and nearly 500million people lacked access to safe drinking water in 2005.[297] Reports by the World Bank and the New York Times have claimed industrial pollution, particularly of the air,[298] to be a significant health hazard in China.

China

63

Religion
In mainland China, the government allows a degree of religious freedom to members of state-approved religious organizations. An accurate number of religious adherents is hard to obtain because of a lack of official data, but there is general consensus that religion has been enjoying a resurgence over the past 20years.[299] A survey by Phil Zuckerman on Adherents.com found that in 1998, 59% (over 700million)[300] of the population was irreligious. A later survey, conducted in 2007, found that there are 300million believers in China, constituting 23% of the population, as distinct from an official figure of 100million.[299] Despite the surveys' varying results, most agree that China's traditional religions Buddhism, Taoism, and Chinese folk religions are the dominant faiths. According to a number of sources, Buddhism in China accounts for between 660million (~50%) and over 1billion (~80%)[301] [302] [303] [304] while Taoists number 400million (~30%).[305] [306] However, because of the fact that one person may subscribe to two or more of these traditional beliefs simultaneously and the difficulty in clearly differentiating Buddhism, Taoism, and Chinese folk religions, the number of adherents to these religions can be overlaid. In addition, subscribing to Buddhism and Taoism is not necessarily considered religious by those who follow the philosophies in principle but stop short of believing in any kind of deity or

"Three laughs at Tiger Brook", Confucianism, Taoism, and Buddhism are one, a litang style painting portraying three men laughing by a river stream, 12th century, Song Dynasty.

The Round Mound Altar, the altar of the Temple of Heaven in Beijing, where the Emperor was said to commune with Heaven.

divinity.[307] [308] [309] Most Chinese Buddhists are merely nominal adherents, because only a small proportion of the population (around 8% or 100million)[311] [312] may have taken the formal step of going for refuge.[313] [314] Even then, it is still difficult to estimate accurately the number of Buddhists because they do not have congregational memberships and often do not participate in public ceremonies.[315] Mahayana (, Dacheng) and its subsets Pure Land (Amidism), Tiantai and Chn (better known in the west by its Japanese pronunciation Zen) are the most widely practiced denominations of Buddhism. Other forms, such as Theravada and Tibetan, are practiced largely by ethnic minorities along the geographic fringes of the Chinese mainland.[316]

Saint Sophia Cathedral in Harbin, northeast China. Harbin had a sizable Russian population, totalling around 100,000, by 1921, feeding the growth of [310] Christianity in the city.

Christianity was first introduced to China during the Tang Dynasty, with the arrival of Nestorian Christianity in 635 CE. This was followed by Franciscan missionaries in the 13th century, Jesuits in the 16th century, and finally Protestants in the 19th century. Of China's minority religions, Christianity is one of the fastest-growing. The total number of Christians is difficult to determine, as many belong to unauthorized house churches, but estimates of their number have ranged from 40million (3% of the total population)[299] [317] to 54million (4%)[318] to as many as 130 million (10%).[319] Official government statistics put the number of Christians at 16million, but these count only members of officially-sanctioned church bodies.[320] China is believed to now have the world's second-largest evangelical Christian population behind only the United States and if current growth rates continue, China will become a global center of evangelical Christianity in

China coming decades.[321] Islam in China dates to a mission in 651, only 18 years after Muhammad's death. Muslims came to China for trade, becoming prominent in the trading ports of the Song Dynasty.[322] [323] They became influential in government circles, including Zheng He, Lan Yu and Yeheidie'erding. Nanjing became an important center of Islamic study.[324] Statistics are hard to find, and most estimates give a figure of between 20 and 30million Muslims (1.5% to 2% of the population).[325] [326] [327] [328] [329] China also plays host to numerous minority religions, including Hinduism, Dongbaism, Bn, and a number of more modern religions and sects (particularly Xiantianism). In July 1999, the Falun Gong spiritual practice was officially banned by the authorities,[330] and many international organizations have criticized the government's treatment of Falun Gong that has occurred since then.[331] There are no reliable estimates of the number of Falun Gong practitioners in China,[332] although informal estimates have given figures as high as 70 million.[333] [334]
The Masjid and Islamic Centre in Kowloon.

64

Culture

A traditional Beijing opera being performed.

[335]

A north corner of Forbidden City, displaying its classical Chinese architectural style.

Since ancient times, Chinese culture has been heavily influenced by various versions of Confucianism and conservatism. For centuries, opportunity for economic and social advancement in China could be provided by high performance on Imperial examinations. The literary emphasis of the exams affected the general perception of cultural refinement in China, such as the belief that calligraphy and literati painting were higher forms of art than dancing or drama. A number of more authoritarian and rational strains of thought were also influential, with Legalism being a prominent example. There was often conflict between the philosophies - the individualistic Song Dynasty neo-Confucians believed Legalism departed from the original spirit of Confucianism. Examinations and a culture of merit remain greatly valued in China today. In recent years, a number of New Confucians have advocated that modern democratic ideals and human rights are compatible with traditional Confucian values.[336]

China The first leaders of the People's Republic of China were born into the traditional imperial order, but were influenced by the May Fourth Movement and reformist ideals. They sought to change some traditional aspects of Chinese culture, such as rural land tenure, sexism, and the Confucian system of education, while preserving others, such as the family structure and culture of obedience to the state. Some observers see the period following the establishment of the PRC in 1949 as a continuation of traditional Chinese dynastic history, while others claim that the Communist Party's rule has damaged the foundations of Chinese culture, especially through political movements such as the Cultural Revolution of the 1960s, where many aspects of traditional culture were destroyed, having been denounced as 'regressive and harmful' or 'vestiges of feudalism'. Many important aspects of traditional Chinese morals and culture, such as Confucianism, Chinese art, literature, and performing arts like Peking opera, were altered to conform to government policies and propaganda at the time. Today, the Chinese government has accepted numerous elements of traditional Chinese culture as being integral to Chinese society. With the rise of Chinese nationalism and the end of the Cultural Revolution, various forms of traditional Chinese art, literature, music, film, fashion and architecture have seen a vigorous revival,[337] [338] and folk and variety art in particular have sparked interest nationally and even worldwide.[339] Traditionally, China and the European West were linked by the Silk Road, which became a key route of cultural as well as economic exchange in medieval and post-medieval times. Artifacts from the history of the Road, as well as from the natural history of the Gobi desert, are displayed in the Silk Route Museum in Jiuquan.[340]

65

Cuisine
Chinese cuisine is highly diverse, drawing on several millennia of culinary history. The dynastic emperors of ancient China were known to host banquets with over 100 dishes served at a time,[341] employing countless imperial kitchen staff and concubines to prepare the food. Over time, many royal dishes became part of everday Chinese culture. Numerous foreign offshoots of Chinese food, such as Hong Kong cuisine and American Chinese food, have emerged in the various nations which play host to the Chinese diaspora.
Traditional Chinese food in Tianjin, including dumpling and dandan noodles.

Sports
China has one of the oldest sporting cultures in the world. There is evidence that a form of association football was played in China around 1000 AD.[342] Besides football,[343] some of the most popular sports in the country include martial arts, table tennis, badminton, swimming, basketball and snooker. Board games such as Go (Weiqi), Xiangqi, and more recently chess are also played at a professional level.[344] Physical fitness is widely emphasized in Chinese culture. Morning exercises are a common activity, with elderly citizens encouraged to

Dragon boat racing, a popular traditional Chinese sport.

China practice qigong and tai chi chuan. Young people in China are also keen on basketball, especially in urban centers with limited space and grass areas. The American National Basketball Association has a huge following among Chinese youths, with Chinese players such as Yao Ming being held in high esteem.[345] Many more traditional sports are also played in China. Dragon boat racing occurs during the Dragon Boat Festival. In Inner Mongolia, sports such as Mongolian-style wrestling and horse racing are popular. In Tibet, archery and equestrianism are a part of traditional festivals.[346] China has participated at the Olympic Games since 1932, although it has only participated as the PRC since 1952. China hosted the 2008 Summer Olympics in Beijing, and received the highest number of gold medals of any participating nation that year.[347] China will host the 2013 East Asian Games in Tianjin and the 2014 Youth Olympic Games in Nanjing.

66

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[294] " China 'buried smog death finding' (http:/ / news. bbc. co. uk/ 2/ hi/ asia-pacific/ 6265098. stm)". BBC News. 3 July 2007. [295] " China overtakes US as world's biggest CO2 emitter (http:/ / www. guardian. co. uk/ environment/ 2007/ jun/ 19/ china. usnews)". Guardian.co.uk. 19 June 2007. [296] " China says water pollution so severe that cities could lack safe supplies (http:/ / www. chinadaily. com. cn/ english/ doc/ 2005-06/ 07/ content_449451. htm)". China Daily 7 June 2005. [297] " As China Roars, Pollution Reaches Deadly Extremes (http:/ / www. nytimes. com/ 2007/ 08/ 26/ world/ asia/ 26china. html)". The New York Times. 26 August 2007. [298] "Air Pollution in Yixian" (http:/ / 7ride. com/ rides/ cycling-china-2009/ day-6-fangshan-to-yixian. aspx). Air Polution in Yixian. 1900-1-0. . Retrieved 25 May 2010. [299] "Asia-Pacific | Survey finds 300m (980ft) China believers" (http:/ / news. bbc. co. uk/ 2/ hi/ asia-pacific/ 6337627. stm). BBC News. 7 February 2007. . 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[318] "China Survey Reveals Fewer Christians than Some Evangelicals Want to Believe" (http:/ / www. assistnews. net/ STORIES/ 2007/ s07100011. htm). Assistnews.net. 1 October 2007. . Retrieved 15 June 2009. [319] "Sons of heaven" (http:/ / www. economist. com/ node/ 12342509). The Economist. 2 October 2008. . [320] "Chinese government official statistics on Christian population in China" (http:/ / web. archive. org/ web/ 20070808215628/ http:/ / hrwf. org/ religiousfreedom/ news/ 2007PDF/ China+ 2007. doc). hrwf.org. Archived from the original (http:/ / hrwf. org/ religiousfreedom/ news/ 2007PDF/ China 2007. doc) on 2007-08-08. . Retrieved 27 August 2007. 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Available at islamsymposium.cityu.edu.hk (http:/ / www. islamsymposium. cityu. edu. hk/ ). The 2000 census reported a total of 20.3million members of Muslim nationalities, of which again 96% belonged to just three groups: Hui 9.8million, Uyghurs 8.4million, and Kazakhs 1.25million. [326] "CIA The World Factbook China" (https:/ / www. cia. gov/ library/ publications/ the-world-factbook/ geos/ ch. html). Cia.gov. . Retrieved 15 June 2009. [327] "China (includes Hong Kong, Macau, and Tibet)" (http:/ / www. state. gov/ g/ drl/ rls/ irf/ 2006/ 71338. htm). State.gov. . Retrieved 15 June 2009. [328] "NW China region eyes global Muslim market" (http:/ / www. chinadaily. com. cn/ bizchina/ 2008-07/ 09/ content_6831389. htm). China Daily. 9 July 2008. . Retrieved 14 July 2009. [329] "Muslim Media Network" (http:/ / muslimmedianetwork. com/ mmn/ ?p=1922). Muslim Media Network. 24 March 2008. . Retrieved 14 July 2009. [330] Xinhua, China Bans Falun Gong (http:/ / english. people. com. cn/ special/ fagong/ 1999072200A101. html), People's Daily, 22 July 1999 [331] Mary-Anne Toy, Underground existence for Falun Gong faithful (http:/ / www. theage. com. au/ world/ underground-existence-for-falun-gong-faithful-20080725-3l2p. html?page=-1), The Age, 26 July 2008. "The US State Department, US Congress, the United Nations and human rights groups such as Amnesty say persecution of Falun Gong practitioners in China is a continuing abuse of human rights." [332] Xu Jiatun, Cultural Revolution revisited in crackdown (http:/ / www. taipeitimes. com/ News/ editorials/ archives/ 1999/ 09/ 08/ 1308), Taipai Times, 8 September 1999. [333] Seth Faison, "In Beijing: A Roar of Silent Protestors," New York Times, 27 April 1999 [334] http:/ / www. upi. com/ Top_News/ 2009/ 04/ 24/ Falun-Gong-said-to-total-tens-of-millions/ UPI-47081240585793/ United Press International. Retrieved 2011-10-04. [335] "Tour Guidebook: Beijing" (http:/ / en. cnta. gov. cn). China National Tourism Administration. . [336] Bary, Theodore de. "Constructive Engagement with Asian Values" (http:/ / www. columbia. edu/ cu/ ccba/ cear/ issues/ fall97/ graphics/ special/ debary/ debary. htm). Columbia University. [337] "China: Traditional arts". Library of Congress Country Studies. (http:/ / lcweb2. loc. gov/ cgi-bin/ query/ r?frd/ cstdy:@field(DOCID+ cn0133)) Accessed: 26 December 2007. [338] "China: Cultural life: The arts". Encyclopdia Britannica Online (http:/ / www. britannica. com/ eb/ article-258942/ China) Accessed: 26 December 2007. [339] "China: Folk and Variety Arts". Library of Congress Country Studies. (http:/ / lcweb2. loc. gov/ cgi-bin/ query/ r?frd/ cstdy:@field(DOCID+ cn0138)) Accessed: 26 December 2007. [340] "Silk Route Museum" (http:/ / www. silkroutemuseum. com). Silk Route Museum. . Retrieved 14 July 2009. [341] Kong, Foong, Ling. [2002]. The Food of Asia. Tuttle Publishing. ISBN 0-7946-0146-4 [342] Origins of the Great Game (http:/ / athleticscholarships. net/ history-of-soccer. htm). 2000. Athleticscholarships.net. Retrieved 23 April 2006. [343] ESPN Soccernet (http:/ / soccernet. espn. go. com/ news/ story?id=370457& cc=5901). 2002. ESPN Soccernet. Retrieved 26 January 2006. [344] http:/ / thestar. com. my/ lifestyle/ story. asp?file=/ 2011/ 9/ 2/ lifeliving/ 9398979& sec=lifeliving TheStar.com. Retrieved 2011-09-24. [345] Beech, Hannah (28 April 2003). "Yao Ming" (http:/ / www. time. com/ time/ asia/ 2003/ heroes/ yao_ming. html). Time Magazine. . Retrieved 30 March 2007. [346] Qinfa, Ye. Sports History of China (http:/ / chineseculture. about. com/ library/ weekly/ aa032301a. htm). About.com. Retrieved 21 April 2006. [347] Beijing2008.cn (http:/ / results. beijing2008. cn/ WRM/ ENG/ INF/ GL/ 95A/ GL0000000. shtml)

76

Further reading Chang, Jung (1992). Wild Swans. Doubleday. ISBN0385425473. Farah, Paolo, Five Years of Chinas WTO Membership. EU and US Perspectives on Chinas Compliance with Transparency Commitments and the Transitional Review Mechanism, Legal Issues of Economic Integration, Kluwer Law International, Volume 33, Number 3, pp.263304, 2006. Abstract (http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=916768). Heilig, Gerhard K., China Bibliography Online (http://www.china-profile.com/bib/bib_start.htm). 2006, 2007. Lynch, Michael (1998). Peoples Republic of China 194990. Trafalgar Square Publishing. ISBN0-340-68853-X. Murphey, Rhoads (1996). East Asia: A New History. University of Michigan Press. ISBN0-321-07801-2. Sang Ye (2006). China Candid: The People on the People's Republic. University of California Press. ISBN0-520-24514-8.

China Selden, Mark (1979). The People's Republic of China: Documentary History of Revolutionary Change. New York: Monthly Review Press. ISBN0853455325. Terrill, Ross (2003). The New Chinese Empire, And What It Means For The United States. New York: Basic Books. ISBN0-465-08412-5. Thurston, Anne F. (1994). China Bound: A Guide to Academic Life and Work in the PRC. Washington: National Academies Press. ISBN0-309-04932-6.

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External links
Overviews China at a Glance (http://english.peopledaily.com.cn/china/home.html) People's Daily BBC News Country Profile: China (http://news.bbc.co.uk/1/hi/world/asia-pacific/country_profiles/ 1287798.stm) China (https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html) entry at The World Factbook Modern China: A Primer (http://www.life.com/gallery/54731/modern-china-a-primer#index/0) slideshow by Life magazine "Rethinking Capitalist Restoration in China" (http://www.monthlyreview.org/1105wu.htm) by Yiching Wu Documentaries "China on the Rise" (http://www.pbs.org/newshour/bb/asia/china/) PBS Online NewsHour. October 2005. China in the Red (http://www.pbs.org/wgbh/pages/frontline/shows/red/), 19982001. PBS Frontline. China From the Inside (http://www.pbs.org/kqed/chinainside/) A documentary series co-produced by KQED Public Television and Granada Television. Government The Central People's Government of People's Republic of China (http://english.gov.cn/) (English) China Internet Information Center (China.org.cn) (http://www.china.org.cn/) (English) Authorized government portal site to China Studies Assertive Pragmatism: China's Economic Rise and Its Impact on Chinese Foreign Policy (http://ifri.org/files/ Securite_defense/Prolif_Paper_Minxin_Pei.pdf) analysis by Minxin Pei, IFRI Proliferation Papers n15, 2006 The Dragon's Dawn: China as a Rising Imperial Power (http://www.globalpolitician.com/articles. asp?ID=341) 11 February 2005. History of The People's Republic of China (http://www.china-profile.com/history/hist_list_1.htm) Timeline of Key Events since 1949. Media, advertising, and urban life in China. (http://www.danwei.org/) Travel China travel guide from Wikitravel Maps Google Maps China (http://maps.google.com/maps?q=China&ll=30.600094,103.710938&spn=64. 10009,177.1875&om=1) Google Maps China (http://www.china-profile.com/maps/map_overview_1.htm) Interesting locations Wikimedia Atlas of the People's Republic of China

Collective investment scheme

78

Collective investment scheme

A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to hire a professional investment manager, which theoretically offers the prospects of better returns and/or risk management benefit from economies of scale - cost sharing among others diversify more than would be feasible for most individual investors which, theoretically, reduces risk.

The values and performance of collective funds are

listed in newspapers Terminology varies with country but collective investment schemes are often referred to as mutual funds, investment funds, managed funds, or simply funds (note: mutual fund has a specific meaning in the US). Around the world large markets have developed around collective investment and these account for a substantial portion of all trading on major stock exchanges.

Collective investments are promoted with a wide range of investment aims either targeting specific geographic regions (e.g. Emerging, Europe) or specified industry sectors (e.g. Technology). Depending on the country there is normally a bias towards the domestic market to reflect national self-interest as perceived by policymakers, familiarity, and the lack of currency risk. Funds are often selected on the basis of these specified investment aims, their past investment performance and other factors such as fees.

Generic information - structure

Constitution and terminology
Collective investment schemes may be formed under company law, by legal trust or by statute. The nature of the scheme and its limitations are often linked to its constitutional nature and the associated tax rules for the type of structure within a given jurisdiction. Typically there is: A fund manager or investment manager who manages the investment decisions. A fund administrator who manages the trading, reconciliations, valuation and unit pricing. A board of directors or trustees who safeguards the assets and ensures compliance with laws, regulations, and rules. The shareholders or unitholders who own (or have rights to) the assets and associated income. A "marketing" or "distribution" company to promote and sell shares/units of the fund. Please see below for general information on specific forms of scheme in different jurisdictions.

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Net asset value

The Net Asset Value or NAV is the value of a scheme's assets less the value of its liabilities. The method for calculating this varies between scheme types and jurisdiction and can be subject to complex regulation.

Open-end fund
An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.

Closed-end fund
A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO) or through private placement. If shares are issued through an IPO, they are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the scheme if demand is high although this may affect the share price. For listed funds, the added element of market forces tends to amplify the performance of the fund increasing investment risk through increased volatility.

Gearing and leverage

Some collective investment schemes have the power to borrow money to make further investments; a process known as gearing or leverage. If markets are growing rapidly this can allow the scheme to take advantage of the growth to a greater extent than if only the subscribed contributions were invested. However this premise only works if the cost of the borrowing is less than the increased growth achieved. If the borrowing costs are more than the growth achieved a net loss is achieved. This can greatly increase the investment risk of the fund by increased volatility and exposure to increased capital risk. Gearing was a major contributory factor in the collapse of the split capital investment trust debacle in the UK in 2002.[1] [2] [3]

Availability and access

Collective investment schemes vary in availability depending on their intended investor base: Public-availability Schemes - are available to most investors within the jurisdiction they are offered. Some restrictions on age and size of investment may be imposed. Limited-availability schemes - are limited by laws, regulations, and/or rules to experienced and/or sophisticated investors and often have high minimum investment requirements. Hedge funds are often restricted this way. Private-availability schemes - may be limited to family members or whoever set up the fund. They are not publicly quoted and often are arranged for tax- or estate-planning purposes. Private equity funds are typically structured this way.

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Limited duration
Some schemes are designed to have a limited term with enforced redemption of shares or units on a specified date.

Unit or share class

Many collective investment schemes split the fund into multiple classes of shares or units. The underlying assets of each class are effectively pooled for the purposes of investment management, but classes typically differ in the fees and expenses paid out of the fund's assets. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example: One class may be sold through a broker or financial adviser with an initial commission (front-end load) and might be called retail shares. Another class may be sold with no commission (load) direct to the public called direct shares. Still a third class might have a high minimum investment limit and only be open to financial institutions, and called institutional shares. In some cases, by aggregating regular investments by many individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase "institutional" shares (and gain the benefit of their typically lower expense ratios) even though no members of the plan would qualify individually.

Generic information - advantages

Diversity and risk
One of the main advantages of collective investment is the reduction in investment risk (capital risk) by diversification. An investment in a single equity may do well, but it may collapse for investment or other reasons (e.g., Marconi, Enron). If your money is invested in such a failed holding you could lose your capital. By investing in a range of equities (or other securities) the capital risk is reduced. The more diversified your capital, the lower the capital risk. This investment principle is often referred to as spreading risk. Collective investments by their nature tend to invest in a range of individual securities. However, if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid this systematic risk investment managers may diversify into different non-perfectly-correlated asset classes. For example, investors might hold their assets in equal parts in equities and fixed income securities.

Reduced dealing costs

If one investor were to buy a large number of direct investments, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large chunk out of the capital (affecting future profits).

Generic information - disadvantages

Costs
The fund manager managing the investment decisions on behalf of the investors will of course expect remuneration. This is often taken directly from the fund assets as a fixed percentage each year or sometimes a variable (performance based) fee. If the investor managed their own investments, this cost would be avoided.

Collective investment scheme Often the cost of advice given by a stock broker or financial adviser is built into the scheme. Often referred to as commission or load (in the U.S.) this charge may be applied at the start of the plan or as an ongoing percentage of the fund value each year. While this cost will diminish your returns it could be argued that it reflects a separate payment for an advice service rather than a detrimental feature of collective investment schemes. Indeed it is often possible to purchase units or shares directly from the providers without bearing this cost.

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Lack of choice
Although the investor can choose the type of fund to invest in, they have no control over the choice of individual holdings that make up the fund.

Loss of owner's rights

If the investor holds shares directly, they may be entitled to shareholders' perks (for example, discounts on the company's products) and the right to attend the company's annual general meeting and vote on important matters. Investors in a collective investment scheme often have none of the rights connected with individual investments within the fund.

Style
Investment aims and benchmarking
Each fund has a defined investment goal to describe the remit of the investment manager and to help investors decide if the fund is right for them. The investment aims will typically fall into the broad categories of Income (value) investment or Growth investment. Income or value based investment tends to select stocks with strong income streams, often more established businesses. Growth investment selects stocks that tend to reinvest their income to generate growth. Each strategy has its critics and proponents; some prefer a blend approach using aspects of each. Funds are often distinguished by asset-based categories such as equity, bonds, property, etc. Also, perhaps most commonly funds are divided by their geographic markets or themes. Examples The largest markets - U.S., Japan, Europe, UK and Far East are often divided into smaller funds e.g. US large caps, Japanese smaller companies, European Growth, UK mid caps etc. Themed funds - Technology, Healthcare, Socially responsible funds In most instances whatever the investment aim the fund manager will select an appropriate index or combination of indices to measure its performance against; e.g. FTSE 100. This becomes the benchmark to measure success or failure against.

Active or passive management

The aim of most funds is to make money by investing in assets to obtain a real return (i.e. better than inflation). The methods used to make your investment vary and two opposing views exist. Active management - Active managers believe that by selectively buying within a Financial market that it is possible to outperform the market as a whole. Therefore they employ dynamic portfolio strategies buying and selling investments with changing market conditions. Passive management - Passive managers believe that it is impossible to predict which individual holdings or section of the market will perform better than another therefore their portfolio strategy is determined at outset of the fund and not varied thereafter. Many passive funds are index funds where the fund tries to mirror the market as a whole. Another example of passive management is the "buy and hold" method used by many traditional Unit Investment

Collective investment scheme Trusts where the portfolio is fixed from outset. An example of active management success In 1998 Richard Branson (head of Virgin) publicly bet Nicola Horlick (head of SG Asset Management) that her SG UK Growth fund would not beat the FTSE 100 index, nor his Virgin Index Tracker fund over three years, nor achieve its stated aim to beat the index by 2% each year. He lost and paid 6,000 to charity.

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Alpha, Beta, R-squared and standard deviation

When analysing investment performance, statistical measures are often used to compare 'funds'. These statistical measures are often reduced to a single figure representing an aspect of past performance: Alpha represents the fund's return when the benchmark's return is 0. This shows the fund's performance relative to the benchmark and can demonstrate the value added by the fund manager. The higher the 'alpha' the better the manager. Alpha investment strategies tend to favour stock selection methods to achieve growth. Beta represents an estimate of how much the fund will move if its benchmark moves by 1 unit. This shows the fund's sensitivity to changes in the market. Beta investment strategies tend to favour asset allocation models to achieve outperformance. R-squared is a measure of the association between a fund and its benchmark. Values are between 0 and 1. Perfect correlation is indicated by 1, and 0 indicates no correlation. This measure is useful in determining if the fund manager is adding value in their investment choices or acting as a closet tracker mirroring the market and making little difference. For example, an index fund will have an R-squared with its benchmark index very close to 1, indicating close to perfect correlation (the index fund's fees and tracking error prevent the correlation from ever equalling 1). Standard deviation is a measure of volatility of the fund's performance over a period of time. The higher the figure the greater the variability of the fund's performance. High historical volatility may indicate high future volatility, and therefore increased investment risk in a fund.

Types of risk
Depending on the nature of the investment, the type of 'investment' risk will vary. A common concern with any investment is that you may lose the money you invest - your capital. This risk is therefore often referred to as capital risk. If the assets you invest in are held in another currency there is a risk that currency movements alone may affect the value. This is referred to as currency risk. Many forms of investment may not be readily salable on the open market (e.g. commercial property) or the market has a small capacity and investments may take time to sell. Assets that are easily sold are termed liquid therefore this type of risk is termed liquidity risk.

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Charging structures and fees

Fee types
There may be an initial charge levied on the purchase of units or shares this covers dealing costs, and commissions paid to intermediaries or salespeople. Typically this fee is a percentage of the investment. Some schemes waive the initial charge and apply an exit charge instead. This may be gradually disappearing after a number of years. The scheme will charge an annual management charge or AMC to cover the cost of administering the scheme and remunerating the investment manager. This may be a flat rate based on the value of the assets or a performance related fee based on a predefined target being achieved. Different unit/share classes may have different combinations of fees/charges.

Pricing models
Open-ended schemes are either dual priced or single priced. Dual priced schemes have a buying (offer) price and selling or (bid) price. The buying price is higher than the selling price, this difference is known as the spread or bid-offer spread. The difference is typically 5% and may be varied by the scheme manager to reflect changes in the market; the amount of variation may be limited by the schemes rules or regulatory rules. The difference between the buying and selling price includes initial charge for entering the fund. The internal workings of a fund are more complicated than this description suggests. The manager sets a price for creation of units/shares and for cancellation. There is a differential between the cancellation and bid prices, and the creation and offer prices. The additional units are created are place in the managers box for future purchasers. When heavy selling occurs units are liquidated from the managers box to protect the existing investors from the increased dealing costs. Adjusting the bid/offer prices closer to the cancellation/creation prices allows the manager to protect the interest of the existing investors in changing market conditions[4] . Most unit trusts are dual priced. Single priced schemes notionally have a single price for units/shares and this price is the same if buying or selling. As single prices scheme can't adjust the difference between the buying and selling price to allow for market conditions another mechanism the dilution levy exists. SICAVs, OEICs and U.S. mutual funds are single priced. A dilution levy can be charged at the discretion of the fund manager, to offset the cost of market transactions resulting from large un-matched buy or sell orders. For example if the volume of purchases outweigh the volume of sales in a particular trading period the fund manager will have to go to the market to buy more of the assets underlying the fund, incurring a brokerage fee in the process and having an adverse affect on the fund as a whole ("diluting" the fund). The same is the case with large sell orders. A dilution levy is therefore applied where appropriate and paid for by the investor in order that large single transactions do not reduce the value of the fund as a whole.[5]

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Internationally recognised collective investments

Exchange-traded funds or ETFs - a closed-end fund traded by listed shares on major stock exchanges. Real Estate Investment Trusts or REITs - a close-ended fund that invests in real estate. Sovereign investment funds

US-specific collective investments

(Click here for US SEC description of investment company types) [6]. Mutual Funds - Open-ended with a corporate or trust structure. Closed-end funds - Closed-ended with corporate structure. Unit Investment Trusts - Open-ended with a trust structure and limited duration. Exchange-traded funds (ETFs) - Structured as mutual funds or unit investment trusts, but publicly traded.

UK-specific collective investments

Investment Trusts - Introduced 1868. Closed-ended with corporate structure. Unit Trusts - Introduced 1931. Open-ended with a trust structure. With-profits policy - Open-ended with a life policy structure. Unitised Insurance Funds - Introduced 1970s. Open-ended with a life policy structure. OEICs or ICVCs - Introduced 1997. Open-ended with a corporate structure. Exchange-traded funds (ETFs) - Open-ended with a corporate structure.

Canadian collective investments

Income Trusts Labour Sponsored Funds Mutual funds

Ireland specific collective investments

Common contractual fund

European collective investments

UCITS SICAVs

France & Luxembourg

Investment funds FCP (Fonds commun de placement) (unincorporated investment fund or common fund) SICAF (Socit d'investissement capital fixe) (Investment company with fixed capital) SICAV (Socit d'investissement capital variable) (Investment company with variable capital)

Netherlands and Belgium

BEVEK (Investment Company with variable capital) BEVAK (Investment company with fixed capital) PRIVAK (Closed-end investment company)

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Ukraine
Instytut spilnogo investuvannya, ISI (Investment Funds) Private investment fund (Payovyi investytsiyny fond) Public investment fund (Korporatyvny investytsiyny fund) Both funds are run by Investment Company (KUA - kompania z upravlinnya actyvami).Funds and companies regulated and supervised by DKTsPFR (Securities and stock market state commission)

Greece
We could say that a mutual fund is a pool of money which belongs to many investors. Otherwise a M/F is the common cashier of many investors who trust a third party to operate and manage their wealth. Moreover they order this third party which in Greece is called A.E.D.A.K. (Mutual Fund Management Company S.A.) to spread their money in many different investment products such as shares, bonds, deposits, repo etc. Those companies in Greece may provide services according to article 4 of Law 3283/2004. People who own units (shares) of a mutual fund are called unitholders. In Greece co-unitholders, which are persons participating in the same units of M/F have exactly the same rights as the unitholder (according to the Law for the deposits in common account 5638/1932). The unitholders have to sign and accept the document which describes the purpose of the Mutual Fund, how it operates, and anything concerning the Fund. This document is the regulation of the M/F. The property of each M/F by law have to be under the control of a bank legally operating in Greece (Greek or foreign). The bank is the custodian of the M/F and except of the custody of the fund also controls the lawfulness of all movements of the management company. The Supervisory and Regulatory Body of M.F. Management Companies and Portfolio Investment Companies is the Greek Capital Market Commission. It comes under the jurisdiction of the Ministry of National Economy and controls the operation of all M/Fs available in Greece. All investors have to be very careful and about the risk they undertake. They have to have in mind that all investments have a certain degree of risk. Risk free investments does not exist. You can find more about Greek Mutual Funds in the site of the Association of Greek Institutional Investors [7] or the site of Greek (Hellenic) Capital Market Commission [8].

Switzerland
open-ended Anlagefonds (unincorporated investment fund or common fund) SICAV (Socit d'investissement capital variable) (Investment company with variable capital) closed-ended SICAF (Socit d'investissement capital fixe) (Investment company with fixed capital) Kommanditgesellschaft fr Kapitalanlagen (Limited Partnership)

Australian collective investments

Managed Investment Scheme per s 9 of the Corporations Act (Cth) 2001 Listed investment company or LIC. Closed-ended collective investment either corporate or trust based. Available since 1928. Unit trusts open-ended trust based investments often called Managed funds, managed investment schemes or unlisted managed funds. If the managed investment scheme is open for retail investors, the managed investment scheme must be registered with ASIC. An unregistered scheme has an Trustee whilst a registered scheme has an Responsible Entity.

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Offshore collective investments

Segregated portfolio company a corporate entity for holding various investments under a single legal entity.

References
[1] Adams, Andrew A (October 2004). The Split Capital Investment Trust Crisis. John Wiley & Sons. ISBN978-0-470-86858-4. [2] Carlisle, James (2002-10-30). "The Lesson From The Split Capital Debacle" (http:/ / www. fool. co. uk/ news/ Comment/ 2002/ c021030a. htm). Market Comment. The Motley Fool. . [3] "Split Capital Investment trusts" (http:/ / www. publications. parliament. uk/ pa/ cm200203/ cmselect/ cmtreasy/ 418/ 41802. htm). Treasury Select Committee. British House of Commons. 2003-02-05. . [4] "Unit trusts and OEICs" (http:/ / www. incademy. com/ courses/ Unit-trusts-and-OEICs/ Pricing-of-units---in-practice/ 8/ 1007/ 10002). Incademy Investor Education. . Retrieved 2008-08-14. [5] "Unit trusts and OEICs" (http:/ / www. incademy. com/ courses/ Unit-trusts-and-OEICs/ OEICs---charges/ 13/ 1007/ 10002). Incademy Investor Education. . Retrieved 2008-08-14. [6] http:/ / www. sec. gov/ answers/ mfinvco. htm [7] http:/ / www. agii. gr [8] http:/ / www. hcmc. gr

External links
Answers (http://www.sec.gov/answers/mfinvco.htm) U.S. SEC Consumer Information Investments (http://www.fsa.gov.uk/consumer/08_INVESTMENTS/index.html) UK FSA Consumer Information [[pt:Fundo_de_investimento]

Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or Domestic credit to private sector in 2005 services (e.g. consumer credit). Credit encompasses any form of deferred payment.[1] Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower. Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services (Ingham 2004 p.12-19). However, in modern societies credit is usually denominated by a unit of account. Unlike money, credit itself cannot act as a unit of account. Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium

Credit (finance) and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

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Trade credit
The word credit is used in commercial trade in the term "trade credit" to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

Consumer credit
Consumer debt can be defined as money, goods or services provided to an individual in lieu of payment. Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), consumer lines of credit, retail loans (retail installment loans) and mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England's definition of "Lending to individuals". Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit - such as the one adopted by the Federal Reserve in the US. The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement. Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote truth in lending, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation (Finlay 2009).

References
[1] Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.512. ISBN0-13-063085-3. .

Finlay, S. (2009). Consumer Credit Fundamentals. Second Edition. Palgrave Macmillan. Ingham, G. (2004). The Nature of Money. Polity Press.

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Dollar hegemony
This article describes the ideas of Henry C.K. Liu. For the topic of Jean Gabriel's book The Dollar Hegemony: Dollar, Dollarization, and Progress (2000), see dollarization. Dollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. Henry C.K. Liu popularized the term in a widely circulated and quoted article "Dollar Hegemony has to go" in Asia Times, April 11, 2002. The article was quoted by William Clark[1] in January 2003, Immanuel Wallerstein of the Fernand Braudel Center on June 1, 2003,[2] Greg Moses,[3] James Robertson in April 2004[4] and subsequently by many others.

Definition
The term describes a geopolitical phenomenon of the 1990s in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally. Three developments allowed dollar hegemony to emerge over a span of two decades. The Bretton Woods system established in 1945 a fixed exchange rate regime based on a gold-backed dollar. The US did not view cross-border flow of funds necessary or desirable for promoting trade or economic development. Due to negative consequences accruing due to the Triffin dilemma, in 1971 President Richard Nixon abandoned the Bretton Woods regime and suspended the dollar's peg to gold as U.S. fiscal deficits from overseas spending caused a massive drain in U.S. gold holdings. The second development was the denomination of oil in dollars after the 1973 Middle East oil crisis; see petrodollars. The third development was the emergence of deregulated global financial markets after the Cold War that made cross-border flow of funds routine. A general relaxation of capital and foreign exchange control in the context of free-floating exchange rates made speculative attacks on the exchange rates of currencies a regular occurrence. These three developments permitted the emergence of dollar hegemony in the 1990s. At the end of the 20th century it was for the most part undisputed that the US dollar is the most important reserve currency in the world. As of 2007, it still has the largest share (65.7%) of foreign reserve holdings, with the euro some distance behind at 25.2%.[5] However since 2000, the dollar share is falling and the euro share is rising, though the trend is very gentle.

References
[1] [2] [3] [4] [5] Ratical.org (http:/ / www. ratical. org/ ratville/ CAH/ RRiraqWar. html) Binghampton (http:/ / www. binghamton. edu/ fbc/ 114en. htm) Dissidentvoice.org (http:/ / www. dissidentvoice. org/ Aug06/ Moses02. htm) Prosperityuk.com (http:/ / www. prosperityuk. com/ prosperity/ articles/ sumsr. html) See Euro#Use as reserve currency

External links
Dollar Hegemony Has Got To Go (http://www.atimes.com/global-econ/DD11Dj01.html) by Henry C.K. Liu, Asia Times Online, April 11, 2002 The Coming Trade War, Part 2 Dollar hegemony against sovereign credit (http://www.atimes.com/atimes/ Global_Economy/GF24Dj01.html) by Henry C.K. Liu, Asia Times Online, June 24, 2005 China steady on the peg (http://www.atimes.com/atimes/China/FL01Ad01.html) by Henry C.K. Liu, Asia Times Online, December 1, 2004 House Member Ron Paul on the Dollar hegemony (http://www.house.gov/paul/congrec/congrec2006/ cr021506.htm)

Dollar hegemony Primacy of Dollar and Global Inequality (http://ariseasia.blogspot.com/2010/11/ primacy-of-dollar-and-global-inequality.html) by Niraj Kamal

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Dollarization
Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

Origins
After the gold standard was abandoned at the outbreak of World War I and the Bretton Woods Conference following World War II, some countries were desperately seeking ways to promote global economic stability and hence their own prosperity. Countries usually peg their currency to a major convertible currency. When countries choose to use a major convertible currency parallel to or in place of their national currency, this is called the process of dollarization.
Worldwide use of the United States dollarU.S. dollar and the euro: United StatesExternal adopters of the US dollarCurrencies pegged to the US dollarCurrencies pegged to the US dollar within narrow bandEurozoneExternal adopters of the euroCurrencies pegged to the euroCurrencies pegged to the euro within narrow band

Effects of dollarization
The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation. Dollarization leads to loss of monetary policy autonomy.

Worldwide official use of foreign currency or pegs: United States dollarU.S. dollar users, including the United StatesCurrencies pegged to the US dollarEuro users, including the EurozoneCurrencies pegged to the EuroAustralian dollar users, including AustraliaNew Zealand dollar users, including New ZealandSouth African rand users (Common Monetary AreaCMA, including South Africa)Indian rupee users and pegs, including IndiaPound sterling users and pegs, including the United KingdomSpecial Drawing Rights or other currency basket pegsThree cases of a country using or pegging the currency of a neighbor

The biggest economies to have officially dollarized as of June 2002 are Panama (since 1904), Ecuador (since 2000), and El Salvador (since 2001). As of August 2005, the United States dollar, the euro, the New Zealand dollar, the Swiss franc, the Indian rupee, and the Australian dollar were the only currencies used by other countries for official dollarization. In addition, the Turkish lira, the Israeli shekel, and the Russian ruble are used by internationally unrecognized but de facto independent states.

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Types
Dollarization can occur in a number of situations. It can be used unofficially, when private agents prefer the foreign currency over the domestic currency. For example, they hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the domestic currency. It can be used semiofficially (or officially bimonetary systems), where the foreign currency is legal tender alongside the domestic currency. Some countries use a foreign currency as the sole legal tender, and have ceased to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its exchange rate, with its economy being pegged to that of the foreign country.

U.S. dollar
Countries using the U.S. dollar exclusively
British Virgin Islands Caribbean Netherlands (from 1 January 2011) East Timor (uses its own coins) Ecuador (uses its own coins in addition to U.S. coins) El Salvador Marshall Islands Federated States of Micronesia Palau Panama (uses its own coins in addition to U.S. coins) Turks and Caicos Islands

Countries using the U.S. dollar alongside other currencies

Cambodia (uses Cambodian Riel for many official transactions but most businesses deal exclusively in dollars) Lebanon (along with the Lebanese pound) Liberia (was fully dollarized until 1982; U.S. dollar still in common usage alongside Liberian dollar) Zimbabwe[1]

Euro
Andorra (formerly French franc and Spanish peseta) Kosovo Monaco (formerly French franc; issues its own euro coins) Montenegro (formerly German mark and Yugoslav dinar) San Marino (formerly Italian lira; issues its own euro coins) Vatican City (formerly Italian lira; issues its own euro coins)

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New Zealand dollar

Cook Islands (issues its own coins and some notes) Niue Pitcairn Island Tokelau

Australian dollar
Kiribati (issues its own coins) Nauru Tuvalu (issues its own coins)

South African rand

Further information: Common Monetary Area Lesotho Namibia Swaziland

Zimbabwe
Due to the hyperinflation and official abandonment of the Zimbabwean dollar several currencies are used instead: British Pound Sterling Botswana pula Euro South African rand United States dollar

The U.S. dollar has been officially adopted for all transactions involving the new power-sharing government.

Others
Russian ruble: Abkhazia and South Ossetia (de facto independent states, but recognized as part of Georgia by nearly all other states) Indian rupee: Bhutan and Nepal Swiss franc: Liechtenstein Israeli shekel: Palestinian territories Turkish lira: Turkish Republic of Northern Cyprus (de facto independent state, but recognized as part of Cyprus by all states but Turkey)

References
[1] Tsvangirai sours on his abusive partner Mugabe (http:/ / www. earthtimes. org/ articles/ show/ 299918,yearender-tsvangirai-sours-on-his-abusive-partner-mugabe. html)

External links
Dollarization.org (Reference for list of dollarized economies) (http://www.dollarization.org)

Fixed capital

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Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital (fixed asset) that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like. Fixed capital is that portion of the total capital that is invested in fixed assets (such as land, buildings, vehicles and equipment) that stay in the business almost permanently, or at the very least, for more than one accounting period. Fixed assets can be purchased by a business, in which case the business owns them, but also leased, hired or rented, if that is cheaper or more convenient, or if owning the fixed assets is practically impossible. Refining the classical distinction between fixed and circulating capital in Das Kapital, Karl Marx emphasizes that it is really purely relative, i.e. refers only to the comparative rotation speeds (turnover time) of different types of capital assets. Fixed capital also "circulates", except that the circulation time is much longer, because a fixed asset may be held for 5, 10 or 20 years before it has yielded its value and is discarded for its salvage value. A fixed asset may also be resold and re-used, which often happens with vehicles and planes. In national accounts, fixed capital [1] is conventionally defined as the stock of tangible, durable fixed assets owned or used by resident enterprises for more than one year. This includes plant, machinery, vehicles & equipment, installations & physical infrastructures, the value of land improvements, and buildings. The European system of national and regional accounts (ESA95) [2] explicitly includes produced intangible assets (e.g. mineral exploitation, computer software, copyright protected entertainment, literary and artistics originals) within the definition of fixed assets. Land itself is not included in fixed capital even though it is a fixed asset, because it is not a product (a reproducible good). But the value of land improvements is included.

Estimating the value of fixed capital

Attempts have been made to estimate the value of the stock of fixed capital for the whole economy using direct enterprise surveys of "book value", administrative business records, tax assessments, and data on gross fixed capital formation, price inflation and depreciation schedules. A pioneer in this area was the economist Simon Kuznets. Using the so-called "perpetual inventory method", one starts off from a benchmark asset figure, and adds on the net additions to fixed assets year by year, while deducting annual depreciation, all data being adjusted for price inflation using a capital expenditure price index. In this way, one obtains a time series of annual fixed capital stocks. However, it is widely acknowledged that it is extremely difficult to obtain any accurate measurement of the value of fixed capital, especially because even the owner himself or herself may not know what assets are currently "worth". Some valuations for fixed assets may refer to historic cost (acquisition cost) or book value, others to current replacement cost, current sale value in the market, or scrap value. The depreciation write-off permitted for tax purposes may also diverge from so-called "economic depreciation" or "real" depreciation rates. Economic depreciation rates are calculated on the basis of the observed average market prices that depreciated assets at different ages actually sell for. Sometimes statisticians try to estimate the average "service lives" of fixed assets as a basis for calculating depreciation and scrap values, based on the observed length of time that fixed assets are actually held and used by their owners.

Investment risk of fixed capital

A business executive who invests in or accumulates fixed capital is tying up money in a fixed asset, hoping to make a future profit. Thus, such an investment usually implies a risk. Sometimes depreciation write-offs are also viewed partly as a compensation for this risk. Often leasing or renting a fixed asset (such as a vehicle) rather than buying it is preferred by enterprises because the cost of using it is lowered thereby, and the real owner may be able to obtain special tax advantages.

Fixed capital

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Sources of funding for fixed capital investment

An owner can obtain funding for purchase of fixed capital assets from the aptly named capital market, where loans are given on a long-term basis. Funding can also come from reserve funds, the selling of shares, and the issuing of debentures, bonds or other promissory notes.

Factors which influence fixed-capital requirements

The nature of the undertaking: the nature of the business certainly plays a role in determining fixed capital requirements. A florist, for example, needs less fixed capital than a vehicle-assembly factory. The size of the undertaking: a general rule applies: the bigger the business, the higher the need for fixed capital. The stage of development of the undertaking: the requirement of capital for a new undertaking is usually greater than that needed for an established business that has reached optimum size.

References
Bureau of Economic Analysis, Fixed assets and consumer durable goods in the United States, 1925-1997 (September 2003) [3] Canberra Group on Capital Stock Statistics Conference, March 1997 [4]

References
[1] [2] [3] [4] http:/ / epp. eurostat. ec. europa. eu/ statistics_explained/ index. php/ Fixed_capital http:/ / circa. europa. eu/ irc/ dsis/ nfaccount/ info/ data/ ESA95/ en/ titelen. htm http:/ / www. bea. gov/ national/ pdf/ Fixed_Assets_1925_97. pdf http:/ / www. oecd. org/ document/ 63/ 0,3343,en_2825_500246_1876351_1_1_1_1,00. html

Fordism
Fordism, named after Henry Ford, is a type of capitalist economy. The concept is used in various social theories about production and related socio-economic phenomena.[1] It has varying but related meanings in different fields, as well as for Marxist and non-Marxist scholars. In a Fordist system the worker is paid relatively high wages in order to buy in large quantity the products turned out in mass production.

Ford Motor Company

The Ford Motor Company was one of a dozen small automobile manufacturers that emerged in the early 20th century.[2] After five years of producing automobiles, Ford introduced the Model T, which was simple and light, yet sturdy enough to drive on the country's primitive roads.[3] The mass production of this automobile lowered its unit price, making it affordable for the average consumer. Furthermore, Ford substantially increased its workers' wages,[4] giving them the means to become customers. These factors led to massive consumption. In fact, the Model T surpassed all expectations, because it attained a peak of 60% of the automobile output within the United States.[5] The production system that Ford exemplified involved synchronization, precision, and specialization within a company.[6]

Ford cars (Model A shown), became a symbol of effective mass production. Efficiency both decreased the price of the cars and allowed Henry Ford to increase the workers' wages. Hence, common workers could buy their own cars.

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Definition
The term was first introduced by Antonio Gramsci in his essay "Americanism and Fordism", in his Prison Notebooks. Since then it has been used by a number of writers on economics and society, mainly but not exclusively in the Marxist tradition. It is a key concept in the theories of the Regulation school. Fordism is "the eponymous manufacturing system designed to spew out standardized, low-cost goods and afford its workers decent enough wages to buy them".[7] It has also been described as "a model of economic expansion and technological progress based on mass production: the manufacture of standardized products in huge volumes using special purpose machinery and unskilled labour".[8] Although Fordism was a method used to improve productivity in the automotive industry, this principle could be applied to any kind of manufacturing process. Major success stemmed from three major principles: 1) The standardization of the product (nothing hand-made: everything is made through machines, molds and not by skilled craftsmanship) 2) The use of special-purpose tools and/or equipment designed to make assembly lines possible: tools are designed to permit workers with low skill levels to operate "assembly lines" - where each worker does one task over and over and over again - like on a doll assembly line, where one worker might spend all day every day screwing on doll heads. 3) Workers are paid higher "living" wages, so they can afford to purchase the products they make. (modified from [9] ) These principles coupled with a technological revolution during Henry Ford's time allowed for his revolutionary form of labour to flourish. It is true that his assembly line was revolutionary, but it was in no way original. His most original contribution to the modern world was his breaking down of complex tasks into simpler ones with the help of specialised tools.[10] This allowed for a very adaptable flexibility allowing the assembly line to change its components whenever the product being assembled, changed enough to warrant a change in tools.[11] In reality, the assembly line had already been around before Ford, but not in quite the same effectiveness as Ford would create. His real accomplishment was recognizing the potential, breaking it all down into its components only to build it back up again in a more effective and productive combination, therefore to produce an optimum method for the real world.[12] The major advantages of such a change was that it cut down on the man power necessary for the factory to operate, not to mention that it deskilled the labour itself, cutting down on costs of production.[13] There are four levels of Fordism as described by Bob Jessop.[14]

Fordism in the United States

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Fordism in Western Europe

According to historian Charles Maier, Fordism proper was preceded in Europe by Taylorism, a technique of labor discipline and workplace organization, based upon supposedly scientific studies of human efficiency and incentive systems. It attracted European intellectuals especially in Germany and Italy at the fin de sicle and up until World War I.[19] After 1918, however, the goal of Taylorist labor efficiency thought in Europe moved to "Fordism", that is, reorganization of the entire productive process by means of the moving assembly line, standardization, and the mass market. The grand appeal of Fordism in Europe was that it promised to sweep away all the archaic residues of pre-capitalist society by subordinating the economy, society and even human personality to the strict criteria of technical rationality.[20] The Great Depression blurred the utopian vision of American technocracy, but World War II and its aftermath have revived the ideal. The principles of Taylorism were quickly picked up by Lenin and applied to the industrialisation of the Soviet Union. Later under the inspiration of Antonio Gramsci, Marxists picked up the Fordism concept in the 1930s and in the 1970s developed "Post-Fordism." Antonio and Bonanno (2000) trace the development of Fordism and subsequent economic stages, from globalization through neoliberal globalization, during the 20th century, emphasizing America's role in globalization. "Fordism" for Italian Marxist Antonio Gramsci meant routinized and intensified labor to promote production. They argue that Fordism peaked in the post-World War II decades of American

Fordism dominance and mass consumerism but collapsed due to political and cultural attacks on the people in the 1970s. Advances in technology and the end of the Cold War ushered in a new "neoliberal" phase of globalization in the 1990s. They argue that negative elements of Fordism, such as economic inequality, remained, however, and related cultural and environmental troubles surfaced that inhibited America's pursuit of democracy.

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Fordism and the Soviet Union

Historian Thomas Hughes (Hughes 2004) has detailed the way in which the Soviet Union in the 1920s and 1930s enthusiastically embraced Fordism and Taylorism, importing American experts in both fields as well as American engineering firms to build parts of its new industrial infrastructure. The concepts of the Five Year Plan and the centrally planned economy can be traced directly to the influence of Taylorism on Soviet thinking. Hughes quotes Joseph Stalin: "American efficiency is that indomitable force which neither knows nor recognises obstacles; which continues on a task once started until it is finished, even if it is a minor task; and without which serious constructive work is inconceivable.... The combination of the Russian revolutionary sweep with American efficiency is the essence of Leninism." (Hughes 2004, 251) Hughes describes how, as the Soviet Union developed and grew in power, both sides, the Soviets and the Americans, chose to ignore or deny the contribution of American ideas and expertise. The Soviets did this because they wished to portray themselves as creators of their own destiny and not indebted to their rivals. Americans did so because they did not wish to acknowledge their part in creating a powerful rival in the Soviet Union.

Other Marxist variations

Fordism is also a term used in Western Marxist thought for a "regime of accumulation" or macroeconomic pattern of growth developed in the US and diffused in various forms to Western Europe after 1945. It consisted of domestic mass production with a range of institutions and policies supporting mass consumption, including stabilizing economic policies and Keynesian demand management that generated national demand and social stability; it also included a class compromise or social contract entailing family-supporting wages, job stability and internal labor markets leading broadly shared prosperityrising incomes were linked to national productivity from the late 1940s to the early 1970s. At the level of the labor process Fordism is Taylorist and as a national mode of regulation Fordism is Keynesianism.

Mass consumption is the other side of Fordism.

The social-scientific concept of "Fordism" was introduced by the French regulation school, sometimes known as regulation theory, which is a Marxist-influenced strand of political economy. According to the regulation school, capitalist production paradigms are born from the crisis of the previous paradigm; a newborn paradigm is also bound to fall into crisis sooner or later. The crisis of Fordism became apparent to Marxists in late 1960s. Marxist regulation theory talks of Regimes of Capital Accumulation (ROA) and Modes of Regulation (MOR). ROAs are periods of relatively settled economic growth and profit across a nation or global region. Such regimes eventually become exhausted, falling into crisis, and are torn down as capitalism seeks to remake itself and return to a period of profit. These periods of capital accumulation are "underpinned", or stabilised, by MOR. A plethora of laws, institutions, social mores, customs and hegemonies both national and international work together to create the environment for long-run capitalist profit. Fordism is a tag used to characterise the post-1945 long boom experienced by western nations. It is typified by a cycle of mass production and mass consumption, the production of standardized (most often) consumer items to be

Fordism sold in (typically) protected domestic markets, and the use of Keynesian economic policies. Whilst the standard pattern is post-war America, national variations of this standard norm are well known. Regulation theory talks of National Modes of Growth to denote different varieties of Fordism across western economies. Fordism as an ROA broke down, dependent on national experiences, somewhere between the late 1960s and the mid-1970s. Western economies experienced slow or nil economic growth, rising inflation and growing unemployment. The period after Fordism has been termed Post-Fordist and Neo-Fordist. The former implies that global capitalism has made a clean break from Fordism (including overcoming its inconsistencies), whilst the latter implies that elements of the fordist ROA continued to exist. The Regulation School preferred the term After-Fordism (or the French Aprs-Fordisme) to denote that what comes after Fordism was, or is, not yet clear.

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Other meanings
The concept may also refer to some of Ford's social views: It may also be applied to the fictional religion-like ideology described in Aldous Huxley's novel Brave New World. 'Our Ford', a parody on Our Lord, provides a centre-point in the religious celebration in Brave New World's society, and the name is used both as an incantation and source of authority throughout the book.(( As stated above, it is important to recall that Aldous Huxley's book was intended as a satire and a criticism of Fordism, rather than an advocate of it)) It often describes the paternalistic "taking care of the worker" - a "family-like" mentality seen in some companies, e.g., in the auto-industry (Ford) or some 19th century employers (e.g., Rowntree, Cadbury, Titus Salt, Lever Brothers). The paternalism could be kindly (providing benefits) or restrictive (for example, Ford discouraged smoking even off premises). In a broader sense, Fordism refers to the classical 20th century consumer society: high productivity allows for high wages, mass production allows for mass consumption. Charlie Chaplin in Modern Times, a black and white film that effectively demonstrates the alienation and stress that the common worker under Fordism is subjected to. It does so in a light-hearted fashion.

Post-Fordism
The period after Fordism has been termed Post-Fordist. Fordism as a Regime of Accumulation (ROA) broke down, dependent on national experiences, somewhere between the late 1960s and the mid-1970s. Western economies experienced slow or nil economic growth, rising inflation and growing unemployment. The economies of western countries had shifted away from manufacturing and industry and towards service and the knowledge economy. Meanwhile, industry has moved from the west to second- and third-world countries, where production is cheaper, and environmental and worker regulations are Information technology, white-collar work and less strict (Baca, 2004). The movement of capital has become more specialization are some of the attributes of fluid, and nation-states have withdrawn significantly from the post-Fordism. economic sphere. Post-Fordism has arisen in part due to globalization. When Fordism was prominent, the majority of laborers were unskilled. These laborers joined together to form labor unions, which were able to gain power as a result of this static capital. Ultimately, as the middle class became more affluent, consumer demand for individualized goods increased, and "classic" Fordism was not the most efficient method to meet that demand (Mead, 2004). Post-Fordism can be characterized by the following attributes:

Fordism New information technologies. Emphasis on types of consumers in contrast to previous emphasis on social class. The rise of the service industry and the white-collar worker. The feminization of the work force. The globalization of financial markets. Instead of producing generic goods, firms now found it more profitable to produce diverse product lines targeted at different groups of consumers, appealing to their sense of taste and fashion. Instead of investing huge amounts of money on the mass production of a single product, firms now needed to build intelligent systems of labor and machines that were flexible and could quickly respond to the whims of the market. Modern just-in-time manufacturing is one example of a flexible approach to production. Post-Fordism is very much driven by information technology. Advancement in computer technologies allows for just-in-time manufacturing. There is no longer a need to stock-up on a given product. Products are made and then they are out the door. The key to production flexibility lies in the use of informational technologies in machines and operations. These permit more sophisticated control over the production process. With increasing sophistication of automated processes and, especially, the new flexibility of electronically controlled technology, far-reaching changes in the process of production need not necessarily be associated with increased scale of production. Indeed, one of the major results of the new electronic and computer-aided production technology is that it permits rapid switching from one part of a process to another and allows - at least potentially - the tailoring of production to the requirements of individual customers. Traditional automation is geared to high-volume standardized production; the newer flexible manufacturing systems are quite different, allowing the production of small volumes without a cost penalty. This creates less space needed, which creates less rent. Modular processes can be taken advantage of to create custom & limited products for niche markets. Focus is now on the principal task of manufacturing. Companies are smaller and subcontract many tasks. Likewise, the production structure began to change on the sector level. Instead of a single firm manning the assembly line from raw materials to finished product, the production process became fragmented as individual firms specialized on their areas of expertise. As evidence for this theory of specialization, proponents claim that clusters of integrated firms, have developed in places like Silicon Valley, Jutland, Smland, and several parts of Italy.

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References
[1] Fordism & Postfordism (http:/ / www. willamette. edu/ ~fthompso/ MgmtCon/ Fordism_& _Postfordism. html), www.willamette.edu, , retrieved 2008-12-26 [2] Foner, Eric (2006). Give Me Liberty!: An American History. New York:W.W Norton & Company, p.591-592. [3] Foner, Eric (2006). Give Me Liberty!: An American History. New York:W.W Norton & Company, p.591-592. [4] Sward, Keith (1948). The Legend of Henry Ford. New York: Rinehart & Company, p. 53. [5] Rae, John B. (1969). Henry Ford. Englewood Cliffs, New Jersey: Prentice-Hall, p. 45. [6] Rae, John B. (1969). Henry Ford. Englewood Cliffs, New Jersey: Prentice-Hall, p. 36. [7] De Grazia 2005. p. 4. [8] Tolliday, Steven & Zeitlin, Jonathan. The Automobile Industry and its Workers: Between Fordism and Flexibility, St.Martin's Press (New York: 1987) pp. 1-2. [9] Tolliday, Steven & Zeitlin, Jonathan. The Automobile Industry and its Workers: Between Fordism and Flexibility, St.Martin's Press (New York: 1987)pp.1-2. [10] Edited by; Burrows, Rober; Gilbert, Nigel; Pollert, Anna. Fordism and Flexibility: Divisions and Change St. Martin's Press (New York: 1992)pp.13-17. [11] Edited by; Burrows, Rober; Gilbert, Nigel; Pollert, Anna. Fordism and Flexibility: Divisions and Change St. Martin's Press (New York: 1992)pp.13-17. [12] Edited by; Burrows, Rober; Gilbert, Nigel; Pollert, Anna. Fordism and Flexibility: Divisions and Change St. Martin's Press (New York: 1992)pp.13-17. [13] Edited by; Burrows, Rober; Gilbert, Nigel; Pollert, Anna. Fordism and Flexibility: Divisions and Change St. Martin's Press (New York: 1992)pp.13-17.

Fordism
[14] Jessop, Bob (1992), "Fordism and post-fordism: A critical reformulation", in Storper, M; Scott, A J, Pathways to industrialization and regional development, London: Routledge, pp.4262 [15] http:/ / www. willamette. edu/ ~fthompso/ MgmtCon/ Fordism_& _Postfordism. html [16] http:/ / toolserver. org/ ~dcoetzee/ duplicationdetector/ compare. php?url1=http%3Ahttp%3A%2F%2Fen. wikipedia. org%2Fwiki%2F%253Afordism& url2=http%3A%2F%2Fwww. willamette. edu%2F%7Efthompso%2FMgmtCon%2FFordism_%26_Postfordism. html& minwords=3& minchars=13& removequotations=& removenumbers= [17] http:/ / en. wikipedia. org/ wiki/ Fordism?action=history [18] http:/ / www. willamette. edu/ ~fthompso/ MgmtCon/ Fordism_& _Postfordism. html. [19] Maier, Charles S. (1970), "Between Taylorism and Technocracy: European Ideologies and the Vision of Industrial Productivity in the 1920's", Journal of Contemporary History (Sage Publications) 5 (2): 2761, doi:10.1177/002200947000500202, JSTOR259743 [20] Edited by; Burrows, Rober; Gilbert, Nigel; Pollert, Anna. Foridsm and Flexibility: Divisions and Change St. Martin's Press (New York: 1992)pp.13-17.

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Bibliography
Antonio, Robert J. and Bonanno, Alessandro. "A New Global Capitalism? From 'Americanism and Fordism' to 'Americanization-globalization.'" American Studies 2000 41(2-3): 33-77. ISSN 0026-3079. Banta, Martha. Taylored Lives: Narrative Production in the Age of Taylor, Veblen, and Ford. U. of Chicago Press, 1993. 431 pp. De Grazia, Victoria (2005), Irresistible Empire: America's Advance Through 20th-Century Europe, Cambridge: Belknap Press of Harvard University Press, ISBN0674016726 Baca, George. "Legends of Fordism." Social Analysis Fall 2004: 171-180. Doray, Bernard (1988). From Taylorism to Fordism: A Rational Madness. Holden, Len. "Fording the Atlantic: Ford and Fordism in Europe" in Business History Volume 47, #1 January 2005 pp 122127. Hounshell, David A. (1984), From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States, Baltimore, Maryland, USA: Johns Hopkins University Press, ISBN978-0-8018-2975-8, LCCN83-016269. Hughes, Thomas P. (2004). American Genesis: A Century of Invention and Technological Enthusiasm 1870-1970. 2nd ed. The University of Chicago Press. (http://books.google.com/books?id=61ZmYyAQgvAC& lpg=PA251&dq=American efficiency is that indomitable force which neither knows nor recognises obstacles; which continues on a task once started until it is finished, even if it is a minor task; and without which serious constructive work is impossible ...The combination of the Russian revolutionary sweep with American efficiency is the essence of Leninism.&hl=de&pg=PA251#v=onepage&q&f=false) Jenson, Jane. "'Different' but Not 'Exceptional': Canada's Permeable Fordism," Canadian Review of Sociology and Anthropology, Vol. 26, 1989 Koch, Max. (2006). Roads to Post-Fordism: Labour Markets and Social Structures in Europe Ling, Peter J. America and the Automobile: Technology, Reform, and Social Change chapter on Fordism and the Architecture of Production Maier, Charles S. "Between Taylorism and Technocracy: European Ideologies and the Vision of Industrial Productivity." Journal of Contemporary History (1970) 5(2): 27-61. Issn: 0022-0094 Fulltext online at Jstor Mary Nolan; Visions of Modernity: American Business and the Modernization of Germany Oxford University Press, 1994 online (http://www.questia.com/PM.qst?a=o&d=58971942) Mead, Walter Russell. "The Decline of Fordism and the Challenge to American Power." New Perspectives Quarterly; Summer 2004: 53-61. Spode, Hasso: "Fordism, Mass Tourism and the Third Reich." Journal of Social History 38(2004): 127-155. Pietrykowski, Bruce. "Fordism at Ford: Spatial Decentralization and Labor Segmentation at the Ford Motor Company, 19201950," Economic Geography, Vol. 71, (1995) 383-401 online (http://www.questia.com/PM. qst?a=o&d=5000373348)

Fordism Roediger, David, ed. "Americanism and Fordism - American Style: Kate Richards O'hare's 'Has Henry Ford Made Good?'" Labor History 1988 29(2): 241-252. Socialist praise for Ford in 1916 . Shiomi, Haruhito and Wada, Kazuo. (1995). Fordism Transformed: The Development of Production Methods in the Automobile Industry Oxford University Press. Tolliday, Steven and Zeitlin, Jonathan eds. (1987) The Automobile Industry and Its Workers: Between Fordism and Flexibility Comparative analysis of developments in Europe, Asia, and the United States from the late 19th century to the mid-1980s. Watts, Steven. (2005). The People's Tycoon: Henry Ford and the American Century. Williams, Karel, Colin Haslam and John Williams, "Ford versus `Fordism': The Beginning of Mass Production?" Work, Employment & Society, Vol. 6, No. 4, 517-555 (1992). Stress on Ford's flexibility and commitment to continuous improvements.

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Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1] The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business' income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.[2] In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size. As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4] The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps

Foreign exchange market $43 billion Currency swaps $207 billion in options and other products

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Market Size and liquidity

The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 Main foreign exchange market turnover, 19882007, measured in billions of USD. trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives. Trading in the UK accounted for 36.7% of the total, making UK by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in the USA accounted for 17.9%, and Japan accounted for 6.2%.[5] Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies.[6] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account.
Top 10 currency traders
[7]

% of overall volume, May 2011 Rank 1 2 3 4 5 6 Name Deutsche Bank Barclays Capital UBS AG Citi JPMorgan HSBC Market share 15.64% 10.75% 10.59% 8.88% 6.43% 6.26%

Foreign exchange market

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7 8 9 10 Royal Bank of Scotland Credit Suisse Goldman Sachs Morgan Stanley 6.20% 4.80% 4.13% 3.64%

Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.[8] The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution methods and the diverse selection of execution venues have lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot FX turnover, or $150 billion per day (see retail trading platforms). Because foreign exchange is an over-the-counter (OTC) market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading center is the UK, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the International Monetary Fund (IMF) calculates the value of its Special Drawing Rights (SDRs) every day, they use the London market prices at noon that day.

Market participants
Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size.[9] Central banks also participate in the foreign exchange market to align currencies to their economic needs.

Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

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Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

Forex fixing
Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[10] Several scenarios of this nature were seen in the 199293 European Exchange Rate Mechanism collapse, and in more recent times in Southeast Asia.

Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

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Retail foreign exchange traders

Individual Retail speculative traders constitute a growing segment of this market with the advent of retail forex platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the Commodity Futures Trading Commission and National Futures Association have in the past been subjected to periodic foreign exchange scams.[11] [12] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the forex brokers operate from the UK under Financial Services Authority regulations where forex trading using margin is part of the wider over-the-counter derivatives trading industry that includes Contract for differences and financial spread betting. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at.

Non-bank foreign exchange companies

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). It is estimated that in the UK, 14% of currency transfers/payments[13] are made via Foreign Exchange Companies.[14] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money transfer/remittance companies and bureaux de change

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange Bureau de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.

Trading characteristics

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Most traded currencies by value

Currency distribution of global foreign exchange market turnover Rank Currency ISO 4217 code (Symbol) % daily share (April 2010) 84.9% 39.1% 19.0% 12.9% 7.6% 6.4% 5.3% 2.4% 2.2% 1.6% 1.5% 1.4% 1.3% 1.3% 0.9% 12.2% 200% [3]

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

United States dollar USD ($) Euro Japanese yen Pound sterling Australian dollar Swiss franc Canadian dollar Hong Kong dollar Swedish krona EUR () JPY () GBP () AUD ($) CHF (Fr) CAD ($) HKD ($) SEK (kr)

New Zealand dollar NZD ($) South Korean won Singapore dollar Norwegian krone Mexican peso Indian rupee KRW () SGD ($) NOK (kr) MXN ($) INR ( ) Other [15] Total

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. Major trading exchanges include EBS and Reuters. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism. The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Foreign exchange market Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD). The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ. On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were: EURUSD: 28% USDJPY: 14% GBPUSD (also called cable): 9% and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies. Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

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Determinants of FX rates
The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government): (a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world. (b) Balance of payments model (see exchange rate): This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit. (c) Asset market model (see exchange rate): views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people's willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies. None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithms can be devised to predict prices. It is understood from the above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large

Foreign exchange market and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

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Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be. Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector [16].

Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Flights to quality: Unsettling international events can lead to a "flight to quality", a type of capital flight whereby investors move their assets to a perceived "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.[17] Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks

Foreign exchange market at longer-term price trends that may rise from economic or political trends.[18] "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[19] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices. Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight. Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.[20]

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Financial instruments
Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.

Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

Swap
The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

Future
Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

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Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[21] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[22] Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors.[23] Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[24] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators. Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[25] In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

Risk aversion in forex

Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.[26] In the context of the forex market, traders liquidate their positions in Fig.1 Chart showing MSCI World Index of various currencies to take up positions in safe-haven currencies, such Equities fell while the US Dollar Index rose. [27] as the US Dollar. Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across world fell while the US Dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA.[28]

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Further reading
The National Futures Association [29] (2010). Trading in the Retail Off-Exchange Foreign Currency Market [30]. Chicago, Illinois.

Notes
[1] The Economist Guide to the Financial Markets (https:/ / docs. google. com/ fileview?id=0B_Qxj5U7eaJTZTJkODYzN2ItZjE3Yy00Y2M0LTk2ZmUtZGU0NzA3NGI4Y2Y5& hl=en& pli=1) (pdf) [2] Global imbalances and destabilizing speculation (http:/ / www. igidr. ac. in/ ~money/ mfc_10/ Massimiliano_submission_40. pdf) (2007), UNCTAD Trade and development report 2007 (Chapter 1B). [3] 2010 Triennial Central Bank Survey (http:/ / www. bis. org/ publ/ rpfxf10t. htm), Bank for International Settlements. [4] " What is Foreign Exchange? (http:/ / au. ibtimes. com/ articles/ 110821/ 20110210/ what-is-foreign-exchange-currency-conversion-financial-markets-forex-foreign-exchange-markets. htm)". Published by the International Business Times AU (http:/ / au. ibtimes. com/ forex). Retrieved: February 11, 2011. [5] BIS Triennial Central Bank Survey (http:/ / www. bis. org/ publ/ rpfx10. pdf), published in September 2010. [6] "Derivatives in emerging markets" (http:/ / www. bis. org/ publ/ qtrpdf/ r_qt1012f. htm), the Bank for International Settlements, December 13, 2010 [7] Source: Euromoney FX survey FX survey 2011 (http:/ / www. euromoney. com/ poll/ 3301/ PollsAndAwards/ Foreign-Exchange. html): The Euromoney FX survey is the largest global poll of foreign exchange service providers.' [8] "The $4 trillion question: what explains FX growth since the 2007 survey? (http:/ / www. bis. org/ publ/ qtrpdf/ r_qt1012e. htm), the Bank for International Settlements, December 13, 2010 [9] Gabriele Galati, Michael Melvin (December 2004). "Why has FX trading surged? Explaining the 2004 triennial survey" (http:/ / www. bis. org/ publ/ qtrpdf/ r_qt0412f. pdf). Bank for International Settlements. . [10] Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. (http:/ / opinionjournal. com/ editorial/ feature. html?id=110010981), the Wall Street Journal, December 12, 2007 [11] McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits" (http:/ / online. wsj. com/ article/ SB112233850336095645. html?mod=Markets-Main). The Wall Street Journal (Dow Jones and Company). . Retrieved 2007-10-31. [12] Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100" (http:/ / www. nytimes. com/ 2005/ 06/ 19/ business/ yourmoney/ 19fore. html?_r=2& adxnnl=1& oref=slogin& adxnnlx=1191337503-g1yHfewhqPWye0XtI+ Eq0A& oref=slogin). The New York Times. . Retrieved 2007-10-30. [13] The Sunday Times (UK), 16 July 2006 [14] The 5 largest in the UK are Travelex, Moneycorp, HiFX, World First and Currencies Direct [15] The total sum is 200% because each currency trade always involves a currency pair. [16] http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=711362 [17] Safe haven currency (http:/ / glossary. reuters. com/ index. php/ Safe_Haven_Currency) [18] John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343375. [19] Investopedia (http:/ / www. investopedia. com/ terms/ o/ overbought. asp) [20] Sam Y. Cross, All About the Foreign Exchange Market in the United States (http:/ / www. newyorkfed. org/ education/ addpub/ usfxm/ ), Federal Reserve Bank of New York (1998), chapter 11, pp. 113115. [21] Michael A. S. Guth, " Profitable Destabilizing Speculation (http:/ / michaelguth. com/ economist/ chap1. htm)," Chapter 1 in Michael A. S. Guth, Speculative behavior and the operation of competitive markets under uncertainty, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850. [22] What I Learned at the World Economic Crisis (http:/ / www. globalpolicy. org/ socecon/ bwi-wto/ critics/ 2000/ whatilearned. htm) Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org [23] Summers LH and Summers VP (1989) 'When financial markets work too well: a Cautious case for a securities transaction tax' Journal of financial services [24] But Don't Rush Out to Buy Kronor: Sweden's 500% Gamble - International Herald Tribune (http:/ / www. iht. com/ articles/ 1992/ 09/ 17/ perc. php) [25] Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995. [26] "Risk Averse" (http:/ / www. investopedia. com/ terms/ r/ riskaverse. asp). Investopedia. . Retrieved 2010-02-25. [27] "Global markets-US stocks rebound, dollar gains on risk aversion" (http:/ / www. reuters. com/ article/ idUSN0515775320100205). Reuters. 2010-02-05. . Retrieved 2010-02-27. [28] Stewart, Heather (2008-04-09). "IMF says US crisis is 'largest financial shock since Great Depression'" (http:/ / www. guardian. co. uk/ business/ 2008/ apr/ 09/ useconomy. subprimecrisis). London: guardian.co.uk. . Retrieved 2010-02-27. [29] http:/ / www. nfa. futures. org/ [30] http:/ / www. nfa. futures. org/ nfa-investor-information/ publication-library/ forex. pdf

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References External links

A user's guide to the Triennial Central Bank Survey of foreign exchange market activity, Bank for International Settlements (http://www.bis.org/publ/qtrpdf/r_qt1012h.htm) London Foreign Exchange Committee with links (on right) to committees in NY, Tokyo, Canada, Australia, HK, Singapore (http://www.bankofengland.co.uk/markets/forex/fxjsc/) United States Federal Reserve daily update of exchange rates (http://www.federalreserve.gov/releases/h10/ update/) Bank of Canada historical (10-year) currency converter and data download (http://www.bankofcanada.ca/en/ rates/exchform.html) Microstructure effects, bid-ask spreads and volatility in the spot foreign exchange market pre and post-EMU (http://www.cfr.statslab.cam.ac.uk/events/content/20056/mcgroarty2.pdf) OECD Exchange rate statistics (monthly averages) (http://stats.oecd.org/Index.aspx?QueryId=169)

Grey market
A grey market or gray market also known as parallel market[1] is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. The term gray economy, however, refers to workers being paid under the table, without paying income taxes or contributing to such public services as Social Security and Medicare.[2] It is sometimes referred to as the underground economy or "hidden economy." A black market is the trade of goods and services that are illegal in themselves and/or distributed through illegal channels, such as the selling of stolen goods, certain drugs or unregistered handguns. The two main types of grey market are imported manufactured goods that would normally be unavailable or more expensive in a certain country and unissued securities that are not yet traded in official markets. Sometimes the term dark market is used to describe secretive, unregulated (though often technically legal) trading in commodity futures, notably crude oil in 2008.[3] This can be considered a third type of "grey market" since it is legal, yet unregulated, and probably not intended or explicitly authorized by oil producers.

Description
Unlike black market goods, grey-market goods are legal. However, they are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this form of parallel import occurs when the price of an item is significantly higher in one country than another. This situation commonly occurs with electronic equipment such as cameras. Entrepreneurs buy the product where it is available cheaply, often at retail but sometimes at wholesale, and import it legally to the target market. They then sell it at a price high enough to provide a profit but under the normal market price. International efforts to promote free trade, including reduced tariffs and harmonized national standards, facilitate this form of arbitrage whenever manufacturers attempt to preserve highly disparate pricing. Because of the nature of grey markets, it is difficult or impossible to track the precise numbers of grey-market sales. Grey-market goods are often new, but some grey market goods are used goods. A market in used goods is sometimes nicknamed a Green Market. Importing certain legally restricted items such as prescription drugs or firearms would be categorized as black market, as would smuggling the goods into the target country to avoid import duties. A related concept is bootlegging, the smuggling or transport of highly regulated goods, especially alcoholic beverages. The term "bootlegging" is also often applied to the production or distribution of counterfeit or otherwise infringing goods.

Grey market Grey markets can sometimes develop for select video game consoles and titles whose demand temporarily outstrips supply and the local shops run out of stock, this happens especially during the holiday season. Other popular items, such as dolls can also be affected. In such situations the grey market price may be considerably higher than the manufacturer's suggested retail price. Online auction sites such as eBay have contributed to the emergence of the video game grey market.

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Responses
The parties most concerned with the grey market are usually the authorized agents or importers, or the retailers of the item in the target market. Often this is the national subsidiary of the manufacturer, or a related company. In response to the resultant damage to their profits and reputation, manufacturers and their official distribution chain will often seek to restrict the grey market. Such responses can breach competition law, particularly in the European Union. Manufacturers or their licensees often seek to enforce trademark or other intellectual-property rights against the grey market. Such rights may be exercised against the import, sale and/or advertisement of grey imports. In 2002, Levi Strauss, after a 4-year legal fight, prevented UK supermarket Tesco from selling grey market jeans.[4] However, such rights can be limited. Examples of such limitations include the first-sale doctrine in the United States and the doctrine of the exhaustion of rights in the European Union. When grey-market products are advertised on Google, eBay or other legitimate web sites, it is possible to petition for removal of any advertisements that violate trademark or copyright laws. This can be done directly, without the involvement of legal professionals. eBay, for example, will remove listings of such products even in countries where their purchase and use is not against the law. Manufacturers may refuse to supply distributors and retailers (and with commercial products, customers) that trade in grey-market goods. They may also more broadly limit supplies in markets where prices are low. Manufacturers may refuse to honor the warranty of an item purchased from grey-market sources, on the grounds that the higher price on the non-grey market reflects a higher level of service even though the manufacturer does of course control their own prices to distributors. Alternatively, they may provide the warranty service only from the manufacturer's subsidiary in the intended country of import, not the diverted third country where the grey goods are ultimately sold by the distributor or retailer. This response to the grey market is especially evident in electronics goods. Local laws (or customer demand) concerning distribution and packaging (for example, the language on labels, units of measurement, and nutritional disclosure on foodstuffs) can be brought into play, as can national standards certifications for certain goods. Manufacturers may give the same item different model numbers in different countries, even though the functions of the item are identical, so that they can identify grey imports. Manufacturers can also use batch codes to enable similar tracing of grey imports. Parallel market importers often de-code the product in order to avoid the identification of the supplier. In the United States, courts have decided that decoding which blemishes the product is a material alteration, rendering the product infringed. Parallel market importers have worked around this limitation by developing new removal techniques. The development of DVD region codes, and equivalent regional-lockout techniques in other media, are examples of technological features designed to limit the flow of goods between national markets, effectively fighting the grey market that would otherwise develop. This enables movie studios and other content creators to charge more for the same product in one market than in another or alternatively withhold the product from some markets for a particular time. Consumer advocacy groups argue that this discrimination against consumersthe charging of higher prices on the same object simply because of where they happen to liveis unjust and anti-competitive. Since it requires governments to legislate to prevent their citizens from purchasing goods at cheaper prices from other markets, and since this is clearly not in their citizens' interests, many governments in democratic countries have chosen not to protect anti-competitive technologies such as DVD region-coding.

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By industry
Automobiles
Automobile manufacturers segment world markets by territory and price, thus creating a demand for grey import vehicles. In the United Kingdom the term applies to vehicles imported either new from cheaper European countries or from Japanese domestic models imported secondhand from Japan or Singapore, which both have strict laws against older cars. This importation of secondhand models from Japan/Singapore tends to involve sports models that were never released in the UK or models that fetch a high price in the UK because of their performance or status. Although some grey imports are a bargain, some buyers have discovered that their vehicles do not meet British regulations or that parts and service are hard to come by because these cars are different from the versions sold new in the UK. In New Zealand, grey market vehicles comprise a majority of cars in the national fleet. These secondhand imports have achieved 'normal' status and are used and serviced without comment throughout society. A huge industry servicing and supplying parts for these vehicles has developed. After years of trying to stop grey imports the car companies themselves have become involved, importing in competition with their own new models. Russia and many African countries (excluding South Africa, where second-hand car imports are prohibited) have massive fleets imported secondhand from Japan.

Cell Phones
The emergence of the GSM international standard for cell phones in 1990 prompted the beginning of the Grey Market in the cell phone industry. As global demand for mobile phones grew, so did the size of the parallel market. Today, it is estimate that over 30% of all mobile phones traded will pass through the grey market and that statistic continues to grow. It is impossible to quantify an exact figure, but sources[5] suggest that as many as 500,000 mobile phones are bought and sold outside of official distribution channels through their trading platforms every day. The driving forces behind a heavily active mobile phone grey market include currency fluctuations, customers demands, manufacturers policies and price variations. It is not uncommon for grey market traders to introduce a product into a market months in advance of the official launch. This was evident with the launch of the iPhone 4, where international grey market traders bought large quantities at Apples retail price then shipped to countries where the product was not available adding a substantial margin to the resale price.

Computer Games
Purchasing some games from online content distribution systems, such as Valve's Steam, simply requires entering a valid CD key to associate with an account. In 2007, after the release of The Orange Box, Valve deactivated accounts with CD keys that were purchased outside of the consumer's territory in order to maintain the integrity of region-specific licensing. This generated complaints from North American customers who had circumvented their Steam end-user license agreement by purchasing The Orange Box through cheaper, market retailers.[6] [7]

Pharmaceuticals
Some prescription medications, most notably popular and branded drugs, can have very high prices in comparison to their cost of transport. In addition, pharmaceutical prices can vary significantly between countries, particularly as a result of government intervention in prices. As a consequence, the grey market for pharmaceuticals flourishes, particularly in Europe and along the USCanadian border where Canadians often pay significantly lower prices for US made pharmaceuticals than Americans do.

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Pianos
While in all other fields grey market refers to new products that are made new for markets other than the one they are ultimately sold in, Yamaha dealers coined the phrase "Grey Market Pianos" in order to stigmatize used products.

Photographic equipment
Generally regarded as legal in most countries, parallel imports make expensive photographic equipment attractive to savvy users. The grey market in photographic equipment is thriving in highly developed and heavily taxed states like Singapore with dealers importing directly from lower taxed states and selling at a lower price, creating competition against a local authorised distributor. Grey sets, as colloquially called, are often comparable to authorised imports. Lenses or flash units of parallel imports often only differ by the warranty provided, and since the grey sets were manufactured for another state, photographic equipment manufacturers often offer local warranty, instead of international warranty, which will render grey sets ineligible for warranty claims with the manufacturer. Because of the nature of local warranties, importers of grey sets usually offer their own warranty schemes with reduced benefits or lasting a shorter period of time. Grey sets do not differ particularly from an authorised import. They look and function identically, apart from the manufacturer's warranties having been voided. In the salad days of camera sales during the 60s and 70s, when the latter were made of satin chrome outside and brass inside and lenses had amber coating, the bargain basements for Japanese equipment were Hong Kong and Singapore, through which goods were channelled to European shop windows bypassing the often substantial levy of the official importers. World-market pricing and the Internet have largely eliminated this today and certainly the two former sources, that have become expensive if anything. With the dollar in a permanent state of anemia, the cheapest source is probably the USA, a market highly esteemed by manufacturers albeit with a murderous state of competition because of consumer-happy, if highly diligent, bargain hunters. This has led Canon to give their hard-selling DSLR cameras names like "Rebel" in the USA and "EOS" outside it, aimed at preventing the competitively priced US-merchandise reaching Europe where sales are slower but achievable profit higher.

Broadcasting
In television and radio broadcasting, grey markets primarily exist in relation to satellite radio and satellite television delivery. The most common form is companies reselling the equipment and services of a provider not licensed to operate in the market. For instance, a Canadian consumer who wants access to American television and radio services that are not available in Canada may approach a grey market reseller of Dish Network or DirecTV. There is also a grey market in the United States for Canadian satellite services such as Bell TV or Shaw Direct. In Europe some satellite TV services are encrypted for rights reasons, as they are only entitled to broadcast films, sporting events and US entertainment programming in a certain country or countries, hence only residents of the UK and Ireland may subscribe to Sky Digital. In other European countries with large British expatriate populations, such as Spain, Sky is widely available. Although Sky does not condone the use of its viewing cards outside the UK or Ireland, and has the technology to render them invalid, many people continue to use them. Illegitimate importing of "free-to-view" Sky cards from the UK to Ireland is often done so that Irish Sky customers can receive Channel 5 and some of the other channels not generally available via Sky in the Republic because of rights issues. Irish Sky viewing cards, which allow viewing of Irish terrestrial channels, are imported into the UK. Northern Ireland residents subscribing to Sky can watch RT One and Two and TG4, although not TV3, which carries many of the same programmes as ITV, a lot of the programmes airing before ITV can show them. It is also becoming increasingly common in the UK for some pubs to use satellite decoder cards from Greece, Norway, Poland or the Arab world to receive satellite TV broadcasting live English football matches from those countries. Alternatively, they may use cards which allow pirate decryption of scrambled signals. Such cards are typically much cheaper than the cards available in the UK from Sky (who charge extra fees for public showing licenses). However, Sky has taken civil and criminal action against some who do this. Two recent cases involving

Grey market grey cards have been referred to the European Court of Justice.[8]

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With securities
In securities markets, grey market refers to the buying and selling of securities to be issued in the future, and therefore not yet circulating. This typically occurs some days before an auction of government bonds or bills and that trading is subject to the effective issue of those securities. Sometimes this is taken as a forecast of the prices that markets expect for future issues.

IPO in India
Cities like Ahmedabad, Kolkata and Rajkot are the most active centres for the IPO (initial public offerings). Trades done in the grey market are settled on the day of listing. Once the deal is done at a stipulated price, the seller must deliver the shares after he has been allotted the shares by the company. If the seller falls short in receiving the exact number of shares that he has sold in anticipation, then he must buy the shares on the market (once the share is listed) to honour his commitment. Most of the recently-concluded initial public offerings are quoting at a significant premium in the grey market, compared to their issue prices; this means that the issues are perceived to have been underpriced. Many traders short sell in the grey market if they feel that the premium on offer is unwarranted and that the stock may list at a price lower than what most market players expect it to. Though grey-market operators say that there is a constant change in the grey-market premium, it largely depends on the subscription on the last day and the market conditions, post issue closing. Example: Grey market premium for the Roman Tarmat issue went up from Rs 2830 to Rs 110140. This was because the issue was subscribed around 30 times eventually, after receiving a lukewarm response from investors during the first two days when it was open for subscription. Though illegal, the grey market continues to thrive. Investors who bid for an issue normally do not get the full quantity because of the limits for each class. This has resulted in many people "selling" their IPO applications to the grey market operators for a secured interest. Many investors earn a fixed amountanywhere between Rs 2,500 and Rs 4,000 by selling their IPO applications to grey-market operators in Ahmedabad. Though many IPOs are yet to open for subscription, investors may need to look at more than the prospectus when subscribing to IPOs. Street-smart investors would rather look at indicators from the booming grey market before taking a call on IPO investments. It is not only market-savvy investors from Gujarat, but also lead managers of IPOs from Mumbai, Delhi and other parts of the country, who look at Ahmedabad's grey-market premium rates as an indicator of the price at which the issue is likely to get listed..

Electronics
There is a grey market in electronics in which on line retailers will sell merchandise below the manufacturer's authorized selling price, or advertise below the MAP.

Frequent Flyer Miles

Trade or bartering of frequent flyer miles is prohibited by nearly all major airlines. Online exchanges of frequent flyer miles of which several exist are also useful examples of grey markets.

Snus
Snus tobacco remains legal in Sweden due to a special agreement, but illegal elsewhere in Europe. Import for personal consumption is legal, but import for resale is illegal, although often practiced.

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Textbooks
College level textbooks have a grey market, with publishers offering them for lower prices in developing countries or sometimes the UK.[9] The content of these books is said to differ from the content needed for universities in North America. The content is usually 98% identical to what is taught in different areas of the world. Most commonly the units of measure, spelling of certain words and/or grammar is that of the region it was intended for. Sometimes the editions are not the newest. For example, a $160 math, chemistry or biology book in Canada, US or Britain could easily be acquired for 10 to 20% of the cost in Asia. The content is identical, the only discernible differences are thinner pages and a soft cover. Most text books are absolutely identical these days except for the quality of the paper and binding, though this has been greatly improved in India by the import of modern manufacturing equipment. Indian Booksellers however, are unwilling to fulfil foreign purchase orders, which means that a local individual is needed to buy the books on his account and ship them, a worthwhile practice for any inter-university cooperation.. These books typically contain a disclaimer stating that importation is not permitted. However, the 1998 U.S. Supreme Court decision Quality King v. L'anza protects the reimportation of copyrighted materials under the first-sale doctrine. Note that this decision does not apply to books manufactured outside the US.

References
[1] "What is Parallel Market" (http:/ / espinosaiplaw. com/ wordpress/ ?page_id=5). The Gray Blog. . Retrieved 8 September 2010. [2] "Hidden economy a hidden danger" (http:/ / www. signonsandiego. com/ news/ 2010/ may/ 30/ hidden-economy-a-hidden-danger/ ) San Diego Union-Tribune, May 30, 2010 [3] http:/ / www. nefi. com/ NEON/ NEON_issues/ NEON_May_22_2008. html Victory: "Close the ENRON Loophole" Bill is Small Step In Right Direction [4] http:/ / news. bbc. co. uk/ 1/ hi/ business/ 2163561. stm Tesco defeated in cheap jeans battle; Case T-415/99 Levi Strauss v Tesco Stores (http:/ / curia. europa. eu/ jurisp/ cgi-bin/ form. pl?lang=en& Submit=Submit& numaff=C-415%2F99) [5] www.gsmexchange.com (http:/ / www. gsmexchange. com) [6] "Steam Error: Game not available in your territory" (https:/ / support. steampowered. com/ kb_article. php?p_faqid=461). Valve Corporation. 2007-10-23. . Retrieved 2008-03-24. [7] Caron, Frank (2007-10-25). "Valve locking out user accounts for "incorrect territory"" (http:/ / arstechnica. com/ journals/ thumbs. ars/ 2007/ 10/ 25/ valve-locking-out-user-accounts-for-incorrect-territory). Ars Technica. . Retrieved 2007-10-25. [8] Case C-403/08 The Football Association Premier League Ltd v QC Leisure http:/ / curia. europa. eu/ jurisp/ cgi-bin/ form. pl?lang=en& Submit=Submit& numaff=C-403%2F08; Case C-429/08 Karen Murphy v Media Protection Services Ltd http:/ / curia. europa. eu/ jurisp/ cgi-bin/ form. pl?lang=en& Submit=Submit& numaff=C-429%2F08 [9] Lewin, Tamar (2003-10-21). "Students Find $100 Textbooks Cost $50, Purchased Overseas" (http:/ / www. nytimes. com/ 2003/ 10/ 21/ us/ students-find-100-textbooks-cost-50-purchased-overseas. html). The New York Times. . Retrieved 2010-05-04.

Hays, Thomas (2003) (hardcover). Parallel Importation Under European Union Law. Sweet & Maxwell. pp.488. ISBN0-42186-300-5. Nissanoff, Daniel (2006) (hardcover). FutureShop. The Penguin Press. pp.246. ISBN1-59420-077-7. Stothers, Christopher (2007) (hardcover). Parallel Trade in Europe. Hart Publishing. pp.526. ISBN1-84113-437-6. Michael Levy, Barton A. Weitz (1995) (hardcover). Retailing Management Second Edition. IRWIN. pp.700. ISBN0-256-13661-0. David Sugden (2009) (paperback). Gray Markets: Prevention, Detection & Litigation. Oxford Press. pp.360. ISBN9780-19-537129-1.

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External links
The Gray Blog (http://www.thegrayblog.com/), a blog dedicated to law related to the parallel market

HarrodDomar model
The HarrodDomar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Sir Roy F. Harrod in 1939 and Evsey Domar in 1946. The HarrodDomar model was the precursor to the exogenous growth model.

Mathematical formalism
Let Y represent output, which equals income, and let K equal the capital stock. S is total saving, s is the savings rate, and I is investment. stands for the rate of depreciation of the capital stock. The HarrodDomar model makes the following a priori assumptions:
1: Output is a function of capital stock 2: The marginal product of capital is constant; the production function exhibits constant returns to scale. This implies capital's marginal and average products are equal. 3: Capital is necessary for output. 4: The product of the savings rate and output equals saving, which equals investment 5: The change in the capital stock equals investment less the depreciation of the capital stock

Derivation of output growth rate:

An alternative (and, perhaps, simpler) derivation is as follows, with dots (for example, growth rates.

) denoting percentage

First, assumptions (1)(3) imply that output and capital are linearly related (for readers with an economics background, this proportionality implies a capital-elasticity of output equal to unity). These assumptions thus

HarrodDomar model generate equal growth rates between the two variables. That is,

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Since the marginal product of capital, c, is a constant, we have

Next, with assumptions (4) and (5), we can find capital's growth rate as,

In summation, the savings rate times the marginal product of capital minus the depreciation rate equals the output growth rate. Increasing the savings rate, increasing the marginal product of capital, or decreasing the depreciation rate will increase the growth rate of output; these are the means to achieve growth in the HarrodDomar model. Although the HarrodDomar model was initially created to help analyse the business cycle, it was later adapted to explain economic growth. Its implications were that growth depends on the quantity of labour and capital; more investment leads to capital accumulation, which generates economic growth. The model also had implications for less economically developed countries; labour is in plentiful supply in these countries but physical capital is not, slowing economic progress. LEDCs do not have sufficient average incomes to enable high rates of saving, and therefore accumulation of the capital stock through investment is low. The model implies that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through technological advances. The model concludes that an economy does not find full employment and stable growth rates naturally, similar to the Keynesian beliefs.

Criticisms of the model

The main criticism of the model is the level of assumption, one being that there is no reason for growth to be sufficient to maintain full employment; this is based on the belief that the relative price of labour and capital is fixed, and that they are used in equal proportions. The model explains economic boom and bust by the assumption that investors are only influenced by output (known as the accelerator principle); this is now widely believed to be false. In terms of development, critics claim that the model sees economic growth and development as the same; in reality, economic growth is only a subset of development. Another criticism is that the model implies poor countries should borrow to finance investment in capital to trigger economic growth; however, history has shown that this often causes repayment problems later. The endogenity of savings: Perhaps the most important parameter in the HarrodDomar model is the rate of savings. Can it be treated as a parameter that can be manipulated easily by policy? That depends on how much control the policy maker has over the economy. In fact, there are several reasons to believe that the rate of savings may itself be influenced by the overall level of per capita income in the society , not to mention the distribution of that income among the population.

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Reference
Roy F. Harrod, An Essay in Dynamic Theory (1939) 49 Economic Journal 1433 [1]

References
[1] http:/ / www. sonoma. edu/ users/ e/ eyler/ 426/ harrod1. pdf

Human capital
Human capital is the stock of competences, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience. [1] Many early economic theories refer to it simply as workforce, one of three factors of production, and consider it to be a fungible resource -- homogeneous and easily interchangeable. Other conceptions of this labor dispense with these assumptions.

Background
Justin Slay defined four types of fixed capital (which is characterized as that which affords a revenue or profit without circulating or changing masters). The four types were: 1. 2. 3. 4. useful machines, instruments of the trade; buildings as the means of procuring revenue; improvements of land; the acquired and useful abilities of all the inhabitants or members of the society.

Adam Smith defined human capital as follows: Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit..[2] Therefore, Smith argued, the productive power of labor are both dependent on the division of labor: "The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour". There is a complex relationship between the division of labor and human capital.

Origin of the term

A. W. Lewis is said to have begun the field of Economic Development and consequently the idea of human capital when he wrote in 1954 the "Economic Development with Unlimited Supplies of Labour." The term "human capital" was not used due to its negative undertones until it was first discussed by Arthur Cecil Pigou: "There is such a thing as investment in human capital as well as investment in material capital. So soon as this is recognised, the distinction between economy in consumption and economy in investment becomes blurred. For, up to a point, consumption is investment in personal productive capacity. This is especially important in connection with children: to reduce unduly expenditure on their consumption may greatly lower their efficiency in after-life. Even for adults, after we

Human capital have descended a certain distance along the scale of wealth, so that we are beyond the region of luxuries and "unnecessary" comforts, a check to personal consumption is also a check to investment.[3] The use of the term in the modern neoclassical economic literature dates back to Jacob Mincer's article "Investment in Human Capital and Personal Income Distribution" in The Journal of Political Economy in 1958. Then T.W. Schultz who is also contributed to the development of the subject matter. The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker of the "Chicago School" of economics. Becker's book entitled Human Capital, published in 1964, became a standard reference for many years. In this view, human capital is similar to "physical means of production", e.g., factories and machines: one can invest in human capital (via education, training, medical treatment) and one's outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output. Human capital is substitutable, but not transferable like land, labor, or fixed capital. Modern growth theory sees human capital as an important growth factor. Further research shows its relevance for democracy or AIDS.[4]

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Competence and capital

The introduction is explained and justified by the unique characteristics of competence (often used only knowledge). Unlike physical labor (and the other factors of production), competence is: Expandable and self generating with use: as doctors get more experience, their competence base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation. Transportable and shareable: competence, especially knowledge, can be moved and shared. This transfer does not prevent its use by the original holder. However, the transfer of knowledge may reduce its scarcity-value to its original possessor. Example An athlete can gain human capital through education and training, and then gain capital through experience in an actual game. Over time, an athlete who has been playing for a long time will have gained so much experience (much like the doctor in the example above) that his human capital has increased a great deal. For example: a point guard gains human capital through training and learning the fundamentals of the game at an early age. He continues to train on the collegiate level until he is drafted. At that point, his human capital is accessed and if he has enough he will be able to play right away. Through playing he gains experience in the field and thus increases his capital. A veteran point guard may have less training than a young point guard but may have more human capital overall due to experience and shared knowledge with other players. Competence, ability, skills or knowledge? Often the term "knowledge" is used. "Competence" is broader and includes thinking ability ("intelligence") and further abilities like motoric and artistic abilities. "Skill" stands for narrow, domain-specific ability. The broader terms "competence" and "ability" are interchangeable. Knowledge equity (= knowledge capital - knowledge liability) plus emotional capital (= emotional capital emotional liability) equals goodwill or immaterial/intangible value of the company. Intangible value of the company (goodwill) plus (material) equity equals the total value of the company.

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Marxist analysis
In some way, the idea of "human capital" is similar to Karl Marx's concept of labor power: he thought in capitalism workers sold their labor power in order to receive income (wages and salaries). But long before Mincer or Becker wrote, Marx pointed to "two disagreeably frustrating facts" with theories that equate wages or salaries with the interest on human capital. 1. The worker must actually work, exert his or her mind and body, to earn this "interest." Marx strongly distinguished between one's capacity to work, Labor power, and the activity of working. 2. A free worker cannot sell his human capital in one go; it is far from being a liquid asset, even more illiquid than shares and land. He does not sell his skills, but contracts to utilize those skills, in the same way that an industrialist sells his produce, not his machinery. The exception here are slaves, whose human capital can be sold, though the slave does not earn an income himself.

An advertisement for labour from Sabah and

An employer must be receiving a profit from his operations, so that Sarawak, seen in Jalan Petaling, Kuala Lumpur. workers must be producing what Marx (under the labor theory of value) perceived as surplus-value, i.e., doing work beyond that necessary to maintain their labor power.[5] Though having "human capital" gives workers some benefits, they are still dependent on the owners of non-human wealth for their livelihood. The term appears in Marx's article in the New-York Daily Tribune article "The Emancipation Question," January 17 and 22, 1859, although there the term is used to describe humans who act like a capital to the producers, rather than in the modern sense of "knowledge capital" endowed to or acquired by humans.[6]

Importance of Human Capital

The concept of Human capital has relatively more importance in labour-surplus countries. These countries are naturally endowed with more of labour due to high birth rate under the given climatic conditions. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. This human resource can be transformed into Human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of human capital formation. The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their National economies. The tangible financial capital is an effective instrument of promoting economic growth of the nation. The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable [7] . This importance of human capital is explicit in the changed approach of United Nations [8] towards comparative evaluation of economic development of different nations in the World economy. United Nations publishes Human Development Report [9] on human development in different nations with the objective of evaluating the rate of human capital formation in these nations. The statistical indicator of estimating Human Development in each nation is Human Development Index (HDI). It is the combination of "Life Expectancy Index", "Education Index" and "Income Index". The Life expectancy index reveals the standard of health of the population in the country; education index reveals the educational standard and the literacy ratio of the population; and the income index reveals the standard of living of the population. If all these indices have the rising trend over a long period of time, it is reflected into rising trend in

Human capital HDI. The Human Capital is developed by health, education and quality of Standard of living. Therefore, the components of HDI viz, Life Expectancy Index, Education Index and Income Index are directly related to Human Capital formation within the nation. HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases. Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation. This process of human development is the strong foundation of a continuous process of economic development of the nation for a long period of time. This significance of the concept of Human capital in generating long-term economic development of the nation cannot be neglected. It is expected that the Macroeconomic policies of all the nations are focussed towards promotion of human development and subsequently economic development. Human Capital is the backbone of Human Development and economic development in every nation.

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Cumulative Growth of Human Capital

Human Capital is distinctly different from the tangible monetary capital due to the extraordinary characteristic of Human Capital to grow cumulatively over a long period of time.[10] The growth of tangible monetary capital is not always linear due to the shocks of Business cycles. During the period of prosperity, monetary capital grows at relatively higher rate while during the period of Recession and depression, there is deceleration of monetary capital. On the other hand, Human Capital has uniformly rising rate of growth over a long period of time because the foundation of this Human Capital is laid down by the educational and health inputs.[11] The current generation is qualitatively developed by the effective inputs of education and health.[12] The future generation is more benefited by the advanced research in the field of education and health, undertaken by the current generation. Therefore, the educational and health inputs create more productive impacts upon the future generation and the future generation becomes superior to the current generation. In other words, the productive capacity of future generation increases more than that of current generation. Therefore, rate of human capital formation in the future generation happens to be more than the rate of human capital formation in the current generation. This is the cumulative growth of Human Capital formation generated by superior quality of manpower in the succeeding generation as compared to the preceding generation. In India, rate of Human Capital formation has consistently increased after Independence due to qualitative improvement in each generation. In the second decade of 21st century, the third generation of India's population is active in the workforce of India. This third generation is qualitatively most superior human resource in India. It has developed the service sector of India with the export of Financial services, software services[13] , tourism services and improved the Invisible balance of India's Balance of payments. The rapid growth of Indian economy in response to improvement in the service sector is an evidence of cumulative growth of Human Capital in India.

Debates about the concept

Some labor economists have criticized the Chicago-school theory, claiming that it tries to explain all differences in wages and salaries in terms of human capital. The concept of human capital can be infinitely elastic, including unmeasurable variables such as personal character or connections with insiders (via family or fraternity). This theory has had a significant share of study in the field proving that wages can be higher for employees on aspects other than human capital. Some variables that have been identified in the literature of the past few decades include, gender and nativity wage differentials, discrimination in the work place, and socioeconomic status. However, Austrian economist Walter Block theorizes that these variables are not the cause of gender wage gap. Thomas J. DiLorenzo summarizes Block' s theory well: "marriage affects men and women very differently in terms of their future earning abilities, and is therefore an important cause of the male/female wage gap".[14] Block alleges that there is no wage gap between unmarried men and women, but married

Human capital men salaries are usually more than married women. These wages, he contends, are the opportunity cost of being a mother and raising children.[15] The prestige of a credential may be as important as the knowledge gained in determining the value of an education. This points to the existence of market imperfections such as non-competing groups and labor-market segmentation. In segmented labor markets, the "return on human capital" differs between comparably skilled labor-market groups or segments. An example of this is discrimination against minority or female employees. Following Becker, the human capital literature often distinguishes between "specific" and "general" human capital. Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital (such as literacy) is useful to all employers. Economists view firm specific human capital as risky, since firm closure or industry decline lead to skills that cannot be transferred (the evidence on the quantitative importance of firm specific capital is unresolved). Human capital is central to debates about welfare, education, health care, and retirement..

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Mobility between nations

Educated individuals often migrate from poor countries to rich countries seeking opportunity. This movement has positive effects for both countries: capital-rich countries gain an influx in labor, and labor rich countries receive capital when migrants remit money home. The loss of labor in the old country also increases the wage rate for those who do not emigrate. When workers migrate, their early care and education generally benefit the country where they move to work. And, when they have health problems or retire, their care and retirement pension will typically be paid in the new country. African nations have invoked this argument with respect to slavery, other colonized peoples have invoked it with respect to the "brain drain" or "human capital flight" which occurs when the most talented individuals (those with the most individual capital) depart for education or opportunity to the colonizing country (historically, Britain and France and the U.S.). Even in Canada and other developed nations, the loss of human capital is considered a problem that can only be offset by further draws on the human capital of poorer nations via immigration. The economic impact of immigration to Canada is generally considered to be positive. During the late 19th and early 20th centuries, human capital in the United States became considerably more valuable as the need for skilled labor came with newfound technological advancement. The 20th century is often revered as the "human capital century" by scholars such as Claudia Goldin. During this period a new mass movement toward secondary education paved the way for a transition to mass higher education. New techniques and processes required further education than the norm of primary schooling, which thus led to the creation of more formalized schooling across the nation. These advances produced a need for more skilled labor, which caused the wages of occupations that required more education to considerably diverge from the wages of ones that required less. This divergence created incentives for individuals to postpone entering the labor market in order to obtain more education. The high school movement had changed the educational system for youth in America. With minor state involvements, the high school movement started at the grass-roots level, particularly the communities with the most homogeneous populations. As a year in high school added more than ten percent to an individuals income, post-elementary school enrollment and graduation rates increased significantly during the 20th century. The U.S. system of education was characterized for much of the 20th century by publicly funded mass secondary education that was open and forgiving, academic yet practical, secular, gender neutral, and funded by small, fiscally independent districts. This early insight into the need for education allowed for a significant jump in US productivity and economic prosperity, when compared to other world leaders at the time. It is suggested by several economists, that there is a positive correlation between high school enrollment rates and GDP per capita. Less developed countries have not established a set of institutions favoring equality and role of education for the masses and therefore have been incapable of investing in human capital stock necessary for technological growth.

Human capital The rights and freedom of individuals to travel and opportunity, despite some historical exceptions such as the Soviet bloc and its "Iron Curtain", seem to consistently transcend the countries in which they are educated. One must also remember that the ability to have mobility with regards to where people want to move and work is a part of their human capital. Being able to move from one area to the next is an ability and a benefit of having human capital. To restrict people from doing so would be to inherently lower their human capital. This debate resembles, in form, that regarding natural capital.

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Classification
Human capital is an intangible asset as it is not owned by the firm that employs it. Basically, human capital arrives at 9am and leaves at 5pm. Human capital when viewed from a time perspective consumes time in one of key activities: 1. Knowledge (activities involving one employee), 2. Collaboration (activities involving more than 1 employee), 3. Processes (activities specifically focused on the knowledge and collaborative activities generated by organizational structure - such as silo impacts, internal politics, etc.) and 4. Absence (annual leave, sick leave, holidays, etc.).

Risk
When human capital is assessed by activity based costing via time allocations it becomes possible to assess human capital risk. Human capital risk occurs when the organization operates below attainable operational excellence levels. For example, if a firm could reasonably reduce errors and rework (the Process component of human capital) from 10,000 hours per annum to 2,000 hours with attainable technology, the difference of 8,000 hours is human capital risk. When wage costs are applied to this difference (the 8,000 hours) it becomes possible to financially value human capital risk within an organizational perspective. Human capital risk accumulates in four primary categories: 1. Absence activities (activities related to employees not showing up for work such as sick leave, industrial action, etc.). Unavoidable absence is referred to as Statutory Absence. All other categories of absence are termed "Controllable Absence"; 2. Collaborative activities are related to the expenditure of time between more than one employee within an organizational context. Examples include: meetings, phone calls, instructor led training, etc.; 3. Knowledge Activities are related to time expenditures by a single person and include finding/retrieving information, research, email, messaging, blogging, information analysis, etc.; and 4. Process activities are knowledge and collaborative activities that result due to organizational context such as errors/rework, manual data transformation, stress, politics, etc.

Notes
[1] Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action (http:/ / www. pearsonschool. com/ index. cfm?locator=PSZ3R9& PMDbSiteId=2781& PMDbSolutionId=6724& PMDbCategoryId=& PMDbProgramId=12881& level=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp.5. ISBN0-13-063085-3. . [2] (http:/ / www. adamsmith. org/ smith/ won-b2-c1. htm) Smith, Adam: An Inquiry into the Nature And Causes of the Wealth of Nations Book 2 - Of the Nature, Accumulation, and Employment of Stock; Published 1776. [3] Pigou, Arthur Cecil A Study in Public Finance, 1928, Macmillan, London, p. 29 [4] Eric Hanushek and Ludger Woessmann: The role of cognitive skills in economic development, September 2008, Journal of Economic Literature, 46, pp. 607-668. Rindermann, Heiner: Relevance of education and intelligence at the national level for the economic welfare of people, March 2008, Intelligence, 36, p. 127-142. [5] Marx, Karl. Capital, volume III, ch. 29 pp. 465-6 of the International Publishers edition (http:/ / www. marxists. org/ archive/ marx/ works/ 1894-c3/ ch29. htm)

Human capital
[6] The Emancipation Question in New-York Daily Tribune, January 17 and 22, 1859 (http:/ / www. marxists. org/ archive/ marx/ works/ 1858/ 12/ 31. htm) [7] Haq, Mahbub ul (1996). Reflection on Human Development. Delhi: Oxford University Press. [8] UN. "Official website" (http:/ / www. un. org/ ). . [9] Human Development Report, UNDP. "HDR" (http:/ / hdr. undp. org/ en/ ). . [10] Investopedia. "Human Capital: The most overlooked Asset Class" (http:/ / www. investopedia. com/ articles/ younginvestors/ 09/ human-capital. asp#axzz1Wb8QpjGs). . [11] Becker, Gary (1994). Human Capital: A theoretical and empirical analysis with special reference to Education. The University of Chicago Press. [12] Hansen, W. Lee (1970). Education, Income and Human Capital. [13] Bagde, Surendrakumar. "Human Capital and Economic Development in India" (http:/ / www. heinz. cmu. edu/ research/ 251full. pdf). . [14] http:/ / www. lewrockwell. com/ dilorenzo/ dilorenzo164. html [15] http:/ / www. lewrockwell. com/ block/ block112. html

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References
Gary S. Becker (1964, 1993, 3rd ed.). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press. ISBN978-0-226-04120-9. ( UCP descr (http:// www.press.uchicago.edu/cgi-bin/hfs.cgi/00/12426.ctl)) Ceridian UK Ltd. (2007) (PDF). Human Capital White Paper (http://www.ceridian.co.uk/hr/downloads/ HumanCapitalWhitePaper_2007_01_26.pdf). Retrieved 2007-02-27. Samuel Bowles & Herbert Gintis (1975). "The Problem with Human Capital Theory--A Marxian Critique," American Economic Review, 65(2), pp.7482, Sherwin Rosen (1987). "Human capital," The New Palgrave: A Dictionary of Economics, v. 2, pp.68190. Seymour W. Itzkoff (2003). Intellectual Capital in Twenty-First-Century Politics. Ashfield, MA: Paideia, ISBN 0-913993-20-4 Brian Keeley (2007). OECD Insights; Human Capital. ISBN 92-64-02908-7 (http://www.oecd.org/insights/ humancapital) Rossilah Jamil (2004). Human Capital: A Critique (http://www.fppsm.utm.my/download/doc_download/ 88-human-capital-a-critique.html). Jurnal Kemanusiaan ISSN 1675-1930 (http://www.fppsm.utm.my/ jurnal-kemanusiaan.html).

External links
New papers and articles on human Capital, a free Newsletter edited by the RePEc academic Project (http://lists. repec.org/mailman/listinfo/nep-hrm) Human Capital (http://www.econlib.org/library/Enc/HumanCapital.html), Gary Becker The Concise Encyclopedia of Economics. Human Capital Management (HCM) research papers (http://www.softscape.com/us/forms/form_whitepapers. htm), Softscape Whitepapers. OECD Insights: Human Capital - a primer (http://www.oecd.org/insights/humancapital) Jurnal Kemanusiaan, Bil 04 Dis 2004 (http://www.fppsm.utm.my/download/cat_view/ 13-jurnal-kemanusiaan/19-bil-04-dis-2004.html) (ISSN 1675-1930). Faculty of Management and Human Resource Development (http://www.fppsm.utm.my)

Investment

126

Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time.[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments. To avoid speculation an investment must be either directly backed by the pledge of sufficient collateral or insured by sufficient assets pledged by a third party. A thoroughly analyzed loan of money backed by collateral with greater immediate value than the loan amount may be considered an investment. A financial instrument that is insured by the pledge of assets from a third party, such as a deposit in a financial institution insured by a government agency may be considered an investment. Examples of these agencies include, in the United States, the Securities Investor Protection Corporation, Federal Deposit Insurance Corporation, or National Credit Union Administration, or in Canada, the Canada Deposit Insurance Corporation. Promoters of and news sources that report on speculative financial transactions such as stocks, mutual funds, real estate, oil and gas leases, commodities, and futures often inaccurately or misleadingly describe speculative schemes as investment. Investment: thorough analysis and security. Speculation: analysis and some risk. Gambling: lack of analysis and lack of safety.

In economics or macroeconomics
In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. Examples include railroad or factory construction. Investment in human capital includes costs of additional schooling or on-the-job training. Inventory investment refers to the accumulation of goods inventories; it can be positive or negative, and it can be intended or unintended. In measures of national income and output, "gross investment" (represented by the variable I) is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP - C - G - NX). Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I. "Net investment" deducts depreciation from gross investment. Net fixed investment is the value of the net increase in the capital stock per year. Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock that is, accumulated net investment to a point in time (such as December 31). Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.[2]

Investment

127

Investment related to business of a firm - business management

The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business. In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times, the goal of the investment is to produce future cash flows, while at others it may be for the purpose of gaining access to more assets by establishing control or influence over the operation of a second company (the investee). Business firms or organisations raise funds from investors in the form of equites and debts (collectively known as the capital structure) and further reinvest it into various investment schemes by carefully analysing the returns in order to meet out their obligations relating to purchase of assets which provides them long term benefits.

In finance
In finance, investment is the commitment of funds through collateralized lending, or making a deposit into a secured institution. In contrast to investment; dollar cost averaging, market timing, and diversification are phrases associated with speculation. Investments are often made indirectly through intermediaries, such as banks, Credit Unions, Brokers, Lenders, and insurance companies. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

History
The Code of Hammurabi 1700 B.C. provided a legal framework for investment establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death. In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. By the 1950s the term investment had been co-opted by financial brokers and their advertising agencies to promote speculation.

Linguistic significance
Common usage of "investment" to describe "speculation" has reduced investor capacity to discern investment from speculation, reduced investor awareness of risk associated with speculation, increased capital available to speculation, and decreased capital available to investment.

Real estate as the instrument of investment

In real estate, investment money is used to purchase property for the purpose of holding, reselling or leasing for income and there is an element of capital risk.

Investment

128

Residential real estate

Investment in residential real estate is the most common form of real estate investment measured by number of participants because it includes property purchased as a primary residence. In many cases the buyer does not have the full purchase price for a property and must engage a lender such as a bank, finance company or private lender. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.

Commercial real estate

Commercial real estate consists of multifamily apartments, office buildings, retail space, hotels and motels, warehouses, and other commercial properties. Due to the higher risk of commercial real estate, loan-to-value ratios allowed by banks and other lenders are lower and often fall in the range of 50-70%.

Notes
[1] Graham, Benjamin and David Dodd (1951). Security Analysis. McGraw-Hill Book Comany. ISBN007144829. [2] Kevin A. Hassett (2008, 2nd ed.). "Investment," (http:/ / www. econlib. org/ library/ Enc/ Investment. html) The Concise Encyclopedia of Economics. Library of Economics and Liberty.

External links
Investing (http://www.dmoz.org/Business/Investing/Stocks_and_Bonds/Equities/Research_and_Analysis//) at the Open Directory Project

Islamic banking
Islamic banking (or participant banking) (Arabic: ) is banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.[1] [2]

History of Islamic banking

Introduction
An early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism".[3] The monetary economy of the period was based on the widely circulated currency the dinar, and it tied together regions that were previously economically independent. A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership (mufawada) such as limited partnerships (mudaraba), and forms of capital (al-mal), capital accumulation (nama al-mal),[4] cheques, promissory notes,[5] trusts (see Waqf),[6] transactional accounts, loaning, ledgers and assignments.[7] Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time.[8] [9] Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.[4]

Islamic banking Riba The word "Riba" means excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart", or "to ensure equivalency in real value", and that "numerical value was immaterial." Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them.[10] When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in a higher number of units of this fiat money being riba" was not relevant as the jurists only needed to be concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).

129

Modern Islamic banking

Interest-free banking seems to be of very recent origin. The earliest references to the reorganisation of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late forties, followed by a more elaborate exposition by Mawdudi in 1950. The writings of Muhammad Hamidullah 1944, 1955, 1957 and 1962 should be included in this category. They have all recognised the need for commercial banks and their perceived "necessary evil," have proposed a banking system based on the concept of Mudarabha - profit and loss sharing. In the next two decades interest-free banking attracted more attention, partly because of the political interest it created in Pakistan and partly because of the emergence of young Muslim economists. Works specifically devoted to this subject began to appear in this period. The first such work is that of Muhammad Uzair (1955). Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors. The early 1970s saw institutional involvement. The Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977 were the result of such involvement. The involvement of institutions and governments led to the application of theory to practice and resulted in the establishment of the first interest-free banks. The Islamic Development Bank, an inter-governmental bank established in 1975, was born of this process.[11] The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic imagefor fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in country.[12] In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, currently, is still in business in Egypt. In 1975, the Islamic Development Bank was set up with the mission to provide funding to projects in the member countries.[13] The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth.[14] Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according to The Economist.[15]

Islamic banking This represents approximately 0.5% of total world estimated assets as of 2005.[16] According to CIMB Group Holdings, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24 percent to $25 billion in 2010.[17] The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."[18] Largest Islamic banks Shariah-compliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poors Ratings Services, and the potential market is $4 trillion.[19] [20] Iran, Saudi Arabia and Malaysia have the biggest sharia-compliant assets.[21] In 2009 Iranian banks accounted for about 40 percent of total assets of the world's top 100 Islamic banks. Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi Arabia's Al Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3 billion.[22] [23] Iran holds the world's largest level of Islamic finance assets valued at $235.3bn which is more than double the next country in the ranking with $92bn. Six out of ten top Islamic banks in the world are Iranian.[24] [25] [26] In November 2010, The Banker published its latest authoritative list of the Top 500 Islamic Finance Institutions with Iran topping the list. Seven out of ten top Islamic banks in the world are Iranian according to the list.[27]

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Principles
Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. Because Islam forbids simply lending out money at interest (see riba), Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid). An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia. There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank

Islamic banking so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing the lender to monopolize the economy. Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing, and moral purchasing. Islamic Banking and Finance Database provides more information on the subject. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio.[28] However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.[29] Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).[30] [31]

131

Shariah Advisory Council/Consultant

Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the banking institutions comply with Shariah principles. On the other hand, there are also those who believe that no form of banking that involves interest payments can ever comply with the Shariah.[32] In Malaysia, the National Shariah Advisory Council, which has been set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia). In Indonesia the Ulama Council serves a similar purpose. A number of Shariah advisory firms have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced. The WDIBF World Database for Islamic Banking and Finance has been developed to provide information about all the websites related to this type of banking.[33]

Islamic Financial Accounting Standards

The Institute of Chartered Accountants of Pakistan issues Islamic Financial Accounting Standards (IFAS) for Islamic Mode of financing. IFAS 1 (issued in 2005) concerns Musharakah and Mudarabah. While, IFAS 2 (issued in 2007) relates to Ijarah.

Fundamentals of Islamic finance

The term Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). Furhermore the Shariah prohibits what is called "Maysir" and "Gharar". Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future whereas Gharar describes speculative transactions. Both concepts involve excessive risk and are suppposed to foster uncertainty and fraudlent behaviour. Therefore the use of all conventional derivate instruments is impossible in Islamic banking.[34] In the late 20th century, a number of Islamic banks were created to cater to this particular banking market.

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132

Usury in Islam
The criticism of usury in Islam was well established during the lifetime of the Prophet Muhammad and reinforced by several of verses in the Qur'an dating back to around 600 AD. The original word used for usury in this text was Riba, which literally means excess or addition. This was accepted to refer directly to interest on loans so that, according to Islamic economists Choudhury and Malik (1992), by the time of Caliph Umar, the prohibition of interest was a well-established working principle integrated into the Islamic economic system. This interpretation of usury has not been universally accepted or applied in the Islamic world. A school of Islamic thought which emerged in the 19th Century, led by Sir Sayyed, argues for an interpretative differentiation between usury, or consumptional lending, and interest, or lending for commercial investment (Ahmed, 1958). Nevertheless, Choudhury and Malik provide evidence for a gradual evolution of the institutions of interest-free financial enterprises across the world (1992: 104). They cite, for instance, the current existence of financial institutions in Iran, Pakistan and Saudi Arabia, the Dar-al-Mal-al-Islami in Geneva and Islamic trust companies in North America. This growing practice of Islamic banking will be discussed more fully in a later section as a modern application of usury prohibition.

Islamic financial transaction terminology

Bai' al 'inah (sale and buy-back agreement)
Bai' al inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility. Subsequently the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility. There are differences of opinion amongst the scholars on the permissibility of Bai' al 'inah, however this is practised in Malaysia (A set of strict conditions must be complied) and the like jurisdictions.[35] [36]

Bai' bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. Like Bai' al 'inah, this concept is also used under an Islamic financing facility. Interest payment can be avoided as the customer is paying the sale price which is not the same as interest charged on a loan. The problem here is that this includes linking two transactions in one which is forbidden in Islam. The common perception is that this is simply straightforward charging of interest disguised as a sale.

Bai' muajjal (credit sale)

Literally bai' muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. Bai' muajjal is also called a deferred-payment sale. However, one of the essential descriptions of riba is an unjustified delay in payment or either increasing or decreasing the price if the payment is immediate or delayed.

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Musharakah
Musharakah (joint venture) is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to the invested capital. In case of loss, no partner loses capital in the same ratio. If the Bank provides capital, the same conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. Each partner may or may not participate in carrying out the business. A working partner gets a greater profit share compared to a sleeping (non-working) partner. The difference between Musharaka and Madharaba is that, in Musharaka, each partner contributes some capital, whereas in Madharaba, one partner, e.g. A financial institution, provides all the capital and the other partner, the entrepreneur, provides no capital. Note that Musharaka and Madharaba commonly overlap.[37]

Mudarabah
"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib". The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the money has to take losses.in this only "rabb-ul mal"suffered from loss mudarib do not suffered with loss.Profit distributed between both rabb-ul-mal and mudarib.

Murabahah
This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled. This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are common in North American stores.

Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Islamic banking Basic features and conditions of Salam 1. The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible. 2. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain. 3. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. 4. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa. 5. The exact date and place of delivery must be specified in the contract. 6. Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed. 7. This is the most preferred financing structure and carries higher order Shariah compliance.

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Hibah (gift)
This is a token given voluntarily by a debtor to a debitor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities. It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.[38]

Ijarah
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. Ijarah thumma al bai' (hire purchase) Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.

Islamic banking The bank generates a profit by determining in advance the cost of the item, its residual value at the end of the term and the time value or profit margin for the money being invested in purchasing the product to be leased for the intended term. The combining of these three figures becomes the basis for the contract between the Bank and the client for the initial lease contract. This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law. Ijarah-wal-iqtina A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.

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Musharakah (joint venture)

Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.[37] All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).

Qard hassan/ Qardul hassan (good loan/benevolent loan)

This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.[39]

Sukuk (Islamic bonds)

Sukuk, plural of Sakk, is the Arabic name for financial certificates that are the Islamic equivalent of bonds. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

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Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. See Takaful for details.

Wadiah (safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.

Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.

Islamic equity funds

Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 1215% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products. Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities. Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.

Islamic derivatives
With help of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association, global standards for Islamic derivatives were set in 2010. The Hedging Master Agreement [40] provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps.[17]

Islamic laws on trading

The Qur'an prohibits gambling (games of chance involving money). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty). The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities,

Islamic banking with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." Other modern scholars, such as Dr. Sami al-Suwailem, have used Game Theory to try and reach a more measured definition of Gharar, defining it as "a zero-sum game with unequal payoffs".[41] There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.[42] What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading.

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Microfinance
Microfinance is a key concern for Muslims states and recently Islamic banks also. Microfinance is ideologically compatible with Islamic finance, capable of Shariah-compliancy, and possesses a sizeable potential market. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor.[43] The use of interest found in conventional microfinance products and services can easily be avoided by creating microfinance hybrids delivered on the basis of the Islamic contracts of mudaraba, musharaka, and murabahah. Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria.

Controversy
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking: Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.[44] Some Islamic banks charge for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia. The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest

Islamic banking and therefore acceptable under Sharia. Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place. The majority of Islamic banking clients are found in the Gulf states and in developed countries. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the general population. The majority of financial institutions that offer Islamic banking services are majority owned by Non-Muslims. With Muslims working within these organizations being employed in the marketing of these services and having little input into the actual day to day management, the veracity of these institutions and their services are viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was found to have the majority of these funds invested in the gaming industry; the managers administering these funds were non Muslim.[44] These types of stories contribute to the general impression within the Muslim populace that Islamic banking is simply another means for banks to increase profits through growth of deposits and that only the rich derive benefits from implementation of Islamic Banking principles. Hence, the controversy that surrounds Islamic Banking continues. The question of whether or not Islamic banking really is Islamic is still is a matter of debate among the Muslim academia.

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Notes
[1] Rammal, H. G. and Zurbruegg, R. (2007). Awareness of Islamic Banking Products Among Muslims: The Case of Australia. Journal of Financial Services Marketing, 12(1), 65-74. [2] Saeed, A. (1996). "Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation". Leiden, Netherlands: E.J.Brill. [3] Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1), p. 79-96 [81, 83, 85, 90, 93, 96]. [4] Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", Historical Materialism 15 (1), pp. 4774, Brill Publishers. [5] Robert Sabatino Lopez, Irving Woodworth Raymond, Olivia Remie Constable (2001), Medieval Trade in the Mediterranean World: Illustrative Documents, Columbia University Press, ISBN 0-231-12357-4. [6] Timur Kuran (2005), "The Absence of the Corporation in Islamic Law: Origins and Persistence", American Journal of Comparative Law 53, pp. 785834 [7989]. [7] Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1), pp. 7996 [923]. [8] Said Amir Arjomand (1999), "The Law, Agency, and Policy in Medieval Islamic Society: Development of the Institutions of Learning from the Tenth to the Fifteenth Century", Comparative Studies in Society and History 41, pp. 26393. Cambridge University Press. [9] Samir Amin (1978), "The Arab Nation: Some Conclusions and Problems", MERIP Reports 68, pp. 314 [8, 13]. [10] (Badr 1989, p.424) [11] 4.1 Historical development (http:/ / users. bart. nl/ ~abdul/ chap4. html) [12] http:/ / www. usc. edu/ dept/ MSA/ economics/ islamic_banking. html [13] Warde, I. (2000). "Islamic Finance In The Global Economy". Edinburgh: Edinburgh University Press. [14] http:/ / www. imf. org/ external/ pubs/ ft/ wp/ 2008/ wp0816. pdf Islamic Banks and Financial Stability: An Empirical Analysis pg. 5 [15] "Sharia calling" (http:/ / www. economist. com/ world/ europe/ displaystory. cfm?story_id=14859353). The Economist. 2009-11-12. . [16] Slater, Joanna (2007-01-10). "World's Assets Hit Record Value Of $140 Trillion" (http:/ / online. wsj. com/ article/ SB116839213664272112. html). The Wall Street Journal. . [17] http:/ / www. iran-daily. com/ 1388/ 12/ 11/ MainPaper/ 3630/ Page/ 5/ Index. htm [18] Lorenzo Totaro (2009-03-04). "Vatican Says Islamic Finance May Help Western Banks in Crisis" (http:/ / www. bloomberg. com/ apps/ news?pid=20601092& sid=aOsOLE8uiNOg& refer=italy). Bloomberg L.P.. . Retrieved 2009-04-13. [19] http:/ / iran-daily. com/ 1386/ 2860/ html/ focus. htm [20] http:/ / www. payvand. com/ news/ 09/ nov/ 1122. html [21] http:/ / www. zawya. com/ Story. cfm/ sidZAWYA20091211065734/ Iran%202nd%20in%20Islamic%20Banking%20Assets%20 [22] http:/ / www. presstv. com/ detail. aspx?id=104662& sectionid=351020102 [23] http:/ / www. presstv. com/ detail. aspx?id=117077& sectionid=351020102 [24] http:/ / www. radicalmiddleway. co. uk/ topics/ finance/ top-500-islamic-financial-institutions [25] http:/ / in. bsi. ir/ default. aspx?scn=News-Details& & news_dtid=e75d2324-fb20-4edb-b14a-7c4ef2bd2677& lid=c845e22d-2f63-49fc-9b4b-855986b2af20& mln=News_DetailPage

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[26] http:/ / www. thebanker. com/ news/ fullstory. php/ aid/ 6129/ Iran_dominates_sharia_ranking_as_newcomers_make_their_mark. html [27] http:/ / top500islamic. thebanker. com/ index. cfm?fuseaction=top500. home& CFID=1277573& CFTOKEN=93128769 [28] http:/ / faculty. capebretonu. ca/ mchoudhu/ money. htm [29] http:/ / web. archive. org/ web/ 20070716151628/ http:/ / www. islamibankbd. com/ page/ ih_12. htm [30] Gabriel Rozenberg, Nobel prizewinner using micro-credit for macro benefit (http:/ / business. timesonline. co. uk/ tol/ business/ markets/ china/ article755694. ece), The Times, December 16, 2006. [31] Zeeshan Hasan, The Redefinition of Islamic Economics (http:/ / web. archive. org/ web/ 20080404224903/ http:/ / www. geocities. com/ zeeshanhasan/ economics. html), The Daily Star, August 27th, 1994. [32] http:/ / zakatpages. com/ 2007/ 01/ 19/ alhamdulillah-for-lloyds-tsb-bank/ [33] World Database for Islamic Banking and Finance (http:/ / www. wdibf. com/ ) [34] Mervyn K. Lewis, Latifa M. Algaoud: Islamic Banking Cheltenham, 2001 [35] http:/ / www. badralislami. com/ glossary/ a-h. asp [36] http:/ / www. azmilaw. com/ Article/ Article_8_& _9/ Article_9_Tawarruq_00093603_. pdf [37] Nomani, Farhad; Rahnema, Ali. (1994). Islamic Economic Systems. New Jersey: Zed books limited. pp.99101. ISBN1-85649-058-0. [38] "Learn more about Islamic Banking - Returns on deposits are competitive" (http:/ / www. rhbislamicbank. com. my/ index. asp?fuseaction=learning. details& recID=77). RHB Banking Group. 2006-05-17. . Retrieved 2009-03-26. [39] http:/ / www. irfi. org/ articles/ articles_301_350/ is_islamic_banking_islamic. htm [40] http:/ / www. isda. org/ media/ press/ 2010/ press030110. html [41] http:/ / www. irti. org/ irj/ go/ km/ docs/ documents/ IDBDevelopments/ Internet/ English/ IRTI/ CM/ downloads/ IES_Articles/ Vol%207-1%20and%202%20. . %20Sami%20Al-Suwailem. . Measure%20of%20Gharar. . dp. pdf [42] http:/ / www. ruf. rice. edu/ ~elgamal/ files/ gharar. pdf [43] Sait, 2006, p.175 [44] http:/ / www. dawn. com/ 2004/ 06/ 17/ top2. htm

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References
Sait, Siraj; Lim, Hilary (2006). Land, Law and Islam. New York: UN-HABITAT.

Further reading
Financial planning key to Islamic banking growth (http://www.alfalahconsulting.com/2011/04/ financial-planning-key-to-islamic.html) How Islamic Finance and Investments work and availability in the US and Canada (http://ijaraloans.com) Partnership, Equity-Financing and Islamic Finance: Whither Profit-Loss Sharing? (http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1415239) by Dr. Mohammad Omar Farooq Historic Judgment on Interest Given by the Supreme Court of Pakistan (http://albalagh.net/Islamic_economics/ riba_judgement.shtml) Library of essential reading list of Islamic Banking and Insurance (http://www.financialislam.com/reports1. html) Guide to Islamic Banking (http://www.meezanbank.com/guide_islamicbanking.aspx) Mufti Taqi Usmani's book on Islamic Finance (http://www.darululoomkhi.edu.pk/fiqh/islamicfinance/ islamicfinance.html) Islamic Banking references (GDRC) (http://www.gdrc.org/icm/islamic-banking.html) Risk & Compliance Management in Islamic Banking (http://www.infosys.com/finacle/pdf/thoughtpapers/ Risk-Compliance-Islamic-Banking.pdf) Bringing morality into finance (http://www.latrobe.edu.au/news/articles/2009/opinion/ bringing-morality-into-finance) - an opinion piece by Dr. Hayat Khan of La Trobe University Mahlknecht, Michael (2009). Islamic Capital Markets and Risk Management. London: Risk Books. ISBN978-1-906348-17-5. Encyclopedia of Islamic Finance, by Dr Aly Khorshid, published by Euromoney PLC, July 2009 Islamic Finance as a Progenitor of Venture Capital, by Benedikt Koehler in: Economic Affairs, December 2009 Rosly, Saiful Azhar (2006). Critical Issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Investments, Takaful and Financial Planning. AuthorHouse. ISBN978-1420837377.

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External links
World Database for Islamic Banking and Finance (http://www.wdibf.com) Islamic Banks and Financial Institutions Information (http://www.ibisonline.net/) Islamic Financial Services Board (http://www.ifsb.org/) AIBIM - Association of Islamic Banking Institutions Malaysia (http://www.aibim.com/) Islamic Finance at Deloitte (http://www.islamicfinance.deloitte.com/) Accounting and Auditing Organization for Islamic Financial Institutions (http://www.aaoifi.com) Reviewing Islamic Banking (http://www.iguides.org/articles/articles/15/1/Reviewing-Islamic-Banking/ Page1.html) Riba and Islamic Banking (http://www.hazariba.com/RibaNIB.shtml) Islamic Banks Directory (http://www.islamicbankingzone.com/islamic-banking-finance-directory/) Neighborhood Development Center / First Reba-Free Financing program in the US (http://www.ndc-mn.org/ programs-services/small-business-lending-reba-free-financing)

Jensen's alpha
In finance, Jensen's alpha [1] (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return is predicted by a market model, most commonly the Capital Asset Pricing Model (CAPM) model. The market model uses statistical methods to predict the appropriate risk-adjusted return of an asset. The CAPM for instance uses beta as a multiplier. Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskiness of the asset. After all, riskier assets will have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha. In the context of CAPM, calculating alpha requires the following inputs: the realized return (on the portfolio), the market return, the risk-free rate of return, and the beta of the portfolio.

Jensen's alpha = Portfolio Return [Risk Free Rate + Portfolio Beta * (Market Return Risk Free Rate)]

Since Eugene Fama, many academics believe financial markets are too efficient to allow for repeatedly earning positive Alpha, unless by chance. To the contrary, empirical studies of mutual funds spearheaded by Russ Wermers usually confirm managers' stock-picking talent, finding positive Alpha. However, they also show that after fees and expenses are deducted, the effective Alpha for investors is negative. (These results also explain why passive investing is increasingly popular.) Nevertheless, Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in conjunction with the Sharpe ratio and the Treynor ratio.

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Use in Quantitative Finance[2] , [3]

Jensen's alpha is a statistic that is commonly used in empirical finance to assess the marginal return associated with unit exposure to a given strategy. Generalizing the above definition to the multifactor setting, Jensen's alpha is a measure of the marginal return associated with an additional strategy that is not explained by existing factors. We obtain the CAPM alpha if we consider excess market returns as the only factor. If we add in the Fama-French factors, we obtain the 3-factor alpha, and so on. If Jensen's alpha is significant and positive, then the strategy being considered has a history of generating returns on top of what would be expected based on other factors alone. For example, in the 3-factor case, we may regress momentum factor returns on 3-factor returns to find that momentum generates a significant premium on top of size, value, and market returns.

References
[1] Jensen, M.C., The Performance of Mutual Funds in the Period 1945-1964, Journal of Finance 23, 1968, pp. 389-416. (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=244153) [2] Jensen's Alpha in Quantitative Finance (http:/ / www. quantiphile. com/ 2010/ 10/ 09/ jensens-alpha/ ) [3] Addendum, Jensen's Alpha in Quantitative Finance (http:/ / www. quantiphile. com/ 2011/ 02/ 15/ jensens-alpha-revisited/ )

Means of production
Not to be confused with Mode of production. Means of production refers to physical, non-human inputs used in productionthe factories, machines, and tools used to produce wealth[1] along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital. They include two broad categories of objects: instruments of labour (tools, factories, infrastructure, etc.) and subjects of labour (natural resources and raw materials). People operate on the subjects of labour, using the instruments of labour, to create a product; or, stated another way, labour acting on the means of production creates a product.[2] When used in the broad sense, the "means of production" includes the "means of distribution" which includes stores, banks, and railroads.[3] The term can be simply and picturesquely described in an agrarian society as the soil and the shovel; in an industrial society, the mines and the factories.

Related terms
Factors of production are defined by Karl Marx in Das Kapital as labour, subjects of labour, and instruments of labour; i.e., the term is equivalent to means of production plus labour. The factors of production are often listed in economic writings derived from the classical school as "land, labour and capital". Marx sometimes used the term "productive forces" equivalently with "factors of production;" in Capital, he uses "factors of production," in his famous Preface to the Critique of Political Economy, he uses "productive forces" (note that this is in the English versions and may depend on the translation.) Production relations (Marx: Produktionsverhltnis) are the relations humans enter into with each other in using the means of production to produce. Examples of such relations are employer/employee, buyer/seller, the technical division of labour in a factory, and property relations. Mode of production (Marx: Produktionsweise) (In political context) - the facilities and resources for producing goods. Study of how people take over other governments using force and violence, not talks and agreements.

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Marxist analysis of ownership of MoP within capitalism

The analysis of people's relationships with the means of production is one element that stands at the basis of Marxism. Marx argued that, while in pre-capitalist societies it is clearly the labourer that uses the means of production to create product; in capitalism, whose nature as a mode of production is embodied in its drive to reproduce and increase capital, it is more realistic to say that the means of production uses the labourer.[4] The idea of factors of production is typically used as an explanation for income as duly paid to owners of each means of production and also to the workers themselves within capitalism. By comparison, the term means of production applies to these means independent of their ownership and their compensation, and regardless of whether the mode of production is capitalist, feudal, slave, communal, or otherwise. To the question of why classes exist in human societies in the first place, Karl Marx offered an historical explanation that it was the cultural practice of Ownership of the Means of Production that gives rise to them. This explanation differs dramatically from other explanations based on "differences in ability" between individuals or on religious or political affiliations giving rise to castes. This explanation is consistent with the bulk of Marxist theory in which Politics and Religion are seen as mere outgrowths (superstructures) of the basic underlying economic reality of a people. To remain consistent with these principles, an explanation as to why classes exist in a society must be derived from causes that are essentially economic in nature, and must appeal to the alleged underlying reality of material production. There are two subtle but important points to the Ownership of the Means of Production. The first being that owning the Means of Production is not the same thing as owning physical property, nor is it equal to owning money. Rather OMP refers to a cultural practice in which a few individuals within a larger corporation (or company) control and decide what is done with the entire profit created by that corporation. The conclusion ultimately reached is that while the "owners" of a corporation only contribute a tiny fraction of the total labor and time in creating profit, they have complete control over that profit and how it is used. The practice of OMP in human societies is then a type of game where some people are labeled owners (Marx used the term, Bourgeoisie) and other people are labeled workers (Marx used the term, Proletariat). The bourgeoisie have complete control over both how the proletariat are paid in wages and complete control over how the profit from production is used, thus giving rise to a class division. Contrarian interpretations of this practice might state that wages paid to workers are subsumed under the regular costs of maintaining business. However, Marx considered it a reification to treat labor as just another "factor" in production; it implied an inversion of means and ends, so that people were effectively used as things. Marx's terms are often employed in economic analysis by socialists who advocate public ownership of some or all of the means of production. The affinity between labor movement causes and this advocacy is very strong - and often shared by social democrats, socialists, communists and greens. Marxists define economic systems in terms of how the means of production are used, and which social class controls them. Thus, in capitalism, the means of production are controlled by the bourgeoisie, (the "capitalists" - the owners of capital). In the pure ideal of upper-stage socialism (see: Pure communism), such as that "communism" was/is supposed to be, the MoP are controlled by the workers production cooperative associations directly. In fact this situation has only been historically realized temporarily such as in the Israeli kibbutz or the early Soviets before the entrenchment of the communist party as a "New Class", or in isolated or preliminary form such as in the final phase of the Second Spanish Republic, or various experimental utopian communities; although in embryonic form.

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References
Institute of Economics of the Academy of Sciences of the U.S.S.R. (1957). Political Economy: A Textbook. London: Lawrence and Wishart.

Footnotes
[1] James M. Henslin (2002). Essentials of Sociology (http:/ / books. google. com/ books?id=852vjh_IwusC& pg=PA159). Taylor & Francis US. p.159. . [2] Michael Evans, Karl Marx, London, England, 1975. Part II, Chap. 2, sect. a; page 63. [3] Flower, B.O. The Arena, Volume 37. The Arena Pub. Co, originally from Princeton University. p. 9 [4] Even under these circumstances, capital is not always in the form of means of production, rather the process or circuit of capital requires capital to change from means of production into finished products into money and back into means of production. This particular circuit is called the circuit of productive capital (see Capital vol2 ch1)

Modigliani Risk-Adjusted Performance

Modigliani Risk-Adjusted Performance or M2 or M2 or Modigliani-Modigliani measure or RAP is a measure of the risk-adjusted returns of some investment portfolio. It measures the returns of the portfolio, adjusted for the deviation of the portfolio (typically referred to as the risk), relative to that of some benchmark (e.g., the market). It is derived from the widely used Sharpe Ratio, but it has the significant advantage of being in units of percent return (as opposed to the Sharpe Ratio -- an abstract, dimensionless ratio of limited utility to most investors), which makes it dramatically more intuitive to interpret.

History
In 1966, William Forsyth Sharpe developed what is now known as the Sharpe Ratio.[1] Sharpe originally called it the "reward-to-variability" ratio before it began being called the Sharpe Ratio by later academics and financial operators. Sharpe slightly refined the idea in 1994.[2] In 1997, Nobel-prize winner Franco Modigliani and his granddaughter, Leah Modigliani, developed the Modigliani Risk-Adjusted Performance measure.[3] They originally called it "RAP" (Risk Adjusted Performance). They also defined a related statistic, "RAPA" (presumedly, Risk Adjusted Performance Alpha), which was defined as RAP minus the risk-free rate (i.e., it only involved the risk-adjusted return above the risk-free rate). Thus, RAPA was effectively the risk-adjusted excess return. The RAP measure has since become more commonly known as "M2"[4] (because it was developed by the two Modiglianis), but also as the "Modigliani-Modigliani measure" and "M2", for the same reason.

Definition
It is defined as follows: Let be the excess return of the portfolio (i.e., above the risk-free rate) for some time period :

Where

is the portfolio return for time period is:

and

is the risk-free rate for time period

Then the Sharpe Ratio

Where returns.

is the average of all excess returns over some period and

is the standard deviation of those excess

And finally:

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Where

is the Sharpe Ratio,

is the standard deviation of the excess returns for some benchmark portfolio is

against which you are comparing the portfolio in question (often, the benchmark portfolio is the market), and the average Market Return for the period in question. For clarity, it may be useful to substitute in for and to rearrange:

The original paper also defined a statistic called "RAPA" (presumedly, Risk Adjusted Performance Alpha). Consistent with the more common terminology of , this would be:

or equivalently,

Thus, the portfolio's excess return is adjusted based on the portfolio's relative riskiness with respect to that of the benchmark portfolio (i.e., ). So if the portfolio's excess return had twice as much risk as that of the benchmark,

it would need to have twice as much excess return in order to have the same level of risk-adjusted return. The Modigliani Risk-Adjusted Performance measure is used to characterize how well a portfolio's return rewards an investor for the amount of risk taken, relative to that of some benchmark portfolio and to the risk-free rate. Thus, an investment that took a great deal more risk than some benchmark portfolio, but only had a small performance advantage, might have lesser risk-adjusted performance than another portfolio that took dramatically less risk relative to the benchmark, but had similar returns. Because it is directly derived from the Sharpe Ratio, any orderings of investments/portfolios using the Modigliani Risk-Adjusted Performance measure are exactly the same as orderings using the Sharpe Ratio.

Advantages over the Sharpe Ratio and Other Dimensionless Ratios

The Sharpe Ratio is awkward to interpret when it is negative. Further, it is difficult to directly compare the Sharpe Ratios of several investments. For example, what does it mean if one investment has a Sharpe Ratio of 0.50 and another has a Sharpe Ratio of -0.50? How much worse was the second portfolio than the first? These downsides apply to all risk-adjusted return measures that are ratios (e.g., Sortino Ratio, Treynor Ratio, Upside-Potential Ratio, etc.). M2 has the enormous advantage that it is in units of percent return, which is instantly interpretable by virtually all investors. Thus, for example, it is easy to recognize the magnitude of the difference between two investment portfolios which have M2 values of 5.2% and of 5.8%. The difference is 0.6 percentage points of risk-adjusted returns per year, with the riskiness adjusted to that of the benchmark portfolio (whatever that might be, but usually the market).

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Extensions
It is not necessary to utilize standard deviation of excess returns as the measure of risk. This approach is extensible to use of other measures of risk (e.g., Beta), just by substituting the other risk measures for and :

The main idea is that the riskiness of one portfolio's returns is being adjusted for comparison to another portfolio's returns. Virtually any benchmark return (e.g., some index or some particular portfolio) could be used for risk adjustment, though usually it is the market return. For example, if you were comparing performance of endowments, it might make sense to compare all such endowments to a benchmark portfolio of 60% stocks and 40% bonds.

References
[1] [2] [3] [4] Sharpe, W. F. (1966). "Mutual Fund Performance". Journal of Business 39 (S1): 119138. doi:10.1086/294846. Sharpe, William F. (1994). "The Sharpe Ratio". Journal of Portfolio Management 1994 (Fall): 4958. Modigliani, Franco (1997). "Risk-Adjusted Performance". Journal of Portfolio Management 1997 (Winter): 4554. Modigliani, Leah (1997). "Yes, You Can Eat Risk-Adjusted Returns". Morgan Stanley U.S. Investment Research 1997 (March 17, 1997): 14.

External links
The Sharpe ratio (http://www.stanford.edu/~wfsharpe/art/sr/sr.htm)

Monetary hegemony
Monetary hegemony is an economic and political phenomenon in which a single state has decisive influence over the functions of the international monetary system. The functions influenced by a monetary hegemon are: accessibility to international credits, foreign exchange markets the management of balance of payments problems in which the hegemon operates under no balance of payments constraint. the direct (and absolute) power to enforce a unit of account in which economic calculations are made in the world economy. The term Monetary Hegemony appeared in Michael Hudson's Super Imperalism, which was first published in 1972. Monetary Hegemony describes not only the asymmetrical relationship that the US dollar has to the global economy, but the strictures of this hegemonic edifice that support it, namely the International Monetary Fund and the World Bank. The US dollar continues to underpin the world economy and is the key currency for medium of international exchange, unit of account (e.g. pricing of oil), and unit of storage (e.g. treasury bills and bonds). The international monetary system has borne witness to two monetary hegemons: Britain and the United States.

British monetary hegemony

Great Britain rose to the status of monetary hegemon in 1871 with widespread adoption of the gold standard. During the gold standard of the late nineteenth century, Britain became the greatest exporter of financial capital. Its capital city, London, also became center of the world gold, money, and financial markets. This was a major reason for states adopting the gold standard. In order for Paris, Berlin, and other financial centers to attract the lucrative financial business from London, it was necessary to emulate Britains gold standard, for it reduced transaction costs,

Monetary hegemony represented creditworthiness, and sound financial policy from government (Schwartz, 1996). The city of London was the leading supplier of both short term and long term credit, which was channeled abroad. Its extensive financial facilities provided cheap credit, which enhanced the strength of the pound through deepening its use for international payments. According to Walter (1991), during the decades of 1870-1913, sterling bills and short-term credits financed perhaps 60 percent of world trade (p. 88). Britains foreign investment cultivated foreign economies for the use of sterling. In 1850, Britains net overseas assets grew from 7 percent of the stock of net national wealth to 14 percent in 1870, and to around 32 percent in 1913 (Edelstein, 1994). The world had never before seen one nation committing so much of its national income and savings to foreign investment. Britains foreign lending practices possessed two technical aspects that gave greater credence to the prominence of sterling as a unit of storage and medium of exchange: first, British loans to foreigners were made in sterling, which allowed the borrowing country to service the debt more conveniently with its sterling reserves, and second, Britains use of written instructions to pay or bill exchanges were drawn in London to finance international trade More importantly, its unrivalled ability to run current account deficits through the issuance of its unquestioned currency and its discount rate endowed Britain with a special privilege. The effects of the discount rate had a controlling influence on Britains balance of payments regardless of what other central banks were doing (Cleveland, 1976, p. 17). When other central banks engaged in a tug of war over international capital flows, the Bank of England could tug the hardest (Eichengreen, 1985, p. 6). In this regard, British monetary hegemony was seldom threatened by crises of convertibility for its gold reserves were insulated by the discount rate and all foreign rates followed the British rate. The prominence of Londons credit drains led Keynes (1930) to write that the sway of London on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra (p. 306-307). Karl Polanyi in his renowned work the Great Transformation states Pax Britannica held its sway sometimes by the ominous poise of heavy ships cannon, but more frequently it prevailed by the timely pull of a thread in the international monetary network (Polanyi, 1944, p. 24). Britains position waned due to inter-state competition, insufficient domestic investment, and World War I. Despite its economic weaknesses, British political sway continued after World War I, which led to the gold-exchange standard created under the Genoa Conference of 1922. This system failed, however, not only due to Britains incapability, but to the growing decentralization of the international monetary system with the rise of New York and Paris as financial centers that resulted in the collapse of the gold exchange standard in 1931. The Gold Exchange standard of the interwar period, as Kindleberger cogently stated, collapsed because "Britain couldn't and America wouldn't." In fact, Kindleberger provides a slightly different variation of monetary hegemony that possesses five functions rather than three defined here.

146

American monetary hegemony

The end of World War II witnessed the recentralization of monetary power in the hands of a United States that had become willing to carry the burden of postwar reconstruction. The United States had emerged from World War II with the ideals of economic interdependence, accountability, and altruism, expressed in the vision of universal multilateralism (above all, multilateralism simply meant nondiscrimination via the elimination or reduction of barriers and obstacles to trade, but more importantly was the maintenance of barriers that were difficult to apply in a nondiscriminatory manner (Ruggie, 1982, p. 213)). In essence, the term multilateralism differs today, compared to what it meant after World War II. US interests in a multilateral, liberal world economy would not only be grounded entirely in idealistic internationalism. There was the cold, calculating necessity of generating a US export surplus. This would obviate government spending, stimulate the domestic economy, substitute for domestic investment, and avert reorganization for certain industries in the economy that were overbuilt during the war effort. For these reasons the idea of an export surplus took on a special importance (Block, 1977, p.35) for the US. The production of an

Monetary hegemony export surplus was therefore intimately connected with establishing a world economy that was free of imperial systems, as well as bilateral payments and trading systems. The US would therefore aim to open its predecessors empire to American trade and to garner British compliance to create its postwar monetary system through financial leverage, namely the Anglo-American Financial Agreement of 1945. This new vision of universal multilateralism was, however, forestalled by the new economic realities of a war-torn Europe, symbolized by Britains financial inability to maintain sterling convertibility. Combined with this new economic reality, was the political-military threat of the Soviet Union. On December 29, 1945, only two days before the expiration of Bretton Woods, Soviet Foreign Minister Vyacheslave Molotov notified George Kennan, that for the amount [offered] the U.S.S.R. would not subscribe to the articles (James et al., 1994, p. 617). Two months later, in February 1946, Kennan sent his famous telegram to Washington, which inquired into why the Soviet Union had not ratified the Bretton Woods Agreement. The telegram would later be regarded as the beginning of US Cold War policy (James et al., 1994). The US thus altered its vision from universal multilateralism to regional multilateralism, which it would promote in Europe through the Marshall Plan, the European Recovery Program (ERP), and the European Payments Union (EPU). With the dissolution of the EPU came the prospect of a real multilateral world as the Bretton Woods monetary system came into effect in 1958. The same year marked the beginning of a permanent US balance of payments deficits. Throughout the 1960s, the Bretton Woods system had permitted the US to finance approximately 70 percent of its cumulative balance of payments deficits via dual processes of gold demonetization and liability financing. The liability financing enabled the US to undertake heavy overseas military expenditures and foreign commitments, and to retain substantial flexibility in domestic economic policy (Gowa, 1983, p. 63). In 1970, the US was at the center of international instability that was a consequence of its rapid monetary growth (James, 1996). The US, however, had learned the fate of its predecessors key currency (e.g. Sterling). Britains experience as monetary hegemon demonstrated to the US the problems faced by a reserve currency when foreign monetary authorities, individuals, and investors chose to convert their reserves. In terms of monetary power defined by reserves, the US share of reserves had fallen from 50 percent in 1950 to 11 percent in August 1971 (Odell, 1982, p. 218). Although, the US had become considerably weak in defending convertibility, its rule-making power was second to none. Rather than being constrained by the system it created, the US moved to the conclusion that it was better to attack the system than to work within it (James, 1996, p. 203). This decision was based on the recognition of the inseparability between foreign policy and monetary policy. The termination of the Bretton Woods system signified the subordination of monetary policy to foreign policy. The closing of the gold window was a fix that was assigned to freeforeign policy from constraints imposed by weaknesses in the financial system (Gowa, 1983,p. 69). In other words, monetary policy conformed to the needs of foreign policy; this conformation is denoted by the gradual demonetization of gold throughout the 1960s beginning with the London Gold Pool of 1961 and culminating in the suspension of convertibility in 1971. It was to be a direct attack by the US upon the very system it espoused for the purpose of inverting the classical rules of international finance: debt had become a means of monetary power, rather than credit. US Monetary Hegemony persists as does the Bretton Woods System, as Dooley, Folkerts-Landau, Garber (2003) contend in their work An Essay on The Revised Bretton Woods System. The rules of the Bretton Woods system have stayed the same but the players have changed. The Post Bretton Woods system or Bretton Woods II has given rise to a new periphery for which the development strategy is export-led growth supported by undervalued exchange rates,capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country (e.g. US). In other words, Asia has replaced Europe vis-a-vis in financing US balance of payments deficits.

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Further reading
Bergsten, C. F. (1975). The dilemmas of the dollar: The economics and politics of United States international monetary policy. London, UK: MacMillian Press Ltd.. Cleveland, H. (1976). "The international monetary system in the interwar period". In Ed. Rowland, B. (1976). Balance of power or hegemony: The interwar monetary system. New York, NY: New York University Press. 1-59.. Cohen, B. (1977). Organizing the worlds money: the political economy of international monetary relations. De Cecco, M. (1974). Money and empire: The international gold standard, 1890-1914. London, UK: Basil Blackwell. Edelstein, M. (1994). Foreign investment and accumulation, 1860-1914. In Eds. Floud, R. & McCloskey, D. (1994). The economic history of Britain since 1700 2nd ED, Vol. 2: 1860-1939. Cambridge, UK: Cambridge University Press.. Fields, D.; M. Vernengo (2011). Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective. Levy Economics Institute Working Paper No. 666. Eichengreen, B. (1985). Conducting the international orchestra: Bank of England leadership under the classical gold standard. Journal of international money and finance, 6, 5-29.. Gilpin, R. (1975). U.S. power and the multinational corporation. London, UK: The Macmillian Press Ltd.. Gilpin, R. (1973). "The politics of transnational economic relations". In Keohane, R. O. & Nye, J. S.. Transnational relations and world politics. Cambridge, Mass., USA: Harvard University Press. pp.4869. Gowa, J. (1983). Closing the gold window: Domestic politics and the end of Bretton Woods. Ithaca, New York, USA: Cornell University Press. Hellenier, E. (1994). States and the reemergence of global finance: From Bretton Woods to the 1990s. Ithaca, New York, USA: Cornell University Press. Hudson, M. (2003). Super imperialism: The origin and fundamentals of US world dominance (2nd ed.). London, UK: Pluto Press. James & James, H. & M. (1994). The origins of the Cold War: Some new documents. The Historical Journal, 37, 3, 615-622.. James, H. (1996). International monetary cooperation since Bretton Woods.. Washingston, D.C.: International Monetary Fund.. Kindleberger, C. P. (1973). The world in depression. London, UK: Allen Lane The Penguin Press. Mundell, R. (2003). "Currency areas, exchange rate systems, and international monetary reform". In Salvatore, D., Dean, J. W., & Willett, T. D.. The dollarization debate. Oxford, UK: Oxford University Press. pp.1745. Mundell, R. (1996). "European Monetary Union and the international monetary system". In Baldassarri, A., Imbriani, C., & Salvatore, D.. The international system between new integration and neo-protectionism (Central issues in Contemporary economic theory and policy series). London, UK: Macmillian. pp.81128. Odell, J. S. (1982). U.S. International Monetary Policy. Princeton, New Jersey: Princeton University Press.. Ruggie, J. G. (1982). International regimes, transactions, and change: embedded liberalism in the postwar economic order. In Ed. Krasner, S. (1983). International regimes. Ithaca, NY: Cornell University Press. 195-231.. Schwartz, A. (1996). The operation of the specie standard: Evidence for core and peripheral countries, 1880-1990.. In Ed, Bordo, M. (1999). The gold standard and related regimes: Collected essay. Cambridge, UK: Cambridge University Press..

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Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.[1]

Overview
In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. The fund manager, also known as the fund sponsor or fund management company, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". The Investment Company Act of 1940 (the 1940 Act) established three types of registered investment companies or RICs in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are open-end funds or unit investment trusts that trade on an exchange, have gained in popularity. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type. Hedge funds are not considered a type of mutual fund. While they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission (though many hedge fund managers now must register as investment advisors). Mutual funds are not taxed on their income as long as they comply with certain requirements established in the Internal Revenue Code. Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies.[2] Mutual funds pass taxable income on to their investors. The type of income they earn is unchanged as it passes through to the shareholders. For example, mutual fund distributions of dividend income are reported as dividend income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors. Outside of the United States, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies, unitized insurance funds, Undertakings for Collective Investment in Transferable Securities, and SICAVs.

Advantages of mutual funds

Mutual funds have advantages compared to direct investing in individual securities.[3] These include: Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison

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Disadvantages of mutual funds

Mutual funds have disadvantages as well, which include[4] : Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

History
The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in 1774.[5] The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange.[6] Mutual funds were introduced into the United States in the 1890s.[7] They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio.[8] The first open-end mutual fund with redeemable shares was established on March 21, 1924. This fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However, closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets.[9] After the stock market crash of 1929, Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the Securities and Exchange Commission (SEC) and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, while the Investment Company Act of 1940 governs their structure. When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By 1970, there were approximately 360 funds with $48 billion in assets.[10] The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011.[11] Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bull market for both stocks and bonds, new product introductions (including tax-exempt bond, sector, international and target date funds) and wider distribution of fund shares.[12] Among the new distribution channels were retirement plans. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs), all of which surged in popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. At the end of 2010, there were 7,581 mutual funds in the United States with combined assets of $11.8 trillion, according to the Investment Company Institute (ICI), a national trade association of investment companies in the United States. The ICI reports that worldwide mutual fund assets were $4.7 trillion on the same date.[13]

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Leading mutual fund complexes

At the end of 2009, the top 10 mutual fund complexes in the United States were:[14] 1. Fidelity Investments 2. Vanguard Group 3. Capital Research & Management (American Funds) 4. JP Morgan Chase & Co. 5. BlackRock Funds 6. PIMCO Funds 7. Franklin Templeton Investments 8. Federated Investors 9. Bank of New York Mellon 10. Goldman Sachs & Co.

Types of mutual funds

There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds, unit investment trusts (UITs); and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange.

Open-end funds
Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Read more: http://www.investopedia.com/terms/o/open-endfund.asp#ixzz1aP0gjdL6

Closed-end funds
Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.

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Unit investment trusts

Unit investment trusts or UITs issue shares to the public only once, when they are created. Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. UITs generally have a limited life span, established at creation.

Exchange-traded funds
A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). ETFs combine characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value. To keep the market price close to net asset value, ETFs issue and redeem large blocks of their shares with institutional investors. Most ETFs are index funds.

Investments and classification

Mutual funds may invest in many kinds of securities. The types of securities that a particular fund may invest in are set forth in the fund's prospectus, which describes the fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks. For example, a "capital appreciation" fund generally looks to earn most of its returns from increases in the prices of the securities it holds, rather than from dividend or interest income. The investment approach describes the criteria that the fund manager uses to select investments for the fund. A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers, who are employed by the fund's manager or sponsor. Mutual funds are classified by their principal investments. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Within these categories, funds may be subclassified by investment objective, investment approach or specific focus. The SEC requires that mutual fund names not be inconsistent with a fund's investments. For example, the "ABC New Jersey Tax-Exempt Bond Fund" would generally have to invest, under normal circumstances, at least 80% of its assets in bonds that are exempt from federal income tax, from the alternative minimum tax and from taxes in the state of New Jersey.[15] Bond, stock and hybrid funds may be classified as either index (passively-managed) funds or actively-managed funds.

Money market funds

Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not government insured, unlike bank savings accounts. Money market funds strive to maintain a $1.00 per share net asset value, meaning that investors earn interest income from the fund but do not experience capital gains or losses. If a fund fails to maintain that $1.00 per share because its securities have declined in value, it is said to "break the buck". Only two money market funds have ever broken the buck: Community Banker's U.S. Government Money Market Fund in 1994 and the Reserve Primary Fund in 2008. At the end of 2010, money market funds accounted for 24% of the assets in all U.S. mutual funds.[16]

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Bond funds
Bond funds invest in fixed income securities. Bond funds can be subclassified according to the specific types of bonds owned (such as high-yield or junk bonds, investment-grade corporate bonds, government bonds or municipal bonds) or by the maturity of the bonds held (short-, intermediate- or long-term). Bond funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S. and foreign securities (global or world funds), or primarily foreign securities (international funds). At the end of 2010, bond funds accounted for 22% of the assets in all U.S. mutual funds.[17]

Stock or equity funds

Stock or equity funds invest in common stocks. Stock funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S. and foreign securities (global or world funds), or primarily foreign securities (international funds). They may focus on a specific industry or sector. A stock fund may be subclassified along two dimensions: (1) market capitalization and (2) investment style (i.e., growth vs. blend/core vs. value). The two dimensions are often displayed in a grid known as a "style box." Market capitalization or market cap is the value of a company's stock and equals the number of shares outstanding times the market price of the stock. Market capitalizations are divided into the following categories: Micro cap Small cap Mid cap Large cap

While the specific definitions of each category vary with market conditions, large cap stocks generally have market capitalizations of at least $10 billion, small cap stocks have market capitalizations below $2 billion, and micro cap stocks have market capitalizations below $300 million. Funds are also classified in these categories based on the market caps of the stocks that it holds. Stock funds are also subclassified according to their investment style: growth, value or blend (or core). Growth funds seek to invest in stocks of fast-growing companies. Value funds seek to invest in stocks that appear cheaply priced. Blend funds are not biased toward either growth or value. At the end of 2010, stock funds accounted for 48% of the assets in all U.S. mutual funds.[18]

Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in other mutual funds that invest in securities. Most fund of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor), although some invest in unaffiliated funds (meaning those managed by other fund sponsors) or in a combination of the two. At the end of 2010, hybrid funds accounted for 6% of the assets in all U.S. mutual funds.[19]

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Index (passively-managed) versus actively-managed

An index fund or passively-managed fund seeks to match the performance of a market index, such as the S&P 500 index, while an actively managed fund seeks to outperform a relevant index through superior security selection.

Mutual fund expenses

Investors in mutual funds pay fees. These fall into four categories: distribution charges (sales loads and 12b-1 fees), the management fee, other fund expenses, shareholder transaction fees and securities transaction fees. Some of these expenses reduce the value of an investor's account; others are paid by the fund and reduce net asset value. Recurring expenses are included in a fund's expense ratio.

Distribution charges
Distribution charges pay for marketing and distribution of the fund's shares to investors. Front-end load or sales charge A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased. It is expressed as a percentage of the total amount invested (including the front-end load), known as the "public offering price." The front-end load often declines as the amount invested increases, through breakpoints. Front-end loads are deducted from an investor's account and reduce the amount invested. Back-end load Some funds have a back-end load, which is paid by the investor when shares are redeemed depending on how long they are held. The back-end loads may decline the longer the investor holds shares. Back-end loads with this structure are called contingent deferred sales charges (or CDSCs). Like front-end loads, back-end loads are deducted from an investor's account. 12b-1 fees A mutual fund may charge an annual fee, known as a 12b-1 fee, for marketing and distribution services. This fee is computed as a percentage of a fund's assets, subject to a maximum of 1% of assets. The 12b-1 fee is included in the expense ratio. No-load funds A no-load fund does not charge a front-end load under any circumstances, does not charge a back-end load under any circumstances and does not charge a 12b-1 fee greater than 0.25% of fund assets. Share classes A single mutual fund may give investors a choice of different combinations of front-end loads, back-end loads and 12b-1 fees, by offering several different types of shares, known as share classes. All of the shares classes invest in the same portfolio of securities, but each has different expenses and, therefore, a different net asset value and different performance results. Some of these share classes may be available only to certain types of investors. Typical share classes for funds sold through brokers or other intermediaries are: Class A shares usually charge a front-end sales load together with a small 12b-1 fee. Class B shares don't have a front-end sales load. Instead they, have a high contingent deferred sales charge, or CDSC that declines gradually over several years, combined with a high 12b-1 fee. Class B shares usually convert automatically to Class A shares after they have been held for a certain period. Class C shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years. Class C shares usually do not convert to another class. They are often called "level load" shares.

Mutual fund Class I are subject to very high minimum investment requirements and are, therefore, known as "institutional" shares. They are no-load shares. Class R are for use in retirement plans such as 401(k) plans. They do not charge loads, but do charge a small 12b-1 fee. No-load funds often have two classes of shares: Class I shares do not charge a 12b-1 fee. Class N shares charge a 12b-1 fee of no more than 0.25% of fund assets. Neither class of shares charges a front-end or back-end load.

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Management fee
The management fee is paid to the fund manager or sponsor who organizes the fund, provides the portfolio management or investment advisory services and normally lends its brand name to the fund. The fund manager may also provide other administrative services. The management fee often has breakpoints, which means that it declines as assets (in either the specific fund or in the fund family as a whole) increase. The management fee is paid by the fund and is included in the expense ratio.

Other fund expenses

A mutual fund pays for other services including: Board of directors' (or board of trustees') fees and expenses Custody fee: paid to a bank for holding the fund's portfolio in safekeeping Fund accounting fee: for computing the net asset value daily Professional services fees: legal and accounting fees Registration fees: when making filings with regulatory agencies Shareholder communications expenses: printing and mailing required documents to shareholders Transfer agent services fee: keeping shareholder records and responding to customer inquiries

These expenses are included in the expense ratio.

Shareholder transaction fees

Shareholders may be required to pay fees for certain transactions. For example, a fund may charge a flat fee for maintaining an individual retirement account for an investor. Some funds charge redemption fees when an investor sells fund shares shortly after buying them (usually defined as within 30, 60 or 90 days of purchase); redemption fees are computed as a percentage of the sale amount. Shareholder transaction fees are not part of the expense ratio.

Securities transaction fees

A mutual fund pays any expenses related to buying or selling the securities in its portfolio. These expenses may include brokerage commissions. Securities transaction fees increase the cost basis of the investments. They do not flow through the income statement and are not included in the expense ratio. The amount of securities transaction fees paid by a fund is normally positively correlated with its trading volume or "turnover".

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Expense ratio
The expense ratio allows investors to compare expenses across funds. The expense ratio equals the 12b-1 fee plus the management fee plus the other fund expenses divided by average net assets. The expense ratio is sometimes referred to as the "total expense ratio" or TER.

Controversy
Critics of the fund industry argue that fund expenses are too high. They believe that the market for mutual funds is not competitive and that there are many hidden fees, so that it is difficult for investors to reduce the fees that they pay. Many researchers have suggested that the most effective way for investors to raise the returns they earn from mutual funds is to reduce the fees that they pay. They suggest that investors look for no-load funds with low expense ratios.

Definitions
Definitions of key terms.

Net asset value or NAV

A fund's net asset value or NAV equals the current market value of a fund's holdings minus the fund's liabilities (sometimes referred to as "net assets"). It is usually expressed as a per-share amount, computed by dividing by the number of fund shares outstanding. Funds must compute their net asset value every day the New York Stock Exchange is open. Valuing the securities held in a fund's portfolio is often the most difficult part of calculating net asset value. The fund's board of directors (or board of trustees) oversees security valuation.

Average annual total return

The SEC requires that mutual funds report the average annual compounded rates of return for 1-year, 5-year and 10-year periods using the following formula:[20] P(1+T)n = ERV Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

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Turnover
Turnover is a measure of the volume of a fund's securities trading. It is expressed as a percentage of net asset value and is normally annualized. Turnover equals the lesser of a fund's purchases or sales during a given period (of no more than a year) divided by average net assets. If the period is less than a year, the turnover figure is annualized.

Further reading
Robert Pozen and Theresa Hamacher. The Fund Industry: How Your Money is Managed. Hoboken, NJ: John Wiley & Sons, 2011.

References
[1] "U.S. Securities and Exchange Commission Information on Mutual Funds" (http:/ / www. sec. gov/ answers/ mutfund. htm). U.S. Securities and Exchange Commission (SEC). . Retrieved 2011-04-06. [2] I.R.C. 851(b)(3) and I.R.C. 852(a) [3] Pozen, Robert and Theresa Hamacher. The Fund Industry: How Your Money is Managed. John Wiley & Sons, 2011, pp. 57. [4] Pozen and Hamacher (2011), pp. 79. [5] Rouwenhorst, K. Geert, "The Origins of Mutual Funds," Yale ICF Working Paper No. 04-48 (December 12, 2004), p. 5. [6] Rouwenhorst, p. 16. [7] Rouwenhorst, p. 17. [8] Fink, Matthew P. The Rise of Mutual Funds. Oxford University Press, 2008, p. 9. [9] Fink, p. 15. [10] Fink (2008), p. 63. [11] "Vanguard 500 Index Fund Investor Shares" (https:/ / personal. vanguard. com/ us/ FundsSnapshot?FundId=0040& FundIntExt=INT). The Vanguard Group. . Retrieved 2011-02-22. [12] Pozen, Robert and Theresa Hamacher (2011), pp. 1115. [13] "2011 Investment Company Fact Book" (http:/ / www. icifactbook. org/ ). Investment Company Institute. . Retrieved 2011-08-02. [14] Pozen, Robert and Theresa Hamacher (2011), p. 405. [15] 17 C.F.R. 270.35d-1 [16] "2011 Investment Company Fact Book" (http:/ / www. icifactbook. org/ ). . [17] "2011 Investment Company Fact Book" (http:/ / www. icifactbook. org/ ). . [18] "2011 Investment Company Fact Book" (http:/ / www. icifactbook. org/ ). . [19] "2011 Investment Company Fact Book" (http:/ / www. icifactbook. org/ ). . [20] "Final Rule: Registration Form Used by Open-End Management Investment Companies: Sample Form and instructions" (http:/ / www. sec. gov/ rules/ final/ 33-7512f. htm#E12E2). U.S. Securities and Exchange Commission (SEC). . Retrieved 2008-09-25.

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Organizational capital
Organizational capital is the ability of an organization to mobilize and sustain the process of change required to execute strategy.[1] Working practices such as Just In Time, accounts payable processes and Total Quality Management contribute to organizational capital. Buildings, equipment and vehicles are considered as capital assets which businesses buy to receive a financial return on the investment. Similarly, if a business implements new working practices or administrative procedures, its aim is to increase efficiency to receive a financial return. Organizational capital can be thought of as any procedures according to which cooperating individuals perform tasks; it can include work techniques, accounting practices, and management procedures.

Adam Smith and the Division of Labor

Perhaps the most famous example is the division of labor as illustrated by the pin factory Adam Smith described in the first chapter of The Wealth of Nations. Smith explained how the process of making a pin was divided into as many as 18 separate steps, including: drawing out the wire, straightening the wire, cutting it, pointing it, grinding the unpointed end in preparation for adding the head, making the head, affixing the head, whitening the pin, and packaging it (putting the pin into the paper). Labor was divided by assigning one or more of these discrete tasks to a single worker. In this manner, Smith assures us, ten men could make some 48,000 pins a day, whereas if each man had wrought separately and independentlythey certainly could not each of them have made twenty.[2] By dividing the tasks among the ten workers, production was increased from, at most, 200 pins a day to 240 times that number. This huge productivity improvement was achieved without any additional physical inputs that is, without increasing the number of workers, the size of the factory, or even the number or quality of the tools. In fact, by picturing the factory just before the tasks were divided, we can see that the number of tools needed would actually have been reduced. Imagine each man working separately, making complete pins by himself. Each man needs the whole array of tools used to draw the wire, cut it, point it, and so on, so that ten complete sets of tools are required. After dividing the tasks among the workers, however, only a single set of tools is necessary. The division of labor is an example of organizational capital; knowledge that, when applied, can increase productivity as much as (and perhaps more than) introducing machinery. In fact, the division of labor was a necessary precursor to the invention of the machines so common in modern factories. One can scarcely imagine, for example, how to design a single machine capable of making a complete pin. Yet one can readily conceive of a machine that can cut wire into predetermined lengths, of another that can put a point on each of the cut segments, and so on. The exercise of separating the pin-making process into distinct tasks made possible the automation of those tasks; organizational capital begets physical capital.

Breaking Bottlenecks
We can raise our pin factorys productivity even more by applying Eliyahu M. Goldratts insights as described in his book, The Goal.[3] Suppose, for example, our factorys profitability is falling. Thousands of feet of wire are going into the plant, but far less of that wire is coming out in the form of finished pins. Were paying for raw materials that are not returning any revenue. A walk through the plant reveals a large pile of cut wires in front of the pin pointer, and another pile of pointed wires in front of the pin header. The task of cutting the wire must be taking less time than the job of pointing it, which, in turn, must take less time than adding a head. To "break" these bottlenecks, we could have the wire cutter and pin header take their breaks and lunch hours at different times, and then have the cutter add heads while the regular header is away. This would speed the task of pin heading and, at the same time, allow the pointer to catch up with the cutter.

Organizational capital Production could also be increased by locating the various work stations in the factory so as to facilitate the flow of the unfinished pins between them, and by arranging the available light sources to their best advantage. Again, in each case, productivity is raised without increasing either the workforce or tangible capital. Unlike tangible capital, organizational capital is not an exclusive resource. That is, while only a single person can use a physical resource such as a lathe or a drill press at one time, any number of people can employ the idea of the division of labor or use Goldratts techniques to identify and break bottlenecks. At first glance, then, organizational capital appears to fall outside the traditional definition of economics: the study of the use of scarce resources that have alternative uses. However, exclusive is not synonymous with scarce. Organizational capital is, in effect, institutionalized knowledge; knowledge is a scarce commodity and institutionalized knowledge scarcer still. Organizational capital may, in some cases, be more difficult to change, or upgrade, than is tangible capital. This is because new techniques can conflict with existing institutions in unexpected ways. For example, both Goldratts insights and just-in-time inventory practices run afoul of accounting standards which treat inventory (including work-in-progress) as an asset. When either of these new paradigms is implemented, one impact is that inventories are sharply reduced. While falling inventories lead to lower costs and higher profits, they show up on a companys books as a drop in assets and, therefore, in the companys net worth. Such a drop may be enough to cause management to have second thoughts about implementing the changes.

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Determining the Value of Organizational Capital

The value of a business's organizational capital is determined by calculating the changes in cash flow resulting from the combination of changes in processes, procedures, and communications within the business.

Research
Academic work on organizational capital began in the United States in the 1970s with the research of Professor John F. Tomer.[4] In 1987, Tomer provided an academic definition of organizational capital in his book Organizational Capital: The Path to Higher Productivity and Well-Being.[5] More recently (2009), Professor Ahmed Bounfour, of the University of Paris, edited the book Organisational Capital: Modelling, Measuring and Contextualising.[6] This book provides an overview of organizational capital as a concept, and offers different perspectives - IT, marketing, business and societal modeling - for managing organizational capital as an intangible asset.

Notes
[1] Kaplan, Robert S.; David Norton (2004). Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston, MA, USA: Harvard Business School Publishing. p.275. [2] Wealth of Nations. An Inquiry into the Nature and Causes of the Wealth of Nations (http:/ / www. gutenberg. org/ etext/ 3300) [3] The Goal. The Goal (http:/ / www. amazon. com/ Goal-Process-Ongoing-Improvement/ dp/ 0884271781/ ref=sr_1_1?ie=UTF8& qid=1298574750& sr=8-1) [4] Tomer, John. (http:/ / home. manhattan. edu/ ~john. tomer/ ) [5] Organizational Capital. The Path to Higher Productivity and Well-Being (http:/ / www. amazon. com/ Organizational-Capital-Higher-Productivity-Well-Being/ dp/ 027592582X/ ref=sr_1_1?ie=UTF8& qid=1298575286& sr=8-1) [6] Organisational Capital. Modelling, Measuring and Contextualising (http:/ / www. routledge. com/ books/ details/ 9780415437714/ )

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Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.[1]

Definition
The term portfolio refers to any collection of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The dollar amount of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio. [2]

Description
There are many types of portfolios including the Market Portfolio and the Zero-Investment Portfolio. A portfolio's asset allocation may be managed utilizing any of the following investment approaches and principles: equally-weighting, capitalization-weighting, price-weighting, Risk parity, Capital asset pricing model, Arbitrage pricing theory, Jensen Index, Treynor Index, Sharpe Diagonal (or Index) model, Value at risk model, Modern Portfolio Theory and others. There are several methods for calculating portfolio returns and performance. One traditional method is using quarterly or monthly money-weighted returns, however the true time-weighted method is a method preferred by many investors.[3] There are also several models for measuring the Performance Attribution of a portfolio's returns when compared to an Index or benchmark.

References
[1] (http:/ / www. investopedia. com/ terms/ p/ portfolio. asp) Investopedia, Portfolio definition and explanation, Retrieved July 2011 [2] (http:/ / www. investopedia. com/ terms/ p/ portfolio. asp) Investopedia, Portfolio definition and explanation, Retrieved July 2011. [3] (http:/ / www. compoundinghappens. com/ mw_tw. htm) Investment Performance Measurement Errors, accessed 2008-06-29.

External links
Risk Minimization in Financial Portfolios (http://www.riskcog.com/portfolio.jsp) Simultaneous Consumption Planning and Portfolio Management (http://papers.ssrn.com/sol3/papers. cfm?abstract_id=927331)

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Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.

Definition
There are several important profit measures in common use. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US or UK usage), thus inflating the number of profit measures. Gross profit equals sales revenue minus cost of goods sold (COGS), thus removing only the part of expenses that can be traced directly to the production or purchase of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) equals sales revenue minus cost of goods sold and all expenses except for interest, amortization, depreciation and taxes. It measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debtholder can ignore taxes. Operating profit or Earnings Before Interest and Taxes (EBIT) equals sales revenue minus cost of goods sold and all expenses except for interest and taxes. This is the surplus generated by operations. It is also known as Operating Profit Before Interest and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT). Earnings Before Tax (EBT) or Net Profit Before Tax equals sales revenue minus cost of goods sold and all expenses except for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes or simply pre-tax Income. Earnings After Tax or Net Profit After Tax equals sales revenue after deducting all expenses, including taxes (unless some distinction about the treatment of extraordinary expenses is made). In the US, the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. Earnings After Tax (or Net Profit After Tax) minus payable dividends becomes Retained Earnings. To accountants, Economic Profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is Earnings After Tax less the Equity Charge, a risk-weighted cost of capital. This is almost identical to the economists' definition of economic profit. There are analysts who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as Economic Value Added (EVA). Economists define also the following types of profit: Abnormal profit (or Supernormal profit) Subnormal profit Monopoly profit (or Super profit) Optimum Profit is a theoretical measure and denotes the "right" level of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.

Profit (accounting) Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, whereby that resource cannot be easily duplicated by other firms.

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Notes References
Pyle, William W., and Kermit D. Larson (1981). Fundamental Accounting Principles. Homewood, Illinois: Richard D. Irwin. ISBN 0256023867

External links
Profit and Loss (http://mises.org/story/2321), Ludwig von Mises (1951) Measuring the Long-Run Profitability of the Firm (http://lipas.uwasa.fi/~ts/smuc/smuc.html), Salmi Virtanen (1997)

Real versus nominal value (economics)

In economics, nominal value refers to a value expressed in money terms (that is, in units of a currency) in a given year or series of years. By contrast, real value adjusts nominal value to remove effects of price changes over time. For example, changes in the nominal value of some commodity bundle over time can happen because of a change in the quantities in the bundle or their associated prices, whereas changes in real values reflect only changes in quantities. Real values over time are a measure purchasing power net of any price changes over time. They are often used for restating nominal income to real income, thus adjusting that part of income changes that merely offset inflation (a general increase in prices). Similarly, for aggregate measures of output, such as gross domestic product (GDP), the nominal amount reflects production quantities and prices in that year, whereas real amounts in different years reflect only changes in quantities. A series of real values over time, such as for real GDP, measures relative quantities over time expressed in prices of one year, called the base year (or more generally the base period). In a related fashion, the real value of a commodity bundle in a given year may be derived from its nominal value by replacing then-current prices of commodities in the bundle with prices that prevailed in the base year. Real values in different years then express values of the bundles as if prices had been constant for all the years, with any differences due to differences in underlying quantities. The nominal value of a commodity bundle in a given year may be expressed in prices and quantities, namely, as a sum of prices times quantities for the different commodities in the bundle. In turn nominal values are related to real values by the following arithmetic definition: nominal value / real value = P x Q / Q = P. Here P serves as a price index, and Q serves as a quantity index of real value. In the equation, P is constructed to equal 1.00 in the base year. Alternatively, P can be constructed to equal 100 in the base year: (nominal value / real value) x 100 = P. note: the base year can be any year but government economists usually uses the same base year for 5 consecutive years. In Canada, a base year was 2002 then 2007 and Canadians will continue using 2007 as a base year up until 2013. The nominal/real value distinction can apply not only to time-series data, as above, but to cross-section data varying by region, for example a cost-of-living index.

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Illustration, notation, and generalization

The simplest case of a bundle of commodities (goods) is one that has only one commodity. In that case, output or consumption may be measured either in terms of money value (nominal) or physical quantity (real). Let i designate that commodity and let: Pi = the unit price of i, say, $5 Qi = the quantity of i, say, 10 units. The nominal value of the bundle would then be price times quantity: nominal value of i = Pi x Qi = $5 x 10 = $50. Given only the nominal value and price, derivation of a real value is immediate: real value of bundle i = Pi x Qi/Pi = Qi = 50/5 = 10. The price "deflates" (divides) the nominal value to derive a real value, the quantity itself. Similarly for a series of years, say five, given only nominal values of the good and prices in each year t, a real value can be derived for each of the five years: real value of bundle i in year t = nominal value of Qit/Pit = Qit. This example generalizes for nominal values relative to real values across different years for which P, a price index comparing the general price level across years, is available. Consider a nominal value (say of an hourly wage rate) in each different year t. To derive a real-value series from a series of nominal values in different years, divide nominal value in each year by Pt, the price index in that year. By definition then: real value in year t = nominal value in year t/Pt.
Numerical example: If for years 1 and 2 (say 20 years apart) the nominal wage and P are respectively $10 and $16 $1.00 and $1.333, real wages are respectively: 10 (= $10/$1.00) and 12 (= $16/$1.333). The real wage so constructed in each different year indexes the amount of commodities in that year that could be purchased relative to other years. Thus, in the example the price level increased by 33 percent, but the real wage rate still increased by 20 percent, permitting a 20 percent increase in the quantity of commodities the nominal wage could purchase.

The generalization to a commodity bundle from the single-good illustration above is to a bundle of quantities of different commodities and different years. This has practical use, because price indexes and the National Income and Product Accounts are constructed from such bundles of commodities and their respective prices. A sum of nominal values for each of the different commodities in the bundle is also called a nominal value. A bundle of n different commodities with corresponding prices and quantities for each year t defines: nominal value of that bundle in year t = P1t x Q1t + . . . + Pnt x Qnt. From the above: The nominal value of the bundle over a series of years and corresponding Pt define: real value of the bundle in year t = Qt = nominal value of the bundle in year t/Pt. Alternatively, multiplying both sides by Pt: nominal value of the bundle in year t = Pt x Qt. So, every nominal value can be dichotomized into a price-level part and a real part. The real part Qt is an index of the quantities in the bundle. Pt = the value of a price index in year t.

Real versus nominal value (economics) An illustration of a nominal-value sum is nominal GDP. An illustration of a real-value sum (or quotient) is real GDP.

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Uses and examples

Nominal valuessuch as nominal wages or (nominal) gross domestic productrefer to amounts that are paid or earned in money terms. In the illustration of the previous section, for a single good with a nominal value, the nominal value of the good was divided by its unit price to calculate its real value, namely the quantity of the good. The same general method applies for calculation of other real values, except that a price index is used instead of the price of a single commodity. Real values (such as real wages or real gross domestic product) can be derived by dividing the relevant nominal value (money wages or nominal GDP) by the appropriate price index. For consumers, a relevant bundle of goods is that used to compute the Consumer Price Index. So, for wage earners as consumers a relevant real wage is the nominal wage (after-tax) divided by the CPI. A relevant divisor of nominal GDP is the GDP price index. [1] Real values represent the purchasing power of nominal values in a given period, including wages, interest, or total production. In particular, price indexes are typically calculated relative to some base year. If for example the base year is 1992, real values are expressed in constant 1992 dollars, referenced as 1992=100, since the published index is usually normalized to equal 100 in the base year. To use the price index as a divisor for converting a nominal value into a real value, as in the previous section, the published index is first divided by the base-year price-index value of 100. In the U.S. National Income and Product Accounts, nominal GDP is called GDP in current dollars (that is, in prices current for each designated year), and real GDP is called GDP in [base-year] dollars (that is, in dollars that can purchase the same quantity of commodities as in the base year). In effect the price index of 100 for the base year is a numraire for price-index values in other years. The terminology of classical economics used by Adam Smith used a unit of labour as the purchasing power unit, so monetary quantities were deflated by wages to indicate the number of hours of labour required to produce or purchase a given quantity.

Interest rates
Real interest rates are measured as the difference between nominal interest rates and the rate of inflation. The expected real interest rate is the nominal interest rate minus the inflation rate expected over the term of the loan. The realized (ex post) real interest rate has the actual inflation rate subtracted from the nominal interest rate. The relationship above is approximate only. The actual relationship is:[2] (1+IRN)=(1+IRR)(1+I), where: IRN is the nominal interest rate, IRR is the real interest rate, and I is the inflation rate

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Notes
[1] http:/ / bea. gov/ bea/ glossary/ glossary. cfm?key_word=GDP_price_index& letter=G#GDP_price_index [2] Benninga, Simon; Oded Sarig (1997). Corporate Finance: A Valuation Approach. The McGraw-Hill Companies. pp.21. ISBN0-07-005099-6.

References
W.E. Diewert, "index numbers," ([1987] 2008)The New Palgrave Dictionary of Economics, 2nd ed. Abstract. (http://www.dictionaryofeconomics.com/article?id=pde2008_I000053&edition=current&q=Index numbers& topicid=&result_number=1) R. O'Donnell (1987). "real and nominal quantities," The New Palgrave: A Dictionary of Economics, v. 4, pp. 97-98 (Adam Smith's early distinction vindicated) Amartya Sen (1979). "The Welfare Basis of Real Income Comparisons: A Survey," Journal of Economic Literature, 17(1), p p. 1 (http://links.jstor.org/sici?sici=0022-0515(197903)17:1<1:TWBORI>2.0.CO;2-6& size=LARGE&origin=JSTOR-enlargePage)-45. D. Usher (1987). "real income," The New Palgrave: A Dictionary of Economics, v. 4, pp. 104-05

External links
DataBasics: Deflating Nominal Values to Real Values (http://www.dallasfed.org/data/basics/nominal.html) from Federal Reserve Bank of Dallas CPI Inflation Calculator (http://data.bls.gov/cgi-bin/cpicalc.pl) from U.S. Bureau of Labor Statistics

Royalties
Royalties (sometimes, running royalties, or private sector taxes) are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation.[1] [2] [3] [4] [5] [6] [7] A royalty interest is the right to collect a stream of future royalty payments, often used in the oil industry and music industry to describe a percentage ownership of future production or revenues from a given leasehold, which may be divested from the original owner of the asset.[8]

Royalty cheque.

A license agreement defines the terms under which a resource or property such as petroleum, minerals, patents, trademarks, and copyrights are licensed by one party to another, either without restriction or subject to a limitation on term, business or geographic territory, type of product, etc. License agreements can be regulated, particularly where a government is the resource owner, or they can be private contracts that follow a general structure. However, certain types of franchise agreements have comparable provisions.

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Non-renewable resource royalties

The owner of petroleum and mineral resources may licence a party to extract those resources while paying a resource rent, or a royalty on the value or the resultant profits. When a government is the owner of the resource the terms of the licence and the royalty rate are typically legislated or regulated. An example from Canada's North is the federal Frontier Lands petroleum royalty regime. The royalty rate is determined as an incremental rate from 15% of gross revenues until costs have been recovered, at which point the royalty rate increases to 30% of net revenues or 5% of gross revenues. In this manner risks and profits are shared between the government of Canada (as resource owner) and the petroleum developer. This attractive royalty rate is intended to encourage oil and gas exploration in the remote Canadian frontier lands where costs and risks are higher than other locations. In many jurisdictions oil and gas royalty interests are considered real property under the NAICS classification code and qualify for a 1031 like-kind exchange.[9]

Patent royalties
A patent[4] [5] gives the owner an exclusive right to prevent others from practicing the patented technology in the country issuing the patent for the term of the patent. The right may be enforced in a lawsuit for monetary damages and/or imprisonment for violation on the patent. In accordance with a patent license, royalties are paid to the patent owner in exchange for the right to practice one or more of the four basic patent rights: to manufacture with, to use, to sell, or to advertise for sale of a patented technology. Patent rights may be divided and licensed out in various ways, on an exclusive or nonexclusive basis. The license may be subject to limitations as to time or territory. A license may encompass an entire technology or it may involve a mere component or improvement on a technology. In the United States, "reasonable" royalties may be imposed, both after-the-fact and prospectively, by a court as a remedy for infringement.

Patent royalty rates

Patent royalty rates are influenced by the importance of the patent and its value to the products. Some realms of business have conventions regarding royalty rates and other license terms. Royalties are often computed as a percentage of the value of the finished product made by using the patent. To illustrate, the following are prevalent rates for gross sales within the United States pharmaceutical industry:[10] a pending patent on a strong business plan, royalties of the order of 1% issued patent, 1%+ to 2% the pharmaceutical with pre-clinical testing, 23% with clinical trials, 34% proven drug with US FDA approval, 57% drug with market share, 810%

Royalty rates may also be affected by whether a patent is strong (i.e. broadly written, seemingly valid) or weak; whether it is a fundamental patent or merely a slight improvement on a known technology; whether substitute technologies are available or an ability to work around the patent; the extent of the contribution of the patented technology to the value of the final product and whether there are other patents that must also be licensed (in which case there is a practical limit on how much royalty can be paid to license each). With regards to the actual rates of royalty payments in the industry, the Licensing Economics Review,[11] [12] reported in 2002 that in a review of 458 license agreements, over a 16-year period, it found that an average royalty rate of 7.0%. However, the range extended from 0% to 50%. All of these agreements may not have been at "arms length". In the Arab countries, it may be found, that a royalty as a percentage of sales may be difficult to transact; a flat fee may be preferred as percentages may be interpreted as percentage of profit.[13]

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Know-how royalties
In addition to licensing the applicable patents, a company may need to learn how to manufacture a product. This knowledge, standing alone or together with a patent license, may be obtained through a know-how license. Know-how is trade secret information in combination with data, techniques, or human and intellectual expertise, that helps a company exploit a licensed technology. Know-how may help a company achieve better operational efficiency, manufacturing productivity, or product/system quality. Know-how royalties may be stated as distinct from patent royalties since their periods of validity vary. The rates vary widely.

Trademark royalties
Trademarks are words, logos, slogans, sounds, or other distinctive expressions that distinguish the source, origin, or sponsorship of a good or service (in which they are generally known as service marks). Trademarks offer the public a means of identifying and assuring themselves of the quality of the good or service. They may bring consumers a sense of security, integrity, belonging, and a variety of intangible appeals. The value that inures to a trademark in terms of public recognition and acceptance is known as goodwill. A trademark right is an exclusive right to sell or market under that mark within a geographic territory. The rights may be licensed to allow a company other than the owner to sell goods or services under the mark. A company may seek to license a trademark it did not create in order to achieve instant name recognition rather than accepting the cost and risk of entering the market under its own brand that the public does not necessarily know or accept. Licensing a trademark allows the company to take advantage of already-established goodwill and brand identification. Like patent royalties, trademark royalties may be assessed and divided in a variety of different ways, and are expressed as a percentage of sales volume or income, or a fixed fee per unit sold. When negotiating rates, one way companies value a trademark is to assess the additional profit they will make from increased sales and higher prices (sometimes known as the "relief from royalty") method. Trademark rights and royalties are often tied up in a variety of other arrangements. Trademarks are often applied to an entire brand of products and not just a single one. Because trademark law has as a public interest goal the protection of a consumer, in terms of getting what they are paying for, trademark licenses are only effective if the company owning the trademark also obtains some assurance in return that the goods will meet its quality standards. When the rights of trademark are licensed along with a know-how, supplies, pooled advertising, etc., the result is often a franchise relationship. Franchise relationships may not specifically assign royalty payments to the trademark license, but may involve monthly fees and percentages of sales, among other payments.

Trademark royalty rates

In a long-running dispute in the United States involving the valuation of the DHL trademark of DHL Corporation,[14] it was reported that experts employed by the IRS surveyed a wide range of businesses and found a broad range of royalties for trademark use from a low of 0.7% to a high of 15%.

Franchises
While a payment to employ a trademark licence is a royalty, it is accompanied by a "guided usage manual", the use of which may be audited from time to time. However, this becomes a supervisory task when the mark is used in a franchise agreement for the sale of goods or services carrying the reputation of the mark. For a franchise, it is said, a fee is paid, even though it comprises a royalty element. To be a franchise, the agreement must be a composite of three items: the right to use a trademark to offer, sell or distribute goods or services (the trademark element) payment of a required royalty or fee (the fee element)

Royalties significant assistance or control with respect to the franchisees business (the supervisory element) One of the above three items must not apply for the franchise agreement to be considered a trademark agreement (and its laws and conventions). In a franchise, for which there is no convention, laws apply concerning training, brand support, operating systems/support and technical support in a written format ("Disclosure").[15]

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Copyright
Copyright law gives the owner the right to prevent others from copying, creating derivative works, or publicly performing their works. Copyrights, like patent rights, can be divided in many different ways, by the right implicated, by specific geographic or market territories, or by more specific criteria. Each may be the subject of a separate license and royalty arrangements. Copyright royalties are often very specific to the nature of work and field of endeavor. With respect to music, royalties for performance rights in the United States are set by the Library of Congress' Copyright Royalty Board. Mechanical rights to recordings of a performance are usually managed by one of several performance rights organizations. Payments from these organizations to performing artists are known as residuals. Royalty free music provides more direct compensation to the artists. In 1999, recording artists formed the Recording Artists' Coalition to repeal supposedly "technical revisions" to American copyright statutes which would have classified all "sound recordings" as "works for hire", effectively assigning artists' copyrights to record labels.[16] [17] Book authors may sell their copyright to the publisher. Alternatively, they might receive as a royalty a certain amount per book sold. It is common in the UK for example, for authors to receive a 10% royalty on book sales. Some photographers and musicians may choose to publish their works for a one-time payment. This is known as a royalty-free license.

Book publishing royalties

Except in the rarity of cases where book writers can demand high advances and royalties, an author's royalty rate is dictated by their publisher. All book-publishing royalties are paid by the publisher. For the predominant case, the publishers advance an amount (part of the royalty) which can constitute the bulk of the authors total income plus whatever little flows from the "running royalty" stream. Some costs may be attributed to the advance paid, which depletes further advances to be paid or from the running royalty paid. The author and the publisher can independently draw up the agreement that binds them or alongside an agent representing the author. There are many risks for the author definition of cover price, the retail price, "net price", the discounts on the sale, the bulk sales on the POD (publish on demand) platform, the term of the agreement, audit of the publishers accounts in case of impropriety, etc. which an agent can provide. The following illustrates the income to an author on the basis chosen for royalty, particularly in POD which minimizes losses from inventorying and is based on computer technologies.

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Retail Basis Cover Price Discount to Booksellers Wholesale Price, $ 15.00 50% 7.50

Net Basis 15.00 50% 7.50 3.50 4.00 20% 0.20x4 0.80

Printing Cost,$ (200 pp Book) 3.50 Net Income,$ Royalty Rate Royalty Calcn. Royalty,$ 4.00 20% 0.20x15 3.00

|+ Book-publishing Royalties - "Net" and "Retail" Compared Hardback royalties on the published price of trade books usually range from 10% to 12.5%, with 15% for more important authors. On paperback it is usually 7.5% to 10%, going up to 12.5% only in exceptional cases. All the royalties displayed below are on the "cover price". Paying 15% to the author can mean that the other 85% of the cost pays for editing and proof-reading, printing and binding, overheads, and the profits (if any) to the publisher. The publishing company pays no royalty on bulk purchases of books since the buying price may be a third of the cover price sold on an singles basis. In the US there is no "maximum retail price" for books (whereas there is in the UK) which can serve as a calculation basis.

Music royalties
Unlike other forms of intellectual property, music royalties have a strong linkage to individuals composers (score), songwriters (lyrics) and writers of musical plays in that they can own the exclusive copyright to created music and can license it for performance independent of corporates. Recording companies and the performing artists that create a "sound recording" of the music enjoy a separate set of copyrights and royalties from the sale of recordings and from their digital transmission (depending on national laws). With the advent of pop music and major innovations in technology in the communication and presentations of media, the subject of music royalties has become a complex field with considerable change in the making. A musical composition obtains protection in copyright law immediate to its reduction to tangible form a score on paper or a taping; but it is not protected from infringed use unless registered with the copyright authority; for instance, the Copyright Office in the United States, administered by the Library of Congress. No person or entity, other than the copyright owner, can use or employ the music for gain without obtaining a license from the composer/songwriter. Inherently, as copyright, it confers on its owner, a distinctive "bundle" of five exclusive rights: (a) to make copies of the songs through print or recordings (b) to distribute them to the public for profit (c) to the "public performance right"; live or through a recording (d) to create a derivative work to include elements of the original music; and (e) to "display" it (not very relevant in context). Where the score and the lyric of a composition are contributions of different persons, each of them is an equal owner of such rights. These exclusivities have led to the evolution of distinct commercial terminology used in the music industry.

Royalties They take four forms: (1) royalties from "print rights" (2) mechanical royalties from the recording of composed music on CDs and tape (3) performance royalties from the performance of the compositions/songs on stage or television through artists and bands, and (4) synch (for synchronization) royalties from using or adapting the musical score in the movies, television advertisements, etc. and With the advent of the internet, an additional set of royalties has come into play: the digital rights from simulcasting, webcasting, streaming, downloading, and online "on-demand service". In the following the terms "composer" and "songwriter" (either lyric or score) are synonymous.

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Print rights in music

Brief history While the focus here is on royalty rates pertaining to music marketed in the print form or "sheet music", its discussion is a prelude to the much more important and larger sources of royalty income today from music sold in media such as CDs, television and the internet. Sheet music is the first form of music to which royalties were applied, which was then gradually extended to other formats. Any performance of music by singers or bands requires that it be first reduced to its written sheet form from which the "song" (score) and its lyric are read. Otherwise, the authenticity of its origin, essential for copyright claims will be lost as has been the case with folk songs and American "westerns" propagated by the aural tradition. The ability to print music arises from a series of technological developments in print and art histories over a long span of time (from the 11th to the 18th century) of which two will be highlighted. The first, and commercially successful, invention was the development of the "movable type" printing press, the Gutenberg press in the 15th century. It was used to print the well-known Gutenberg bible and later the printing system enabled printed music. Printed music, till then, tended to be one line chants. The difficulty in using movable type for music is that all the elements must align the note head must be properly aligned with the staff, lest it have an unintended meaning. Musical notation was well developed by then, originating around 1025. Guido d'Arezzo developed a system of pitch notation using lines and spaces. Until this time, only two lines had been used. Guido expanded this system to four lines, and initiated the idea of ledger lines by adding lines above or below these lines as needed. He used square notes called neumes. This system eliminated any uncertainty of pitch which existed at that time. Guido also developed a system of clefs, which became the basis for our clef system: bass clef, treble clef, and so on. (Co-existing civilizations used other forms of notation). In Europe, the major consumers of printed music in the 17th and 18th centuries were the royal courts for both solemn and festive occasions. Music was also employed for entertainment, both by the courts and the nobility. Composers made their livings from commissioned work, and worked as conductors, performers and tutors of music or through appointments to the courts. To a certain extent, music publishers also paid composers for rights to print music, but this was not royalty as it is generally understood today. The European Church was also a large user of music, both religious and secular. However, performances were largely based on hand-written music or aural training.

Royalties American contribution: The Origins of Music Copyright and Royalties Till the mid-18th century American popular music largely consisted of songs from the British Isles, whose lyric and score were sometimes available in engraved prints. Mass production of music was not possible till the movable type was introduced. Music with this type was first printed in the US in 1750.[18] At the beginning the type consisted of the notehead, stem and staff which were combined into a single font. Later the fonts were made up of the notehead, stems and flags attached to the staff line. Prints till that time existed only on engraved plates. The first federal law on copyright was enacted in the US Copyright Act of 1790 which made it possible to give protection to original scores and lyrics. America's most prominent contribution is jazz and all the music styles which preceded and co-exist with it its variations on church music, African-American work songs, cornfield hollers, wind bands in funeral procession, blues, rag, etc. and of innovations in church music, rhythmic variations, stamping, tapping of feet, strutting, shuffling, wailing, laments and spiritual ecstasy. Until its recent sophistication, jazz was not amenable to written form, and thus not copyrightable, due to its improvisational element and the fact that many of the creators of this form could not read or write music.[19] It was its precursor, minstrelsy which came to be written and royalties were paid for the use of popular music. Blackface minstrelsy, in which white men parodied black music of the day with blackened faces was the first distinctly theatrical form. In the 1830s and 1840s, it was at the core of the rise of an American music industry. For several decades it provided the means through which white America saw black America. The blackfaces were not products of the American South, but first prevailed in the midwest and the north, starting in low-level white establishments, and later moving to upscale theaters. White, working-class northerners could identify with the characters portrayed in early performances with images of "white slavery" and "wage slavery".[20] In 1845, the blackfaces purged their shows of low humor. Christy's Minstrels, formed by C.F. Christy, among the major minstrels of that time, was to epitomize the songs of its most renknowned composer, Stephen Foster. Stephen Foster was the pre-eminent songwriter in the United States of that time. His songs, such as "Oh! Susanna", "Camptown Races", "My Old Kentucky Home", "Beautiful Dreamer" and "Swanee River") remain popular 150 years after their composition and have worldwide appreciation.[21] Foster had little formal music training. While he was able to publish several songs before he was twenty, his sophistication came from Henry Kleber and Dan Rice. Kleber was a classically trained German immigrant, and Rice was a popular blackface performer who befriended Foster. But it was his joining the Christy Minstrels which made him and his songs, North American favorites. W.C. Peters was the first major publisher of Fosters works, but Foster saw very little of the profits. "Oh, Susanna" was an overnight success and a Goldrush favorite but Foster received just $100 from his publisher for it, in part due to his lack of interest in money and the free gifts of music he gave to him. Foster's first love lay in writing music and its success. Foster did later contract with Christy, with $15 each for "Old Folks at Home" and "Farewell my Lilly Dear". "Oh, Susanna" also led Foster to two New York publishers, Firth, Pond and Co. and F.D. Benson who contracted with him to pay royalty at 2 cents for every printed copy sold by them.[22] Minstrelsy slowly gave way to songs generated by the American Civil War, followed by the rise of Tin Pan Alley and Parlour music,[23] both of which led to an explosion of sheet music, greatly aided by the emergence of the player piano. While the player piano was to make inroads deep into the 20th century, more and more music was reproduced through radio and the phonograph, leading to new forms of royalty payments, but leading to the decline of sheet music. American innovations in church music also provided royalties to its creators. While Stephen Foster is often credited as the originator of print music in America, William Billings is the real father of American music. In 1782, of the 264 music compositions in print, 226 were his church-related compositions. Similarly, Billings was the composer of a quarter of the 200 anthems published till 1810. He, or his family, saw no royalties although the Copyright Act of

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Royalties 1790 was in place by then. Church music plays a significant part in American print royalties. When the Lutheran Church split from the Catholic Church in the 16th century, more than religion changed. Martin Luther wanted his entire congregation to take part in the music of his services, not just the choir. This new chorale style finds its way in both present church music and jazz.

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Print royalties (music)

The royalty rate for printing a book, or its download,(a novel, lyrics or music) for sale varies from 820% of the suggested retail sales value, typically 1214%, for a new writer. The payment is made by the publisher and corresponds to the agreement (license) between the writer and the publisher as with other music royalties. The agreement is typically non-exclusive to the publisher and the term may vary from 35 years. Established writers favor certain publishers and usually receive higher royalties. All of the royalty does not accrue to the writer. It is shared with the publisher on of book sales income on a 50:50 basis. Publishing encompasses the whole area of administering, exploiting and promotion of the musical work, not just the print rights; in forms as piano and vocal arrangements, as folios, movies and obtaining foreign publication, etc. If a book involved is a play, it might be dramatized. The right to dramatize is a separate right known as a grand right. This income is shared by the many personalities and organizations who come together to offer the play: the playwright, composer of the music played, producer, director of the play and so forth. There is no convention to the royalties paid for grand rights and it is freely negotiated between the publisher and the mentioned participants. If the writers work is only part of a publication, then the royalty paid is pro-rata, a facet which is more often met in a book of lyrics or in a book of hymns and sometimes in an anthology. Church music that is, music that is based on written work is important particularly in the Americas and in some other countries of Europe. Examples are hymns, anthems and songbooks. Unlike novels and plays, hymns are sung with regularity. Very often, the hymns and songs are sung from lyrics in a book, or more common nowadays, from the work projected on computer screen. When the lyrics from a song are so projected, the same copyright laws apply as if sheet music or the hymn books have been purchased. A lyric reprint license is required by Federal copyright law to compensate the songwriter for using their work. By license the author exempts the songs sung in worship; however, songs sung (even in worship) from reproductions as photocopies or from projections are subject to license. In the US, the Christian Copyright Licensing Incorporated is the collection agency for royalties but song or hymn writers have to be registered with them and the songs identified.[24]

Foreign publishing
Viewed from a US perspective, foreign publishing involves two basic types of publishing sub-publishing and co-publishing occurrences in one or more territories outside that of basic origin. Sub-publishing, itself, is one of two forms: sub-publishers who merely license out the original work or those which make and sell the products which are the subject of the license, such as print books and records (with local artists performing the work). Sub-publishers who produce and market a product retain 1015% of the marked retail price and remit the balance to the main publisher with whom they have the copyright license. Those sub-publishers who merely license out the work earn between 1525%.[25] Co-publishing takes place when there is more than one publisher and it arises usually when there is more than one writer on a work. Each writer then has his or her own publishing company who together then become Co-publishers.

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Mechanical royalties
The term "mechanical" and mechanical license has its origins in the "piano rolls" on which music was recorded in the early part of the 20th Century. Although its concept is now primarily oriented to royalty income from sale of compact discs (CDs), its scope is wider and covers any copyrighted audio composition that is rendered mechanically; that is, without human performers: tape recordings music videos ringtones MIDI files downloaded tracks DVDs, VHS, UMDs computer games musical toys etc.

The United States treatment of mechanical royalties is in sharp contrast to international practice. In the United States, while the right to use copyrighted music for making records for public distribution (for private use) is an exclusive right of the composer, the Copyright Act provides that once the music is so recorded, anyone else can record the composition/song without a negotiated license but on the payment of the statutory compulsory royalty. Thus, its use by different artists could lead to several separately-owned copyrighted "sound recordings". The following is a partial segment of the compulsory rates as they have applied from 1998 to 2007 in the United States.[26] The royalty rates in the table comprise of two elements: (i) a minimum rate applies for a duration equivalent to 5 minutes, or less, of a musical composition/song and (ii) a per-minute rate if the composition exceeds it, whichever is greater.

Compulsory Mechanical Royalty Rates - United States

Period Royalty Rate

01-01-1998 12-31-1999 7.10 cents or 1.35 cents/min 01-01-2000 12-31-2001 7.55 cents or 1.43 cents/min 01-01-2002 12-31-2003 8.00 cents or 1.55 cents/min 01-01-2004 12-31-2005 8.50 cents or 1.65 cents/min 01-01-2006 12-31-2007 9.10 cents or 1.75 cents/min

In the predominant case, the composer assigns the song copyright to a publishing company under a "publishing agreement" which makes the publisher exclusive owner of the composition. The publisher's role is to promote the music by extending the written music to recordings of vocal, instrumental and orchestral arrangements and to administer the collection of royalties (which, as will shortly be seen, is in reality done by specialized companies). The publisher also licenses 'subpublishers' domestically and in other countries to similarly promote the music and administer the collection of royalties. In a fair publishing agreement, every 100 units of currency that flows to the publisher gets divided as follows: 50 units go to the songwriter and 50 units to the publisher minus operating and administrative fees and applicable taxes. However, the music writer obtains a further 25 units from the publisher's share, if the music writer retains a portion of the music publishing rights (as a co-publisher). In effect, the co-publishing agreement is a 50/50 share of royalties in favor of the songwriter if administrative costs of publishing are disregarded. This is near international practice. When a company (recording label) records the composed music, say, on a CD master, it obtains a distinctly separate copyright to the sound recording, with all the exclusivities that flow to such copyright. The main obligation of the recording label to the songwriter and her publisher is to pay the contracted royalties on the license received.

Royalties While the compulsory rates remain unaffected, recording companies, in the U.S., will, typically, negotiate to pay not more than 75% of the compulsory rate where the songwriter is also the recording artist[27] and will further (in the U.S.) extend that to a maximum of 10 songs, even though the marketed recording may carry more than that number. This 'reduced rate' results from the incorporation of a "controlled composition" clause in the licensing contract[28] since the composer as recording artist is seen to control the content of the recording. Mechanical royalties for music produced outside of the United States are negotiated there being no compulsory licensing and royalty payments to the composer and her publisher for recordings are based on the wholesale, retail, or "suggested retail value" of the marketed CDs. Recording artists earn royalties only from the sale of CDs and tapes and, as will be seen later, from sales arising from digital rights. Where the song-writer is also the recording artist, royalties from CD sales add to those from the recording contract. In the U.S., recording artists earn royalties amounting to 10%25% (of the suggested retail price of the recording[29] depending on their popularity but such is before deductions for "packaging", "breakage", "promotion sales" and holdback for "returns", which act to significantly reduce net royalty incomes. In the U.S., the Harry Fox Agency, HFA, is the predominant licensor, collector and distributor for mechanical royalties, although there are several small competing organizations. For its operations, it charges about 6% as commission. HFA, like its counterparts in other countries, is a state-approved quasi-monopoly and is expected to act in the interests of the composers/song-writers and thus obtains the right to audit record company sales. In the UK the Mechanical-Copyright Protection Society, MCPS (now in alliance with PRS), acts to collect (and distribute) royalties to composers, songwriters and publishers for CDs and for digital formats. It is a not-for-profit organization which funds its work through a commissions on aggregate revenues. The royalty rate for licensing tracks is 6.5% of retail price (or 8.5% of the published wholesale price). In Europe, the major licensing and mechanical royalty collection societies are: SACEM in France[30] GEMA in Germany[31] SFA in Italy[32] SACEM acts collectively for "francophone" countries in Africa. The UK society also has strong links with English-speaking African countries. Mechanical societies for other countries can be found at the main national collection societies.[33] The mechanical royalty rate paid to the publisher in Europe is about 6.5% on the PPD (published price to dealers).[34] Record companies are responsible for paying royalties to those artists who have performed for a recording based on the sale of CDs by retailers.

174

Performance royalties
"Performance" in the music industry can include any of the following: a performance of a song or composition live, recorded or broadcast a live performance by any musician a performance by any musician through a recording on physical media performance through the playing of recorded music music performed through the web (digital transmissions)

It is useful to treat these royalties under two classifications: (a) those associated with conventional forms of music distribution which have prevailed for most part of the 20th Century, and

Royalties (b) those from emerging 'digital rights' associated with newer forms of communication, entertainment and media technologies (from 'ring tones' to 'downloads' to 'live internet streaming'. Conventional forms of royalty payment In the conventional context, royalties are paid to composers and publishers and record labels for public performances of their music on vehicles such as the jukebox, stage, radio or TV. Users of music need to obtain a "performing rights license" from music societies as will be explained shortly to use the music. Performing rights extend both to live and recorded music played in such diverse areas as cafs, skating rinks, etc. Licensing is generally done by music societies called "Performing Rights Organizations" (PROs), some of which are government-approved or government-owned, to which the composer, the publisher, performer (in some cases) or the record label have subscribed. The diagram on the right titled "The Performance Rights Complex"[35] shows the general sequences by which a song or a composition gets to be titled a "performance" and which brings royalties to song-writers/publishers, performing artists and record labels. How, and to whom, royalties are paid is different in the United States from what it is, for example, in the UK. Most countries have "practices" more in common with the UK than the US. In the United Kingdom there are three principal organizations: (i) PPL (for Phonographic Performance Ltd) (ii) PRS (for Performing Rights Society), and (iii) MCPS (for Mechanical Copyright Protection Society) who license music (to music-users) and act as royalty collection and distribution agencies for their members. PPL which is claimed to be the largest in the world[36] issues performance licenses to all UK radio, TV and broadcast stations, as also to such diverse users as clubs and bars who employ sound recordings (tapes, CDs), in entertaining the public and collects and distributes royalties to the "record label" for the sound recording and to "featured UK performers" in the recording. Performers do not earn from sound recordings on video and film. PRS, which is now in alliance with MCPS,[37] collects royalties from music-users and distributes them directly to "song-writers" and "publishers" whose works are performed live, on radio or on TV on a 50:50 basis. MCPS licenses music for broadcast in the range 3 to 5.25% of net advertising revenues.[38] MCPS also collects and disburses mechanical royalties to writers and publishers in a manner similar to PRS. Although allied, they serve, for now, as separate organizations for membership.

175

Royalties

176

The next diagram shows the sequences in the licensing of performances and the royalty collection and distribution process in the UK.[35] Every song or recording has a unique identity by which they are licensed and tracked. Details of songs or recordings are notified to the PROs directly, or through Catco, an electronic tracking system. It needs to be clarified that while blanket licenses are commonly issued to music-users, the latter are responsible for "usage returns" the actual frequency of performances under the license which then becomes the basis for the PRO to apportion royalties to writers, publishers and record labels. ("DIY indies" are "do-it-yourself" independent song-writers and, often, the performers as well who record and publish under their own labels). In the UK, music is licensed (and royalties paid on it) at the track level. There is also a separate organization in the UK called VPL, which is the collecting society set up by the record industry in 1984 to grant licenses to users of music videos, e.g. broadcasters, program-makers, video jukebox system suppliers.[39] The licensing income collected from users is paid out to the society's members after administrative costs are deducted. There are different models for royalty collection in the European countries. In some of them, mechanical and performing rights are administered jointly. SACEM (France), SABAM (Belgium), GEMA (Germany) and JASRAC (Japan) work that way. In the United States, in contrast, the ASCAP, BMI (Broadcast Music, Inc) and SESAC (Society of European Stage Authors & Composers) are the three principal Performance Rights Organizations (PROs), although smaller societies exist. The royalty that is paid to the composer and publisher is determined by the method of assessment used by the PRO to gage the utilization of the music, there being no external metrics as in mechanical royalties or the reporting system used in the UK. Very basically, a PRO aggregates the royalties that are due to all of the composers/songwriters "who are its members" and each composer and publisher is paid royalties based on the assessed frequency of the musics performance, post deductions of charges (which are many). The PROs are audited agencies. They "directly" pay the songwriter and the publisher their respective shares. (If part of the publisher's share is retained by the songwriter, the publisher pays the songwriter that part of the publisher's share). Typically, the PRO negotiates blanket licenses with radio stations, television networks and other "music users", each of whom receives the right to perform any of the music in the repertoire of the PRO for a set sum of money. PROs use different types of surveys to determine the frequency of usage of a composition/song. ASCAP uses random sampling, SESAC utilizes cue sheets for TV performances and digital pattern recognition for radio performances while BMI employs more scientific methods. In the United States only the composer and the publisher are paid performance royalties and not performing artists (digital rights being a different matter). Likewise, the record label, whose music is used in a performance, is not entitled to royalties in the US on the premise that performances lead sales of records. Where a performance has co-writers along with the composer/songwriter as in a musical play they will share the royalty.

Royalties

177

Royalties in digital distribution

The term "digital music" typically applies to Internet and wireless (mobile) technologies. Digital music files can be identified by serial numbers embedded in the data ('watermarking') or natural patterns in the data ("fingerprinting"). Digital music have begun to give music a different direction by their capacities to internationally distribute the music for instant hearing or storage by private and public persons. Digital music is generally expected to become the predominant form by which music is 'used' in the longer term. Nonetheless, compact discs will continue to be the major form of musical reach and storage for the present. For example, revenues from the sales of CDs in the US in 2007 far outweighed that from digital downloads, representing some 85% of music sales, or 81 million units per quarter.[40] Also, as the following data illustrates, the amount of music (tracks) available on CDs (stored music) is extremely large compared to what is available in digital format:[41] PPLs CatCo holds details of over 7 million recordings There are 15 million published works with ISWC codes (and many more without) The Gracenote database[42] (CDDB) holds details of 51 million tracks Around half a million new tracks are formally released every year.

In contrast to: RealNetworks license 60,000 albums for home entertainment services. The USA digital jukebox suppliers license about 200,000 tracks. There are over 2 million on XM Satellite Radio (Sirius has over 500,000). UK Inspired Broadcast Network jukebox THE music offers 2 million tracks. RedDotNets kiosk system has over 2.5 million tracks online. There are about 6 million retail tracks on iTunes Music Store. Kazaa[43] has about 1 million tracks. Last.fm[44] has a music-discovery database of 60 million titles.

Nonetheless, there has been a decline in CD sales since 2000 in the US (perhaps less so in the EU). At the same time, digital tracks legally downloaded from the internet continue to be a growing force, track downloads totalling 417.3 million units in the first half of 2007 a 48.5% increase over the corresponding period last year according to Nielsen SoundScan.[45] Apple Inc's sale of over 100 million iPods and the strong presence of iTunes and eMusic (a subscription service) in the US, and now in EU and in other 18 countries, testify to the strong emergence of digital music. This is further emphasized by the large presence of internet broadcasts of live and internet-only radio stations ("streamed music"). They represent the "buy" and "listen" choices. US regulatory provisions Regulatory provisions in the US, EU and elsewhere is in a state of flux, continuously being challenged by developments in technology; thus almost any regulation stated here exists in a tentative format. The US Copyright Act of 1976 identified musical works and sound recordings eligible for copyright protection. The term musical work refers to the notes and lyrics of a song or a piece of music, while a sound recording results from its fixation on physical media. Copyright owners of musical works are granted exclusive rights to license over-the-air radio and TV broadcasts, entitling them royalties, which are, as said earlier, collected and distributed by the PROs. Under the Act, record companies and recording artists are, presently, not entitled to royalties from radio and TV broadcasts of their music, except in the case of digital services and webcasts where copyright owners and performers obtain royalties (see later). This is in contrast to international standards where performers also obtain royalties from over-the-air and digital broadcasting. In 1995, the Congress introduced the Digital Performance Right in Sound Recordings Act (DPRA), which became effective Feb 1, 1996. This Act granted owners of sound recordings the exclusive license to perform the copyrighted work publicly by means of digital audio transmissions but it exempted non-subscription services (and some other services). Where the rights owner could not voluntarily reach agreement with the broadcaster, it could avail of

Royalties compulsory licensing provisions. Under the Act, the compulsory royalty (the royalty schedule follows) was to be shared in the manner: 50% to the record companies, 45% to featured artists, 2 % to non-featured musicians through American Federation of Musicians (AFM) in the United States and Canada[46] and 2% for non-featured vocalists through American Federation of Television and Radio Artists (AFTRA).[47] United States Congress also created a new compulsory license for certain subscription digital audio services, which transmit sound recordings via cable television and Direct-broadcast satellite (DBS) on a non-interactive basis in the absence of a voluntary negotiation and agreement. In 1998, the Congress amended DPRA to create the Digital Millennium Copyright Act (DMCA) by redefining the above-noted subscription services of DPRA as preexisting subscription services and expanded the statutory license to include new categories of digital audio services that may operate under the license. In effect, DMCA created three categories of licensees: 1. pre-existing satellite digital audio radio services 2. new subscription services, and 3. eligible non-subscription transmission services. In addition to the above, a fourth license was created permit webcasters to make ephemeral recordings of a sound recording (temporary copies) to facilitate streaming but with a royalty to be paid. Non-subscription webcasting royalties have also to be shared between record companies and performers in the proportions set out under DPRA. The Table below titled SUMMARY OF STATUTORY ROYALTY RATES FOR DIGITAL WEBCASTING UNITED STATES encapsulates the royalties set for non-interactive webcasting. To qualify for compulsory licensing under non-subscription services, the webcasting needs to fit the following six criteria: it is non-interactive it does not exceed the sound recording performance complement it is accompanied by information on the song title and recording artist it does not publish a program schedule or specify the songs to be transmitted it does not automatically switch from one program channel to another, and it does not allow a user to request songs to be played particularly for that user.

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An inter-active service is one which allows a listener to receive a specially created internet stream in which she dictates the songs to be played by selecting songs from the website menu. Such a service would take the website out from under the compulsory license and require negotiations with the copyright owners. However, a service is non-interactive if it permits people to request songs which are then played to the public at large. Nonetheless, several rules apply such as, within any three-hour period, three cuts from a CD, but no more than two cuts consecutively can be played, or a site can play four songs from any singer from a boxed CD-set, but no more than three cuts consecutively. The SoundExchange, a non-profit organization, is defined under the legislation to act on behalf of record companies (including the majors) to license performance and reproduction rights and negotiate royalties with the broadcasters. It is governed by a board of artist and label representatives. Services include track level accounting of performances to all members and collection and distribution of foreign royalties to all members.[48] In the absence of a voluntary agreement between the SoundExchange and the broadcasters, Copyright Arbitration Royalty Panel (CARP) was authorized to set the statutory rates as could prevail between a "willing buyer" and "willing sellers". SoundExchange handles only the collection of royalties from "compulsory licenses" for non-interactive streaming services that use satellite, cable or internet methods of distribution. To recap, under the law three types of licenses are required for streaming of musical recordings: (a) a performance license applicable for underlying words( lyrics) and music (score)

Royalties (b) a performance license applicable to the streaming the sound recording (c) a storage license for the passage of a sound recording through a file server The royalties for the first of the above two licenses are obtained from SoundExchange and the third from the PROs. Failure to make required payments constitutes copyright infringement and is subject to statutory damages. Both broadcasters involved in webcasting and pure-Internet non-broadcasters are required to pay these royalties under the rules framed under the Act. All webcasters are also required to be registered with the United States Copyright Office. SUMMARY OF STATUTORY ROYALTY RATES FOR DIGITAL WEBCASTING - UNITED STATES[49]
1. Webcaster DMCA Compliant Service Performance Fee (per performance) 0.07 Ephemeral Licence Fee

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(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts (b)All other internet transmission

9% of performance fees due 9% of performance fees due

0.14

2. Commercial Broadcaster DMCA Compliant Service Performance Fee (per performance) 0.07 Ephemeral Licence Fee

(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts (b)All other internet transmission

9% of performance fees due 9% of performance fees due

0.14

3. Non-CPB, non-commercial broadcasts: DMCA Compliant Service Performance Fee (per performance) 0.02 Ephemeral Licence Fee

(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts (b)All other internet transmission

9% of performance fees due 9% of performance fees due

0.05

4. Business Establishment Service: DMCA Compliant Service Performance Fee (per performance) Statutorily Exempt Ephemeral Licence Fee

(a)Simultaneous internet retransmission of over-the-air AM or FM radio broadcasts Minimum Fee

10% of gross proceeds

All Cases

$500 per year for each licensee

Royalties UK legislation The United Kingdom adopted the European Copyright Directive (EUCD) in 2003 and the meaning of broadcast performance was broadened to cover "communicating to the public". This then included music distribution through the internet and the transmission of ringtones to mobiles. Thus a music download was a "copy" of proprietary music and hence required to be licensed. After a prolonged battle on royalties between online music companies such as AOL, Napster and the recording companies (but not all of them), represented by the British Phonographic Industry (BPI), and organizations representing the interests of songwriters (MCPS and PRS) a compromise was reached, leading to a subsequent 3-year interim legislation (2007) adopted by the UK Copyright Tribunal under the Copyright, Designs and Patents Act 1988.[50] The legislation, referring to a new JOL (Joint Online License), applies only to music purchased within UK. The applicable royalties are given in the Table below which, interestingly, also includes music downloads and music services through mobile devices. This path-breaking legislation is expected to become the model for EU (which is yet to develop comprehensive legislation), and perhaps even extend to the US. Note that the new legislation includes the distinction between downloads of musical tracks from iTunes and other stores, which were considered "sales" and the webcasts considered "performances". In brief, the compromise reached is that songwriters will receive 8% of gross revenues (definition follows), less VAT, as royalty for each track downloaded bridging the demand of the artists demanding a 12% royalty rate (what was, otherwise, the norm for a CD) and music companies holding out for 6.5%, slightly higher than the 5.7% paid for a 79p track sold by iTunes.[51] A minimum of four pence will be paid, in the new legislation, if tracks are discounted. The terms used in the legislated Table are explained following it.

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Digital Royalties - Interim Settlement, United Kingdom - 2007

Service Royalty Rate 8% Minimum

Permanent Download

0.04 per download - reducing by degrees for larger bundles of tracks, or certain older tracks, to 0.02 (in respect of a bundle 0f 30 tracks+) Mobile subscription: 0.60/subscriber/month PC subscription: 0.40/subscriber/month Limited Subscription: 0.20/subscriber/month All others: 0.0022 per musical work communicated to the public Subscription: 0.0022 per musical work (if not subscription); if the service is subscription, minimum to be negotiated

Limited Download or On Demand Service

8%

Special Webcasting (premium or 8% interactive service where 50%+ of content is by single band/artist) Premium or interactive webcasting 6.5%

Subscription: 0.22/subscriber/month;otherwise, 0.00085 per musical work communicated to the public Subscription 0.22/subscriber/month; otherwise 0.0006/musical work communicated to the public

Pure webcasting

6.5%

Service Mobile or Permanent downloads and other mobile services

Royalty Rate and Minimum Rates and minima as per services above, except that: For mobile Permanent Downloads, revenue is reduced by 15% For all other Mobile services revenue is reduced by 7.5% The above reductions to apply until prices converge with non-mobile services.

Not all music providers in the UK were part of the compromise that led to the legislation. For those not participating - principally, AOL, Yahoo! and RealNetworks - the Tribunal set the royalty rate for pure webcasting at 5.75%.

Royalties UK legislation recognizes the term online as referring to downloading digital files from the internet and mobile network operators. Offline is the term used for the delivery of music through physical media such as a CD or a DVD. A stream is a file of continuous music listened to through a consumers receiving device with no playable copy of the music remaining. Permanent Downloads are transfers (sale) of music from a website to a computer or mobile telephone for permanent retention and use whenever the purchaser wishes, analogous to the purchase of a CD. A Limited Download is similar to a permanent download but differs from it in that the consumers use of the copy is in some way restricted by associated technology; for instance, becomes unusable when the subscription ends (say, through an encoding, such as DRM, of the downloaded music). On-demand streaming is music streamed to the listener on the computer or mobile to enable her to listen to the music once, twice or a number of times during the period of subscription to the service. Pure Webcasting is where the user receives a stream of pre-programmed music chosen "by the music service provider". It is non-interactive to the extent that even pausing or skipping of tracks is not possible. Premium and Interactive Webcasting are personalized subscription services intermediate between pure webcasting and downloading. Special webcasting is a service where the user can choose a stream of music, the majority of which comprises works from one source an artist, group or particular concert. Simulcasting, although not in the Table above, is the simultaneous re-transmission by a licensed transmission of the program of a radio or TV station over the internet of an otherwise traditional broadcast. The person receiving the simulcast normally makes no permanent copy of it. It is defined in the legislation as an offline service. Gross Revenue, which is comprehensively defined in the legislation, summarized here, means, all revenue received (or receivable) by the licensee from Users, all revenue received through advertisements associated with the music service, sponsorship fees, commissions from third parties and revenue arising from barter or contra deals. No deductions are permitted except for refunds of unused music due to technical faults. The advertising revenue which is shared between the artist and music provider is defined as: when the advertising is in-stream; when the music offered forms the only content of a page featuring advertising (excluding the advertisement itself); and when the music offered forms more than 75% of a page featuring advertising (excluding the advertisement itself).

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Synchronization royalties
The term synchronization comes from the early days of the talkies when music was first synchronized with film. The terminology originated in US industry but has now spread worldwide. Because it would be impractical to join music to film or images without making a "copy" of the music, it is clear that some sort of license is needed but the legal argument is difficult to construct. In the UK and elsewhere, with the exception of the US,, there is apparently no legal prohibition to the combination of audio and visual images and no explicit statutory right for the collection of synch royalties. In the US, however, the Copyright Act defines the audiovisual format as that of combining images with music for use in machines but there is no explicit rate set such as the "compulsory royalty rate" for copying music but there are instances of courts implying the synchronization right,[52] fuller version at[53] but even so, it is an amorphous colloquial commercial term of acceptance. Synchronization royalties("synch licenses") are paid for the use of copyrighted music in (largely) audiovisual productions, such as in DVDs, movies, and advertisements. Music used in news tracks are also synch licenses. Synchronization can extend to live media performances, such as plays and live theatre. They become extremely

Royalties important for new media - the usage of music in the form of mp3, wav, flac files and for usage in webcasts, embedded media in microchips (e.g. karaoke), etc. but the legal conventions are yet to be drawn. Synchronization royalties are due to the composer/song-writer or his/her publisher. They are strictly contractual in nature and vary greatly in amount depending on the subjective importance of the music, the mode of production and the media used. The royalty payable is that of mutual acceptance but is conditioned by industry practice. It is useful to note in this connection the concept of the "needle drop" (now laser drop) in that the synch royalty becomes payable every time the needle drops 'on the record player' in a public performance! All openings and closings, every cut to advertisements, every cut back from ads, all re-runs shown by every TV company, in every country in the world generates a "synchro", although a single payment may be renegotiable in advance.[54] There is a category of royalty free music in the field of synchronization. This refers to the use of music in a "library" for which a one-time royalty has been negotiated. It is an alternative to needle-drop negotiation. In terms of numbers, royalties can range from, say. $5002000 for a "festival-use license" to $250,000 or more for a movie film score. For low budget films, which are deemed less than $2 million, the royalties range from 3%6%[55] or could be per song per usage.

182

Audio Home Recording Act of 1992

In the US, the Audio Home Recording Act became effective law in October 1992 and established a historic compromise between the consumer electronics industry (devices) and the music industry (content) after a long period of contention on how royalties should be applied.[56] This is an additional royalty payment to the print, mechanical, performance and synchronization royalties discussed in other sections of this coverage. In brief, the Act confirms the consumers' right to use (noncommercial use) and retailers' retailers right to sell all digital audio formats without fear of copyright infringement lawsuits. Also no copyright lawsuit may be based on the manufacture, importation, distribution, or sale of digital or analog recording devices or media. As part of this compromise, however, digital audio recording devices must include a system that prohibits serial copying and manufacturers or importers must pay a modest royalty on new digital audio recording devices and media. The Serial Copy Management System (SCMS) or its alternatives, permits first-generation digital-to-digital copies of prerecorded music and other audio works but prohibits multi-generation or "serial" copies of those copies. SCMS is automatically implemented in DAT, MiniDisc and DCC recorders. U.S. manufacturers and importers must make payments as follows: for digital audio recording devices, 2% of the wholesale price, with a floor of $1 royalty payment per device and a ceiling of $8 per device, and 3% of the wholesale price for media. Only the first person to manufacture and distribute or to import and distribute must pay the royalty. The law does not impose any royalty on consumers or retailers. The Act applies only to "digital audio recording devices", defined as devices that are designed or marketed primarily for making digital audio recordings for private use (whether or not incorporated in some other device). Royalty payments from digital audio recording technology are divided into two funds: two-thirds of the royalties paid goes into a Sound Recordings Fund with a small percentages of this fund earmarked for non-featured artists and backup musicians, 40% of the remainder for featured artists and the balance to record companies. one-third goes into a Musical Works Fund, to be split 50/50 between songwriters and publishers. Royalty payments are administered through the US Music Industry. Featured Artist and Sound Recording Copyright Owner(Record Label) royalties are administered by the Alliance of Artists and Recording Companies. Non-Featured Artist royalties are administered by the AFM/AFTRA Intellectual Property Rights Distribution Fund. Writer

Royalties royalties are administered through ASCAP, BMI, and SESAC. Publisher royalties are administered through Harry Fox. Although technically these royalties are claimed at the United States Copyright Office by an Interested Copyright Party, the Copyright Office has no way to administer or calculate the royalties to the earning parties, thus the royalties have been claimed by the aforementioned organizations since 1992 on behalf of the music industry then independently administer these funds. Royalty payments are calculated based on methodologies by the administering company, on sales data only.

183

Art royalties
Resale royalty or droit de suite
Gone or almost gone is the time when the art collector was the focal point of a painting. The artist is now not satisfied with recognition by the value his/her artwork gets by increasing value but wants to receive a part of that resale of increase- known as droit de suite whilst alive or for his heirs, thus obtaining a moral right implied by the copyright claim otherwise legal in a musical creation or in the sale of a book. As of May 2011 the scheme is ,at a national level, restricted to the EU. The European commissions ec.europa webpage on Resale royalty states that,under the heading 'Indicative list of third countries (Article 7.2)' : 'A letter was sent to Member States on March 1, 2006 requesting that they provide a list of third countries which meet these requirements and that they also provide evidence of application. To date the Commission has not been supplied with evidence for any third country which demonstrates that they qualify for inclusion on this list.'[57] [The emphasis is from the European commission web page.] Whether 'resale royalties' exist as a meaningful encyclopedia whole world classification category class is a bit doubtful; Should this droit de suite section be retitled to something more specific to the EU? There are very few common facets to the various national schemes. Some prescribe a minimum amount that the artwork must receive before the artist can invoke resale rights (the hammer price or equivalent). Some countries prescribe and others such as Australia, do not prescribe, the maximum royalty that can be received. Most do prescribe the calculation basis of the royalty. Some country's make the usage of the royalty compulsory. Some country's prescribe a sole monopoly collection service agency, while others like the UK and France, allow multiple agencies. Some schemes involve varying degrees of retrospective application and other schemes such as Australia's are not retrospective at all. In some cases, for example Germany, a openly tax-like use is made of the "royalties"; Half of the money collected is redistributed to fund public programs. Whether this German levy on the resale of art can be called a "royalty" is open to question. The New Zealand and Canadian governments have not proceeded with any sort of artist resale scheme. The Australian scheme is not retrospective and individual usage of the right (by Australian artists) is not compulsory. Details of the Australian scheme can be gotten from[58] the website of the sole appointed Australian agency; The "Copyright Agency Limited". The UK scheme is in the context of common-law countries an oddity; No other common-law country has mandated an individual economic right where actual usage of the right is a compulsory duty for the individual right holder. Whether the common law conception of an individual economic right as an "individual right of control of usage" is compatible with the Code Civil origins of droit de suite is open to question. The payment agency may be a collection society whom pays the artist after costs and a fixed commission. Or It may be collected by the individual artist as she/he sees fit. The UK is a recent member of the Group and prescribes a sliding scale for the calculation of royalty as follows: The portion of the sale price Royalty Rate[59] From 0 to 50,000 a royalty rate of 4% From 50,000.01 to 200,000, 3%

Royalties From 200,000.01 to 350,000, 1% From 350,000.01 to 500,000, 0.5% Exceeding 500,000 0.25% Maximum royalty paid, the equivalent of Sterling 12, 500.

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In the UK, only living artists have this right now. Heirs will receive royalties as prescribed by the EU Directive only from 2012. France, which introduced this right in 1920, the living artist or heirs receive royalty 70 years of the death of the artist. In California law, heirs receive royalty for 20 years. The royalty applies to any work of graphic or plastic art such as a ceramic, collage, drawing, engraving, glassware, lithograph, painting, photograph, picture, print, sculpture, tapestry. However, a copy of a work is not to be regarded as a work unless the copy is one of a limited number made by the artist or under the artist's authority. In Christieon the resale of a work bought directly from the artist and then resold within 3 years for a value of 10,000 or less. The artist retains the copyright unless the artist is commissioned, or is an employee as with magazine illustrators or book cover artists when the publisher is assigned the ownership of the copyright. In the UK an artist cannot waive their resale rights; nor can they agree to share or repay resale royalties, for example, to their dealer or a client of their dealer's. In Australia artists have a case by case right (under clause 22/23 of the Act) to refuse consent to the usage of the right by the appointed collection society and in Australia artists may make payments to other citizens as they see fit . An artist cannot assign their resale right to anyone else, except to a qualifying body under the regulations, such as a charity. Whether resale royalties are of net economic benefit to artists is a highly contested area. Many economic studies have seriously questioned the assumptions underlying the argument that resale royalties have net benefits to artists. Many modelings have suggested that resale royalties could be actually harmful to living artists economic positions.[60] Australia's chief advocate for the adoption of artist resale royalties the collection society, Viscopy, commissioned in 2004 a report from Access Economics to model the likely impact of their scheme. In the resulting report, Access Economics warned that the claim of net benefit to artists was: "based upon extremely unrealistic assumptions, in particular the assumption that seller and buyer behaviour would be completely unaffected by the introduction of RRR [ARR]" and that, "Access Economics considers that the results of this analysis are both unhelpful and potentially misleading."[61]

Artwork royalties
An artwork is usually a copyrighted article which be mass produced for sale, such as greeting cards. They are both seasonal and on occasion. In the UK it is estimated that one billion pounds are spent on greeting cards every year, with the average person sending 55 cards per year. The royalty range is 25% with an upfront royalty. Other artwork royalties are as under <http://www.nolo.com/legal-encyclopedia/article-30093.html>: Greeting cards and gift wrap: 2% to 5% Household items such as cups, sheets, towels: 3% to 8% Fabrics, apparel (T-shirts, caps, decals): 2% to 10% Posters and prints: 10% or more Toys and dolls: 3% to 8%

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Software royalties
There is simply too much computer software to consider the royalties applicable to each. The following is a guide to royalty rates: *Computer Software: 10.5% (average), 6.8% (median) *Internet: 11.7% (average), 7.5% (median) For the development of customer-specific software one will have to consider: * Total software development cost * Break-even cost (if the software can be sold to many agencies) * Ownership of code (if the client's, he bears the development cost) * Life of the software (usually short or requiring maintenance) * Risk in development (high, commanding A high price) Normally, it is estimated that 55%70% of total project cost is spent in development, especially in the initial version. This high proportion is because new products require "basic foundation development" (R&D, refining/defining business processes, etc.). Marketing software typically consumes 20%40% of the budget. To estimate profit, it can be assumed that large companies will make a profit between 515%[62]

Other royalty arrangements

The term "royalty" also covers areas outside of IP and technology licensing, such as oil, gas, and mineral royalties paid to the owner of a property by a resources development company in exchange for the right to exploit the resource. In a business project the promoter, financier, LHS enabled the transaction but are no longer actively interested may have a royalty right to a portion of the income, or profits, of the business. This sort of royalty is often expressed as a contract right to receive money based on a royalty formula, rather than an actual ownership interest in the business. In some businesses this sort of royalty is sometimes called an override.

Alliances and partnerships

Royalties may exist in technological alliances and partnerships. The latter is more than mere access to secret technical or a trade right to accomplish an objective. It is, in the last decade of the past century, and the first of this one of the major means of technology transfer. Its importance for the licensor and the licensee lies in its access to markets and raw materials, and labor,when the international trend is towards globalization. There are three main groups when it comes to technological alliances. They are Joint-ventures (sometimes abbreviated JV), the Franchises and Strategic Alliances (SA).[63] [64] Joint-ventures are usually between companies long in contact with a purpose. JVs are very formal forms of association, and depending on the country where they are situated, subject to a rigid code of rules, in which the public may or may not have an opportunity to participate in capital; partly depending on the size of capital required, and partly on Governmental regulations. They usually revolve around products and normally involve an inventive step. Franchises revolve around services and they are closely connected with trademarks, an example of which is McDonald's. Although franchises have no convention like trademarks or copyrights they can be mistaken as a trademark-copyright in agreements. The franchisor has close control over the franchisee, which, in legal terms cannot be tie-ins such as frachisee located in an areas owned by the franchisor. Strategic Alliances can involve a project (such as bridge building). a product or a service. As the name implies, is more a matter of 'marriage of convenience' when two parties want to associate to take up a particular (but modest) short-term task but generally are uncomfortable with the other. But the strategic alliance could be a test of

Royalties compatibility for the forming of a joint venture company and a precedent step. Note that all of these ventures s could be in a third county. JVs and franchises are rarely found formed within a county. They largely involve third countries. On occasion, a JV or SA may be wholly oriented to research and development, typically involving multiple organizations working on an agreed form of engagement. The Airbus is an example of such. Technical Assistance and Technical Service in technology transfer Firms in developing countries often are asked by the supplier of know-how or patent licensing to consider Technical Service (TS)and Technical Assistance (TA) as elements of the technology transfer process and to pay "royalty" on them. TS and TA are associated with the IP (Intellectual Property) transferred and, sometimes, dependent on its acquisition but they are, by no means, IP.[65] TA and TS may also be the sole part of the transfer or the tranferor of the IP, their concurrent supplier. They are seldom met with in the developed countries, which sometimes view even know-how as similar to TS. TS comprises services which are the specialized knowledge of firms or acquired by them for operating a special process. It is often a "bundle" of services which can by itself meet an objective or help in meeting it. It is delivered over time, at end of which the acquirer becomes proficient to be independent of the service. In this process, no consideration is given on whether the transfer of the proprietary element has been concluded or not. On the other hand, Technical Assistance is a package of assistance given on a short timetable. It can range variously from procurement of equipment for a project, inspection services on behalf of the buyer, the training of buyer's personnel and the supply technical or managerial staff. Again, TA is independent of IP services. The payment for these services is a fee, not a royalty. The TS fee is dependent on how many of the specialized staff of its supplier are required and over what period of time. Sometimes, the "learning" capacity to whom the TS is supplied is involved. In any case, the cost per Service-Hour should be calculated and evaluated. Note that in selecting a TS supplier (often the IP Supplier), experience and dependency are critical. In the case of TA there is usually a plurality of firms and choice is feasible.

186

Approaches to royalty rate

Intellectual property
The rate of royalty applied in a given case is determined by various factors, the most notable of which are: Market drivers and demand structure Territorial extent of rights Exclusivity of rights Level of innovation and stage of development (see The Technology Life Cycle) Sustainability of the technology Degree and competitive availability of other technologies Inherent risk Strategic need The portfolio of rights negotiated Fundability Deal-reward structure (negotiation strength)

To correctly gauge royalty rates, the following criteria must be taken into consideration: The transaction is at "arms-length" There is a willing buyer and a willing seller The transaction is not under compulsion

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187

Rate determination and illustrative royalties

There are three general approaches to assess the applicable royalty rate in the licensing of intellectual property. They are[66] 1. The Cost Approach 2. The Comparable Market Approach 3. The Income Approach For a fair evaluation of the royalty rate, the relationship of the parties to the contract should: be at "arms-length" (related parties such as the subsidiary and the parent company need to transact as though they were independent parties) be viewed as acting free and without compulsion Cost approach The Cost Approach considers the several elements of cost that may have been entered to create the intellectual property and to seek a royalty rate that will recapture the expense of its development and obtain a return that is commensurate with its expected life. Costs considered could include R&D expenditures, pilot-plant and test-marketing costs, technology upgrading expenses, patent application expenditure and the like. The method has limited utility since the technology is not priced competitively on "what the market can bear" principles or in the context of the price of similar technologies. More importantly, by lacking optimization (through additional expense), it may earn benefits below its potential. However, the method may be appropriate when a technology is licensed out during its R&D phase as happens with venture capital investments or it is licensed out during one of the stages of clinical trials of a pharmaceutical. In the former case, the venture capitalist obtains an equity position in the company (developing the technology) in exchange for financing a part of the development cost (recovering it, and obtaining an appropriate margin, when the company gets acquired or it goes public through the IPO route). Recovery of costs, with opportunity of gain, is also feasible when development can be followed stage-wise as shown below for a pharmaceutical undergoing clinical trials (the licensee pays higher royalties for the product as it moves through the normal stages of its development):
Success State of development Royalty rates,% ---------------------------Pre-clinical success 0-5 in-vitro Phase I Phase II (safety) (efficacy) 5-10 100 healthy people 8-15 300 subjects 10-20 several thousand patients regulatory body approval --------------Nature ----------------------

Phase III (effectiveness) Launched product 20+

A similar approach is used when custom software is licensed (an in-license, i.e. an incoming license). The product is accepted on a royalty schedule depending on the software meeting set stage-wise specifications with acceptable error levels in performance tests. Comparable market approach Here the cost and the risk of development are disregarded. The royalty rate is determined from comparing competing or similar technologies in an industry, modified by considerations of useful "remaining life" of the technology in that industry and contracting elements such as exclusivity provisions, front-end royalties, field of use restrictions, geographic limitations and the "technology bundle" (the mix of patents, know-how, trade-mark rights, etc.) accompanying it.

Royalties Although widely used, the prime difficulty with this method is obtaining access to data on comparable technologies and the terms of the agreements that incorporate them. Fortunately, there are several recognized organizations, among them, RoyaltySource, Royaltystat, Knowledge Express, ktMINE etc. (see "Royalty Rate Websites" listed at the end of this article) who have comprehensive information on both royalty rates and the principal terms of the agreements of which they are a part. There are also IP-related organizations, such as the Licensing Executives Society, which enable its members to access and share privately assembled data. The two tables shown below are drawn, selectively, from information that is available with an IP-related organization and on-line.[67] [68] The first depicts the range and distribution of royalty rates in agreements. The second shows the royalty rate ranges in select technology sectors (latter data sourced from: Dan McGavock of IPC Group, Chicago, USA).

188

Royalty Distribution Analysis in Industry

Industry Automotive Computers Licenses (nos.) 35 68 Min. Royalty,% 1.0 0.2 0.0 0.5 0.1 0.3 0.5 0.1 0.0 Max. Royalty,% 15.0 15.0 17.0 15.0 77.0 40.0 26 40.0 70.0 Average,% 4.7 5.2 5.5 4.3 5.8 11.7 5.2 7.0 10.5 Median,% 4.0 4.0 5.0 4.0 4.8 7.5 4.6 5.1 6.8

Consumer Gds 90 Electronics Healthcare Internet Mach.Tools. Pharma/Bio Software 132 280 47 84 328 119

Royalty Rate Segmentation in Some Technology Sectors

Industry Aerospace Chemical Computer Electronics Healthcare 3.3% 0-2% 50% 16.5% 62.5% 2-5% 50% 58.1% 31.3% 50.0% 51.7% 32.1% 37.3% 24.3% 6.3% 25.0% 45.0% 29.3% 23.6% 12.5% 1.1% 0.7% 25.0% 0.8% 0.4% 5-10% 10-15% 15-20% 20-25%

Pharmaceuticals 23.6% Telecom 40.0%

Commercial sources also provide information that is invaluable for making comparisons. The following table provides typical information that is obtainable, for instance, from Royaltystat:[69] Sample License Parameters Reference: 7787 Effective Date: 10/01/1998 SIC Code: 2870 SEC Filed Date: 07/26/2005 SEC Filer: Eden Bioscience Corp Royalty Rate: 2.000 (%) SEC Filing: 10-Q Royalty Base: Net Sales Agreement Type: Patent Exclusive: Yes Licensor: Cornell Research Foundation, Inc.

Royalties Licensee: Lump-Sum Pay: Duration: Territory: Eden Bioscience Corp. Research support is $150,000 for 1 year. 17 year(s) Worldwide

189

Coverage : Exclusive patent license to make, have made, use and sell products incorporating biological materials, including genes, proteins and
peptide fragments, expression systems, cells, and antibodies, for the field of plant disease

The comparability between transactions requires a comparison of the significant economic conditions that may affect the contracting parties: Similarity of geographies Relevant date Same industry Market size and its economic development; Contracting or expanding markets Market activity: whether wholesale, retail, other Relative market shares of contracting entities Location-specific costs of production and distribution

Competitive environment in each geography Fair alternatives to contracting parties Income approach The Income approach focuses on the licensor estimating the profits generated by the licensee and obtaining an appropriate share of the generated profit. It is unrelated to costs of technology development or the costs of competing technologies. The approach requires the licensee (or licensor): (a) to generate a cash-flow projection of incomes and expenses over the life-span of the license under an agreed scenario of incomes and costs (b) determining the Net Present Value, NPV of the profit stream, based on a selected discount factor, and c) negotiating the division of such profit between the licensor and the licensee. The NPV of a future income is always lower than its current value because an income in the future is attended by risk. In other words, an income in the future needs to be discounted, in some manner, to obtain its present equivalent. The factor by which a future income is reduced is known as the 'discount rate'. Thus, $1.00 received a year from now is worth $0.9091 at a 10% discount rate, and its discounted value will be still lower two years down the line. The actual discount factor used depends on the risk assumed by the principal gainer in the transaction. For instance, a mature technology worked in different geographies, will carry a lower risk of non-performance (thus, a lower discount rate) than a technology being applied for the first time. A similar situation arises when there is the option of working the technology in one of two different regions; the risk elements in each region would be different. The method is treated in greater detail, using illustrative data, in Royalty Assessment. The licensor's share of the income is usually set by the "25% rule of thumb", which is said to be even used by tax authorities in the US and Europe for arms-length transactions. The share is on the operating profit of the licensee firm. Even where such division is held contentious, the rule can still be the starting point of negotiations. Following are three aspects that are important for the profit: (a) the profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. Allowances need to be made for them. (b) profits are also generated by thrusts in the general economy, gains from infrastructure, and the basket of licensed rights patents, trademark, know-how. A lower royalty rate may apply in an advanced country where

Royalties large market volumes can be commanded, or where protection to the technology is more secure than in an emerging economy (or perhaps, for other reasons, the inverse). (c) the royalty rate is only one aspect of the negotiation. Contractual provisions such as an exclusive license, rights to sub-license, warranties on the performance of technology etc may enhance the advantages to the licensee, which is not compensated by the 25% metric. The basic advantage of this approach, which is perhaps the most widely applied, is that the royalty rate can be negotiated without comparative data on how other agreements have been transacted. In fact, it is almost ideal for a case where precedent does not exist. It is, perhaps, relevant to note that the IRS also uses these three methods, in modified form, to assess the attributable income, or division of income, from a royalty-based transaction between a US company and its foreign subsidiary (since US law requires that a foreign subsidiary pay an appropriate royalty to the parent company).[70]

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Other compensation modes

Royalties are only one among many ways of compensating owners for use of an asset. Others include: buying the asset outright, possibly with a leaseback arrangement offering the licensor an equity position in the licensee company staged milestone payments (as in drug development and commissioned software arrangements) lump sum payment made to the licensor in one or more installments cross-licensing agreements with or without cash payments, and entering into a strategic alliance or Joint Venture.

In discussing the licensing of Intellectual Property, the terms valuation and evaluation need to be understood in their rigorous terms. Evaluation is the process of assessing a license in terms of the specific metrics of a particular negotiation, which may include its circumstances, the geographical spread of licensed rights, product range, market width, licensee competitiveness, growth prospects, etc. On the other hand, valuation is the fair market value (FMV) of the asset trademark, patent or know-how at which it can be sold between a willing buyer and willing seller in the context of best awareness of circumstances. The FMV of the IP, where assessable, may itself be a metric for evaluation. If an emerging company is listed on the stock market, the market value of its intellectual property can be estimated from the data of the balance sheet using the equivalence: Market Capitalization = Net Working Capital + Net Fixed Assets + Routine Intangible Assets + IP where the IP is the residual after deducting the other components from the market valuation of the stock. One of the most significant intangibles may be the work-force. The method may be quite useful for valuing trademarks of a listed company if it is mainly or the only IP in play (franchising companies).

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External links
"Royalty Rate Websites" [71] "CPT page on Royalties on patents for health care inventions" [72] "Free online calculator for U.S. mechanical royalties" [73]

References
[1] "Focus: Tax and Intellectual Property April 2004" (http:/ / www. aar. com. au/ pubs/ tax/ fotaxapr04. htm). Allens Arthur Robinson. . Retrieved 2007-09-13. [2] "Royalty (definition)" (http:/ / dictionary. law. com/ Default. aspx?selected=1870& bold=). law.com. . Retrieved 2007-09-13. [3] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer), United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7 [4] Guidelines for Evaluation of Transfer of Technology Agreements, United Nations, New York, 1979 [5] Licensing Guide for Developing Countries, World Intellectual Property Organization (WIPO), Geneva, 1977, ISBN 92-805-0395-2 [6] UNIDO International Workshop on Technology Transfer Negotiation and Plant Level Technology Needs Assessment, 78 December 1999, New Delhi. [7] Dave Tyrrell. "Intellectual Property & Licensing" (http:/ / www. vertexips. com/ information/ articles/ licensing. html). Vertex. . Retrieved 2007-09-14. [8] "Royalty interest (definition)" (http:/ / www. glossary. oilfield. slb. com/ Display. cfm?Term=royalty interest). Schlumberger. . Retrieved 2007-09-13. [9] http:/ / www. oilgas1031. com/ [10] "Ranges of royalty rates, and royalty guidelines, U.S. Pharmaceutical Industry" (http:/ / www. cptech. org/ ip/ health/ royalties/ ). . Retrieved 2007-07-19. [11] The Royalty Rate Journal of Intellectual Property, December 2002, p. 8. [12] "Sample: License Parameters" (http:/ / www. intellectualpropertyanalysis. com/ article4. html). . Retrieved 2007-10-26. [13] Mallat, Chibli. "Joint ventures in Lebanese and European law" (http:/ / www. mallat. com/ articles/ joint_ventures. htm). mallat.com. . Retrieved 29 November 2010. [14] "DHL Corporation and Subsidiaries vs. Commissioner of Internal Revenue, Docket Nos. 19570-95, 26103-95, United States Tax Court." (http:/ / www. ausinc. com/ news/ More_on_Trademark. pdf) (PDF). . Retrieved 2007-09-09. [15] Dicenstein_brands_2005-2.pdf [16] "Four little words" (http:/ / www. salon. com/ entertainment/ music/ feature/ 2000/ 08/ 28/ work_for_hire/ print. html). . Retrieved 2007-03-15. [17] "Don Henley Speaks on Behalf of Recording Artists" (http:/ / web. archive. org/ web/ 20060117191640/ http:/ / www. yourcongress. com/ ViewArticle. asp?article_id=1263). Archived from the original (http:/ / www. yourcongress. com/ ViewArticle. asp?article_id=1263) on 2006-01-17. . Retrieved 2007-03-15. [18] "Printing & Publishing of Music - A Short History & How it is Done" (http:/ / parlorsongs. com/ insearch/ printing/ printing. php). . Retrieved 2008-08-13. [19] Carter Harman, A Popular History of Music, Dell Publishing Company, New York, 1956 [20] Song Sheets to Software: A Guide to Print Music, Software, and Web Sites for Musicians, Elizabeth C. Axford, Scarecrow Press, 2004,ISBN 0810850273, 9780810850279 [21] (The score and some digital versions of Stephen Foster's songs can be sampled here (http:/ / www. sibeliusmusic. com/ index. php?sm=home. score& ?scoreid=127497). [22] Elizabeth C. Axford, Song Sheets to Software: A Guide to Print Music, Software, and Web Sites for Musicians, Scarecrow Press, 2004,ISBN 0810850273, 9780810850279 [23] "Printing & Publishing of Music. A Short History & How it is Done" (http:/ / parlorsongs. com/ insearch/ printing/ printing. php). parlorsongs.com. . Retrieved 29 November 2010. [24] "Christian Copyright Licensing Incorporated" (http:/ / www. ccli. com). ccli.com. . [25] Alan S. Bergman, The Language of the Music Business (http:/ / www. alanbergman. com/ musicbusinesslanguage. pdf) [26] "Compulsory Rates for Mechanical royalties" (http:/ / www. copyright. gov/ carp/ m200a. html). . Retrieved 2007-10-15. [27] "'Reduced Rate' Royalties" (http:/ / www. ascap. com/ musicbiz/ money-clauses. html). . Retrieved 2007-10-29. [28] "Royalties on Controlled Composition" (http:/ / www. ascap. com/ musicbiz/ money-clauses. html). . Retrieved 2007-10-29. [29] http:/ / www. ascap. com/ musicbiz/ money-recording. html [30] "SACEM homepage" (http:/ / www. sacem. fr/ cms) (in French). . Retrieved 29 November 2010. [31] "GEMA homepage" (http:/ / www. gema. de/ ) (in German). . Retrieved 29 November 2010. [32] "?" (http:/ / www. scfitalia. it/ webnew/ ). . [33] "The main national collection societies" (http:/ / www. bemuso. com/ musicbiz/ collectionsocieties. html#themainnationalcollectionsocieties). bemuso.com. . Retrieved 2010-12-03.

Royalties
[34] "Language of the Music Business" (http:/ / www. alanbergman. com/ articles. htm). . Retrieved 2007-10-29. [35] "Diagram courtesy" (http:/ / www. bemuso. com). bemuso.com. . [36] PPL (http:/ / www. ppluk. com/ ) [37] "PRS for Music homepage" (http:/ / www. prsformusic. com/ Pages/ default. aspx). . Retrieved 29 November 2010. [38] "Songwriters challenge UK online royalty rate" (http:/ / www. theregister. co. uk/ 2005/ 12/ 07/ uk_music_downloads_royalty_dispute/ ). . Retrieved 2007-12-18. [39] VPL (http:/ / www. ppluk. com/ ) [40] Smith, Ethan (2007-03-21). "Sale of Music Long in Decline" (http:/ / online. wsj. com/ public/ article/ SB117444575607043728-oEugjUqEtTo1hWJawejgR3LjRAw_20080320. html?mod=rss_free). The Wall Street Journal. . Retrieved 2007-12-20. [41] "What is Digital Distribution" (http:/ / www. bemuso. com/ musicbiz/ digitaldistribution. html#whatisdigitaldistribution). . Retrieved 2010-12-03. [42] "Gracenote homepage" (http:/ / www. gracenote. com). . [43] Download Music - Music Downloads and mp3 downloads from Kazaa.com (http:/ / www. kazaa. com/ ) [44] Last.fm - Listen to internet radio and the largest music catalogue online (http:/ / last. fm/ ) [45] "U.S. H1 Album Sales Down 15.1%" (http:/ / www. billboard. biz/ bbbiz/ content_display/ industry/ e3idb123582ebc7d42b3f8bee9123801556). . Retrieved 2007-12-22. [46] "American Federation of Musicians" (http:/ / www. afm. org/ public/ home/ index. php)). . Retrieved 2008-02-24. [47] "American Federation of Television and Radio Artists" (http:/ / www. aftra. org). . Retrieved 2008-02-24. [48] "The Sound Exchange" (http:/ / www. soundexchange. com). . Retrieved 2008-02-29. [49] "SECTION 114 (f)2 and 112(e)" (http:/ / www. copyright. gov/ carp/ webcasting_rates_a. pdf) (PDF). . Retrieved 2007-12-19. [50] "Interim Settlement of Digital Royalty Rates (Music), United Kingdom" (http:/ / www. ipo. gov. uk/ ctribunaldownloadingdecision. pdf) (PDF). . Retrieved 2007-12-19. [51] "Artists bid for CD parity on digital royalties" (http:/ / www. pcpro. co. uk/ news/ 78202/ artists-bid-for-cd-parity-on-digital-royalties. html. ). . Retrieved 2008-02-24. [52] Clintons (http:/ / www. clintons. co. uk/ ?news_id=38) [53] (http:/ / www. ca9. uscourts. gov/ ca9/ newopinions. nsf/ 6128717C16DB42D8882573C400597DC7/ $file/ 0655102. pdf?openelement) [54] "Current UK Limited Synchronisation Licence example" (http:/ / i. current. com/ pdf/ music_sync_uk. pdf). i.current.com. . Retrieved 29 November 2010. [55] Songwriting Articles - Publishing by Nancy VanReece (http:/ / www. musesmuse. com/ pubart. html) [56] United States Code: Title 17,1001. Definitions | LII / Legal Information Institute (http:/ / www. law. cornell. edu/ uscode/ 17/ usc_sec_17_00001001----000-. html) [57] http:/ / ec. europa. eu/ internal_market/ copyright/ resale-right/ resale-right_en. htm [58] "About the artists resale royalty scheme" (http:/ / www. resaleroyalty. org. au/ ). resaleroyalty.org.au. . Retrieved 29 November 2010. [59] "DACS homepage" (http:/ / www. Dacs. com) (in Russian). . Retrieved 29 November 2010. [60] name="Kirstein, R./Schmidtchen, D. (2001); Do Artists Benefit from Resale Royalties? An Economic Analysis of a New EU Directive. In: Deffains, B./Kirat, T. (eds.): Law and Economics in Civil Law Countries; The Economics of Legal Relationships Vol. 6, Elsevier Science, Amsterdam et al., 231-248." [61] "?" (http:/ / www. arts. gov. au/ __data/ assets/ pdf_file/ . . . / Viscopy_Access_Economics. pdf). arts.gov.au. . [62] "Software Royalty Rates Details" (http:/ / www. nwds-ak. com/ WebResources/ WebDesign/ RoyaltyRates/ RoyaltyRatesDetails. aspx). North West Data Solutions. . Retrieved 29 November 2010. [63] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer),1996 United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7 [64] Patterns of Internationalization for Developing Country Enterprises, United Nations Industrial Organization, Vienna, Austria 2008, ISBN 978-92-1-106302-7 [65] Manual on Technology Transfer Negotiation (A reference for policy-makers and practitioners on Technology Transfer),1996 United Nations Industrial Development Organization, Vienna, 1990, ISBN 92-1-106302-7, pp 260-261 [66] "?" (http:/ / www. bvappraisers. org/ contentdocs/ Conference/ Royalty_Rates_in_Intellectual_Property_Valuation. pdf). bvappraisers.org. . [67] Goldscheider, Robert; John Jarosz and Carla Mulhern (Dec 2002). "Use Of The 25 Per Cent Rule In Valuing IP" (http:/ / lesanz. org. au/ membership/ royaltyrates. html). . Retrieved 2007-09-20. [68] David G. Weiler. "Valuing Your Intellectual Property for Strategic Alliances and Financing" (http:/ / www. njsbdc. com/ SciTech/ scitech120804weiler. ppt). . Retrieved 2007-09-20. [69] "Sample: License Parameters" (http:/ / www. royaltystat. com/ royaltystat. cfm). . Retrieved 2007-09-26. [70] "Treasury Evaluations" (http:/ / www. intltaxlaw. com/ shared/ transfer/ regs. htm). . Retrieved 2007-09-27. [71] http:/ / www. usa-canada. les. org/ licensing/ #royalty. htm [72] http:/ / www. cptech. org/ ip/ health/ royalties/ [73] http:/ / dashbook. com/ CalculatorMechanical. aspx

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Sharpe ratio

193

Sharpe ratio
The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William Forsyth Sharpe. Since its revision by the original author in 1994, it is defined as:

where

is the asset return,

is the return on a benchmark asset, such as the risk free rate of return, is the

is the expected value of the excess of the asset return over the benchmark return, and

standard deviation of the excess of the asset return. (This is often confused with the excess return over the benchmark return; the Sharpe ratio utilizes the asset standard deviation whereas the information ratio utilizes standard deviation of excess return over the benchmark, i.e. the tracking error, as the denominator.) Note, if is a constant risk free return throughout the period,

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken, the higher the Sharpe ratio number the better. When comparing two assets each with the expected return against the same benchmark with return , the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios. However like any mathematical model it relies on the data being correct. Pyramid schemes with a long duration of operation would typically provide a high Sharpe ratio when derived from reported returns, but the inputs are false. When examining the investment performance of assets with smoothing of returns (such as with-profits funds) the Sharpe ratio should be derived from the performance of the underlying assets rather than the fund returns. Sharpe ratios, along with Treynor ratios and Jensen's alphas, are often used to rank the performance of portfolio or mutual fund managers.

History
In 1952, A. D. Roy suggested maximizing the ratio "(m-d)/", where m is expected gross return, d is some "disaster level" (a.k.a., minimum acceptable return) and is standard deviation of returns.[1] This ratio is just the Sharpe Ratio, only using minimum acceptable return instead of risk-free return in the numerator, and using standard deviation of returns instead of standard deviation of excess returns in the denominator. In 1966, William Forsyth Sharpe developed what is now known as the Sharpe ratio.[2] Sharpe originally called it the "reward-to-variability" ratio before it began being called the Sharpe Ratio by later academics and financial operators. Sharpe's 1994 revision acknowledged that the risk free rate changes with time. Prior to this revision the definition was assuming a constant . Recently, the (original) Sharpe ratio has often been challenged with

regard to its appropriateness as a fund performance measure during evaluation periods of declining markets.[3]

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Examples
Suppose the asset has an expected return of 15% in excess of the risk free rate. We typically do not know if the asset will have this return; suppose we assess the risk of the asset, defined as standard deviation of the asset's excess return, as 10%. The risk-free return is constant. Then the Sharpe ratio (using a new definition) will be 1.5 ( and ). As a guide post, one could substitute in the longer term return of the S&P500 as 10%. Assume the risk-free return is 3.5%. And the average standard deviation of the S&P500 is about 16%. Doing the math, we get that the average, long-term Sharpe ratio of the US market is about 0.4 ((10%-3.5%)/16%). But we should note that if one were to calculate the ratio over, for example, three-year rolling periods, then the Sharpe ratio could vary dramatically.

Strengths and weaknesses

The Sharpe ratio has as its principal advantage that it is directly computable from any observed series of returns without need for additional information surrounding the source of profitability. Other ratios such as the bias ratio have recently been introduced into the literature to handle cases where the observed volatility may be an especially poor proxy for the risk inherent in a time-series of observed returns. While the Treynor ratio works only with systemic risk of a portfolio, the Sharpe ratio observes both systemic and idiosyncratic risks. The returns measured can be of any frequency (i.e. daily, weekly, monthly or annually), as long as they are normally distributed, as the returns can always be annualized. Herein lies the underlying weakness of the ratio - not all asset returns are normally distributed. Abnormalities like kurtosis, fatter tails and higher peaks, or skewness on the distribution can be a problematic for the ratio, as standard deviation doesn't have the same effectiveness when these problems exist. Sometimes it can be downright dangerous to use this formula when returns are not normally distributed. [4] Lpez de Prado (2008)[5] shows that Sharpe ratios tend to be "inflated" in the case of hedge funds with short track records. Because it is a dimensionless ratio, laypeople find it difficult to interpret Sharpe Ratios of different investments. For example, how much better is an investment with a Sharpe Ratio of 0.5 than one with a Sharpe Ratio of -0.2? This weakness was well addressed by the development of the Modigliani Risk-Adjusted Performance measure, which is in units of percent return universally understandable by virtually all investors.

References
[1] Roy, Arthur D. (1952). "Safety First and the Holding of Assets". Econometrica 1952 (July): 431450. [2] Sharpe, W. F. (1966). "Mutual Fund Performance". Journal of Business 39 (S1): 119138. doi:10.1086/294846. [3] Scholz, Hendrik (2007). "Refinements to the Sharpe ratio: Comparing alternatives for bear markets". Journal of Asset Management 7 (5): 347357. doi:10.1057/palgrave.jam.2250040. [4] (http:/ / www. investopedia. com/ articles/ 07/ sharpe_ratio. asp) [5] Lpez de Prado, M. (2008): "The Sharpe Ratio Efficient Frontier", Working paper, RCC at Harvard University http:/ / ssrn. com/ abstract=1821643

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Further reading
Bacon Practical Portfolio Performance Measurement and Attribution 2nd Ed: Wiley, 2008. ISBN 978-0-470-05928-9 Bruce J. Feibel. Investment Performance Measurement. New York: Wiley, 2003. ISBN 0471268496

External links
The Sharpe ratio (http://www.stanford.edu/~wfsharpe/art/sr/sr.htm)

Sortino ratio
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target, or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. The ratio is calculated as: , where R is the asset or portfolio realized return; T is the target or required rate of return for the investment strategy under consideration, (T was originally known as the minimum acceptable return, or MAR); DR is the downside risk. The downside risk, in this formula, is the target semideviation = square root of the target semivariance (TSV). TSV is the return distribution's lower-partial moment of degree 2 (LPM2).

where

is often taken to be the risk free interest rate and

is the pdf of the returns. This can be thought of as

the root mean squared underperformance, where the underperformance is the amount by which a return is below target (and returns above target are treated as underperformance of 0). Thus, the ratio is the actual rate of return in excess of the investor's target rate of return, per unit of downside risk; or, overperformance divided by root-mean-square underperformance. The ratio was created by Brian M. Rom[1] in 1986 as an element of Investment Technologies'[2] Post-Modern Portfolio theory portfolio optimization software.

References
[1] "Sortino ratio" (http:/ / www. sortino. com/ htm/ Sortino Ratio. htm). . [2] "www.investmenttechnologies.com" (http:/ / www. investmenttechnologies. com). .

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Soviet Union
Union of Soviet Socialist Republics Other names Soyuz Sovietskikh Sotsialisticheskikh Respublik

Flag

19221991

State Emblem

Motto , ! (Translit.: Proletarii vsekh stran, soyedinyaytes'!) English: Workers of the world, unite! Anthem The Internationale (19221944) National Anthem of the Soviet Union (1944-1991)

The Soviet Union after World War II

Capital Language(s) Moscow Russian, many others

Soviet Union

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socialist republic, single-party communist state

Government Leader - 19221924 (first) - 19851991 (last) Legislature

Vladimir Lenin Mikhail Gorbachev Congress of Soviets and Central Executive Committee (1922-1937) Supreme Soviet (1937-1989; 1991) Congress of People's Deputies and Supreme Soviet (1989-1991)

History -Established -Disestablished Area -1991 Population -1991 est. Density Currency Internet TLD Calling code 293047571 13.1/km2 (33.9/sqmi) Soviet ruble () (SUR) .su2 +7 22402200km2 (8649538sqmi) 30 December 1922 26 December 1991

Preceded by

Succeeded by

Russian SFSR Transcaucasian SFSR Ukrainian SSR Byelorussian SSR

Russia Georgia Ukraine Moldova Belarus Armenia Azerbaijan Kazakhstan Uzbekistan Turkmenistan Kyrgyzstan Tajikistan Estonia3 Latvia3 Lithuania3

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On 21 December 1991, eleven of the former socialist republics declared in Alma-Ata (with the 12th republic Georgia attending as an observer) that with the formation of the Commonwealth of Independent States the Union of Soviet Socialist Republics ceases to exist. 2 Assigned on 19 September 1990, existing onwards. 3 The governments of Estonia, Latvia, and Lithuania view themselves as continuous and unrelated to the respective Soviet republics. Russia views the Estonian, Latvian, and Lithuanian SSRs as legal constituent republics of the USSR and predecessors of the modern Baltic states. The Government of the United States and a number of other countries did not recognize the annexation of Estonia, Latvia, and Lithuania to the USSR as a legal inclusion.

The Soviet Union (Russian: , tr. Sovietsky Soyuz), officially the Union of Soviet Socialist Republics (USSR or U.S.S.R.; Russian: , tr. Soyuz Sovietskikh Sotsialisticheskikh Respublik; IPA:[sjus svetskx stslstitskx rspublk]( listen); abbreviated , SSSR), was a constitutionally socialist state that existed in Eurasia between 1922 and 1991. The Soviet Union was a single party state ruled by the Communist Party from its foundation until 1990.[1] Even though the USSR was technically a union of 15 independent Soviet republics, its government and economy was highly centralized. The Russian Revolution of 1917 brought about the downfall of the Russian Empire. Following the Russian Revolution, there was a struggle for power between the Bolshevik party, led by Vladimir Lenin, and the anti-communist White movement. In December 1922, the Bolsheviks won the civil war, and the Soviet Union was formed with the merger of the Russian Soviet Federative Socialist Republic, the Transcaucasian Socialist Federative Soviet Republic, the Ukrainian Soviet Socialist Republic and the Byelorussian Soviet Socialist Republic. Following the death of Vladimir Lenin in 1924, Joseph Stalin took power[2] , leading the USSR through a large-scale industrialization program. Stalin established a planned economy and suppressed political opposition to him and the Communist party.[2] [3] In June 1941, Nazi Germany and its allies invaded the Soviet Union, breaking the non-aggression pact, which the latter had signed in 1939. After four years of brutal warfare, the Soviet Union emerged victorious as one of the world's two superpowers, the other being the United States. The Soviet Union and its Eastern European satellite states engaged in the Cold War, a prolonged global ideological and political struggle against the United States and its Western Bloc allies, which it ultimately lost in the face of economic troubles and both domestic and foreign political unrest.[4] [5] In the late 1980s, the last Soviet leader Mikhail Gorbachev tried to reform the state with his policies of perestroika and glasnost, but the Soviet Union collapsed and was formally dissolved in December 1991 after the abortive August coup attempt.[6] The Russian Federation assumed its rights and obligations.[7]

Geography, climate and environment

With an area of 22402200 square kilometres ( sqmi), the Soviet Union was the world's largest state. Covering a sixth of the Earth's land surface, its size was comparable to that of North America. The European portion accounted for a quarter of the country's area, and was the cultural and economic center. The eastern part in Asia extended to the Pacific Ocean to the east and Afghanistan to the south, and was much less populous. It spanned over 10000 kilometres (6200mi) east to west across 11 time zones, and almost 7200 kilometres (4500mi) north to south. It had five climate zones: tundra, taiga, steppes, desert, and mountains. The Soviet Union had the world's longest border, measuring over 60000 kilometres (37000 mi), two-thirds of it a coastline of the Arctic Ocean. Across the Bering Strait was the United States. The Soviet Union bordered Afghanistan, China, Czechoslovakia, Finland, Hungary, Iran, Mongolia, North Korea, Norway, Poland, Romania, and Turkey from 1945 to 1991. The Soviet Union's longest river was the Irtysh. Its highest mountain was Communism Peak (now Ismail Samani Peak) in Tajikistan, at 7495 metres (24590 ft). The world's largest lake, the Caspian Sea, lay mainly within the Soviet

Soviet Union Union. The world's largest freshwater and deepest lake, Lake Baikal, was in the Soviet Union.

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History
The last Russian Tsar, Nicholas II, ruled the Russian Empire until his abdication in March 1917, due in part to the strain of fighting in World War I. A short-lived Russian provisional government took power, to be overthrown in the 1917 October Revolution (N.S. November 1917) by revolutionaries led by the Bolshevik leader Vladimir Lenin. The Soviet Union was officially established in December 1922 with the union of the Russian, Ukrainian, Byelorussian, and Transcaucasian Soviet republics, each ruled by local Bolshevik parties. Despite the foundation of the Soviet state as a federative entity of many constituent republics, each with its own political and administrative entities, the term "Soviet Russia" strictly applicable only to the Russian Federative Socialist Republic was often incorrectly applied to the entire country by non-Soviet writers and politicians.

Revolution and foundation

Modern revolutionary activity in the Russian Empire began with the Decembrist Revolt of 1825. Although serfdom was abolished in 1861, it was done on terms unfavorable to the peasants and served to encourage revolutionaries. A parliamentthe State Dumawas established in 1906 after the Russian Revolution of 1905, but the Tsar resisted attempts to move from absolute to constitutional monarchy. Social unrest continued and was aggravated during World War I by military defeat and food shortages in major cities. A spontaneous popular uprising in Saint Petersburg, in response to the wartime decay of Russia's economy and morale, culminated in the February Revolution and the toppling of the imperial government in March 1917. The tsarist autocracy was replaced by the Russian Provisional Government, which intended to conduct elections to the Russian Constituent Assembly and to continue fighting on the side of the Entente in World War I. At the same time, workers' councils, known as Soviets, sprang up across the country. The Bolsheviks, led by Vladimir Lenin, pushed for socialist revolution in the Soviets and on the streets. In November 1917, during the October Revolution, they seized power. In December, the Bolsheviks signed an armistice with the Central Powers, though by February 1918, fighting had resumed. In March, the Soviets quit the war for good and signed the Treaty of Brest-Litovsk.
Vladimir Lenin addressing a crowd in 1920.

A long and bloody Russian Civil War ensued between the Reds and the Whites, starting in 1917 and ending in 1923 with the Reds victorious. It included foreign intervention, the execution of Nicholas II and his family and the famine of 1921, which killed about five million.[8] In March 1921, during a related conflict with Poland, the Peace of Riga was signed, splitting disputed territories in Belarus and Ukraine between the Republic of Poland and Soviet Russia. The Soviet Union had to resolve similar conflicts with the newly established Republic of Finland, the Republic of Estonia, the Republic of Latvia, and the Republic of Lithuania.

Unification of republics
On 28 December 1922, a conference of plenipotentiary delegations from the Russian SFSR, the Transcaucasian SFSR, the Ukrainian SSR and the Byelorussian SSR approved the Treaty of Creation of the USSR[9] and the Declaration of the Creation of the USSR, forming the Union of Soviet Socialist Republics.[10] These two documents were confirmed by the 1st Congress of Soviets of the USSR and signed by the heads of the delegations,[11] Mikhail Kalinin, Mikha Tskhakaya, Mikhail Frunze, Grigory Petrovsky, and Aleksandr Chervyakov,[12] on 30 December 1922.

Soviet Union On 1 February 1924, the USSR was recognized by the British Empire. The same year, a Soviet Constitution was approved, legitimizing the December 1922 union. An intensive restructuring of the economy, industry and politics of the country began in the early days of Soviet power in 1917. A large part of this was done according to the Bolshevik Initial Decrees, government documents signed by Vladimir Lenin. One of the most prominent breakthroughs was the GOELRO plan, which envisioned a major restructuring of the Soviet economy based on total electrification of the country. The plan was developed in 1920 and covered a 10- to 15-year period. It included construction of a network of 30 regional power plants, including ten large hydroelectric power plants, and numerous electric-powered large industrial enterprises.[13] The plan became the prototype for subsequent Five-Year Plans and was basically fulfilled by 1931.[14]

200

Stalin era
From its beginning, the government in the Soviet Union was based on the one-party rule of the Communist Party (Bolsheviks).[15] After the economic policy of War Communism during the Russian Civil War, the Soviet government permitted some private enterprise to coexist alongside nationalized industry in the 1920s and total food requisition in the countryside was replaced by a food tax (see New Economic Policy). Soviet leaders argued that one-party rule was necessary to ensure that "capitalist exploitation" would not return to the Soviet Union and that the principles of Democratic Centralism would represent the people's will. Debate over the future of the economy provided the background for a power struggle in the years after Lenin's death in 1924. Initially, Lenin was to be replaced by a "troika" consisting of Grigory Zinoviev of Ukraine, Lev Kamenev of Moscow, and Joseph Stalin of Georgia. On 3 April 1922, Stalin was named the General Secretary of the Communist Party of the Soviet Union. Lenin had appointed Stalin the head of the Workers' and Peasants' Inspectorate, which gave Stalin considerable power. By gradually consolidating his influence and isolating and out-maneuvering his rivals within the party, Stalin became the undisputed leader of the Soviet Union and, by the end of the 1920s, established totalitarian rule. In October 1927, Grigory Zinoviev and Leon Trotsky were expelled from the Central Committee and forced into exile. In 1928, Stalin introduced the First Five-Year Plan for building a socialist economy. While encompassing the internationalism expressed by Lenin throughout the course of the Revolution, it also aimed to build socialism in one country. In industry, the state assumed control over all existing enterprises and undertook an intensive program of industrialization. In agriculture, collective farms were established all over the country. Famines ensued, causing millions of deaths; surviving kulaks were persecuted and many sent to Gulags to do forced labour.[16] Social upheaval continued in the mid-1930s. Stalin's Great Purge resulted in the execution or detainment of many "Old Bolsheviks" who had participated in the October Revolution with Lenin. According to declassified Soviet archives, in 1937 and 1938, the NKVD arrested more than one and a half million people, of whom 681,692 were shot an average of 1,000 executions a day.[17] The excess deaths during the 1930s as a whole were in the range of 1011 million.[18] Yet despite the turmoil of the mid-to-late 1930s, the Soviet Union developed a powerful industrial economy in the years before World War II. The 1930s The early 1930s saw closer cooperation between the West and the USSR. From 1932 to 1934, the Soviet Union participated in the World Disarmament Conference. In 1933, diplomatic relations between the United States and the USSR were established. In September 1934, the Soviet Union joined the League of Nations. After the Spanish Civil War broke out in 1936, the USSR actively supported the Republican forces against the Nationalists, who were supported by Fascist Italy and Nazi Germany. In December 1936, Stalin unveiled a new Soviet Constitution. The constitution was seen as a personal triumph for Stalin, who on this occasion was described by Pravda as a "genius of the new world, the wisest man of the epoch, the great leader of communism." By contrast, western historians and historians from former Soviet occupied

Soviet Union countries have viewed the constitution as a meaningless propaganda document. The late 1930s saw a shift towards the Axis powers. In 1938, after the United Kingdom and France had concluded the Munich Agreement with Germany, the USSR dealt with the Nazis as well, both militarily and economically during extensive talks. The two countries concluded the GermanSoviet Nonaggression Pact and the GermanSoviet Commercial Agreement. The nonaggression pact made possible Soviet occupation of Lithuania, Latvia, Estonia, Bessarabia, northern Bukovina, and eastern Poland. In late November of the same year, unable to coerce the Republic of Finland by diplomatic means into moving its border 25 kilometres (16mi) back from Leningrad, Joseph Stalin ordered the invasion of Finland. In the east, the Soviet military won several decisive victories during border clashes with the Japanese Empire in 1938 and 1939. However, in April 1941, USSR signed the SovietJapanese Neutrality Pact with the Empire of Japan, recognizing the territorial integrity of Manchukuo, a Japanese puppet state. World War II Although it has been debated whether the Soviet Union had any intention of invading Germany once it was strong enough,[19] Germany itself broke the treaty and invaded the Soviet Union on 22 June 1941, starting what was known in the USSR as the "Great Patriotic War". The Red Army stopped the seemingly-invincible German Army at the Battle of Moscow, aided by an unusually harsh winter. The Battle of Stalingrad, which lasted from late 1942 to early 1943, dealt a severe blow to the Germans from which they never fully recovered and Soviet Katyusha multiple rocket launchers fire on became a turning point of the war. After Stalingrad, Soviet forces Berlin, April 1945. drove through Eastern Europe to Berlin before Germany surrendered in 1945. The German Army suffered 80% of its military deaths in the Eastern Front.[20] The same year, the USSR, in fulfillment of its agreement with the Allies at the Yalta Conference, denounced the SovietJapanese Neutrality Pact in April 1945[21] and invaded Manchukuo and other Japan-controlled territories on 9 August 1945.[22] This conflict ended with a decisive Soviet victory, contributing to the unconditional surrender of Japan and the end of World War II. The Soviet Union suffered greatly in the war, losing around 27 million people.[23] Despite this, it emerged as a military superpower. Once denied diplomatic recognition by the Western world, the Soviet Union had official relations with practically every nation by the late 1940s. A member of the United Nations at its foundation in 1945, the Soviet Union became one of the five permanent members of the UN Security Council, which gave it the right to veto any of its resolutions (see

201

Soviet Premier Joseph Stalin, U.S. President Franklin D. Roosevelt and British Prime Minister Winston Churchill (left to right) confer in Tehran in 1943.

Soviet Union and the United Nations). The Soviet Union maintained its status as one of the world's two superpowers for four decades through its hegemony in Eastern Europe, military strength, economic strength, aid to developing countries, and scientific research, especially in space technology and weaponry.

Soviet Union Cold War During the immediate postwar period, the Soviet Union rebuilt and expanded its economy, while maintaining its strictly centralized control. It aided post-war reconstruction in the countries of Eastern Europe, while turning them into satellite states, binding them in a military alliance (the Warsaw Pact) in 1955, and an economic organization (The Council for Mutual Economic Assistance or Comecon) from 1949 to 1991, the latter a counterpart to the European Economic Community.[24] Later, the Comecon supplied aid to the eventually victorious Chinese Communist Party, and saw its influence grow elsewhere in the world. Fearing its ambitions, the Soviet Union's wartime allies, the United Kingdom and the United States, became its enemies. In the ensuing Cold War, the two sides clashed indirectly using mostly proxies.

202

Khrushchev era
Stalin died on 5 March 1953. In the absence of a mutually-agreeable successor, the highest Communist Party officials opted to rule the Soviet Union jointly. Nikita Khrushchev, who had won the power struggle by the mid-1950s, denounced Stalin's use of repression in 1956 and eased repressive controls over party and society. This was known as de-Stalinization. Moscow considered Eastern Europe to be a buffer zone for the forward defense of its western borders, and ensured its control of the region by transforming the East European countries into satellite states. Soviet military force was used to suppress anti-communist uprisings in Hungary and Poland in 1956. In the late 1950s, a confrontation with China regarding the USSR's rapprochement with the West and what Mao Zedong perceived as Khrushchev's revisionism led to the SinoSoviet split. This resulted in a break throughout the global Communist movement, with Communist regimes in Albania, Cambodia and Somalia choosing to ally with China in place of the USSR. During this period, the Soviet Union continued to realize scientific and technological exploits: Launching the first artificial satellite, Sputnik 1; a living dog, Laika; the first human being, Yuri Gagarin; the first woman in space, Valentina Tereshkova in 1963; Alexey Leonov, the first person to walk in space in 1965; and the first moon rovers, Lunokhod 1 and Lunokhod 2.[25] Khrushchev initiated "The Thaw" better known as Khrushchev's Thaw, a complex shift in political, cultural and economic life in the Soviet Union. That included some openness and contact with other nations and new social and economic policies with more emphasis on commodity goods, allowing living standards to rise dramatically while maintaining high levels of economic growth. Censorship was relaxed as well.
The maximum territorial extent of countries in the world under Soviet influence, after the Cuban Revolution of 1959 and before the official SinoSoviet split of 1961

Lunokhod 1.

Khrushchev's reforms in agriculture and administration, however, were generally unproductive. In 1962, he precipitated a crisis with the United States over the Soviet deployment of nuclear missiles in Cuba. The Soviet Union backed down after the United States initiated a naval blockade, causing Khrushchev much embarrassment and loss of prestige. He was removed from power in 1964.

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Brezhnev era
Following the ousting of Khrushchev, another period of collective leadership ensued, consisting of Leonid Brezhnev as General Secretary, Alexei Kosygin as Premier and Nikolai Podgorny as Chairman of the Presidium, lasting until Brezhnev established himself in the early 1970s as the preeminent Soviet leader. In 1968 the Soviet Union and its Warsaw Pact allies invaded Czechoslovakia to halt the Prague Spring reforms. Brezhnev presided over a period of dtente with the West (see SALT I, SALT II, Anti-Ballistic Missile Treaty) while at the same time building up Soviet military might. In October 1977, the third Soviet Constitution was unanimously adopted. The prevailing mood of the Soviet leadership at the time of Brezhnev's death in 1982 was one of aversion to change. The long period of Brezhnev's rule had come to be dubbed one of "standstill", with an aging and ossified top political leadership.

Leonid Brezhnev and Jimmy Carter sign SALT II treaty, 18 June 1979, in Vienna.

Reforms and dissolution

Two developments dominated the decade that followed: the increasingly apparent crumbling of the Soviet Union's economic and political structures, and the patchwork attempts at reforms to reverse that process. Kenneth S. Deffeyes argued in Beyond Oil that the Reagan administration encouraged Saudi Arabia to lower the price of oil to the point where the Soviets could not make a profit selling their oil, so that the USSR's hard currency reserves became depleted.[26] Brezhnev's next two successors, transitional figures with deep roots in his tradition, did not last long. Yuri Andropov was 68 years old and Konstantin Chernenko 72 when they assumed power; both died in less than two years. In an attempt to avoid a third short-lived leader, in 1985, the Soviets turned to the next generation and selected Mikhail Gorbachev.
Gorbachev in one-on-one discussions with U.S. President Ronald Reagan.

Gorbachev made significant changes in the economy and party leadership, called perestroika. His policy of glasnost freed public access to information after decades of heavy government censorship. Gorbachev also moved to end the Cold War. In 1988, the Soviet Union abandoned its nine-year war in Afghanistan and began to withdraw its forces. In the late 1980s, he refused military support to the Soviet Union's former satellite states, resulting in the toppling of multiple communist regimes. With the tearing down of the Berlin Wall and with East Germany and West Germany pursuing unification, the Iron Curtain came down. In the late 1980s, the constituent republics of the Soviet Union started Soviet troops withdrawing from Afghanistan in legal moves towards or even declaration of sovereignty over their 1988 territories, citing Article 72 of the USSR constitution, which stated that any constituent republic was free to secede.[27] On 7 April 1990, a law was passed allowing a republic to secede if more than two-thirds of its residents voted for it in a referendum.[28] Many held their first free elections in the Soviet era for their own national legislatures in 1990. Many of these legislatures proceeded to produce legislation

Soviet Union contradicting the Union laws in what was known as the "War of Laws". In 1989, the Russian SFSR, which was then the largest constituent republic (with about half of the population) convened a newly elected Congress of People's Deputies. Boris Yeltsin was elected its chairman. On 12 June 1990, the Congress declared Russia's sovereignty over its territory and proceeded to pass laws that attempted to supersede some of the USSR's laws. The period of legal uncertainty continued throughout 1991 as constituent republics slowly became de facto independent. A referendum for the preservation of the USSR was held on 17 March 1991, with the majority of the population voting for preservation of the Union in nine out of the 15 republics. The referendum gave Gorbachev a minor boost. In the summer of 1991, the New Union Treaty, which would have turned the Soviet Union into a much looser federation, was agreed upon by eight republics. The signing of the treaty, however, was interrupted by the August Coupan attempted coup d'tat by hardline members of the government and the KGB who sought to reverse Gorbachev's reforms and reassert the central government's control over the republics. After the coup collapsed, Yeltsin was seen as a hero for his decisive actions, while Gorbachev's power was effectively ended. The balance of power tipped significantly towards the republics. In August 1991, Latvia and Estonia immediately declared the restoration of their full independence (following Lithuania's 1990 example), while the other twelve republics continued discussing new, increasingly looser, models of the Union.

204

Yeltsin stands on a tank to defy the August Coup in 1991.

On 8 December 1991, the presidents of Russia, Ukraine and Belarus signed the Belavezha Accords, which declared the Soviet Union dissolved and established the Commonwealth of Independent States (CIS) in its place. While doubts remained over the authority of the accords to do this, on 21 December 1991, the representatives of all Soviet republics except Georgia signed the Alma-Ata Protocol, which confirmed the accords. On 25 December 1991, Gorbachev yielded to the inevitable and resigned as the President of the USSR, declaring the office extinct. He turned the powers that had been vested in the presidency over to Yeltsin, the President of Russia. The following day, the Supreme Soviet, the highest governmental body of the Soviet Union, dissolved itself. This is generally recognized as marking the official, final dissolution of the Soviet Union as a functioning state. Many organizations, such as the Soviet Army and police forces, continued to remain in place in the early months of 1992, but were slowly phased out and either withdrawn from or absorbed by the newly independent states. Following the dissolution of the Soviet Union on 26 December 1991, Russia was internationally recognized[29] as its legal successor on the international stage. To that end, Russia voluntarily accepted all Soviet foreign debt and claimed overseas Soviet properties as its own. Since then, the Russian Federation has assumed the Soviet Union's rights and obligations.

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Politics
There were three power hierarchies in the Soviet Union: the legislative branch represented by the Supreme Soviet of the Soviet Union, the government represented by the Council of Ministers, and the Communist Party of the Soviet Union (CPSU), the only legal party and the ultimate policymaker in the country.[30]

Communist Party
At the top of the Communist Party was the Central Committee, elected at Party Congresses and Conferences. The Central Committee in turn voted for a Politburo (called the Presidium between 19521966), Secretariat and the General Secretary (First Secretary from 1953 to 1966), the highest office in the USSR.[31] Depending on the degree of power consolidation, it was either the Politburo as a collective body or the General Secretary, who always was one of the Politburo members, that effectively led the party and the country[32] (except for the period The 1983 annual military parade in Moscow, of the highly personalized authority of Stalin, exercised directly commemorating the 66th anniversary of the through his position in the Council of Ministers rather than the October Revolution. The banner at the top reads: [33] Politburo after 1941). They were not controlled by the general party "Glory to the CPSU!" membership, as the key principle of the party organization was democratic centralism, demanding strict subordination to higher bodies, and elections went uncontested, endorsing the candidates proposed from above.[34] The Communist Party maintained its dominance over the state largely through its control over the system of appointments. All senior government officials and most deputies of the Supreme Soviet were members of the CPSU. Of the party heads themselves, Stalin in 19411953 and Khrushchev in 19581964 were Premiers. Upon the forced retirement of Khrushchev, the party leader was prohibited from this kind of double membership,[35] but the later General Secretaries for at least some part of their tenure occupied the largely ceremonial position of Chairman of the Presidium of the Supreme Soviet, the nominal head of state. The institutions at lower levels were overseen and at times supplanted by primary party organizations.[36] In practice, however, the degree of control the party was able to exercise over the state bureaucracy, particularly after the death of Stalin, was far from total, with the bureaucracy pursuing different interests that were at times in conflict with the party.[37] Nor was the party itself monolithic from top to bottom, although factions were officially banned.[38]

Government
The Supreme Soviet (successor of the Congress of Soviets and Central Executive Committee) was nominally the highest state body for most of the Soviet history,[39] at first acting as a rubber stamp institution, approving and implementing all decisions made by the party. However, the powers and functions of the Supreme Soviet were extended in the late 1950s, 1960s and 1970s, including the creation of new state commissions and committees. It gained additional powers when it came to the approval of the Five-Year Plans and the Soviet state budget.[40] The Supreme Soviet elected a Presidium to wield its power between plenary sessions,[41] ordinarily held twice a year, and

The Grand Kremlin Palace, seat of the Supreme Soviet of the USSR, in 1982

Soviet Union appointed the Supreme Court,[42] the Procurator General[43] and the Council of Ministers (known before 1946 as the Council of People's Commissars), headed by the Chairman (Premier) and managing an enormous bureaucracy responsible for the administration of the economy and society.[41] State and party structures of the constituent republics largely emulated the structure of the central institutions, although the Russian SFSR, unlike the other constituent republics, for most of its history had no republican branch of the CPSU, being ruled directly by the union-wide party until 1990. Local authorities were organized likewise into party committees, local Soviets and executive committees. While the state system was nominally federal, the party was unitary.[44] The state security police (the KGB and its predecessor agencies) played an important role in Soviet politics. It was instrumental in the Stalinist terror,[45] but after the death of Stalin, the state security police was brought under strict party control. Under Yuri Andropov, KGB chairman in 19671982 and General Secretary from 1982 to 1983, the KGB engaged in the suppression of political dissent and maintained an extensive network of informers, reasserting itself as a political actor to some extent independent of the party-state structure,[46] culminating in the anti-corruption campaign targeting high party officials in the late 1970s and early 1980s.[47]

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Separation of power and reform

The Soviet constitutions, which were promulgated in 1918, 1924, 1936 and 1977,[48] did not limit state power. No formal separation of powers existed between the Party, Supreme Soviet and Council of Ministers [49] that represented executive and legislative branches of the government. The system was governed less by statute than by informal conventions, and no settled mechanism of leadership succession existed. Bitter and at times deadly power struggles took place in the Politburo after the deaths of Lenin[50] and Joseph Stalin,[51] as well as after Khrushchev's dismissal,[52] itself due to a coup in both the Politburo and the Central Committee.[53] All Soviet party leaders before Gorbachev died in office, except Georgy Malenkov[54] and Khrushchev, both dismissed from the party leadership amid internal struggle within the party.[53] In 19881990, facing considerable opposition, Mikhail Gorbachev enacted reforms shifting power away from the highest bodies of the party and making the Supreme Soviet less dependent on them. The Congress of People's Deputies was established, the majority of whose members were directly elected in competitive elections held in March 1989. The Congress now elected the Supreme Soviet, which became a full-time parliament, much stronger than before. For the first time since the 1920s, it refused to rubber stamp proposals from the party and An armored personnel carrier surrounded by Council of Ministers.[55] In 1990, Gorbachev introduced and assumed anti-coup demonstrators in Moscow during the the position of the President of the Soviet Union, concentrated power 1991 August Coup in his executive office, independent of the party, and subordinated the government,[56] now renamed the Cabinet of Ministers of the USSR, to himself.[57] Tensions grew between the union-wide authorities under Gorbachev, reformists led in Russia by Boris Yeltsin and controlling the newly elected Supreme Soviet of the Russian SFSR, and Communist Party hardliners. On 1921 August 1991, a group of hardliners staged an abortive coup attempt. Following the failed coup, the State Council of the Soviet Union became the highest organ of state power "in the period of transition".[58] Gorbachev resigned as General Secretary, only remaining President for the final months of the existence of the USSR.[59]

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Judicial system
The judiciary was not independent of the other branches of government. The Supreme Court supervised the lower courts (People's Court) and applied the law as established by the Constitution or as interpreted by the Supreme Soviet. The Constitutional Oversight Committee reviewed the constitutionality of laws and acts. The Soviet Union utilized the inquisitorial system of Roman law, where the judge, procurator, and defense attorney collaborate to establish the truth.[60]

Political divisions
Constitutionally, the Soviet Union was a union of Soviet Socialist Republics (SSRs) and the Russian Soviet Federative Socialist Republic (RSFSR), although the rule of the highly centralized Communist Party made the union merely nominal.[30] The Treaty on the Creation of the USSR was signed in December 1922 by four founding republics, the RSFSR, Transcaucasian SFSR, Ukrainian SSR and Belorussian SSR. In 1924, during the national delimitation in Central Asia, the Uzbek and Turkmen SSRs were formed from parts of the RSFSR's Turkestan ASSR and two Soviet dependencies, the Khorezm and Bukharan SSR. In 1929, the Tajik SSR was split off from the Uzbek SSR. With the constitution of 1936, the constituents of the Transcaucasian SFSR, namely the Georgian, Armenian and Azerbaijan SSRs, were elevated to union republics, while the Kazakh and Kirghiz SSRs were split off from the RSFSR.[61] In August 1940, the Soviet Union formed the Moldavian SSR from parts of the Ukrainian SSR and parts of Bessarabia annexed from Romania. It also annexed the Baltic states as the Estonian, Latvian and Lithuanian SSRs. The Karelo-Finnish SSR was split off from the RSFSR in March 1940 and merged back in 1956. Between July 1956 and September 1991, there were 15 union republics (see map below).[62] On 16 November 1988, the Supreme Soviet of the Estonian SSR passed the Estonian Sovereignty Declaration that asserted Estonia's sovereignty and declared the supremacy of Estonian laws over those of the Soviet Union.[63] In March 1990, the newly-elected Supreme Soviet of the Lithuanian SSR declared independence, followed by the Georgian Supreme Soviet in April 1991. Although the symbolic right of the republics to secede was nominally guaranteed by the constitution and the union treaty,[30] Soviet authorities at first refused to recognize it. After the August coup attempt, most of the other republics followed suit. The Soviet Union ultimately recognized the secession of Estonia, Latvia and Lithuania on 6 September 1991. The remaining republics were recognized as independent with the Soviet Union's final dissolution in December 1991.[64]
# Republic Map of the Union Republics between 19561991

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Russian SFSR Ukrainian SSR Belorussian SSR Uzbek SSR Kazakh SSR Georgian SSR Azerbaijan SSR Lithuanian SSR Moldavian SSR Latvian SSR Kirghiz SSR Tajik SSR Armenian SSR Turkmen SSR Estonian SSR

Economy
The Soviet Union became the first country to adopt a planned economy, whereby production and distribution of goods were centralized and directed by the government. The first Bolshevik experience with a command economy was the policy of War Communism, which involved nationalization of industry, centralized distribution of output, coercive requisition of agricultural production, and attempts to eliminate the circulation of money, as well as private enterprises and free trade. As it had aggravated a severe economic The DneproGES, one of many hydroelectric collapse caused by the war, in 1921, Lenin replaced War Communism power stations in the Soviet Union with the New Economic Policy (NEP), legalizing free trade and private ownership of smaller businesses. The economy recovered fairly quickly.[65] Following a lengthy debate among the members of Politburo over the course of economic development, by 19281929, upon gaining control of the country, Joseph Stalin abandoned the NEP and pushed for full central planning, starting forced collectivization of agriculture and enacting draconian labor legislation. Resources were mobilized for rapid industrialization, which greatly expanded Soviet capacity in heavy industry and capital goods during the 1930s.[65] Preparation for war was one of the main driving forces behind industrialization, mostly due to distrust of the outside capitalistic world.[66] As a result, the USSR was transformed from a largely agrarian economy into a great industrial power, leading the way for its emergence as a superpower after World War II.[67] During the war, the Soviet economy and infrastructure suffered massive devastation and required extensive reconstruction.[68] By the early 1940s, the Soviet economy had become relatively self-sufficient; for most of the period up until the creation of Comecon, only a very small share of domestic products was traded internationally.[69] After the creation of the Eastern Bloc, external trade rose rapidly. Still the influence of the world economy on the USSR was limited by fixed domestic prices and a state monopoly on foreign trade.[70] Grain and sophisticated consumer manufactures became major import articles from around the 1960s.[69] During the arms race of the Cold War, the Soviet economy was burdened by military expenditures, heavily lobbied for by a powerful bureaucracy dependent on the arms

Soviet Union industry. At the same time, the Soviet Union became the largest arms exporter to the Third World. Significant amounts of Soviet resources during the Cold War were allocated in aid to the other socialist states.[69] From the 1930s until its collapse in the late 1980s, the way the Soviet economy operated remained essentially unchanged. The economy was formally directed by central planning, carried out by Gosplan and organized in five-year plans. In practice, however, the plans were highly aggregated and provisional, subject to ad hoc intervention by superiors. All key economic decisions were taken by the political leadership. Allocated resources and plan targets were normally denominated in rubles rather than in physical goods. Credit was discouraged, but widespread. Final allocation of output was achieved through relatively decentralized, unplanned contracting. Although in theory prices were legally set from above, in practice the actual prices were often negotiated, and informal horizontal links were widespread.[65] A number of basic services were state-funded, such as education and healthcare. In the manufacturing sector, heavy industry and defense were assigned higher priority than the production of consumer goods.[71] Consumer goods, particularly outside large cities, were often in short supply, of poor quality and limited choice. Under command economy, consumers had almost no influence over production, so the changing demands of a population with growing incomes could not be satisfied by supplies at rigidly fixed prices.[72] A massive unplanned second economy grew up alongside the planned one at low levels, providing some of the goods and services that the planners could not. Legalization of some elements of the decentralized economy was attempted with the reform of 1965.[65] Although statistics of the Soviet economy are notoriously unreliable and its economic growth difficult to estimate precisely,[73] [74] by most accounts, the economy continued to expand until the mid 1980s. During the 1950s and 1960s, the Soviet economy experienced comparatively high growth and was catching up to the West.[75] However, after 1970, the growth, while still positive, steadily declined, much more quickly and consistently than in other countries, despite a rapid increase in the capital stock, (the rate of increase in capital was only surpassed by Japan).[65] Overall, between 1960 and 1989, the growth rate of per capita income in the Soviet Union was slightly above the world average (based on 102 countries). However, given the very high level of investment in physical capital, high percentage of people with a secondary education, and low population increase, the economy should have grown much faster. According to Stanley Fischer and William Easterly, the Soviet growth record was among "the worst in the world". By their calculation, per capita income of Soviet Union in 1989 should have been twice as high as it was, if investment, education and population had their typical effect on growth. The authors attribute this poor performance to low productivity of capital in the Soviet Union.[76] In 1987, Mikhail Gorbachev tried to reform and revitalize the economy with his program of perestroika. His policies relaxed state control over enterprises, but did not yet allow it to be replaced by market incentives, ultimately resulting in a sharp decline in production output. The economy, already suffering from reduced petroleum export revenues, started to collapse. Prices were still fixed, and property was still largely state-owned until after the dissolution of the Soviet Union.[65] [72] For most of the period after World War II up to its collapse, the Soviet economy was the second largest in the world by GDP (PPP),[77] though in per capita terms the Soviet GDP was behind that of the First World countries.[78]

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Energy
The need for fuel declined in the Soviet Union from the 1970s to the 1980s,[79] both per ruble of gross social product and per ruble of industrial product. At the start, this decline grew very rapidly, but gradually slowed down between 1970 and 1975. From 1975 and 1980, it grew even slower, only 2.6 percent.[80] David Wilson, a historian, believed that the gas industry would account for 40 percent of Soviet fuel production by the end of the century. His theory did not come to fruition because of the USSR's collapse.[81] The USSR, in theory, would have continued to have an economic growth rate of 22.5 A Soviet stamp depicting the 30th anniversary of the International Atomic Energy Agency percent during the 1990s because of Soviet energy fields.[82] However, the energy sector faced many difficulties, among them the country's high military expenditure and hostile relations with the First World (pre-Gorbachev era).[83] In 1991, the Soviet Union had a pipeline network of unknown operator: u',' kilometres (unknown operator: u'strong'unknown operator: u','mi) for crude oil and another unknown operator: u',' kilometres (unknown operator: u'strong'unknown operator: u','mi) for natural gas.[84] Petroleum and petroleum-based products, natural gas, metals, wood, agricultural products, and a variety of manufactured goods, primarily machinery, arms and military equipment, were exported.[85] In the 1970s and 1980s, the Soviet Union heavily relied on fossil fuel exports to earn hard currency.[69] At its peak in 1988, it was the largest producer and second largest exporter of crude oil, surpassed only by Saudi Arabia.[86]

Science and technology

The Soviet Union placed great emphasis on science and technology within its economy,[87] however, the most remarkable Soviet successes in technology, such as producing the world's first space satellite, typically were the responsibility of the military.[71] Lenin believed that the USSR would never overtake the developed world if it remained as technologically backward as it was. Soviet authorities proved their commitment to Lenin's belief by developing massive networks, research and development organizations. By 1989, Soviet scientists were among the world's best-trained specialists in several areas, such as energy physics, selected areas of medicine, mathematics, welding and military technologies. Due to rigid state planning and bureaucracy, the Soviets remained far behind technologically in chemistry, biology, and computers when compared to the First World. Project Socrates, under the Reagan administration, determined that the Soviet Union addressed the acquisition of science and technology in a manner that was radically different than what the US was using at that time. In the case of the US, economic prioritization was being used for indigenous R&D as the means to acquire science and technology in both the private and public sectors. In contrast, the Soviet Union was offensively and defensively maneuvering in the acquisition and utilization of the worldwide technology, to increase the competitive advantage that they acquired from the technology, while preventing the US from acquiring a competitive advantage. However, in addition, the Soviet Union's technology-based planning was executed in a centralized, government-centric manner that greatly hindered its flexibility. It was this significant lack of flexibility that was exploited by the US to undermine the strength of the Soviet Union and thus foster its reform. [88] [89] [90]
A Soviet stamp showing the orbit of Sputnik

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Transport
Transport was a key component of the nation's economy. The economic centralisation of the late 1920s and 1930s led to the development of infrastructure on a massive scale, most notably the establishment of Aeroflot, an aviation enterprise.[91] The country had a wide variety of modes of transport by land, water and air.[84] However, due to bad maintenance, much of the road, water and Soviet civil aviation transport were outdated and technologically backward compared to the First World.[92]

The Soviet-era flag of Aeroflot

Soviet rail transport was the largest and most intensively used in the world;[92] it was also better developed than most of its Western counterparts.[93] By the late 1970s and early 1980s, Soviet economists were calling for the construction of more roads to alleviate some of the burden from the railways and to improve the Soviet state budget.[94] The road network and automobile industry[95] remained underdeveloped,[96] and dirt roads were common outside major cities.[97] Soviet maintenance projects proved unable to take care of even the few roads the country had. By the early to mid-1980s, the Soviet authorities tried to solve the road problem by ordering the construction of new ones.[97] Meanwhile, the automobile industry was growing at a faster rate than road construction.[98] The underdeveloped road network led to a growing demand for public transport.[99] Despite improvements, several aspects of the transport sector were still riddled with problems due to outdated infrastructure, lack of investment, corruption and bad decision-making. Soviet authorities were unable to meet the growing demand for transport infrastructure and services. The Soviet merchant fleet was one of the largest in the world.[84]

Demographics
The first fifty years of the 20th century in tsarist Russia and the Soviet Union were marked by a succession of disasters, each accompanied by largescale population losses. Excess deaths over the course of World War I and the Russian Civil War (including the postwar famine) amounted to a combined total of 18 million,[100] some 10 million in the 1930s,[18] and more than 26 million in 19415. The postwar Soviet population was 45 to 50 million smaller than it would have been if pre-war demographic growth had continued.[101]

The population of the USSR (red) and the post-Soviet states (blue) from 1961 to 2009.

The crude birth rate of the USSR decreased from 44.0 per thousand in 1926 to 18.0 in 1974, largely due to increasing urbanization and the rising average age of marriages. The crude death rate demonstrated a gradual decrease as well from 23.7 per thousand in 1926 to 8.7 in 1974. In general, the birth rates of the southern republics in Transcaucasia and Central Asia were considerably higher than those in the northern parts of the Soviet Union, and in some cases even increased in the postWorld War II period, a phenomenon partly attributed to slower rates of urbanization and traditionally earlier marriages in the southern republics.[102] Soviet Europe moved towards sub-replacement fertility, while Soviet Central Asia continued to exhibit population growth well above replacement-level fertility.[103] The late 1960s and the 1970s witnessed a reversal of the declining trajectory of the rate of mortality in the USSR, and was especially notable among men of working age, but was also prevalent in Russia and other predominantly

Soviet Union Slavic areas of the country.[104] An analysis of the official data from the late 1980s showed that after worsening in the late-1970s and the early 1980s, adult mortality began to improve again.[105] The infant mortality rate increased from 24.7 in 1970 to 27.9 in 1974. Some researchers regarded the rise as largely real, a consequence of worsening health conditions and services.[106] The rises in both adult and infant mortality were not explained or defended by Soviet officials, and the Soviet government simply stopped publishing all mortality statistics for ten years. Soviet demographers and health specialists remained silent about the mortality increases until the late-1980s, when the publication of mortality data resumed and researchers could delve into the real causes.[107]

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Education
Prior to 1917, in the Russian Empire, education was not free, and was therefore either inaccessible or barely accessible for many children from lower-class working and peasant families. Estimates from 1917 recorded that 7585 percent of the Russian population was illiterate. Anatoly Lunacharsky became the first People's Commissariat for Education of Soviet Russia. At the beginning, the Soviet authorities placed great emphasis on the elimination of illiteracy. People who were literate were automatically hired as teachers. For a short period, quality Soviet pupils on a visit to Milovice, was sacrificed for quantity. By 1940, Joseph Stalin could announce Czechoslovakia in 1985. that illiteracy had been eliminated. In the aftermath of the Great Patriotic War, the country's educational system expanded dramatically. This expansion had a tremendous effect. In the 1960s, nearly all Soviet children had access to education, the only exception being those living in remote areas. Nikita Khrushchev tried to make education more accessible, making it clear to children that education was closely linked to the needs of society. Education also became important in creating the New Soviet Man.[108] Access to higher education was restricted, however; only 20 percent of all applicants were accepted. The rest entered the labor market or learned a skill at a vocational technical school or technicum. Students from families of dubious political reliability were barred from higher education.[109] The Brezhnev administration introduced a rule that required all university applicants to present a reference from the local Komsomol party secretary.[110] According to statistics from 1986, the number of students per 10,000 population was 181 for the USSR, compared to 517 for the US.[111]

Ethnic groups
The Soviet Union was a very ethnically diverse country, with more than 100 distinct ethnic groups. The total population was estimated at 293 million in 1991. According to a 1990 estimate, the majority were Russians (50.78%), followed by Ukrainians (15.45%) and Uzbeks (5.84%).[112] All citizens of the USSR had their own ethnic affiliation. The ethnicity of a person was chosen at the age of sixteen[113] by the child's parents. If the parents did not agree, the child was automatically assigned the ethnicity of the mother. Partly due to Soviet policies,
1974 USSR geographic location of ethnicities

Soviet Union some of the smaller minority ethnic groups were considered part of larger ones, such as the Mingrelians of the Georgian SSR, who were classified with the linguistically related Georgians.[114] Some ethnic groups voluntarily assimilated, while others were brought in by force. Russians, Belarusians, and Ukrainians shared close cultural ties, while other groups did not. With multiple nationalities living in the same territory, ethnic antagonisms developed over the years.[115]

213

Health
In 1917, before the Bolshevik uprising, health conditions were significantly behind the developed countries. As Lenin later noted, "Either the lice will defeat socialism, or socialism will defeat the lice".[116] The Soviet principle of health care was conceived by the People's Commissariat for Health in 1918. Health care was to be controlled by the state and would be provided to its citizens free of charge. Article 42 of the 1977 Soviet Constitution gave all citizens the right to health protection and free access to any health institutions in the USSR. However, the Soviet Union's health care system was not able to fulfill all the needs of its people.[117] Before Leonid Brezhnev rose to power, Soviet socialised medicine was held in high esteem by many foreign specialists. This changed however, from Brezhnev's accession and Mikhail Gorbachev's tenure as leader, the Soviet health care system was heavily criticised for many basic faults, such as the quality of service and the unevenness in its provision.[118] Minister of Health Yevgeniy Chazov, during the 19th Congress of the Communist Party of the Soviet Union, while highlighting such Soviet success as having the most doctors and hospitals in the world, recognised the system's deficiencies and felt that billions of Soviet rubles were squandered.[119] After the communist takeover, the life expectancy for all age groups went up. This statistic was used by authorities to prove that the socialist system was superior to the capitalist system. These improvements continued into the 1960s, when the life expectancy in the Soviet Union surpassed that of the United States. It remained fairly stable during most years, although in the 1970s, it went down slightly, probably because of alcohol abuse. Most western sources put the blame on growing alcohol abuse and poor health care; this theory was also implicitly accepted by the Soviet authorities. At the same time, infant mortality began to rise. After 1974, the government stopped publishing statistics on this. This trend can be partly explained by the number of pregnancies rising drastically in the Asian part of the country where infant mortality was highest, while declining markedly in the more developed European part of the Soviet Union.[120]

Language
The Soviet government headed by Vladimir Lenin gave small language groups their own writing systems.[121] The development of these writing systems was very successful, even though some flaws were detected. During the later days of the USSR, countries with the same multilingual situation implemented similar policies. A serious problem when creating these writing systems was that the languages differed dialectally greatly from each other.[122] When a language had been given a writing system and appeared in a notable publication, that language would attain "official language" status. There were many minority languages which never received their own writing system, therefore their speakers were forced to have a second language.[123] There are examples where the Soviet government retreated from this policy, most notable under Stalin's regime, where education was discontinued in languages which were not widespread enough. These languages were then assimilated into another language, mostly Russian.[124] During the Great Patriotic War (World War II), some minority languages were banned, and their speakers accused of collaborating with the enemy.[125] As the most widely-spoken of the Soviet Union's many languages, Russian de facto functioned as an official language as the "language of interethnic communication" (Russian: ), but only assumed the de jure status of the official national language in 1990.[126]

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Religion
A.L. Eliseev writes that a meeting of the antireligious commission of the Central Committee of the All-Union Communist Party(Bolsheviks) took place on 23 May 1929 under the Chairmanship of E. laroslavskii. There, believers in the country were estimated at 80 percent. It cannot be ruled out that this percentage was somewhat understated, to prove the successfulness of the struggle with religion[127] Christianity and Islam had the greatest number of adherents among the Soviet state's religious citizens.[128] Eastern Christianity predominated among Christians, with Russia's traditional Russian Orthodox Church being the Soviet Union's largest Christian denomination. About 90 percent of the Soviet Union's Muslims were Sunnis, with Shiites concentrated in the Azerbaijani Soviet Socialist Republic.[128] Smaller groups included Roman Catholics, Jews, Buddhists, and a variety of Protestant sects.[128] Religious influence had been strong in the Russian Empire. The Russian Orthodox Church enjoyed a privileged status as the church of the monarchy and took part in carrying out official state functions.[129] The immediate period following the establishment of the Soviet state included a struggle against the Orthodox Church, which the revolutionaries considered an ally of the former ruling classes.[130] In Soviet law, the "freedom to hold religious services" was constitutionally guaranteed, although the ruling Communist Party regarded religion as The Cathedral of Christ the Saviour in [130] Moscow during its 1931 demolition. incompatible with the Marxist spirit of scientific materialism. In practice, the Soviet system subscribed to a narrow interpretation of this right, and in fact utilized a range of official measures to discourage religion and curb the activities of religious groups.[130] The 1918 Council of People's Commissars decree establishing the Russian Soviet Federative Socialist Republic (RSFSR) as a secular state also decreed that "the teaching of religion in all [places] where subjects of general instruction are taught, is forbidden. Citizens may teach and may be taught religion privately."[131] Among further restrictions, those adopted in 1929, a half-decade into Stalin's rule, included express prohibitions on a range of church activities, including meetings for organized Bible study.[130] Both Christian and non-Christian establishments were shut down by the thousands in the 1920s and 1930s. By 1940, as many as 90 percent of the churches, synagogues, and mosques that had been operating in 1917 were closed.[132] Convinced that religious anti-Sovietism had become a thing of the past, the Stalin regime began shifting to a more moderate religion policy in the late 1930s.[133] Soviet religious establishments overwhelmingly rallied to support the war effort during the Soviet war with Nazi Germany. Amid other accommodations to religious faith, churches were reopened, Radio Moscow began broadcasting a religious hour, and a historic meeting between Stalin and Orthodox Church leader Patriarch Sergius I of Moscow was held in 1943.[133] The general tendency of this period was an increase in religious activity among believers of all faiths.[134] The Soviet establishment again clashed with the churches under General Secretary Nikita Khrushchev's leadership in 1958 1964, a period when atheism was emphasized in the educational curriculum, and numerous state publications promoted atheistic views.[133] During this period, the number of churches fell from 20,000 to 10,000 from 1959 to 1965, and the number of synagogues dropped from 500 to 97.[135] The number of working mosques also declined, falling from 1,500 to 500 within a decade.[135] Religious institutions remained monitored by the Soviet government, but churches, synagogues, temples, and mosques were all given more leeway in the Brezhnev era.[136] Official relations between the Orthodox Church and the Soviet government again warmed to the point that the Brezhnev government twice honored Orthodox Patriarch Alexey II with Soviet decorations, including the Order of the Red Banner of Labor.[133] A poll conducted by Soviet authorities in 1982 recorded 20 percent of the Soviet population as "active religious believers."[137]

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Culture
The culture of the Soviet Union passed through several stages during the USSR's 70-year existence. During the first eleven years following the Revolution (19181929), there was relative freedom and artists experimented with several different styles in an effort to find a distinctive Soviet style of art. Lenin wanted art to be accessible to the Russian people. On the other hand, hundreds of intellectuals, writers, and artists were exiled or executed, and their work banned, for example Nikolay Gumilev (shot for conspiring against the Bolshevik regime) and Yevgeny Zamyatin (banned).[138] The government encouraged a variety of trends. In art and literature, numerous schools, some traditional and others radically experimental, proliferated. Communist writers Maksim Gorky and Vladimir Mayakovsky were active during this time. Film, as a means of influencing a largely illiterate society, received encouragement from the state; much of director Sergei Eisenstein's best work dates from this period. Later, during Stalin's rule, Soviet culture was characterised by the rise and domination of the government-imposed style of socialist realism, with all other trends being severely repressed, with rare exceptions, for example Mikhail Bulgakov's works. Many writers were imprisoned and killed.[139] Following the Khrushchev Thaw of the late 1950s and early 1960s, censorship was diminished. Greater experimentation in art forms became permissible once again, with the result that more sophisticated and subtly critical work began to be produced. The regime loosened its emphasis on socialist realism; thus, for instance, many protagonists of the novels of author Yury Trifonov concerned themselves with problems of daily life rather than with building socialism. An underground dissident literature, known as samizdat, developed during this late period. In architecture the Khrushchev era mostly focused on functional design as opposed to the highly decorated style of Stalin's epoch. In the second half of the 1980s, Gorbachev's policies of perestroika and glasnost significantly expanded freedom of expression in the media and press.[140]

References
[1] Bridget O'Laughlin (1975) Marxist Approaches in Anthropology Annual Review of Anthropology Vol. 4: pp. 34170 (October 1975) (doi:10.1146/annurev.an.04.100175.002013). William Roseberry (1997) Marx and Anthropology Annual Review of Anthropology, Vol. 26: pp. 2546 (October 1997) (doi:10.1146/annurev.anthro.26.1.25) [2] Robert Service (2005-09-09). Stalin: a biography (http:/ / books. google. com/ ?id=ITKUPwAACAAJ). Picador. ISBN978-0-330-41913-0. . [3] Crile, George (2003-04-21). Charlie Wilson's War: The Extraordinary Story of the Largest Covert Operation in History (http:/ / books. google. com/ ?id=juBxr41_c64C). Atlantic Monthly Press. ISBN978-0-87113-854-5. . [4] Mr. David Holloway (1996-03-27). Stalin and the Bomb (http:/ / yalepress. yale. edu/ book. asp?isbn=9780300066647). Yale University Press. p.18. ISBN978-0-300-06664-7. . [5] Turner 1987, p.23 [6] Iain McLean (1996). The concise Oxford dictionary of politics (http:/ / books. google. com/ ?id=UMuBAAAAMAAJ). Oxford University Press. ISBN978-0-19-285288-5. . [7] "Russia is now a party to any Treaties to which the former Soviet Union was a party, and enjoys the same rights and obligations as the former Soviet Union, except insofar as adjustments are necessarily required, e.g. to take account of the change in territorial extent. [...] The Russian federation continues the legal personality of the former Soviet Union and is thus not a successor State in the sense just mentioned. The other former Soviet Republics are successor States.", United Kingdom Materials on International Law 1993, BYIL 1993, pp. 579 (636). [8] Evan Mawdsley (2007-03-01). The Russian Civil War (http:/ / books. google. com/ ?id=LUhXZD2BPeQC& pg=PA287). Pegasus Books. p.287. ISBN978-1-933648-15-6. . [9] Richard Sakwa The Rise and Fall of the Soviet Union, 19171991: 19171991. Routledge, 1999. ISBN 9780415122902, 9780415122900. pp. 140143. [10] Julian Towster. Political Power in the U.S.S.R., 19171947: The Theory and Structure of Government in the Soviet State Oxford Univ. Press, 1948. p. 106. [11] (Russian) Voted Unanimously for the Union. (http:/ / region. adm. nov. ru/ pressa. nsf/ 0c7534916fcf6028c3256b3700243eac/ 4302e4941fb6a6bfc3256c99004faea5!OpenDocument) Archived (http:/ / web. archive. org/ 20110722233249/ http:/ / region. adm. nov. ru/ pressa. nsf/ 0c7534916fcf6028c3256b3700243eac/ 4302e4941fb6a6bfc3256c99004faea5!OpenDocument) July 22, 2011 at the Wayback Machine

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[12] (Russian) Creation of the USSR (http:/ / www. hronos. km. ru/ sobyt/ cccp. html) at Khronos.ru. [13] "70 Years of Gidroproekt and Hydroelectric Power in Russia" (http:/ / www. springerlink. com/ content/ h3677572g016338u/ ). . [14] (Russian) On GOELRO Plan at Kuzbassenergo. (http:/ / www. kuzbassenergo. ru/ goelro/ ) Archived (http:/ / web. archive. org/ 20110723044724/ http:/ / www. kuzbassenergo. ru/ goelro/ ) July 23, 2011 at the Wayback Machine [15] The consolidation into a single-party regime took place during the first three and a half years after the revolution, which included the period of War Communism and an election in which multiple parties competed. See Leonard Schapiro, The Origin of the Communist Autocracy: Political Opposition in the Soviet State, First Phase 19171922. Cambridge, MA: Harvard University Press, 1955, 1966. [16] Stphane Courtois; Mark Kramer (1999-10-15). 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Bibliography
Ambler, John; Shaw, Denis J.B.; Symons, Leslie (1985). Soviet and East European Transport Problems (http:// books.google.no/books?id=Rpg9AAAAIAAJ&dq). Taylor & Francis. ISBN9780709905572. Comrie, Bernard (1981). The Languages of the Soviet Union (http://books.google.com/ books?id=QTU7AAAAIAAJ&dq). Cambridge University Press (CUP) Archive. ISBN9780709905572. Janz, Denis (1998). World Christianity and Marxism (http://books.google.com/books?id=EUVwrcnXwBsC). New York: Oxford University Press. ISBN9780195119444. Lane, David Stuart (1992). Soviet Society under Perestroika (http://books.google.com/ books?id=rcXafOqyxgQC&dq). Routledge. ISBN9780415076005. Rayfield, Donald (2004). Stalin and His Hangmen: An Authoritative Portrait of a Tyrant and Those Who Served Him. Viking Press. ISBN9780670910880.

Soviet Union Simon, Gerard (1974). Church, State, and Opposition in the U.S.S.R. (http://books.google.com/ books?id=sTLc8H3b4vUC). Berkeley and Los Angeles: University of California Press. ISBN9780520026128. Wilson, David (1983). The Demand for Energy in the Soviet Union (http://books.google.no/ books?id=1qgOAAAAQAAJ&dq). Taylor & Francis. ISBN9780709927045. World Bank and OECD (1991). A Study of the Soviet economy (http://books.google.com/ books?id=fiDpE5M9jRAC&dq). 3. International Monetary Fund. ISBN9789264134689. Madhavan K. Palat, Social Identities in Revolutionary Russia, ed. (Macmillan, Palgrave, UK, and St Martins Press, New York, 2001)

220

Further reading
Surveys A Country Study: Soviet Union (Former) (http://rs6.loc.gov/frd/cs/sutoc.html). Library of Congress Country Studies, 1991. Brown, Archie, et al., eds.: The Cambridge Encyclopedia of Russia and the Soviet Union (Cambridge, UK: Cambridge University Press, 1982). Gilbert, Martin: The Routledge Atlas of Russian History (London: Routledge, 2002). Goldman, Minton: The Soviet Union and Eastern Europe (Connecticut: Global Studies, Dushkin Publishing Group, Inc., 1986). Grant, Ted: Russia, from Revolution to Counter-Revolution, London, Well Red Publications,1997 Howe, G. Melvyn: The Soviet Union: A Geographical Survey 2nd. edn. (Estover, UK: MacDonald and Evans, 1983). Pipes, Richard. Communism: A History (2003), by a leading conservative scholar Lenin and Leninism Clark, Ronald W. Lenin (1988). 570 pp. Debo, Richard K. Survival and Consolidation: The Foreign Policy of Soviet Russia, 19181921 (1992). Marples, David R. Lenin's Revolution: Russia, 19171921 (2000) 156pp. short survey Pipes, Richard. A Concise History of the Russian Revolution (1996) excerpt and text search (http://www. amazon.com/dp/0679745440), by a leading conservative Pipes, Richard. Russia under the Bolshevik Regime. (1994). 608 pp. Service, Robert. Lenin: A Biography (2002), 561pp; standard scholarly biography; a short version of his 3 vol detailed biography Volkogonov, Dmitri. Lenin: Life and Legacy (1994). 600 pp. Stalin and Stalinism Daniels, R. V., ed. The Stalin Revolution (1965) Davies, Sarah, and James Harris, eds. Stalin: A New History, (2006), 310pp, 14 specialized essays by scholars excerpt and text search (http://www.amazon.com/dp/0521616530) De Jonge, Alex. Stalin and the Shaping of the Soviet Union (1986) Fitzpatrick, Sheila, ed. Stalinism: New Directions, (1999), 396pp excerpts from many scholars on the impact of Stalinism on the people (little on Stalin himself) online edition (http://www.questia.com/PM.qst?a=o& d=109468478) Hoffmann, David L. ed. Stalinism: The Essential Readings, (2002) essays by 12 scholars Laqueur, Walter. Stalin: The Glasnost Revelations (1990) Kershaw, Ian, and Moshe Lewin. Stalinism and Nazism: Dictatorships in Comparison (2004) excerpt and text search (http://www.amazon.com/dp/0521565219) Lee, Stephen J. Stalin and the Soviet Union (1999) online edition (http://www.questia.com/read/ 108215209?title=Stalin and the Soviet Union)

Soviet Union Lewis, Jonathan. Stalin: A Time for Judgement (1990) McNeal, Robert H. Stalin: Man and Ruler (1988) Martens, Ludo. Another view of Stalin (1994), a highly favorable view from a Maoist historian Service, Robert. Stalin: A Biography (2004), along with Tucker the standard biography Trotsky, Leon. Stalin: An Appraisal of the Man and His Influence, (1967), an interpretation by Stalin's worst enemy Tucker, Robert C. Stalin as Revolutionary, 18791929 (1973); Stalin in Power: The Revolution from Above, 19291941. (1990) online edition (http://www.questia.com/PM.qst?a=o&d=103246514) with Service, a standard biography; online at ACLS e-books (http://www.historyebook.org/) World War II Bellamy, Chris. Absolute War: Soviet Russia in the Second World War (2008), 880pp excerpt and text search (http://www.amazon.com/dp/0375724710/) Broekmeyer, Marius. Stalin, the Russians, and Their War, 19411945. 2004. 315 pp. Overy, Richard. Russia's War: A History of the Soviet Effort: 19411945 (1998) excerpt and text search (http:// www.amazon.com/dp/0140271694/) Roberts, Geoffrey. Stalin's Wars: From World War to Cold War, 19391953 (2006). Seaton, Albert. Stalin as Military Commander, (1998) online edition (http://www.questia.com/PM.qst?a=o& d=100872346) Cold war Brzezinski, Zbigniew. The Grand Failure: The Birth and Death of Communism in the Twentieth Century (1989) Edmonds, Robin. Soviet Foreign Policy: The Brezhnev Years (1983) Goncharov, Sergei, John Lewis and Litai Xue, Uncertain Partners: Stalin, Mao and the Korean War (1993) excerpt and text search (http://www.amazon.com/dp/0804725217) Gorlizki, Yoram, and Oleg Khlevniuk. Cold Peace: Stalin and the Soviet Ruling Circle, 19451953 (2004) online edition (http://www.questia.com/read/105899376) Holloway, David. Stalin and the Bomb: The Soviet Union and Atomic Energy, 19391956 (1996) excerpt and text search (http://www.amazon.com/dp/0300066643) Mastny, Vojtech. Russia's Road to the Cold War: Diplomacy, Warfare, and the Politics of Communism, 19411945 (1979) Mastny, Vojtech. The Cold War and Soviet Insecurity: The Stalin Years (1998) excerpt and text search (http:// www.amazon.com/dp/0195126599); online complete edition (http://www.questia.com/read/98422373) Nation, R. Craig. Black Earth, Red Star: A History of Soviet Security Policy, 19171991 (1992) Sivachev, Nikolai and Nikolai Yakolev, Russia and the United States (1979), by Soviet historians Taubman, William. Khrushchev: The Man and His Era (2004), Pulitzer Prize; excerpt and text search (http:// www.amazon.com/dp/0393324842) Ulam, Adam B. Expansion and Coexistence: Soviet Foreign Policy, 19171973, 2nd ed. (1974) Zubok, Vladislav M. Inside the Kremlin's Cold War (1996) 20% excerpt and online search (http://search.live. com/results.aspx?q=&scope=books#q=zubok&filter=all&start=1) Zubok, Vladislav M. A Failed Empire: The Soviet Union in the Cold War from Stalin to Gorbachev (2007) Collapse Beschloss, Michael, and Strobe Talbott. At the Highest Levels:The Inside Story of the End of the Cold War (1993) Bialer, Seweryn and Michael Mandelbaum, eds. Gorbachev's Russia and American Foreign Policy (1988). Garthoff, Raymond. The Great Transition: AmericanSoviet Relations and the End of the Cold War (1994), detailed narrative Grachev, A.S. Gorbachev's Gamble: Soviet Foreign Policy and the End of the Cold War (2008) excerpt and text search (http://www.amazon.com/dp/0745643450/)

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Soviet Union Hogan, Michael ed. The End of the Cold War. Its Meaning and Implications (1992) articles from Diplomatic History Kotkin, Stephen. Armageddon Averted: The Soviet Collapse, 19702000 (2008) excerpt and text search (http:// www.amazon.com/dp/0195368630/) Matlock, Jack. Autopsy on an Empire: The American Ambassador's Account of the Collapse of the Soviet Union (1995) Pons, S., Romero, F., Reinterpreting the End of the Cold War: Issues, Interpretations, Periodizations, (2005) ISBN 978071465695X Remnick, David. Lenin's Tomb: The Last Days of the Soviet Empire, (1994), ISBN 9780679751254 Specialty studies Armstrong, John A. The Politics of Totalitarianism: The Communist Party of the Soviet Union from 1934 to the Present. New York: Random House, 1961. Katz, Zev, ed.: Handbook of Major Soviet Nationalities (New York: Free Press, 1975). Moore, Jr., Barrington. Soviet politics: the dilemma of power. Cambridge, MA: Harvard University Press, 1950. Dmitry Orlov, Reinventing Collapse (http://www.newsociety.com/bookid/3991), New Society Books, 2008, ISBN 9780865716063 Rizzi, Bruno: "The Bureaucratization of the World : The First English edition of the Underground Marxist Classic That Analyzed Class Exploitation in the USSR", New York, NY : Free Press, 1985. Schapiro, Leonard B. The Origin of the Communist Autocracy: Political Opposition in the Soviet State, First Phase 19171922. Cambridge, MA: Harvard University Press, 1955, 1966. This article incorporates public domain material from websites or documents (http:/ / lcweb2. loc. gov/ frd/ cs/ ) of the Library of Congress Country Studies.

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External links
Impressions of Soviet Russia (http://ariwatch.com/VS/JD/ImpressionsOfSovietRussia.htm), by John Dewey. Documents and other forms of media from the Soviet Union: 19171991. (http://soviethistory.com/) A Country Study: Soviet Union (Former) (http://lcweb2.loc.gov/frd/cs/sutoc.html) Soviet Union Exhibit at Global Museum on Communism with essay by Richard Pipes (http://soviet. globalmuseumoncommunism.org/) The Soviet Union (http://www.history.com/topics/soviet-union)

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State capitalism
The term State capitalism has various different meanings, but is usually described as management of business and productive forces by the stateespecially when such management is done in a capitalist manner, even if the state is nominally socialist.[1] It may be compared to the term state socialism, which has a different theoretical emphasis but largely overlapping meaning in practice. Corporatized (partly privatized) government agencies and a state that owns controlling shares of corporations listed publicly, thus acting as a capitalist itself, are two examples of state capitalism. State capitalism has also come to refer to an economic system such that the means of production are owned privately and the state has considerable control of the allocation of credit and investment. State capitalism is a term that is also used (sometimes interchangeably with state monopoly capitalism) to describe a system such that the state intervenes in the economy to protect and advance the interests of large-scale businesses. This practice is often claimed to be in contrast with the ideals of both socialism and laissez-faire capitalism.[2] Marxist literature typically defines state capitalism as a social system combining capitalismthe wage system of producing and appropriating surplus value in a commodity economywith ownership or control by a state. By that definition, a state capitalist country is one where the government controls the economy and essentially acts like a single huge corporation.[3] Friedrich Engels, in Socialism: Utopian and Scientific, states that the final stage of capitalism would consist of ownership of production and communication by the bourgeois state.[4] There are various theories and critiques of state capitalism, some of which have existed since the 1917 October Revolution or even before. The common themes among them are to identify that the workers do not meaningfully control the means of production and that commodity relations and production for profit still occur within state capitalism. Other socialists use the term state capitalism to refer to an economic system that is nominally capitalist, such that business and private owners gain the profits from an economy largely subsidized, developed and where decisive research and development is done by the state sector at public cost.[3] This term is also used by some advocates of laissez-faire capitalism to mean a private capitalist economy controlled by a state, often meaning a privately owned economy that is subject to statist economic planning. Some even use the term to refer to capitalist economies such that the state provides substantial public services and regulation of business activity. In the 1930s, Italian Fascist leader Benito Mussolini described Italian Fascism's economic system of corporatism as "state socialism turned on its head".[5] This term was often used to describe the controlled economies of the great powers in the First World War.[6]

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Origins and early uses of the term

The term itself was in use within the socialist movement from the late nineteenth century onwards. Wilhelm Liebknecht in 1896 said: "Nobody has combatted State Socialism more than we German Socialists; nobody has shown more distinctively than I, that State Socialism is really State capitalism!" [7] It has been suggested that the concept of state capitalism can be traced back to Mikhail Bakunin's critique during the First International of the potential for state exploitation under Marxism, or to Jan Waclav Machajski's argument in The Intellectual Worker (1905) that socialism was a movement of the intelligentsia as a class, resulting in a new type of society he termed state capitalism.[8] [9] [10] For anarchists, state socialism is equivalent to state capitalism, hence oppressive and merely a shift from private capitalists to the state being the sole employer and capitalist.[11]
Wilhelm Liebknecht - "Nobody has combatted

During World War I, using Vladimir Lenin's idea that Czarism was State Socialism more than we German Socialists" taking a "Prussian path" to capitalism, the Bolshevik Nikolai Bukharin identified a new stage in the development of capitalism, in which all sectors of national production and all important social institutions had become managed by the state; he termed this new stage 'state capitalism.' [12] After the October Revolution, Lenin used the term positively. In spring 1918, during a brief period of economic liberalism prior to the introduction of war communism, and again during the New Economic Policy (NEP) of 1921, Lenin justified the introduction of state capitalism controlled politically by the dictatorship of the proletariat to further central control and develop the productive forces: Reality tells us that state capitalism would be a step forward. If in a small space of time we could achieve state capitalism, that would be a victory. (Lenin 1918)[13] [14]

Use by Marxists
Use by the Russian Communist Left
The earliest critique of the USSR as state-capitalist was formulated by various groups advocating left communism. One major tendency of the 1918 Russian communist left criticised the re-employment of authoritarian capitalist relations and methods of production. As Ossinsky in particular argued, "one-man management" (rather than the democratic factory committees workers had established and Lenin abolished) and the other impositions of capitalist discipline would stifle the active participation of workers in the organisation of production; Taylorism converted workers into the appendages of machines, and piece work imposed individualist rather than collective rewards in production so instilling petty bourgeois values into workers. In sum these measures were seen as the re-transformation of proletarians within production from collective subject back into the atomised objects of capital. The working class, it was argued, had to participate consciously in economic as well as political administration. This tendency within the 1918 left communists emphasized that the problem with capitalist production was that it treated workers as objects. Its transcendence lay in the workers' conscious creativity and participation, which is reminiscent of Marx's critique of alienation.[15] These criticisms were revived on the left of the Russian Communist Party after the 10th Congress in 1921, which introduced the New Economic Policy. Many members of the Workers' Opposition and the Decists (both later banned) and two new underground Left Communist groups, Gavril Myasnikov's Workers' Group and the Workers' Truth group, developed the idea that Russia was becoming a state capitalist society governed by a new bureaucratic

State capitalism class.[16] [17] The most developed version of this idea was in a 1931 booklet by Myasnikov.[18]

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Use by Mensheviks & 'Orthodox' Marxists

Immediately after the Russian Revolution many western Marxists questioned whether socialism was possible in Russia. Specifically, Karl Kautsky: It is only the old feudal large landed property which exists no longer. Conditions in Russia were ripe for its abolition but they were not ripe for the abolition of capitalism. Capitalism is now once again celebrating a resurrection, but in forms that are more oppressive and harrowing for the proletariat than of old. Instead of assuming higher industrialised forms, private capitalism has assumed the most wretched and shabbyforms of black marketeering and money speculation. Industrial capitalism has developed to become state capitalism. Formerly state officials and officials from private capital were critical, often very hostile towards each other. Consequently the working man found that his advantage lay with one or the other in turn. Today the state bureaucracy and capitalist bureaucracy are merged into onethat is the upshot of the great socialist revolution brought about by the Bolsheviks. It constitutes the most oppressive of all despotisms that Russia has ever had to suffer.[19] After 1929, exiled Mensheviks such as Fyodor Dan began to argue that Stalin's Russia constituted a state capitalist society.[20] In the United Kingdom, the orthodox Marxist group the Socialist Party of Great Britain independently developed a similar doctrine. Although initially beginning with the idea that Soviet capitalism differed little from western capitalism, they later began to argue that the bureaucracy held its property in common, much like the Catholic Church's.[21] As John O'Neill notes: Whatever other merits or problems their theories had, in arguing that the Russian revolution was from the outset a capitalist revolution they avoided the ad hoc and post hoc nature of more recent Maoist- and Trotskyist-inspired accounts of state capitalism, which start from the assumption that the Bolshevik revolution inaugurated a socialist economy that at some later stage degenerated into capitalism.[22]

Use by Trotskyists
Leon Trotsky said the term state capitalism "originally arose to designate the phenomena which arise when a bourgeois state takes direct charge of the means of transport or of industrial enterprises" and is therefore a "partial negation" of capitalism.[23] However, Trotsky rejected that description of the USSR claiming instead that it was a degenerated workers' state. After World War II, most Trotskyists accepted an analysis of the Soviet block countries as being deformed workers' states. However, alternative opinions of the Trotskyist tradition have developed the theory of state capitalism as a New Class theory to explain what they regard as the essentially non-socialist nature of the USSR, Cuba, China, and other self-proclaimed socialist states. The discussion goes back to internal debates in the Left Opposition during the late 1920s and early 1930s. Ante Ciliga, a member of the Left Opposition imprisoned at Verkhen-Uralske in the 1930s, described the evolution of many Left Oppositionists to a theory of state capitalism influenced by Gavril Myasnikov's Workers Group and other Left Communist factions.[24] On release, and returning to activity in the International Left Opposition, Ciliga "was one of the first, after 1936, to raise the theory [of state capitalism] in Trotskyist circles".[25] George Orwell, who was an anti-Stalinist leftist like Ciliga, used the term in his Homage to Catalonia (1938). After 1940, dissident Trotskyists developed more theoretically sophisticated accounts of state capitalism. One influential formulation has been that of the Johnson-Forest Tendency of CLR James and Raya Dunayevskaya who formulated her theory in the early 1940s on the basis of a study of the first three Five Year Plans alongside readings of Marx's early humanist writings. Their political evolution would lead them away from Trotskyism. Another is that of Tony Cliff, associated with the International Socialist Tendency and the British Socialist Workers Party (SWP), dating back to the late 1940s. Unlike Johnson-Forest, Cliff formulated a theory of state capitalism that would enable

State capitalism his group to remain Trotskyists, albeit heterodox ones.[26] A relatively recent text by Stephen Resnick and Richard D. Wolff, Class Theory and History, explores what they term state capitalism in the former Soviet Union, continuing a theme that has been debated within Trotskyist theory for most of the past century. Compare with other left-wing theories regarding Soviet-style societies: deformed workers' states, degenerated workers' states, new class, state socialism and bureaucratic collectivism.

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Use by later left communists and council communists

The left communist/council communist traditions outside Russia consider the Soviet system as state capitalist. Otto Rhle, a major German left communist, developed this idea from the 1920s, and it was later articulated by Dutch council communist Anton Pannekoek, for instance in "State Capitalism and Dictatorship [27]" (1936).

Use by Maoists and Anti-Revisionists

From 1956 to the early 1980s, the Communist Party of China and their Maoist or anti-revisionist adherents around the world often described the Soviet Union as state-capitalist, essentially using the accepted Marxist definition, albeit on a different basis and in reference to a different span of time from either the Trotskyists or the left-communists. Specifically, the Maoists and their descendants use the term state capitalism as part of their description of the style and politics of Nikita Khrushchev and his successors, as well as to similar leaders and policies in other self-styled socialist states.[28] This was involved in the ideological Sino-Soviet Split. After Mao's death, amidst the supporters of the Cultural Revolution and the exploits of the 'Gang of Four', most extended the state capitalist formulation to China itself, and ceased to support the Communist Party of China, which likewise distanced itself from these former fraternal groups. The related theory of Hoxhaism was developed in 1978, largely by Albaniam president Enver Hoxha, who insisted that Mao himself had pursued state capitalist and revisionist economic policies.[29] Most current Communist groups descended from the Maoist ideological tradition still adopt the description of both China and the Soviet Union as being state-capitalist from a certain point in their history onwardsmost commonly, the Soviet Union from 1956 to its collapse in 1991, and China from 1976 to the present. Maoists and anti-revisionists also sometimes use the term Social-imperialism to describe socialist states that they consider to be actually capitalist in essencetheir phrase, "socialist in words, imperialist in deeds" denotes this.

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Use by classical liberals and laissez-faire capitalists

Murray Rothbard, a laissez-faire capitalist philosopher, uses the term interchangeably with the term state monopoly capitalism, and uses it to describe a partnership of government and big business in which the state intervenes on behalf of large capitalists against the interests of consumers.[30] [31] He distinguishes this from laissez-faire capitalism where big business is not protected from market forces. This usage dates from the 1960s, when Harry Elmer Barnes described the post-New Deal economy of the United States as "state capitalism." More recently, Andrei Illarionov, former economic advisor to Russian President Vladimir Putin, resigned in December 2005, protesting Russia's "embracement of state capitalism."[32] The term is not used by the classical liberals to describe the public ownership of the means of production. The economist Ludwig von Mises explains the reason: "The socialist movement takes great pains Murray Rothbard advanced a libertarian analysis to circulate frequently new labels for its ideally constructed state. Each of state capitalism worn-out label is replaced by another which raises hopes of an ultimate solution of the insoluble basic problem of Socialismuntil it becomes obvious that nothing has been changed but the name. The most recent slogan is "State Capitalism." It is not commonly realized that this covers nothing more than what used to be called Planned Economy and State Socialism, and that State Capitalism, Planned Economy, and State Socialism diverge only in non-essentials from the "classic" ideal of egalitarian Socialism."[33]

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Use by Italian Fascists

On economic issues, Italian Fascist leader Benito Mussolini claimed in 1933 that fascism's "path would lead inexorably into state capitalism, which is nothing more nor less than state socialism turned on its head. In either event, [whether the outcome be state capitalism or state socialism] the result is the bureaucratization of the economic activities of the nation."[34] Mussolini claimed that capitalism had degenerated in three stages, starting with dynamic or heroic capitalism (18301870) followed by static capitalism (18701914) and then reaching its final form of decadent capitalism, also known as supercapitalism beginning in 1914.[35] Mussolini denounced supercapitalism for causing the "standardization of humankind" and for causing excessive consumption.[36] Mussolini claimed that at this stage of supercapitalism "[it] is then that a capitalist enterprise, when difficulties arise, throws itself like a dead weight into the state's arms. It is then that state intervention begins and becomes more necessary. It is then that those who once ignored the state now seek it out anxiously."[37] Due to the inability of businesses to operate properly when facing economic difficulties, Mussolini claimed that this proved that state intervention into the economy was necessary to stabilize the economy.[37]

Benito Mussolini claimed that Italian Fascism's economic system of corporatism favored an economy which both maintained private enterprise and property, which he claimed could be considered state socialism "turned on its head".

Mussolini claimed that dynamic or heroic capitalism and the bourgeoisie could be prevented from degenerating into static capitalism and then supercapitalism if the concept of economic individualism were abandoned and if state supervision of the economy was introduced.[38] Private enterprise would control production but it would be supervised by the state.[39] Italian Fascism presented the economic system of corporatism as the solution that would preserve private enterprise and property while allowing the state to intervene in the economy when private enterprise failed.[39]

In Western countries
An alternate definition is that state capitalism is a close relationship between the government and private capitalism, such as one in which the private capitalists produce for a guaranteed market. An example of this would be the military-industrial complex in which autonomous entrepreneurial firms produce for lucrative government contracts and are not subject to the discipline of competitive markets. Many consider this as part of a continuum characterizing the modern world economy with "normal" capitalism at one extreme and complete state capitalism like that of the former USSR at the other. Both the Trotskyist definition and this one derive from discussion among Marxists at the beginning of the twentieth century, most notably Nikolai Bukharin who, in his book Imperialism and the world economy thought that advanced, 'imperialist' countries exhibited the latter definition and considered (and rejected) the possibility that they could arrive at the former. State capitalism is practised by a variety of Western countries with respect to certain strategic resources important for national security. These may involve private investment as well. For example, a government may own or even monopolize oil production or transport infrastructure to ensure availability in the case of war. Examples include Neste, Statoil and OMV.

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In European studies
Several European scholars and political economists have been using the term increasingly to describe one of the three major varieties of capitalism that prevail in the modern context of the European Union. This approach is mainly influenced by Schmidt's (2002) article on The Futures of European Capitalism, in which he divides modern European capitalism in three groups: Market, Managed and State. Here, state capitalism refers to a system where high coordination between the state, large companies and labour unions ensures economic growth and development in a quasi-corporatist model. The author cites France and, to a lesser extent, Italy as the prime examples of modern European State capitalism.[40] A general theory of Capitalist forms, whereby state capitalism is a particular case, was developed by Ernesto Screpanti, who argues that soviet type economies of the 20th century used state capitalism to sustain processes of primitive accumulation. [41]

Current forms in 21st century

Many analysts assert that China is one of the main examples of state capitalism in the 21st century. [42] [43] In his book, The End of the Free Market: Who Wins the War Between States and Corporations, political scientist Ian Bremmer describes China as the primary driver for the rise of state capitalism as a challenge to the free market economies of the developed world, particularly in the aftermath of the 1998 financial crisis. [44]

Notes
[1] Binns, Peter (1986). "State Capitalism" (http:/ / www. marxists. de/ statecap/ binns/ statecap. htm). . Retrieved 2007-05-31. [2] Allan G. Johnson. The Blackwell Dictionary of Sociology. (2000). Blackwell Publishing. ISBN 0-631-21681-2 p.306. In 2008, the term was used by U.S. National Intelligence Council in Global Trends 2025: A World Transformed to describe the development of Russia, India, and China. [3] http:/ / www. fpif. org/ fpiftxt/ 5860 [4] http:/ / www. marxists. org/ archive/ marx/ works/ 1880/ soc-utop/ ch03. htm [5] Mussolini, Benito; Schnapp, Jeffery Thompson (ed.); Sears, Olivia E. (ed.); Stampino, Maria G. (ed.). "Address to the National Corporative Council (14 November 1933) and Senate Speech on the Bill Establishing the Corporations (abridged; 13 January 1934)". A Primer of Italian Fascism. University of Nebraska Press, 2000. Pp. 158-159. "Our path would lead inexorably into state capitalism, which is nothing more nor less than state socialism turned on its head. In either event, [whether the outcome be state capitalism or state socialism] the result is the bureaucratization of the economic activities of the nation." - Benito Mussolini on Italian Fascism's economic goals." [6] David Miller, Janet Coleman, William Conolly and Alan Ryan, ed (1991). Blackwell Encyclopaedia of Political Thought. Blackwell. [7] Liebknecht, Wilhelm (1896). "Our Recent Congress" (http:/ / www. marxists. org/ archive/ liebknecht-w/ 1896/ 08/ our-congress. htm). Justice. . Retrieved 2007-05-31. [8] Michael S Fox "Ante Ciliga, Trotskii and State Capitalism: Theory, Tactics and Reevaluation during the Purge Era, 1935-1939" (http:/ / web. archive. org/ web/ 20091027132653/ http:/ / geocities. com/ cordobakaf/ ciliga_trotsky. pdf), Slavic Review, 50, no. 1 (Spring 1991): 127-143. Published in Croatian translation in ?asopis za suvremenu povijest [Journal of Contemporary History], Zagreb, no. 3, 1994, 427-450. [9] For Bakunin: Gouldner, A.W. 1982. 'Marx's last battle: Bakunin and the First International', Theory and Society 11(6), November, pp. 853-84. Gouldner argues that Bakunin formulated an original critique of Marxism as 'the ideology, not of the working class, but of a new class of scientific intelligentsiawho would corrupt socialism, make themselves a new elite, and impose their rule on the majority' (pp. 860-1) [10] For Machajski: Marshall S. Shatz Jan Waclaw Machajski: A Radical Critic Of The Russian Intelligentsia And Socialism (http:/ / web. archive. org/ web/ 20091026180626/ http:/ / geocities. com/ cordobakaf/ cont. html); TB Bottomore Elites and Society p.54 [11] http:/ / www. infoshop. org/ faq/ secH3. html#sech313 [12] Bukharin, N. 1915 [1972]. Imperialism and World Economy. London: Merlin. p. 158) [13] Lenin's Collected Works Vol. 27 (http:/ / www. marxists. org/ archive/ lenin/ works/ cw/ volume27. htm), p. 293, quoted by Aufheben (http:/ / www. geocities. com/ aufheben2/ auf_6_ussr1. html) [14] See also David S. Pena " Tasks of Working-Class Governments under the Socialist-oriented Market Economy (http:/ / www. politicalaffairs. net/ article/ articleview/ 5869/ )", PoliticalAffairs.net [15] Jerome, W. and Buick, A. 1967. 'Soviet state capitalism? The history of an idea', Survey 62, January, pp. 58-71. [16] Fox "Ante Ciliga" [17] EH Carr, The Interregnum 1923-1924, London, 1954, p80 [18] Marshall Shatz " Makhaevism After Machajski (http:/ / web. archive. org/ web/ 20091027132629/ http:/ / geocities. com/ cordobakaf/ machg. html)" [19] Kautsky, K. 1919 [1983]. Terrorism and Communism. Cited from P. Goode (ed.), Karl Kautsky: Selected Political Writings. London: Macmillan, 1983, cited in State Capitalism in the Soviet Union M.C. Howard and J.E. King (http:/ / www. hetsa. org. au/ pdf/ 34-A-08. pdf)

State capitalism
[20] Liebich, A. 1987. 'Marxism and totalitarianism: Rudolf Hilferding and the Mensheviks', Dissent 34, Spring, pp. 223-40 [21] State capitalism : the wages system under new management / Adam Buick and John Crump. Basingstoke : Macmillan, 1986. ISBN: 0333367758 [22] STATE CAPITALISM - THE WAGES SYSTEM UNDER NEW MANAGEMENT - BUICK,A, CRUMP,J; ONEILL, J; POLITICAL QUARTERLY 59 (3): 398-399 JUL-SEP 1988 [23] Trotsky, Leon (2004). The revolution betrayed (http:/ / www. marxists. org/ archive/ trotsky/ 1936/ revbet/ index. htm). Max Eastman. Mineola, N.Y. : Dover: Newton Abbot : David & Charles. ISBN0486433986. . Retrieved 2007-05-31. [24] Au pays du grand mensonge, see Michael Fox " Ante Ciliga (http:/ / web. archive. org/ web/ 20091027132653/ http:/ / geocities. com/ cordobakaf/ ciliga_trotsky. pdf)" and Philippe Bourrinet " An Ambiguous Journey (http:/ / www. left-dis. nl/ uk/ ciliga. htm)" [25] Fox [26] Aufheben Cliff and the neo-Trotskyist theory of the USSR as state capitalist (http:/ / libcom. org/ library/ what-was-the-ussr-aufheben-1) in What Was The USSR? [27] http:/ / www. marxists. org/ archive/ pannekoe/ 1936/ dictatorship. htm [28] The Economics of Revisionism (http:/ / www. mltranslations. org/ Ireland/ ico. htm) by the Irish Communist Organisation, 1967. [29] Imperialism and the Revolution (http:/ / www. marxists. org/ reference/ archive/ hoxha/ works/ imp_rev/ toc. htm) by Enver Hoxha, 1978. [30] Rothbard, Murray (1973). "A Future of Peace and Capitalism" (http:/ / www. mises. org/ story/ 1559). In James H. Weaver. Modern Political Economy. Boston: Allyn and Bacon. . Retrieved 2007-05-31 [31] Rothbard, Murray (2000). "Left and right: the prospects for liberty" (http:/ / www. lewrockwell. com/ rothbard/ rothbard33. html). Egalitarianism as a revolt against nature and other essays. Auburn, Ala.: Ludwig von Mises Institute. [32] Andrei, Illarionov (2006-01-25). "When the state means business" (http:/ / www. iht. com/ articles/ 2006/ 01/ 25/ opinion/ edandrei. php). International Herald and Tribune. . Retrieved 2007-05-31.

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[33] Von Mises, Ludwig (1979). [[Socialism: An Economic and Sociological Analysis (http:/ / www. mises. org/ books/ socialism/ preface_second_german_edition. aspx)]]. Indianapolis: LibertyClassics. ISBN0913966630. . Retrieved 2007-05-31. [34] Mussolini, Benito; Schnapp, Jeffery Thompson (ed.); Sears, Olivia E. (ed.); Stampino, Maria G. (ed.). "Address to the National Corporative Council (14 November 1933) and Senate Speech on the Bill Establishing the Corporations (abridged; 13 January 1934)". A Primer of Italian Fascism. University of Nebraska Press, 2000. Pp. 158-159. [35] Falasca-Zamponi, Simonetta. Fascist Spectacle: The Aesthetics of Power in Mussolini's Italy. University of California Press, 2000. Pp. 136. [36] Falasca-Zamponi, Simonetta. Fascist Spectacle: The Aesthetics of Power in Mussolini's Italy. University of California Press, 2000. Pp. 137. [37] Mussolini, Benito; Schnapp, Jeffery Thompson (ed.); Sears, Olivia E. (ed.); Stampino, Maria G. (ed.). "Address to the National Corporative Council (14 November 1933) and Senate Speech on the Bill Establishing the Corporations (abridged; 13 January 1934)". A Primer of Italian Fascism. University of Nebraska Press, 2000. Pp. 158. [38] Salvemini, Gaetano.Under the Axe of Fascism. READ BOOKS, 2006. Pp. 134. [39] Salvemini. Pp. 134. [40] Schmidt, Vivien (November 2003). French Capitalism Transformed, yet still a Third Variety of Capitalism. Economy and Society Vol. 32 N. 4. [41] Ernesto Screpanti, Capitalist Forms and the Essence of Capitalism, Review of International Political Economy, vol. 6, n. 1, 1999; Ernesto Screpanti, The Fundamental Institutions of Capitalism, Routledge, London 2001. [42] Communism Is Dead, But State Capitalism Thrives (http:/ / blogs. forbes. com/ greatspeculations/ 2010/ 03/ 22/ communism-is-dead-but-state-capitalism-thrives/ ), by Vahan Janjigian, forbes.com, Mar. 22 2010. [43] The Winners And Losers In Chinese Capitalism (http:/ / blogs. forbes. com/ gadyepstein/ 2010/ 08/ 31/ the-winners-and-losers-in-chinese-capitalism/ ), by Gady Epstein, forbes.com, Aug. 31 2010. [44] [http://www.ft.com/cms/s/0/439ccee0-bec6-11df-a755-00144feab49a,dwp_uuid=9bee261a-bec7-11df-a755-00144feab49a.html#axzz17YEJxrzO

External links
In Defense of Marxism (http://www.marxists.org/archive/trotsky/works/1942-dm/index.htm) by Leon Trotsky A collection of essays and letters to members of the US Socialist Workers Party from 1939 to 1940. Our Recent Congress, Justice 1896 (http://www.marxists.org/archive/liebknecht-w/1896/08/our-congress. htm) by Wilhelm Liebknecht What was the USSR? (http://upl.silentwhisper.net/uplfolders/upload2/what_was_the_ussr_en.pdf) by Aufheben (http://web.archive.org/web/20091027134808/http://www.geocities.com/aufheben2) State Capitalism in Russia (http://www.marxists.org/archive/cliff/works/1955/statecap/index.htm) by Tony Cliff Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure (http://www.mises.org/ journals/jls/1_1/1_1_7.pdf) Libertarian analysis by Walter E. Grinder and John Hagel. Against the Theory of State Capitalism (http://www.marxists.org/archive/grant/1949/cliff.htm) by Ted Grant

State capitalism The Russian Question: A debate between Raya Dunayevskaya and Max Shachtman (http://www.workersliberty. org/node/4714) (May 1947 with August 2005 commentary) Imperialism and World Economy (http://www.marxists.org/archive/bukharin/works/1917/imperial/index. htm) by Nikolai Bukharin State Capitalism and Dictatorship (http://www.marxists.org/archive/pannekoe/1936/dictatorship.htm) by Anton Pannekoek The Theory of State Capitalism (http://www.ernestmandel.org/en/works/txt/FI/theory_of_statecapitalism. htm), by Ernest Mandel (June 1951) The Marxian Concept of Capital and the Soviet Experience: Essay in the Critique of Political Economy (http:// www.questia.com/PM.qst?a=o&d=9364315) by Paresh Chattopadhyay Collection of left-communist links that dismiss the bolshevik state capitalism. (http://www.webcitation.org/ query?url=http://www.geocities.com/youcreatedcosmos/news.html&date=2009-10-26+00:30:03) "The Nature of the Russian Economy" (http://marxists.org/archive/dunayevskaya/works/1946/statecap.htm) a 1946 Polemic written by Raya Dunayevskaya (then writing as Freddie Forest), founder of Marxist Humanism, arguing for a state capitalist position within the Marxist movement. "Trotskyism after Trotsky: The origins of the International Socialists" (http://www.marxists.org/archive/cliff/ works/1999/trotism/index.htm) Summarization of three key points on which Cliff and the International Socialist Tendency deviated from what is traditionally the orthodox Trotskyist position. "C.L.R. James on Marx's Capital and State Capitalism" (http://www.clrjamesinstitute.org/statecap.html) State Capitalism Comes of Age (http://www.foreignaffairs.com/articles/64948/ian-bremmer/ state-capitalism-comes-of-age), Foreign Affairs, May/June 2009 The End of The Free Market: Who Wins the War Between States and Corporations (http://www. endofthefreemarket.com), by Ian Bremmer, (May 2010)

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Stock
The capital stock (or just stock) of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is different from the property and the assets of a business which may fluctuate in quantity and value.

Shares
The stock of a business is divided into multiple shares, the total of which must be stated at the time of business formation. Given the total amount of money invested in the business, a share has a certain declared face value, commonly known as the par value of a share. The par value is the de minimis (minimum) amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business. In other jurisdictions, however, shares may not have an associated par value at all. Such stock is often called non-par stock. Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.

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Usage
Used in the plural, stocks is often used as a synonym for shares.[1] Traditionalist demands for the plural stocks to be used only when referring to stocks of more than one company are rarely heard nowadays. In the United Kingdom, Republic of Ireland, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.[2]

Types of stock
Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.[3] [4] Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK) New equity issues may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time. Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend.

Stock derivatives
A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The underlying security may be a stock index or an individual firm's stock, e.g. single-stock futures. Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. Stock index futures are generally not delivered in the usual manner, but by cash settlement. A stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a put option is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative. The most popular method of valuing stock options is the Black Scholes model.[5] Apart from call options granted to employees, most stock options are transferable.

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History
During Roman times, the empire contracted out many of its services to private groups called publicani. Shares in publicani were called "socii" (for large cooperatives) and "particulae" which were analogous to today's Over-The-Counter shares of small companies. Though the records available for this time are incomplete, Edward Chancellor states in his book Devil Take the Hindmost that there is some evidence that a speculation in these shares became increasingly widespread and that perhaps the first ever speculative bubble in "stocks" occurred.
One of the earliest stock by VOC The first company to issue shares of stock after the Middle Ages was [6] the Dutch East India Company in 1602. The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families.

Economic historians find the Dutch stock market of the 17th century particularly interesting: there is clear documentation of the use of stock futures, stock options, short selling, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and reverted in time with the market (in this case it was headdresses instead of hemlines). Dr. Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary.[7] [8]

Shareholder
A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Both private and public traded companies have shareholders. Companies listed at the stock market are expected to strive to enhance shareholder value. Shareholders are granted special privileges depending on the class of stock, including the right to vote on matters such as elections to the board of directors, the right to share in distributions of the company's income, Stock certificate for ten shares of the Baltimore and Ohio Railroad the right to purchase new shares issued by the Company company, and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors. Shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders.

Stock Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other. However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, USA, majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders.[9] [10] The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and, especially, passively managed exchange-traded funds.

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Application
The owners of a company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private use. By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company. In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows other shareholders to be out-voted effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control of the company.

Shareholder rights
Although ownership of 50% of shares does result in 50% ownership of a company, it does not give the shareholder the right to use a company's building, equipment, materials, or other property. This is because the company is considered a legal person, thus it owns all its assets itself. This is important in areas such as insurance, which must be in the name of the company and not the main shareholder. In most countries, boards of directors and company managers have a fiduciary responsibility to run the company in the interests of its stockholders. Nonetheless, as Martin Whitman writes: ...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI [Outside Passive Minority Investor] stockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the principal/agent problem. It would be naive to think that any management would forgo management compensation, and management entrenchment, just because some of these management privileges might be perceived as giving rise to a conflict of interest with OPMIs.[11] Even though the board of directors runs the company, the shareholder has some impact on the company's policy, as the shareholders elect the board of directors. Each shareholder typically has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) are performing poorly they can elect a new board of directors which can then hire a new management team. In practice, however, genuinely contested board elections are rare. Board candidates are usually nominated by insiders or by the board of the directors themselves, and a considerable amount of stock is held or voted by insiders. Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (often the shareholders end up with nothing).[12]

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Means of financing
Financing a company through the sale of stock in a company is known as equity financing. Alternatively, debt financing (for example issuing bonds) can be done to avoid giving up shares of ownership of the company. Unofficial financing known as trade financing usually provides the major part of a company's working capital (day-to-day operational needs).

Trading
The shares of a company may in general be transferred from shareholders to other parties by sale or other mechanisms, unless prohibited. Most jurisdictions have established laws and regulations governing such transfers, particularly if the issuer is a publicly-traded entity. The desire of stockholders to trade their shares has led to the establishment of stock exchanges. A stock exchange is an organization that provides a marketplace for trading shares and other derivatives and financial products. Today, investors are usually represented by a stock broker who buys and sells shares of a wide range of companies on the exchanges. A company may list its shares on an exchange by meeting and maintaining the listing requirements of a particular stock exchange. In the United States, through the inter-market quotation system, stocks listed on one exchange can also be traded on other participating exchanges, including the Electronic Communication Networks (ECNs), such as Archipelago or Instinet. Many large non-U.S companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital. On this basis, the holding bank establishes American Depositary Shares and issues an American Depository Receipt (ADR) for each share a trader acquires. Likewise, many large U.S. companies list their shares at foreign exchanges to raise capital abroad. Small companies that do not qualify and cannot meet the listing requirements of the major exchanges may be traded over the counter (OTC) by an off-exchange mechanism in which trading occurs directly between parties. The major OTC markets in the United States are the electronic quotation systems OTC Bulletin Board (OTCBB) and the Pink OTC Markets (Pink Sheets) where individual retail investors are also represented by a brokerage firm and the quotation service's requirements for a company to be listed are minimal. Shares of companies in bankruptcy proceeding are usually listed by these quotation services after the stock is delisted from an exchange.

Buying
There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange. There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full service or discount broker. There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers. When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin means buying stock with money

Stock borrowed against the stocks in the same account. These stocks, or collateral, guarantee that the buyer can repay the loan; otherwise, the stockbroker has the right to sell the stock (collateral) to repay the borrowed money. He can sell if the share price drops below the margin requirement, at least 50% of the value of the stocks in the account. Buying on margin works the same way as borrowing money to buy a car or a house, using a car or house as collateral. Moreover, borrowing is not free; the broker usually charges 810% interest.

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Selling
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss. As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, full service or discount, handles the transaction. After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.

Stock price fluctuations

The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is sensitive to demand. However, there are many factors that influence the demand for a particular stock. The fields of fundamental analysis and technical analysis attempt to understand market conditions that lead to price changes, or even predict future price levels. A recent study[13] shows that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), is significantly correlated to the market value of a stock. Stock price may be influenced by analyst's business forecast for the company and outlooks for the company's general market segment.

Share price determination

At any given moment, an equity's price is strictly a result of supply and demand. The supply, commonly referred to as the float, is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time. The price of the stock moves in order to achieve and maintain equilibrium. The product of this instantaneous price and the float at any one time is the market capitalization of the entity offering the equity at that point in time. When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium. Thus, the value of a share of a company at any given moment is determined by all investors voting with their money. If more investors want a stock and are willing to pay more, the price will go up. If more investors are selling a stock and there aren't enough buyers, the price will go down. Note: "For Nasdaq-listed stocks, the price quote includes information on the bid and ask prices for the stock."[14] Of course, that does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Briefly, EMH says that investing is overall (weighted by a Stdev) rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced efficiently, which is to say that they represent accurately the expected value of

Stock the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows. The EMH model, if true, has at least two interesting consequences. First, because financial risk is presumed to require at least a small premium on expected value, the return on equity can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer non-equity investments that could be expected to give the same or better return at lower risk. Second, because the price of a share at every given moment is an "efficient" reflection of expected value, thenrelative to the curve of expected returnprices will tend to follow a random walk, determined by the emergence of information (randomly) over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors (mainly other professional investors) by more intelligently interpreting the emerging flow of information (news). The EMH model does not seem to give a complete description of the process of equity price determination. For example, stock markets are more volatile than EMH would imply. In recent years it has come to be accepted that the share markets are not perfectly efficient, perhaps especially in emerging markets or other markets that are not dominated by well-informed professional investors. Another theory of share price determination comes from the field of Behavioral Finance. According to Behavioral Finance, humans often make irrational decisionsparticularly, related to the buying and selling of securitiesbased upon fears and misperceptions of outcomes. The irrational trading of securities can often create securities prices which vary from rational, fundamental price valuations. For instance, during the technology bubble of the late 1990s (which was followed by the dot-com bust of 20002002), technology companies were often bid beyond any rational fundamental value because of what is commonly known as the "greater fool theory". The "greater fool theory" holds that, because the predominant method of realizing returns in equity is from the sale to another investor, one should select securities that they believe that someone else will value at a higher level at some point in the future, without regard to the basis for that other party's willingness to pay a higher price. Thus, even a rational investor may bank on others' irrationality.

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Arbitrage trading
When companies raise capital by offering stock on more than one exchange, the potential exists for discrepancies in the valuation of shares on different exchanges. A keen investor with access to information about such discrepancies may invest in expectation of their eventual convergence, known as arbitrage trading. Electronic trading has resulted in extensive price transparency (efficient market hypothesis) and these discrepancies, if they exist, are short-lived and quickly equilibrated.

References
[1] "Compact Oxford English Dictionary" (http:/ / www. askoxford. com/ concise_oed/ stock?view=uk). Askoxford.com. . Retrieved 2010-02-12. [2] "Cambridge Advanced Learner's Dictionary" (http:/ / dictionary. cambridge. org/ define. asp?key=78290& dict=CALD). Dictionary.cambridge.org. . Retrieved 2010-02-12. [3] "Stock Basics" (http:/ / www. investorguide. com/ igu-article-818-stock-basics-common-and-preferred-stock. html), Investor Guide.com. [4] Zvi Bodie, Alex Kane, Alan J. Marcus, Investments, 7th Ed., p. 2653. [5] "Black Scholes Calculator" (http:/ / www. tradingtoday. com/ black-scholes). Tradingtoday.com. . Retrieved 2010-02-12. [6] "Stringham, Edward" ("2003"). ""The Extralegal Development of Securities Trading in Seventeenth Century Amsterdam"" (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1676251). "The Quarterly Review of Economics and Finance". . Retrieved 13 September 2011. [7] "Stringham, Edward" ("2002"). ""The Origin of the London Stock Exchange as a Self Policing Club"" (http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1676253). "Journal of Private Enterprise". . Retrieved 16 August 2010. [8] "Devil the Hindmost" by Edward Chancellor. [9] Jones v. H. F. Ahmanson & Co., 1 Cal. 3d) [10] "Jones v. H.F. Ahmanson & Co. (1969) 1 C3d 93" (http:/ / online. ceb. com/ calcases/ C3/ 1C3d93. htm). Online.ceb.com. . Retrieved 2010-02-12. [11] Whitman, 2004, 5

Stock
[12] Jackson, Thomas (2001). The Logic and Limits of Bankruptcy Law. Oxford Oxfordshire: Oxford University Press. p.32. ISBN1587981149. [13] "Increased Customer Satisfaction Increases Stock Price" (http:/ / www. rhsmith. umd. edu/ research/ ras/ spring2006/ 2. html). . [14] "Understanding Stock Prices: Bid, Ask, Spread" (http:/ / www. youngmoney. com/ investing/ sharebuilder/ goals/ 031021_08). Youngmoney.com. . Retrieved 2010-02-12.

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External links
Stock exchanges (http://www.dmoz.org/Business/Investing/Stocks_and_Bonds/Exchanges//) at the Open Directory Project Stocks investing (http://www.dmoz.org/Home/Personal_Finance/Investing/Stocks//) at the Open Directory Project Stock Market Terminology (http://investorguide.110mb.com/investmentterminology.html) Stock Market Trivia: History of Stocks (http://www.stockmarkettrivia.com) The oldest share in the world (http://www.worldsoldestshare.com/), issued by the Dutch East India Company (Vereenigde Oost-Indische Compagnie or VOC), 1606.

Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.[1] Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. States that are sovereign or self-governing under international law have theoretically unlimited powers to enact tax laws affecting their territories, unless limited by previous international treaties. There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens.[2] Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.[3] According to other definitions,[4] the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions. In its December 2008 report on the use of tax havens by American corporations,[5] the U.S. Government Accountability Office was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of a tax haven: 1. 2. 3. 4. 5. nil or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.

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History
The use of differing tax laws between two or more countries to try to mitigate tax liability is probably as old as taxation itself. In Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. It is sometimes suggested that the practice first reached prominence through the avoidance of the Cinque ports and later the staple ports in the twelfth and fourteenth centuries respectively. In 1721, American colonies traded from Latin America to avoid British taxes. Various countries claim to be the oldest tax haven in the world. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to trace its fiscal independence to even earlier times. Nonetheless, the modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War I.[6] Bermuda sometimes optimistically claims to have been the first tax haven based upon the creation of the first offshore companies legislation in 1935 by the newly created law firm of Conyers Dill & Pearman.[7] However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.[8] Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein.[9] Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. However, in the early part of the twentieth century, in the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction efforts following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War, avoided these additional infrastructure costs and was consequently able to maintain a low level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons. It is difficult, nonetheless, to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven. Until the 1950s, tax havens were used to avoid personal taxation but since then jurisdictions have come to focus on attracting companies with low or no corporate tax. Centres which focus on providing financial services to corporations rather than private wealth management are more often known as offshore financial centres. This strategy generally relied on double taxation treaties between large jurisdictions and the tax haven, allowing corporations to structure group ownership through the smaller jurisdiction to reduce tax liability. Although some of these double tax treaties survive,[10] in the 1970s, most major countries began repealing their double taxation treaties with micro-states to prevent corporate tax leakage in this manner. In the early to mid-1980s, most tax havens changed the focus of their legislation to create corporate vehicles which were "ring-fenced" and exempt from local taxation (although they usually could not trade locally either). These vehicles were usually called "exempt companies" or "International Business Corporations". However, in the late 1990s and early 2000s, the OECD began a series of initiatives aimed at tax havens to curb the abuse of what the OECD referred to as "unfair tax competition". Under pressure from the OECD, most major tax havens repealed their laws permitting these ring-fenced vehicles to be incorporated, but concurrently they amended their tax laws so that a company which did not actually trade within the jurisdiction would not accrue any local tax liability.[11]

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Money and exchange control

Most tax havens have a double monetary control system which distinguish residents from non-resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non-residents. A company, belonging to a non-resident, when trading overseas is seen as non-resident in terms of exchange control. It is possible for a foreigner to create a company in a tax haven to trade internationally; the companys operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven. Tax havens usually have currency easily convertible or linked to an easily convertible currency. Most are convertible to US dollars, euro or to pounds sterling.

Methodology
At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:[12] Personal residency. Since the early 20th century, wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation see Tax residence. In some cases the low-tax jurisdictions levy no, or only very low, income tax. But almost no tax haven assesses any kind of capital gains tax, or inheritance tax. Individuals who are unable to return to a high-tax country in which they used to reside for more than a few days a year are sometimes referred to as tax exiles. Asset holding. Asset holding involves utilizing a trust or a company, or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction, they cease to be taxable in that jurisdiction. Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust (with himself being a trustee with another trustee, whilst holding the beneficial life estate) for himself for life, and then to his daughter. On his death, the shares will automatically vest in the daughter, who thereby acquires the house, without the house having to go through probate and being assessed with inheritance tax.[13] (Most countries assess inheritance tax (and all other taxes) on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.) Trading and other business activity. Many businesses which do not require a specific geographical location or extensive labor are set up in tax havens, to minimize tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include internet based services and group finance companies. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing companies simply made a margin without performing any economic function, but as the margin arose in a tax free jurisdiction, it allowed the group to "skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now prevent transfer pricing scams of this nature. Financial intermediaries. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. This has proved particularly successful in the area of offshore funds.[14] In 2010 it was reported that Google uses techniques called the "Double Irish" and "Dutch Sandwich" to reduce its corporate income tax to 2.4%, by funnelling its corporate income through Ireland and from there to a shell in the Netherlands where it can

Tax haven be transferred to Bermuda, which has no corporate income tax.[15]

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The OECD and tax havens

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:[16] 1. Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence. 2. Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. 3. Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayers situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. Secret rulings, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a governments lack of legal access to financial records are contributing factors. However the OECD found that its definition caught certain aspects of its members' tax systems (some countries have low or zero taxes for certain favored groups). Its later work has therefore focused on the single aspect of information exchange. This is generally thought to be an inadequate definition of a tax haven, but is politically expedient because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK.[17] In deciding whether or not a jurisdiction is a tax haven, the first factor to look at is whether there are no or nominal taxes. If this is the case, the other two factors whether or not there is an exchange of information and transparency must be analyzed. Having no or nominal taxes is not sufficient, by itself, to characterize a jurisdiction as a tax haven. The OECD recognizes that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.

Anti-avoidance
To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Generally, such legislation tends to operate in one of five ways: 1. attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled Foreign Corporation legislation is an example of this. 2. transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines. 3. restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients. 4. taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this. 5. exit charges, or taxing of unrealized capital gains when an individual, trust or company emigrates. However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven.[18] Also becoming increasingly popular is "forced disclosure" of tax mitigation schemes. Broadly, these involve the revenue authorities compelling tax advisors to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the five methods indicated above.[19] Although not specifically

Tax haven aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same. Anti-avoidance came to prominence in 2010/2011 as NGOs and politicians in the leading economies looked for convenient scapegoats for their governments' spending cuts.[20] The International Financial Centres Forum (IFC Forum) has asked for a balanced debate on the issue of tax avoidance and an understanding of the role that the tax neutrality of small international financial centres plays in the global economy.[21]

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Incentives
There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies. Many industrialized countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. Various pressure groups also claim that money launderers also use tax havens extensively,[22] although extensive financial and KYC regulations in tax havens can actually make money laundering more difficult than in large onshore financial centers with significantly higher volumes of transactions, such as New York City or London.[23] In 2000 the Financial Action Task Force published what came to be known as the "FATF Blacklist" of countries which were perceived to be uncooperative in relation to money laundering; although several tax havens have appeared on the list from time to time (including key jurisdictions such as the Cayman Islands, Bahamas and Liechtenstein), no offshore jurisdictions appear on the list at this time. A very interesting incentive was Inland Revenue and HM Customs and Excise agreeing to sell more than 600 of their building stock to a firm in a tax haven. The sell-off, was made to Bermuda based Mapeley Steps Ltd in 2001.[24]

Examples
The U.S. National Bureau of Economic Research has suggested that roughly 15% of countries in the world are tax havens, that these countries tend to be small and affluent, and that better governed and regulated countries are more likely to become tax havens, and are more likely to be successful if they become tax havens.[25] No two commentators can generally agree on a "list of tax havens", but the following countries are commonly cited as falling within the "classic" perception of a sovereign tax haven. Andorra The Bahamas Bermuda (United Kingdom) British Virgin Islands (United Kingdom) Cayman Islands (United Kingdom) The Channel Islands of Jersey and Guernsey (United Kingdom) Cyprus The Isle of Man (United Kingdom) Liechtenstein Mauritius Monaco

Panama San Marino

Tax haven Seychelles Switzerland Turks and Caicos Islands (United Kingdom) Non-sovereign jurisdictions sometimes labelled as tax havens potentially include: Campione d'Italia an Italian enclave within Switzerland Delaware Jebel Ali Free Zone in the United Arab Emirates Labuan, a Malaysian island off Borneo

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Some tax havens including some of the ones listed above do charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income.

Former tax havens

Beirut formerly had a reputation as the only tax haven in the Middle East. However, this changed after the Intra Bank crash of 1966,[26] and the subsequent political and military deterioration of Lebanon dissuaded foreign use as a tax haven. Liberia had a prosperous ship registration industry. The series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction. The fact that the ship registration business still continues is partly a testament to its early success, and partly a testament to moving the national Shipping Registry to New York City. Tangier had a brief but colorful existence as a tax haven in the period between the end of effective control by the Spanish in 1945 until it was formally reunited with Morocco in 1956. A number of Pacific based tax havens have ceased to operate as tax havens in response to OECD demands for better regulation and transparency in the late 1990s. Vanuatu's Financial Services commissioner announced in May 2008 that his country would reform its laws so as to cease being a tax haven. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven."[27]

Extent
While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centres), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market).[28] A 2006 academic paper indicated that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries",[29] although they did not define "significant" for this purpose. A January 2009 Government Accountability Office (GAO) report said that the GAO had determined that 83 of the 100 largest U.S. publicly traded corporations and 63 of the 100 largest contractors for the U.S. federal government were maintaining subsidiaries in countries generally considered havens for avoiding taxes. The GAO did not review the companies' transactions to independently verify that the subsidiaries helped the companies reduce their tax burden, but said only that historically the purpose of such subsidiaries is to cut tax costs.[30] Currently the "Caribbean Banking Centers" which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, and Panama hold almost two trillion dollars in United States debt.[31]

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Lost tax revenue

In October 2009 research commissioned from Deloitte for the Foot Review of British Offshore Financial Centres indicated that much less tax had been lost to tax havens than previously had been thought. The report indicated "We estimate the total UK corporation tax potentially lost to avoidance activities to be up to 2 billion per annum, although it could be much lower." The report also dissected an earlier report by the TUC, which had concluded that tax avoidance by the 50 largest companies in the FTSE 100 was depriving the UK Treasury of approximately 11.8 billion. The TUC's analysis had looked at the reported profits of the companies and the amount of tax paid, which created a gap in tax revenues which was mostly due to differences in the accounting treatment of profit for taxation purposes, which were intended under the UK's tax rules.[32] The report also stressed that British Crown Dependencies make a "significant contribution to the liquidity of the UK market". In the second quarter of 2009, they provided net funds to banks in the UK totalling $323 billion (195 billion), of which $218 billion came from Jersey, $74 billion from Guernsey and $40 billion from the Isle of Man. Tax Justice Network, an anti-tax haven pressure group, suggests that global tax revenue lost to tax havens exceeds US$255 billion per year, although those figures are not widely accepted. Estimates by the OECD suggest that by 2007 capital held offshore amounts to somewhere between US$5 trillion and US$7 trillion, making up approximately 68% of total global investments under management. Of this, approximately US$1.4 trillion is estimate to be held in the Cayman Islands alone.[33] The Center for Freedom and Prosperity disputes claims about forgone tax revenue. Academic researchers also have found that tax havens actually boost prosperity in neighboring jurisdictions by creating tax-efficient platforms for economic activity much of which would not occur if subject to onerous taxes if controlled by a domestic entity. Some support for this is found in academic studies which suggest that the tax elasticity of investment is approximately 0.6.[34]

Modern developments
Proposed U.S. legislation
The Foreign Account Tax Compliance Act (FATCA) was initially introduced to target those who evade paying U.S. taxes by hiding assets in undisclosed foreign bank accounts. With the strong backing of the Obama Administration, Congress quickly drafted the FATCA legislation and slipped it into the vaguely related HIRE Hiring_Incentives_to_ Restore_Employment_Act signed into law by President Obama in March 2010. Key provisions of FATCA FATCA requires foreign financial institutions (FFI) of broad scope banks, stock brokers, hedge funds, pension funds, insurance companies, trusts to report directly to the IRS all clients who are U.S. Persons. Starting January 1, 2013 (later delayed to 2014), FATCA will require FFIs to provide annual reports to the Internal Revenue Service (IRS) on the name and address of each U.S. client, as well as the largest account balance in the year and total debits and credits of any account owned by a U.S. person. If an institution does not comply, the U.S. will impose a 30% withholding tax on all its transactions concerning U.S. securities, including the proceeds of sale of securities. In addition, FATCA requires any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax I.D. number (TIN) of any U.S. owner. FATCA also requires U.S. citizens and green card holders who have foreign financial assets in excess of $50,000 to complete a new Form 8938 to be filed with the 1040 tax return, starting with fiscal year 2011 (later delayed to 2012).
[35]

The delay is indicative of a controversy over the feasibility of implementing the legislation as evidenced in this paper from the renowned Peterson Institute for International Economics. [36]

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Proposed German legislation

In January 2009, Peer Steinbrck, the German financial minister, announced a plan to amend fiscal laws. New regulations would disallow that payments to companies in certain countries that shield money from disclosure rules be declared as operative expenses. The effect of this would make banking in such states unattractive and expensive.[37]

Liechtenstein banking scandal

In February 2008 Germany announced that it had paid 4.2 million to Heinrich Kieber,[38] a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts' details. Investigations and arrests followed relating to charges of illegal tax evasion. The German authorities shared the data with U.S. tax authorities, but the British government paid a further 100,000 for the same data.[39] Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property.[40] The Liechtenstein authorities subsequently accused the German authorities of espionage.[41] However, regardless of whether unlawful tax evasion was being engaged in, the incident has fuelled the perception amongst European governments and press that tax havens provide facilities shrouded in secrecy designed to facilitate unlawful tax evasion, rather than legitimate tax planning and legal tax mitigation schemes. This in turn has led to a call for "crackdowns" on tax havens.[42] Whether the calls for such a crackdown are mere posturing or lead to more definitive activity by mainstream economies to restrict access to tax havens is yet to be seen. No definitive announcements or proposals have yet been made by the European Union or governments of the member states.

G20 tax havens blacklist

At the London G20 summit on 2 April 2009, G20 countries agreed to define a blacklist for tax havens, to be segmented according to a four-tier system, based on compliance with an "internationally agreed tax standard."[43] The list as per April 2nd of 2009 can be viewed on the OECD Data [44] After a great progress the four tiers are now: 1. Those that have substantially implemented the standard (includes most countries but China still excludes Hongkong and Macao). 2. Tax havens that have committed to but not yet fully implemented the standard (includes Montserrat, Nauru, Niue, Panama, and Vanuatu) 3. Financial centres that have committed to but not yet fully implemented the standard (includes Guatemala, Costa Rica and Uruguay). 4. Those that have not committed to the standard (an empty category) Those countries in the bottom tier were initially classified as being 'non-cooperative tax havens'. Uruguay was initially classified as being uncooperative. However, upon appeal the OECD stated that it did meet tax transparency rules and thus moved it up. The Philippines took steps to remove itself from the blacklist and Malaysian Prime Minister Najib Razak had suggested earlier that Malaysia should not be in the bottom tier.[45] On April 7, 2009, the OECD, through its chief Angel Gurria, announced that Costa Rica, Malaysia, the Philippines and Uruguay have been removed from the blacklist after they had made "a full commitment to exchange information to the OECD standards."[46] Despite calls from French President Nicolas Sarkozy for Hong Kong and Macau to be included separately from China on the list, they are as of yet not included independently, although it is expected that they will be added at a later date.[43] Government response to the crackdown has been broadly supportive, although not universal.[47] Luxembourg Prime Minister Jean-Claude Juncker has criticised the list, stating that it has "no credibility", for failing to include various states of the U.S.A. which provide incorporation infrastructure which are indistinguishable from the aspects of pure tax havens to which the G20 object.[48]

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Foot report
In November 2009 Sir Michael Foot delivered a report on the British Crown Dependencies and Overseas Territories for HM Treasury.[49] The report indicated that whilst many of the territories "had a good story to tell", others needed to improve in detection and prevention of financial crime. It also stressed the view that narrow tax bases presented long term strategic risks, and that the economies should seek to diversify and broaden their own tax bases. The report also indicated that tax revenue lost by the United Kingdom government appeared to be much smaller than had previously estimated (see above under Lost tax revenue), and also stressed the importance of the liquidity provided by the territories to the United Kingdom. The Crown Dependencies and Overseas Territories broadly welcomed the report,[50] but the pressure group Tax Justice Network, unhappy with the findings, commented "[a] weak man, born to be an apologist, has delivered a weak report."[51]

Notes
[1] Dharmapala, Dhammika und Hines Jr., James R. (2006) Which Countries Become Tax Havens? (http:/ / ssrn. com/ abstract=952721) [2] Doggart, Caroline. 2002. Tax Havens and Their Uses (originally published 1970), Economist Intelligence Unit, ISBN 0-86218-163-1 [3] Davidson, Sinclair (2007-10-15). "The Truth About Tax Havens - retrieved 28 December 2007" (http:/ / www. theage. com. au/ news/ business/ here-is-the-truth-about-tax-havens/ 2007/ 10/ 15/ 1192300685572. html). Melbourne: Theage.com.au. . Retrieved 2011-03-22. [4] "The Truth About Tax Havens - retrieved 28 December 2007" (http:/ / www. taxjustice. net/ cms/ upload/ pdf/ Identifying_Tax_Havens_Jul_07. pdf) (PDF). . Retrieved 2011-03-22. [5] "International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions GAO:GAO-09-157" (http:/ / www. gao. gov/ products/ GAO-09-157). Government Accountability Office. December 18, 2008. . Retrieved 2009-01-21. [6] "[T]he tax haven is a creature of the twentieth century, and began to be used extensively because of the high levels of tax which prevailed after the First World War" at para 26.1, Tolley's International Tax Planning (2002), ISBN 0-7545-1339-4 [7] See generally Introduction to Tolley's International Initiatives Affecting Financial Havens (2001), ISBN 0-406-94264-1 [8] The Personen- und Gesellschaftsrecht of 20 January 1926 [9] Tolley's Tax Havens (2000), ISBN 0-7545-0471-9 [10] For example a double taxation treaty still exists between Barbados and Japan, and another between Cyprus and Russia. Mauritius has a double taxation treaty with India that is used for tax mitigation, although India is seeking to renegotiate the treaty, India to push for change in tax treaty with Mauritius (http:/ / timesofindia. indiatimes. com/ NEWS/ India_Business/ India_to_push_for_change_in_tax_treaty_with_Mauritius/ articleshow/ 1068539. cms) [11] For example, the British Virgin Islands repealed the International Business Companies Act (Cap 291) (which had prohibited such companies from trading locally) and enacted the BVI Business Companies Act 2004 (which permitted this) in its place. Contemporaneously it varied its tax laws by amending the Income Tax Act (Cap 206) which amended the rate of income tax for individuals and corporations to zero, and the Payroll Taxes Act 2004 which imposed a (new) payroll tax on person employed by businesses within the British Virgin Islands. [12] Tolley's Offshore Service (2006), ISBN 1-4057-1568-5 [13] This is a simplistic example; in most sophisticated tax codes there are extensive provisions for catching "gifts" (such as a declaration of trust) made for a specified time preceding death. [14] It has been estimated over 75% of the world's hedge funds (probably the riskiest form of collective investment vehicle) are domiciled in the Cayman Islands, with nearly $1.1 trillion US AUM - Institutional Investor (http:/ / www. dailyii. com/ article. asp?ArticleID=1039798& LS=EMS73445), 15 May 2006, although statistics in the hedge fund industry are notoriously speculative. [15] Drucker J. (2010). The Tax Haven That's Saving Google Billions (http:/ / www. businessweek. com/ magazine/ content/ 10_44/ b4201043146825. htm). Business Week. [16] "Tax Haven Criteria - retrieved 26 February 2008 Tax Haven Criteria" (http:/ / www. oecd. org/ document/ 63/ 0,3343,en_2649_37427_30575447_1_1_1_37427,00. html). Oecd.org. . Retrieved 2011-03-22. [17] Hay, Towards a level playing field - regulating corporate vehicles in cross border transactions, (http:/ / www. itio. org/ documents/ TowardsaLevel. pdf) [18] Companies incorporated in tax havens are often used as bond issuing vehicles in securitisations for tax reasons. [19] The United Kingdom is one country that has strict forced disclosure rules. - http:/ / www. hmrc. gov. uk/ aiu/ index. htm [20] "Tax Dodgers - Big Society Revenue & Customs. UK Uncut" (http:/ / www. ukuncut. org. uk/ targets/ tax-dodgers). . Retrieved 18 March 2011. [21] "Statement on tax avoidance debate. IFC Forum" (http:/ / www. ifcforum. org/ files/ IFC_Forum_holding_statement_on_tax_avoidance. pdf). . Retrieved 18 March 2011. [22] Such as ATTAC and the Tax Justice Network. See for example: Offshore watch (http:/ / visar. csustan. edu/ aaba/ jerseypage. html) [23] See for example the views expressed in The Guardian (http:/ / www. guardian. co. uk/ waronterror/ story/ 0,,563715,00. html) in 2001.

Tax haven
[24] "UK Treasury rebukes Inland Revenue for tax haven deal" (http:/ / www. internationaltaxreview. com/ default. asp?Page=9& PUBid=210& ISS=13230& SID=488943). International Tax Review. . Retrieved 2011-03-22. [25] Working paper 12802, (http:/ / www. nber. org/ papers/ w12802). The paper implicitly adopts the "smaller" tax haven approach, ie. disregarding larger countries which have either low taxes rates (for example, Russia), or systems of taxation which permit them to be used to structure tax avoidance schemes (for example, the United Kingdom). It also excludes non-sovereign tax havens (for example, Delaware or Labuan). [26] "Election Under Fire" (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,945606-1,00. html). Time Magazine. 1976-05-17. . Retrieved 2006-12-23. [27] "Vanuatu to ditch tax haven" (http:/ / www. theaustralian. news. com. au/ story/ 0,25197,23652068-2702,00. html), Anthony Klan, The Australian, May 6, 2008 [28] "Offshore Financial Centers" (http:/ / www. imf. org/ external/ np/ mae/ oshore/ 2000/ eng/ back. htm), International Monetary Fund background paper, June 23, 2000 [29] Desai, Foley and Hines, "The demand for tax haven operations", Journal of Public Economics 90 (2006), page 514. [30] Carol D. Leonnig (January 16, 2009). "Report Finds Major U.S. Companies Have Offshore Tax Havens" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2009/ 01/ 16/ AR2009011602602. html?hpid=topnews). Washington Post. . [31] "U.S. Banking Liabilities to Foreigners." (http:/ / www. treasury. gov/ resource-center/ data-chart-center/ tic/ Pages/ ticliab. aspx). Treasury.gov. . Retrieved 2011-03-22. [32] The Times (2009-10-30). "Tax haven report lays emphasis on vital role of Crown Dependencies" (http:/ / business. timesonline. co. uk/ tol/ business/ industry_sectors/ banking_and_finance/ article6896141. ece). London. . Retrieved 2009-11-02. [33] "Places in the sun" (http:/ / www. economist. com/ surveys/ displaystory. cfm?story_id=8695139), The Economist, February 22, 2007 [34] Hines, Lessons from behavioral responses to international taxation, (1999) 52 National Tax Journal, pp. 305322 [35] U.S. Internal Revenue Service (2011-07-14). "Treasury and IRS Issue Guidance Outlining Phased Implementation of FATCA Beginning in 2013" (http:/ / www. irs. gov/ newsroom/ article/ 0,,id=242164,00. html) (in English). . Retrieved 2011-08-25. [36] "Gary Clyde Hufbauer: The Foreign Account Tax Compliance Act: Imperial Overreach" (http:/ / www. piie. com/ realtime/ ?p=2276) (in English). 2011-07-22. . Retrieved 2011-08-25. [37] Der Spiegel (2009-01-17). "Steinbrck forciert Kampf gegen Steuerparadiese" (http:/ / www. spiegel. de/ wirtschaft/ 0,1518,601859,00. html) (in German). . Retrieved 2009-01-17. [38] Mr Kieber seems to be an unlikely hero for law enforcement authorities. A convicted fraudster, reports indicate that after initially stealing the information, he blackmailed the Liechtenstein authorities into reducing and dropping criminal charges against him relating to property fraud in Spain. However, before returning the disks he made copies which he later sold to foreign governments after he left the country. Further reports indicate that he now lives under a new name in Australia. (http:/ / www. spiegel. de/ international/ business/ 0,1518,537640,00. html) [39] The Guardian, 2 March 2008 (http:/ / www. guardian. co. uk/ business/ 2008/ mar/ 02/ tax. personalfinancenews); The Daily Telegraph, 27 February 2008 (http:/ / www. telegraph. co. uk/ opinion/ main. jhtml?xml=/ opinion/ 2008/ 02/ 27/ do2704. xml); Der Spiegel, 25 February 2008 (http:/ / www. spiegel. de/ international/ business/ 0,1518,537640,00. html) [40] Denmark's tax minister, Kristian Jensen, said: "I think it's a moral problem to reward a criminal for some information that he stole... I don't like this and I don't think this ethic is the best way to ensure that taxes are paid correctly." [41] By Harry de Quetteville 12:01AM GMT 20 Feb 2008 (2008-02-20). "''The Daily Telegraph'', 26 February 2008" (http:/ / www. telegraph. co. uk/ news/ main. jhtml?xml=/ news/ 2008/ 02/ 20/ wliech120. xml). London: Telegraph.co.uk. . Retrieved 2011-03-22. [42] Accountancy Age, 3 March 2008 (http:/ / www. accountancyage. com/ accountancyage/ news/ 2210944/ germany-call-tax-haven); The Times, 9 March 2008 (http:/ / business. timesonline. co. uk/ tol/ business/ money/ tax/ article3510661. ece); The Guardian, 5 March 2008 (http:/ / www. guardian. co. uk/ money/ 2008/ mar/ 05/ capitalgainstax. moneyinvestments?gusrc=rss& feed=worldnews) [43] G20 declares door shut on tax havens (http:/ / www. guardian. co. uk/ world/ 2009/ apr/ 02/ g20-summit-tax-havens), The Guardian, April 2, 2009 [44] "OECD List as per 2009-04-02" (http:/ / www. oecd. org/ dataoecd/ 38/ 14/ 42497950. pdf) (PDF). . Retrieved 2011-03-22. [45] "OECD names and shames tax havens" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 7980848. stm). BBC News. 2009-04-03. . Retrieved 2009-04-04. [46] BBC (2009-04-07). "OECD removes tax havens from list" (http:/ / news. bbc. co. uk/ 2/ hi/ business/ 7987417. stm). BBC News. . Retrieved 2009-04-07. [47] Butler, Eamonn (2009-04-12). "Save the tax havens we need them" (http:/ / www. timesonline. co. uk/ tol/ comment/ columnists/ guest_contributors/ article6078115. ece). London: The Times. . Retrieved 2009-04-14. [48] Clark, Andrew (2009-04-10). "Welcome to tax-dodge city, USA" (http:/ / www. guardian. co. uk/ business/ 2009/ apr/ 10/ tax-havens-blacklist-us-delaware). London: The Guardian. . Retrieved 2009-04-14. [49] "Michael Foot publishes final report" (http:/ / www. hm-treasury. gov. uk/ press_98_09. htm). HM Treasury. 2009-10-29. . Retrieved 2009-11-05. [50] "Governor and Premier Welcome Michael Foot Review Conclusions" (http:/ / www. bviplatinum. com/ news. php?section=article& source=1256939117). 2009-10-30. . Retrieved 2009-11-05. [51] "The Foot Report: a setback" (http:/ / taxjustice. blogspot. com/ 2009/ 10/ foot-report. html). Tax Justice Network. 2009-10-29. . Retrieved 2009-11-05.

247

Tax haven

248

Further reading
Baker, Raymond W. (August 2005). Capitalism's Achilles' Heel: Dirty Money, and How to Renew the Free-Market System. Hoboken, New Jersey: John Wiley & Sons. ISBN 978-0-471-64488-0. Henry, James S. (October 2003). The Blood Bankers: Tales from the Global Underground Economy. New York, NY: Four Walls Eight Windows. ISBN978-1-568-58254-2. Morriss, Andrew P. (2010). Offshore Financial Centers and Regulatory Competition. Washington: The AEI Press. ISBN13: 978-0-844-74324-0. Scevola, Carlo; Sneiderova, Karina (January 2010). Offshore Jurisdictions Guide. Geneva, Switzerland: CS&P Fiduciaire. ISBN978-1-605-94433-3. Shaxson, Nicholas (April 2011). Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. New York, NY: Palgrave Macmillan. ISBN978-0-230-10501-0.

External links
International Financial Centres Forum (IFC Forum) (http://www.ifcforum.org) Offshore Banking (http://www.onlinetaxhavens.com) directory of providers Offshore Banking and Financial Centers (http://www.imf.org/external/ns/cs.aspx?id=55) Offshore Financial Centers -- IMF Background Paper (http://www.imf.org/external/np/mae/oshore/2000/ eng/back.htm) Congressional Research Service (CRS) Reports regarding tax havens (http://digital.library.unt.edu/govdocs/ crs/search.tkl?type=subject&q=Tax havens&q2=LIV) Tax Justice Network (http://www.taxjustice.net/cms/front_content.php?idcat=2) Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD (http://www.oecd.org/ tax/transparency) Global Financial Integrity (http://www.gfip.org/) Task Force on Financial Integrity & Economic Development (http://www.financialtaskforce.org/) An OECD Proposal To Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy (http://www. heritage.org/Research/Taxes/BG1395.cfm) Heritage Foundation: Washington D.C. The Moral Case for Tax Havens (http://admin.fnst.org/uploads/1044/24-OP-pdf.pdf) The Economic Case for Tax Havens (http://freedomandprosperity.org/2008/videos/ the-economic-case-for-tax-havens/) The Economics of Tax Competition: Harmonization vs. Liberalization (http://www.heritage.org/research/ features/index/chapters/pdfs/Index2004_Chap2.pdf) "Why tax havens are a blessing" the Cato Institute (http://www.cato.org/pub_display.php?pub_id=9283) "Profiting from corruption: The role and responsibility of financial institutions" - U4 Anti-Corruption Resource Centre (http://www.cmi.no/publications/file/3537-profiting-from-corruption.pdf) Tax Havens: Myth v. Fact (http://freedomandprosperity.org/issues/tax-havens/)

Treynor ratio

249

Treynor ratio
The Treynor ratio (sometimes called the reward-to-volatility ratio or Treynor measure[1] ), named after Jack L. Treynor,[2] is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e.g., Treasury Bills or a completely diversified portfolio), per each unit of market risk assumed. The Treynor ratio relates excess return over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.

Formula

where: Treynor ratio, portfolio i's return, risk free rate portfolio i's beta

Limitations
Like the Sharpe ratio, the Treynor ratio (T) does not quantify the value added, if any, of active portfolio management. It is a ranking criterion only. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market. An alternative method of ranking portfolio management is Jensen's alpha, which quantifies the added return as the excess return above the security market line in the capital asset pricing model. As these two methods both determine rankings based on systematic risk alone, they will rank portfolios identically.

References
[1] Brown, Keith C.; Frank K. Reilly. "25" (in English). Analysis of Investments and Management of Portfolios (9th International ed.). Cengage Learning. pp.941. [2] "Treynor Ratio" (http:/ / www. investopedia. com/ terms/ t/ treynorratio. asp). . Retrieved 20 February 2010.

United States Treasury security

250

United States Treasury security

A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). There are several types of non-marketable treasury securities including State and Local Government Series (SLGS), Government Account Series debt issued to government-managed trust funds, and savings bonds. All of the marketable Treasury securities are very liquid and are heavily traded on the secondary market. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.

History
The U.S. government knew that the costs of World War I would be great, and the question of how to pay for the war was a matter of intense debate. The resulting decision was to pay for the war with a balance between higher taxes (see the War Tax Act) and government debt. Traditionally, the government borrowed from other countries, but there were no other countries from which to borrow in 1917: U.S. citizens would have to fully finance the war through both higher taxes and purchases of war bonds.[1] The Treasury raised funding throughout the war by selling $21.5 billion in 'Liberty bonds.' These bonds were sold at subscription where officials created coupon price and then sold it at Par value. At this price, subscriptions could be filled in as little as one day, but usually remained open for several weeks, depending on demand for the bond.[1] After the war, the Liberty Bonds were reaching maturity, but the Treasury was unable to pay each down fully with only limited budget surpluses. The resolution to this problem was to refinance the debt with variable short and medium-term maturities. Again the Treasury issued debt through fixed-price subscription, where both the coupon and the price of the debt were dictated by the treasury.[1] The problems with debt issuance became apparent in the late-1920's. The system suffered from chronic oversubscription, where interest rates were so attractive that there were more purchasers of debt than supplied by the government. This indicated that the government was paying too much for debt. As government debt was undervalued, debt purchasers could buy from the government and immediately sell to another market participant at a higher price.[1] In 1929, the U.S. Treasury shifted from the fixed-price subscription system to a system of auctioning where 'Treasury Bills' would be sold to the highest bidder. Securities were then issued on a pro rata system where securities would be allocated to the highest bidder until their demand was full. If more treasuries were supplied by the government, they would then be allocated to the next highest bidder. This system allowed the market to set the price rather than the government. On December 10, 1929, the Treasury issued its first auction. The result was the issuing of $224 million three-month bills. The highest bid was at 99.310 with the lowest bid accepted at 99.152.[1] Foreign countries later started to buy U.S. debt as an investment of their surplus U.S. Dollars. There is fear that foreign countries hold so many bonds that if they stopped buying them, the U.S. economy would collapse; however, the reality is that more bonds are transferred in a single day by the Treasury than are held by any single sovereign state.[2] The perception of this dependence furthers belief that the U.S. and China economies are so tightly linked that both fear the consequences of a potential slow down in China's purchase of those bonds. In her 2010 visit to China, the U.S. Secretary of State Hillary Clinton called on authorities in Beijing to continue buying U.S. Treasuries, saying it would help jumpstart the flagging U.S. economy and stimulate imports of Chinese goods.[3] As the economic recession continues, more doubts arise over the real value of U.S. treasury securities. Though carefully worded, Chinese premier Wen Jia Bao's warning about possible devaluation of Chinese held U.S. bonds was taken very seriously by Washington:

United States Treasury security "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried" ... "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."[4] - Chinese premier, Wen Jiabao, said at a news conference after the closing of China's 2009 legislative session. However, it is important to note that such comments, while critical, were very likely indicative of Chinese "gesturing" ahead of the April 1st G-20 Economic Summit. As of April 2009, the U.S. dollar had rallied YTD against all other major world currencies. On March 18, 2009, the Federal Reserve used quantitative easing "to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."[5]

251

Marketable securities
Directly issued by the United States Government
Treasury bill "Treasury bill" redirects here. Note that the Bank of England issues these in the United Kingdom. Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity.[6] Many regard Treasury bills as the least risky investment available to U.S. investors. Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by single-price auctions held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction, usually at 11:30 a.m., on the following Monday and settlement, or issuance, on Thursday. Offering amounts for 4-week bills are announced on Monday for auction the next day, Tuesday, usually at 11:30 a.m., and issuance on Thursday. Offering amounts for 52-week bills are announced every fourth Thursday for auction the next Tuesday, usually at 11:30 am, and issuance on Thursday. Purchase orders at TreasuryDirect must be entered before 11:00 on the Monday of the auction. The minimum purchase, effective April 7, 2008, is $100. (This amount formerly had been $1,000.) Mature T-bills are also redeemed on each Thursday. Banks and financial institutions, especially primary dealers, are the largest purchasers of T-bills. Like other securities, individual issues of T-bills are identified with a unique CUSIP number. The 13-week bill issued three months after a 26-week bill is considered a re-opening of the 26-week bill and is given the same CUSIP number. The 4-week bill issued two months after that and maturing on the same day is also considered a re-opening of the 26-week bill and shares the same CUSIP number. For example, the 26-week bill issued on March 22, 2007, and maturing on September 20, 2007, has the same CUSIP number (912795A27) as the 13-week bill issued on June 21, 2007, and maturing on September 20, 2007, and as the 4-week bill issued on August 23, 2007 that matures on September 20, 2007. During periods when Treasury cash balances are particularly low, the Treasury may sell cash management bills (or CMBs). These are sold at a discount and by auction just like weekly Treasury bills. They differ in that they are irregular in amount, term (often less than 21 days), and day of the week for auction, issuance, and maturity. When CMBs mature on the same day as a regular weekly bill, usually Thursday, they are said to be on-cycle. The CMB is considered another reopening of the bill and has the same CUSIP. When CMBs mature on any other day, they are off-cycle and have a different CUSIP number.

United States Treasury security Pricing & Quotation Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis. With the advent of TreasuryDirect, individuals can now purchase T-Bills online and have funds withdrawn from and deposited directly to their personal bank account and earn higher interest rates on their savings. General calculation for the discount yield for Treasury bills is

252

Treasury note This is the modern usage of "Treasury Note" in the U.S., for the earlier meanings see Treasury Note (disambiguation). Treasury notes (or T-Notes) mature in one to ten years. They have a coupon payment every six months, and are commonly issued with maturities dates between 1 to 10 years, with denominations of $1,000. In the basic transaction, one buys a "$1,000" T-Note for say, $950, collects interest over 10 years of say, 3% per year, which comes to $30 yearly, and at the end of the 10 years cashes it in for $1000. So, $950 over the course of 10 years becomes $1300. T-Notes and T-Bonds are quoted on the secondary market at percentage of par in thirty-seconds of a point (n/32 of a point, where n = 1,2,3,...). Thus, for example, a quote of 95:07 on a note indicates that it is trading at a discount: $952.19 (i.e., 95 + 7/32%) for a $1,000 bond. (Several different notations may be used for bond price quotes. The example of 95 and 7/32 points may be written as 95:07, or 95-07, or 95'07, or decimalized as 95.21875.) Other notation includes a +, which indicates 1/64 points and a third digit may be specified to represent 1/256 points. Examples include 95:07+ which equates to (95 + 7/32 + 1/64) and 95:073 which equates to (95 + 7/32 + 3/256). Notation such as 95:073+ is not typically used. The 10-year Treasury note has become the security most frequently quoted when discussing the performance of the U.S. government bond market and is used to convey the market's take on longer-term macroeconomic expectations. Treasury bond Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. They have a coupon payment every six months like T-Notes, and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. This role has largely been taken over by the 10-year note, as the size and frequency of long-term bond issues declined significantly in the 1990s and early 2000s. The U.S. Federal government suspended issuing the well-known 30-year Treasury bonds (often called long-bonds) for a four and a half year period starting October 31, 2001 and concluding February 2006.[7] As the U.S. government used its budget surpluses to pay down the Federal debt in the late 1990s,[8] the 10-year Treasury note began to replace the 30-year Treasury bond as the general, most-followed metric of the U.S. bond market. However, because of demand from pension funds and large, long-term institutional investors, along with a need to diversify the Treasury's liabilities - and also because the flatter yield curve meant that the opportunity cost of selling long-dated debt had dropped - the 30-year Treasury bond was re-introduced in February 2006 and is now issued quarterly.[9] This brought the U.S. in line with Japan and European governments issuing longer-dated maturities amid growing global demand from pension funds.

United States Treasury security TIPS Treasury Inflation-Protected Securities (or TIPS) are the inflation-indexed bonds issued by the U.S. Treasury. The principal is adjusted to the Consumer Price Index (CPI), the commonly used measure of inflation. When the CPI rises, the principal adjusts upward. If the index falls, the principal adjusts downwards.[10] The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against inflation. TIPS are currently offered in 5-year, 10-year and 30-year maturities.[11]

253

Federal Reserve holdings of U.S. Treasuries

For the Quantitative easing policy, the Fed's holding of US treasuries increased from $750 billion in 2007 to over $1.5 trillion by June 2011. Source Federal Reserve Bank of Cleveland. [12]

Top Foreign holders of U.S. Treasuries

As of December 2010:
Holder 1. China 2. Japan 3. United Kingdom 4. Oil Exporters 5. Brazil 6. Carib Bnkng Ctrs 7. Taiwan 8. Russia 9. Hong Kong 10. Switzerland 11. Luxembourg 12. Canada 13. Singapore 14. Germany $US billion 1160.1 882.3 272.1 211.9 186.1 168.6 155.1 151.0 134.2 107.0 86.4 76.8 72.9 60.5

Luxembourg holds with approximately 500,000 inhabitants $172,800 per capita of U.S. Treasury securities. In comparison, Germany holds only $747 per capita. Source: The United States Treasury[13]

Created by the Financial Industry

STRIPS Separate Trading of Registered Interest and Principal Securities (or STRIPS) are T-Notes, T-Bonds and TIPS whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately (in units of $100 face value) in the secondary market. The name derives from the days before computerization, when paper bonds were physically traded; traders would literally tear the interest coupons off of paper securities for separate resale. The government does not directly issue STRIPS; they are formed by investment banks or brokerage firms, but the government does register STRIPS in its book-entry system. They cannot be bought through TreasuryDirect, but only

United States Treasury security through a broker. STRIPS are used by the Treasury and split into individual principal and interest payments, which get resold in the form of zero-coupon bonds. Because they then pay no interest, there is not any interest to re-invest, and so there is no reinvestment risk with STRIPS.

254

Nonmarketable securities
Zero-Percent Certificate of Indebtedness
The "Certificate of Indebtedness" is a Treasury security that does not earn any interest and has no fixed maturity. It can only be held in a TreasuryDirect account and bought or sold directly through the Treasury. It is intended to be used as a source of funds for traditional Treasury security purchases. Purchases and redemptions can be made at any time.[14]

Government Account Series

Government Account Series Treasuries are the principal form of intragovernmental debt holdings.[15] Surpluses from the Social Security Trust Fund are invested in this type of security.

U.S. Savings Bonds

Savings bonds were created to finance World War I, and were originally called Liberty Bonds. In 2002, the Treasury Department started changing the savings bond program by lowering interest rates and closing its marketing offices.[16] As of January 2011, Treasury stopped mailing paper bonds through payroll deduction programs in favor of individuals buying bonds online. Banks continue to sell paper bonds. Series EE Series EE bonds are issued at 50% of their face value (paper bonds only, bonds purchased online are sold at face value) and reach maturity 20 years from issuance though they continue to earn interest for a total of 30 years. Interest is added to the bond monthly and paid when the holder cashes the bond. For bonds issued before May 2005 the rate of interest is recomputed every six months at 90% of the average five-year Treasury yield for the preceding six months. Bonds issued in May 2005 or later pay a fixed interest rate for the life of the bond (0.6% in February 2011). At 0.6%, a $200 bond purchased for $100 would be worth less than $113 just before 20 years, but will be adjusted to $200 at 20 years (giving it an effective rate of 3.5%) then continue to earn the fixed rate for 10 more years. In the space of a decade, interest dropped from well over 5% to 0.7% for new bonds in 2009.[17] Interest is taxable at the federal level only. Investors can elect to defer taxation until the bond ceases to pay interest (30 years after issuance) or until it is redeemed. Series EE bonds are designed for individual investors, sold at a discount, and redeemed at an amount that includes the interest income. Hence, while interest is calculated monthly, the interest on a Series EE bond is not paid until redemption. All Series I Savings Bonds and Series EE Savings Bonds issued in May 1997 or later increase in value monthly. All other Savings Bonds, including Series HH bonds issued after May 1997, pay interest on a six-month cycle. These bonds should be cashed near the beginning of their month of issue or of the month exactly six months later.

United States Treasury security Series HH Series HH bonds are sold at face value and mature at face value. Unlike T-Bonds (Treasury Bonds) and agency issues, Series HH bonds are nonmarketable. They also pay interest semi-annually, as do most bonds. Issuance of Series HH bonds stopped as of August 31, 2004, but there are still many yet that have not matured.[18]
[19]

255

Series I Series I bonds are issued at face value and have a variable yield based on inflation. The interest rate consists of two components: the first is a fixed rate which will remain constant over the life of the bond and the second is a variable rate reset every six months from the time the bond is purchased based on the current inflation rate. New rates go into effect on May 1 and November 1 of every year.[20] The fixed rate is determined by the Treasury Department; the variable component is based on the Consumer Price Index [CPI-U] from a six month period ending one month prior to the reset time. Interest accrues monthly, in full, on the first day of the month (i.e., a Savings Bond will have the same value on July 1 as on July 31, but on August 1 its value will increase for the August interest accrual). Like EE bonds, I-bonds are issued to individuals with a limit of $5,000 per person (by Social Security number) per year.[21] A person may purchase the limit of both paper and electronic bonds for a total of $10,000 per year. Redeeming the bonds before five years will incur a penalty of three months of interest.[22] The fixed portion of the rate has varied from as much as 3.6% to 0% (0% in February 2011 while the inflation portion was 0.74% per year). During times of deflation (during part of 2009), the negative inflation portion can wipe out the return of the fixed portion, but the combined rate cannot go below 0% and the bond will not lose value.[20] Besides being available for purchase at financial institutions and online, tax payers may purchase I-bonds using a portion of their 2010 tax refund via IRS Form 8888 Allocation of Refund. Bonds purchased using Form 8888 are issued as paper bonds and mailed to the address listed on the tax return. Tax payers may purchase bonds for themselves or other persons such as children or grandchildren. The remainder of the tax payer's refund may be received by direct deposit or check.[23]

References
[1] Kenneth D. Garbade (July 2008). "Why The U.S. Treasury Began Auctioning Treasury Bills in 1929" (http:/ / www. newyorkfed. org/ research/ epr/ 08v14n1/ 0807garb. pdf). Federal Reserve Bank of New York, Vol. 14, No. 1. . Retrieved 2011-04-27. [2] "Wholesale Securities Services, Program Data" (http:/ / www. publicdebt. treas. gov/ ). U.S. Department of the Treasury, Bureau of the Public Debt. 11 April 2011. . Retrieved 2011-04-27. [3] Indira A.R. Lakshmanan (22 February 2009). "Clinton Urges China to Keep Buying U.S. Treasury Securities" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=apSqGtcNsqSY& refer=news). Bloomberg.com. . Retrieved 2011-04-27. [4] Peter Foster (13 March 2009). "Chinese premier Wen Jiabao worried about US debt" (http:/ / www. telegraph. co. uk/ finance/ g20-summit/ 4984924/ Chinese-premier-Wen-Jiabao-worried-about-US-debt. . html). Daily Telegraph (telegraph.uk). . Retrieved 2011-04-27. [5] "Fed maintains near-[[zero interest rate policy (http:/ / money. cnn. com/ 2009/ 03/ 18/ news/ economy/ fed_statement/ index. htm?postversion=2009031814)] and says it will purchase up to $300 billion in Treasurys over the next 6 months"]. money.cnn.com. 18 March 2009. . Retrieved 2011-04-27. [6] Treasury Bills (http:/ / www. treasurydirect. gov/ indiv/ products/ prod_tbills_glance. htm), TreasuryDirect.gov. U.S. Department of Treasury, Bureau of Public Debt. April 22, 2011. Retrieved May 24, 2011. [7] "Treasury Reintroduces 30-Year Bond" (http:/ / www. treasurydirect. gov/ indiv/ research/ articles/ res_invest_articles_30yearbondarticle_0106. htm). U.S. Department of the Treasury. 4 August 2006. . Retrieved 2011-04-27. [8] "The United States on Track to Pay Off the Debt by End of the Decade" (http:/ / clinton4. nara. gov/ WH/ new/ html/ Fri_Dec_29_151111_2000. html). Clinton4nara.gov. 28 December 2000. . Retrieved 2009-10-23. [9] "Table of Treasury Securities" (http:/ / www. treasurydirect. gov/ instit/ auctfund/ work/ auctime/ auctime_securitiestable. htm). U.S. Department of the Treasury. 4 November 2010. . Retrieved 2011-04-27. [10] Benjamin Shephard (July 9, 2008). "Park Your Cash" (http:/ / www. investingdaily. com/ pf/ 15730/ park-your-cash. html). InvestingDaily.com. . Retrieved 2011-05-17. [11] "Treasury Inflation-Protected Securities(TIPS)" (http:/ / www. treasurydirect. gov/ indiv/ products/ prod_tips_glance. htm). TreasuryDirect.gov. 7 April 2011. . Retrieved 2011-04-27. [12] http:/ / www. clevelandfed. org/ research/ data/ credit_easing/ index. cfm

United States Treasury security

[13] "Major Foreign Holders of Treasury Securities" (http:/ / www. treas. gov/ tic/ mfh. txt). treasury.gov. 15 April 2011. . Retrieved 2011-04-27. [14] "Regulations Governing Treasury Securities, New Treasury Direct System" (http:/ / www. treasurydirect. gov/ lawguide/ lawguide_08162004. pdf). U.S. Department of the Treasury. August 2004. . Retrieved 2011-05-17. [15] "Monthly Statement of the Public Debt of the United States" (http:/ / www. treasurydirect. gov/ govt/ reports/ pd/ mspd/ 2009/ opds092009. pdf) (PDF). treasurydirect.gov. 2009-09-30. . Retrieved 2009-11-04. [16] Pender, Kathleen (December 3, 2007). "Treasury takes new whack at savings bonds" (http:/ / www. sfgate. com/ cgi-bin/ article. cgi?f=/ c/ a/ 2007/ 12/ 04/ BU0ATNHMO. DTL). The San Francisco Chronicle (Hearst). . Retrieved 2007-02-14. [17] "Series EE/E Savings Bond Rates" (http:/ / www. treasurydirect. gov/ indiv/ research/ indepth/ ebonds/ res_e_marketbonds. htm). U.S. Department of the Treasury. . Retrieved 2008-07-19. [18] "Individual - HH/H Savings Bonds" (http:/ / www. treasurydirect. gov/ indiv/ products/ prod_hhbonds_glance. htm). Treasurydirect.gov. . Retrieved 2010-03-25. [19] "Government Will Honor Discontinued HH Bonds" (http:/ / articles. latimes. com/ 2003/ sep/ 14/ business/ fi-montalk14). Los Angeles Times (Articles.latimes.com). September 14, 2003. . Retrieved 2010-03-25. [20] "I Savings Bonds Rates & Terms" (http:/ / www. treasurydirect. gov/ indiv/ research/ indepth/ ibonds/ res_ibonds_iratesandterms. htm). TreasuryDirect.gov. 1 November 2010. . Retrieved 2011-04-27. [21] "Annual Purchase Limit For Savings Bonds Set at $5,000" (http:/ / www. treasurydirect. gov/ news/ pressroom/ pressroom_reducedpurchaselimit. htm). TreasuryDirect.gov. 3 December 2007. . Retrieved 2009-02-17.The annual $5000 limit was effective on January 1, 2008. The earlier limit of $30,000 was set in 2003. [22] "I Savings Bonds" (http:/ / www. treasurydirect. gov/ indiv/ products/ prod_ibonds_glance. htm). TreasuryDirect.gov. 3 January 2011. . Retrieved 2011-04-27. [23] "Use Your Federal Tax Refund to Buy Savings Bonds" (http:/ / www. irs. gov/ newsroom/ article/ 0,,id=218387,00. html). irs.gov. 1 February 2011. . Retrieved 2011-04-27.

256

External links
Bureau of the Public Debt: US Savings Bonds Online (http://www.treasurydirect.gov/indiv/products/ products.htm) Major Foreign Holders of U.S. Treasury Bonds (http://www.treas.gov/tic/mfh.txt) U.S. Bureau of the Public Debt: Series A, B, C, D, E, F, G, H, J, and K Savings Bonds and Savings Notes. (http:// www.treasurydirect.gov/indiv/research/indepth/other/res_othersecurities.htm) Features and Risks of Treasury Inflation Protection Securities (http://www.kc.frb.org/Publicat/econrev/PDF/ 1q98Shen.pdf)

Upside potential ratio

257

Upside potential ratio

The Upside-Potential Ratio is a measure of a return of an investment asset relative to the minimal acceptable return. The measurement allows a firm or individual to choose investments which have had relatively good upside performance, per unit of downside risk.

where the returns which occurs at

have been put into increasing order. Here is the minimal acceptable return.

is the probability of the return

and

The Upside-Potential Ratio may also be expressed as a ratio of partial moments. The measure was developed by Frank A. Sortino.

Discussion
The Upside-Potential Ratio is a measure of risk-adjusted returns. All such measures are dependent on some measure of risk. In practice, standard deviation is often used, perhaps because it is mathematically easy to manipulate. However, standard deviation treats deviations above the mean (which are desirable, from the investor's perspective) exactly the same as it treats deviations below the mean (which are less desirable, at the very least). In practice, rational investors have a preference for good returns (e.g., deviations above the mean) and an aversion to bad returns (e.g., deviations below the mean). Sortino further found that investors are (or, at least, should be) averse not to deviations below the mean, but to deviations below some "minimal acceptable return" (MAR), which is meaningful to them specifically. Thus, this measure uses deviations above the MAR in the numerator, rewarding performance above the MAR. In the denominator, it has deviations below the MAR, thus penalizing performance below the MAR. Thus, by rewarding desirable results in the numerator and penalizing undesirable results in the denominator, this measure attempts to serve as a pragmatic measure of the goodness of an investment portfolio's returns in a sense that is not just mathematically simple (a primary reason to use standard deviation as a risk measure), but one that considers the realities of investor psychology and behavior.

External links
[1] Paper by Frank A. Sortino

References
[1] http:/ / www. sortino. com/ htm/ Upside%20Potential. htm

Value added

258

Value added
Value added refers to "extra" feature(s) of an item of interest (product, service, person etc.) that go beyond the standard expectations and provide something "more" while adding little or nothing to its cost. Value-added features give competitive edges to companies with otherwise more expensive products. In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases (of materials and services). Value Added is a higher portion of Revenue for integrated companies, e.g., manufacturing companies, and a lower portion of Revenue for less integrated companies, e.g., retail companies. Total value added is very closely approximated by Total Labor Expense (including wages, salaries, and benefits) plus "Cash" Operating Profit (defined as Operating Profit plus Depreciation Expense, i.e., Operating Profit before Depreciation). The first component (Total Labor Expense) is a return to labor and the second component (Operating Profit before Depreciation) is a return to capital (including capital goods, land, and other property). In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labour, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution.

National accounts
The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X. In national accounts such as the United Nations System of National Accounts (UNSNA) or the United States National Income and Product Accounts (NIPA), gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output. Net value added is obtained by deducting consumption of fixed capital (or depreciation charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation, and indirect taxes less subsidies.

Marxist interpretation
Karl Marx's concept of the value product is similar to the national accounting concept of net national product, or net value added, since it is the value of the gross product minus expenditure on constant capital, where the latter refers to the costs of intermediate products and depreciation. In turn, value added is equal to the sum of variable capital (labor's compensation) and surplus-value (pre-tax profit income). The argument is that labor creates a new value (value added) that covers the cost of both its own wages (payment for workers' ability to do labor, i.e. for their labor power) and surplus-value (property income). In Marx's example in his Das Kapital, workers exert enough labor-time during a working day to pay for the cost of reproducing their ability to work during that day (their labor-power) and then did extra work (surplus-labor) to pay incomes to capitalists, land-owners, and the like. As labor is the active and conscious factor in the production process, capital goods ("means of production") and gifts from nature ("land," natural resources) only facilitate labor's transformation of raw materials into other products, raising labor's physical productivity (its ability to produce use-values) and its value-productivity (its ability to produce use-values that can be sold for money). In contrast, Neoclassical economics regards the incomes constituting added value as the reward for services rendered. In his critique of political economy, Marx saw incomes as results of production under conditions of capitalist exploitation. The capitalist class control over the production process and the growth of the economy (capital accumulation) gives them the power to claim the benefits of the extra labor done by the workforce. This is enforced by the normal existence of mass unemployment, what Marx called the "reserve army of labor."

Value added

259

Differences between Marxist and neo-classical accounting of value added

A difference between Marxist theory and conventional national accounts concerns the interpretation of the distinction between new value created, transfers of value and conserved value, and of the definition of "production". For example, Marxist theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a fictitious entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time. In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows: "6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner-occupiers is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under household final consumption expenditures." Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them. Another important difference concerns the treatment of property rents, land rents and real estate rents. In the Marxian interpretation, many of these rents, insofar as they are paid out of the sales of current output of production, constitute part of the new value created and part of the real cost structure of production. They should therefore be included in the valuation of the net product. This contrasts with the conventional national accounting procedure, where many property rents are excluded from new value-added and net product on the ground that they do not reflect a productive contribution.

Value added tax

Value added tax (VAT) is a tax on sales. It works by being charged on the sale price of new goods and services, whether purchased by intermediate or final consumers. However, intermediate consumers may reclaim VAT paid on their inputs, so that the net VAT is based on the value added by producing this good or service.

References
Alan Deardorff Deardorff's Glossary of International Economics [1] (Click V for "Value added.") Edgar Z. Palmer, The meaning and measurement of the national income, and of other social accounting aggregates. Paul A. Samuelson and William D. Nordhaus (2004) Economics. "Glossary of Terms," Value added. Anwar Shaikh & Ahmet Ertugrul Tonak, Measuring the Wealth of Nations. CUP. M. Yanovsky, Anatomy of Social Accounting Systems.

Value added

260

External links
What Does Value Add Mean? [2] Value Add - Your Value Add is what Matters to Your Company [3] Information and best practices of regional value added in the Alps [4]

References
[1] [2] [3] [4] http:/ / www-personal. umich. edu/ ~alandear/ glossary/ http:/ / www. sideroad. com/ Sales_Techniques/ value-add-sales. html http:/ / humanresources. about. com/ od/ glossaryv/ g/ value_add. htm http:/ / www. cipra. org/ en/ future-in-the-alps/ questions/ question1

Wealth management
There is no generally accepted standard definition of wealth management both in terms of the products and services provided and the constitution of the client base served but a basic definition would be financial services provided to wealthy clients, mainly individuals and their families.[1] Private banking forms an important, more exclusive, subset of wealth management. At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, many clients trusted their private banking relationship manager to get on with it, and took a largely passive approach to financial decision making.[1] Private banking has a very long pedigree, stretching back at least as far as the seventeenth century in the case of some British private banks. It is, however, only really over the last 15 years or so that the term wealth management has found its way into common industry parlance. It developed in response to the arrival of mass affluence during the latter part of the twentieth century; more sophisticated client needs throughout the wealth spectrum; a desire among some clients to be more actively involved in the management of their money; a willingness on the part of some types of financial services players, such as retail banks and brokerages, to extend their offerings to meet the new demand; and, more generally, a recognition among providers that, for many clients, conventional mass-market retail financial services are inadequate. Wealth management is therefore a broader area of financial services than private banking in two main ways:[1] Product range. As in private banking, asset management services are at the heart of the wealth management industry. But wealth management is more than asset management. It focuses on both sides of the clients balance sheet. Wealth management has a greater emphasis on financial advice and is concerned with gathering, maintaining, preserving, enhancing and transferring wealth. It includes the following types of products and services:[1] 1. 2. 3. 4. 5. Brokerage. Core banking-type products, such as current accounts, time deposits and liquidity management. Lending products, such as margin lending, credit cards, mortgages and private jet finance. Insurance and protection products, such as property and health insurance, life assurance and pensions. Asset management in its broadest sense: discretionary and advisory, financial and nonfinancial assets (such as real estate, commodities, wine and art), conventional, structured and alternative investments.

6. Advice in all shapes and forms: asset allocation, wealth structuring, tax and trusts, various types of planning (financial, inheritance, pensions, philanthropic), family-dispute arbitration even psychotherapy to children suffering from affluenza.

Wealth management 7. A wide range of concierge-type services, including yacht broking, art storage, real estate location, and hotel, restaurant and theatre booking. Client segments. Private banking targets only the very wealthiest clients or high net worth individuals (HNWIs): broadly speaking, those with more than around $1 million in investable assets. Wealth management, by contrast, targets clients with assets as low as $100 000, i.e. affluent as well as high net worth (HNW) clients.[1] Wealth management can mean different things in different geographic regions. The US and Europe have traditionally stood at two extremes in this regard. In the US, wealth management is more closely allied to transaction-driven brokerage and is typically investment-product driven. In Europe, the term is more synonymous with traditional private banking, with its greater emphasis on advice and exclusivity.[1]

261

Private banking
Private banking, also called private wealth management, concerns the high-quality provision of a range of financial and related services to wealthy clients, principally individuals and their families. Typically the services on offer combine retail banking products such as payment and account facilities plus a wide range of up-market investment related services.[2] Market segmentation and the offering of high quality service provision forms the essence of private banking and key components include:[2] tailoring services to individual client requirements anticipation of client needs a long-term relationship orientation personal contact discretion investment performance.

An important feature of the private banking market relates to client segmentation. The bottom end of the market is referred to as the mass affluent segment typically individuals who have up to $300,000 of investable assets. The top-end of the market are often referred to as ultra HNWIs with over $50 million in investable assets and in-between lie HNWIs ($300,000 to $5 million) and very high HNWIs ($5 million to $50 million). Note that these definitions are by no means precise and different banks and commentators use various definitions for their own market segmentation strategies. The level of service and the range of products on offer increases with the wealth of the respective client.[2]

Rankings
According to Scorpio Partnership's Annual Private Banking Benchmark for 2011, Bank of America still leads the pack courtesy of its rescue of Merrill Lynch in 2008.[3] Morgan Stanley follows as a result of its ownership control of the Smith Barney franchise,[4] while UBS has steadied the ship after all of its difficulties. Notably, the top four in the world are some distance from the rest of mega-players in the market. For instance, Bank of America is USD1.08 trillion clear of Credit Suisse in fifth, which itself has more than USD430 billion more AUM than Royal Bank of Canada in sixth.[5] Analysis of the AUM controlled the top 20 wealth managers by size reveals that their share of all Benchmark AUM jumped significantly from 77.1% by year-end 2009 to 81.6% at the end of 2010 and collectively manage USD11.075 trillion. Indeed, the annual ranking of the global wealth managers showed that the top 10 now collectively manage USD9.214 trillion in HNW assets, representing 67.9% of the total AUM benchmarked by Scorpio Partnership.[5] The twenty largest wealth managers in 2011 (listed by assets under management):[5]

Wealth management

262

Before Lehman Brothers collapsed, UBS was the largest wealth manager.

Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12 . 13 . 14 . 15 . 16. 17 . 18 . 19 . 20 .

Firm Bank of America Merrill Lynch Morgan Stanley Smith Barney UBS Wells Fargo Credit Suisse Royal Bank of Canada HSBC Deutsche Bank BNP Paribas J.P. Morgan Pictet Goldman Sachs ABN AMRO Barclays Julius Br Crdit Agricole Bank of New York Mellon Northern Trust Lombard Odier Darier Hentsch Citi Private Bank

AuM ($bln) $1,944.74 $1,628.00 $1,559.90 $1,398.00 $865.06 $435.15 $390.00 $368.55 $340.41 $284.00 $267.66 $229.00 $220.06 $185.91 $181.68 $171.81 $166.00 $154.40 $153.10 $140.70

AuM % Chg. 4.20% 7.96% 6.6% 14.78% 11.56% 14.81% 6.27% 35.31% 45.68% 5.19% 10.05% -0.87% 23.79% 1.92% 22.46% 4.22% 7.79% 6.34% 7.83% 15.42%

Notes: AuM figures are for the high net worth wealth management divisions of these institutions. In the list, there are five Swiss companies including two private banks and eight American companies.

Wealth management

263

Market overview
The worlds high net worth individuals (HNWIs) expanded in population and wealth in 2010 surpassing 2007 pre-crisis levels in nearly every region, according to the 15th annual World Wealth Report from Merrill Lynch Global Wealth Management and Capgemini.[6] Globally, HNWIs* financial wealth grew 9.7% in 2010 to reach US$42.7 trillion, surpassing the 2007 pre-crisis peak. The global population of HNWIs grew 8.3% to 10.9 million.[6] Ultra-HNWIs** posted slightly stronger-than-average gains in their numbers and wealth. The global population of Ultra-HNWIs grew by 10.2% in 2010 and its wealth by 11.5%. As a result, Ultra-HNWIs accounted for 36.1% of global HNWI wealth, up from 35.5%, while representing only 0.9% of the global HNWI population.[6] About 53 percent of the worlds millionaires, or individuals with at least $1 million in investable assets excluding primary residences and collectibles, are found in the U.S., Japan and Germany, the report showed.[6] Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, excluding real estate and property such as art. Wealth became more concentrated, with millionaire households controlling 39 percent of the worlds assets, up from 37 percent a year earlier, the Boston Consulting Group said.[7] Global assets under management rose by 8 percent to $121.8 trillion in 2010, beating the studys previous peak of $111.8 trillion in 2007, the Boston-based firm said in a study. Global wealth is defined as total assets under management (AuM) across all households.[7] Singapore will become the worlds top wealth management center by 2013, because of emerging markets growth and as new rules put pressure on Switzerland and London, according to a PricewaterhouseCoopers LLP survey of global wealth-management firms.[8] Singapore will leapfrog both European centers in the next two years with Hong Kong taking third spot behind Switzerland and ahead of London while New York will retain fith position, PwC wrote in its 2011 Global Private Banking and Wealth Management report.[8] Note 1*: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6] Note 2**: Ultra-HNWIs are defined as those having investable assets of US$30 million or more, excluding primary residence, collectibles, consumables, and consumer durables.[6]

Further reading
David Maude (2006). Global Private Banking and Wealth Management: The New Realities.

External links
Michael J. Moore and David Mildenberg, "In the Battle of the Big Brokers, Merrill Is Winning" [9], Bloomberg Businessweek, September 2, 2010.

References
[1] Global Private Banking and Wealth Management: The New Realities, p. 1-2. [2] Anna Omarini and Philip Molineux, Private Banking in Europe: Getting Clients and Keeping Them! (http:/ / 129. 3. 20. 41/ eps/ fin/ papers/ 0509/ 0509011. pdf) [3] "Bank of America to Acquire Merrill as Crisis Deepens" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=a9O9JGOLdI_U), Bloomberg News, September 15, 2008. [4] "Morgan Stanley Pays $2.7 Billion to Citi in Venture" (http:/ / www. bloomberg. com/ apps/ news?pid=newsarchive& sid=acVWAJ2qai_s), Bloomberg News, January 13, 2009.

Wealth management
[5] Global Private Banking Benchmark 2011 (http:/ / www. scorpiopartnership. com/ uploads/ pdfs/ 110707_Scorpio Partnership_PRESS RELEASE_2011 Global Private Banking Benchmark. pdf), Scorpio Partnership, July 13, 2011. [6] World Wealth Report 2011 (http:/ / www. ml. com/ media/ 114235. pdf), Capgemini and Merrill Lynch, 22 June, 2011. [7] Global Wealth Report 2011 (http:/ / www. dasinvestment. com/ fileadmin/ images/ pictures/ 0907/ BCG_2011_0106_Global_Wealth_Report_client_version_May2011. pdf), The Boston Consulting Group, May, 2011. [8] Global Private Banking and Wealth Management Survey 2011 (http:/ / www. pwc. com/ en_GX/ gx/ private-banking-wealth-mgmt-survey/ pdf/ Global-Private-Banking-Wealth-2011. pdf), PwC, June, 2011. [9] http:/ / www. businessweek. com/ magazine/ content/ 10_37/ b4194037934749. htm

264

Article Sources and Contributors

265

Article Sources and Contributors

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Zh, Zhengfu, Zhenghanjianke, Zhonghuo, Zhouij, Zhouyn, Zia demion, Zleitzen, Znode, Zoe, Zondor, Zscout370, ZxxZxxZ, , , 05, , , , 3076 anonymous edits Collective investment scheme Source: http://en.wikipedia.org/w/index.php?oldid=451677174 Contributors: AWeenieMan, Aledeniz, Altenmann, Antandrus, Aude, Aymatth2, Banggar, Beardo, Berean Hunter, Bluemoose, Bluerasberry, Bobo192, CapitalR, Chris the speller, ChrisWar666, CliffC, Cmdrjameson, Cowpriest2, Danielreed, Dark-Fire, DavidWBrooks, Daytona2, Dungodung, Edward, Falcon8765, Forbsey, Gkklein, Ground Zero, Hello Control, HopiSilva, Hroulf, Hu12, Iitkgp.prashant, Israel32, JamesBurns, Jamesfkeithii, Jeroen, Jkeene, Joanjoc, John M Baker, Johnkitty, Joneill2, Jweiss11, Kevinkkinal, Kristainlondon, Lamro, Legis, Maelnuneb, Mais oui!, Marek69, Marrigreat, Master of Pies, Mellery, Mf1420, Michael Devore, Nirvana2013, Nopetro, Olaffpomona, Original Man in Black, Oxymoron83, Paul A, Pgreenfinch, Philip Trueman, Philip ea, Pnm, Praddy06, 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LeCour, Rjwilmsi, Rnelsonee, Ronnotel, Rror, S2000magician, Salam32, Saric, Schaefman21, Seanlfarrell, Search4Lancer, Sergei Kazantsev, ShadowRangerRIT, Shirik, Skunkboy74, Smallbones, Star2buk, Steve099, Stwalkerster, Surv1v4l1st, SusanLesch, Tan90deg, Tellumo, TerraFrost, Thesilence, Thorn726, Thorncrag, Tobby72, Treasurymarket, Triwbe, Trsrg, Ulner, Universal Cereal Bus, VSimonian, Vajs, Vipin911, Voidvector, Voidxor, Wdfarmer, Wendyb1949, WikHead, Wmahan, Wtmitchell, XS750, Zain Ebrahim111, Zeamays, Zilch0000, Ziva David, Zorakoid, 429 anonymous edits Upside potential ratio Source: http://en.wikipedia.org/w/index.php?oldid=394995240 Contributors: Altruistguy, Btyner, ByeByeBaby, Gene s, Hooperbloob, Jlowin, Karada, Melcombe, Michael Hardy, MrOllie, Octopus-Hands, Phil Boswell, Zotel, 4 anonymous edits Value added Source: http://en.wikipedia.org/w/index.php?oldid=452670626 Contributors: .:Ajvol:., Adam Katz, Armkrunk, Attilios, AuburnPilot, Balabiot, Bhadani, Birdofevil, Boson, Btyner, CSMasick, Cnb, Conjo123, Cuauti, Dricherby, Duoduoduo, Edward, Eurobas, Excirial, Fifelfoo, Hairhorn, Hartz, Henrygb, Hongooi, Ibdbgr, Infinity0, Iridescent, Jdevine, Jeff3000, Jerryseinfeld, John Quiggin, Joy, Jurriaan, Kktor, Kukini, L77, Leeannedy, Mkill, Mrball, NSR, Nightbit, Orange Suede Sofa, Pbrooks, Pgr94, Piotrus, R.O.C, Rctay, RichardF, Rumping, Sam Hocevar, Sammo, Sergei Kazantsev, Shanoor212, Stebulus, Thomasjl, Thomasmeeks, Tomas e, Underpants, WhatamIdoing, Who, Yakudza, 61 anonymous edits Wealth management Source: http://en.wikipedia.org/w/index.php?oldid=454732040 Contributors: Aaatulmishra, Akappes, Andy00001, Arcenciel, Banner page 22, Barek, Belmond, Bobmack89x, Bonadea, Brett k, CDNFinance, Cahk, Chandler123456, Chowbok, ChrisNolte01, Chunt@euromoney.com, Classact1000, Cleduc, Coxeagle, Crocodile Punter, DMCer, Deetdeet, Dekisugi, Dethroned Buoy, Dickietr, Dondegroovily, Edward, EdwardRCollins, Encarbajal, Ewlyahoocom, Funandtrvl, Gavin.collins, Globalprofessor, Grey ham28, Hu12, JHP, Jenix89, Jfichera, Jj137, Jlavorgna, JohnWayne, Jpotee1007, Jstplace, Jweiss11, Kncipi, Kuru, Leszek Jaczuk, MCB, Madcoverboy, Magister Mathematicae, MeS2135, Mn6vj1, Monster889, MrOllie, Nbpandya, Nekohakase, Nx, Ohnoitsjamie, Orangemike, Orina22, PBsam, Peru6502, Pgreenfinch, QueenofBattle, Ravensfire, Remort, Rishu ag, Shadowjams, Simon123, SiobhanHansa, Sir Vicious, Supernova new, Surv1v4l1st, TastyPoutine, Themfromspace, Tra, Trivialist, Truepoint01, TysonLewis, UnitedStatesian, Wall Street CEO, Wikiuser100, Wwjonesy, 92 anonymous edits

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File:...8 VizuIMG 3671.JPG Source: http://en.wikipedia.org/w/index.php?title=File:...8__VizuIMG_3671.JPG License: Creative Commons Attribution-Sharealike 3.0 Contributors: V. 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File:CircularMound.jpg Source: http://en.wikipedia.org/w/index.php?title=File:CircularMound.jpg License: Creative Commons Attribution-ShareAlike 3.0 Unported Contributors: Ian and Wendy Sewell File:The Impressive St. Sophia.jpg Source: http://en.wikipedia.org/w/index.php?title=File:The_Impressive_St._Sophia.jpg License: Creative Commons Attribution-Sharealike 2.0 Contributors: Harry Alverson from Shanghai, China File:Kowloon Masjid and Islamic Centre from East 2.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Kowloon_Masjid_and_Islamic_Centre_from_East_2.jpg License: Creative Commons Attribution 3.0 Contributors: Shafakt (talk) Shafak Thaika Original uploader was Shafakt at en.wikipedia Image:Pekin przedstawienie tradycjnego teatru chinskiego 7.JPG Source: http://en.wikipedia.org/w/index.php?title=File:Pekin_przedstawienie_tradycjnego_teatru_chinskiego_7.JPG License: Creative Commons Attribution-Sharealike 3.0 Contributors: user:Kwz Image:Sunset of the Forbidden City 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File:Flag of Kazakhstan.svg Source: http://en.wikipedia.org/w/index.php?title=File:Flag_of_Kazakhstan.svg License: unknown Contributors: -xfiFile:Flag of Uzbekistan.svg Source: http://en.wikipedia.org/w/index.php?title=File:Flag_of_Uzbekistan.svg License: Public Domain Contributors: User:Zscout370 File:Flag of Turkmenistan.svg Source: http://en.wikipedia.org/w/index.php?title=File:Flag_of_Turkmenistan.svg License: Public Domain Contributors: User:Vzb83 File:Flag of Kyrgyzstan.svg Source: http://en.wikipedia.org/w/index.php?title=File:Flag_of_Kyrgyzstan.svg License: Public Domain Contributors: Made by Andrew Duhan for the Sodipodi SVG flag collection, and is public domain. 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