Applied Economics The
Applied Economics, the use of economic theory to examine practical problems or policies and react conclusions. Some economists specialize in the study, teaching and development of economic theory usually at universities; most use theory in applied economics in industry, commerce, government or international organizations.
Arbitrage, the process of making a profit out of differences in the prices of goods or currencies in different places or times. The profit is made by buying goods at one time or place, and selling them at a higher price at another time or place. The arbitrageur is taking the risk that prices may fall; he is 'speculating'.
The result of such 'speculation' is normally to provide a smooth and continuous market by minimizing fluctuations of price over space and time. Thus if the price of wheat in Chicago were lower than the price in Liverpool by more than the cost of shipping wheat between the two centres, profits could be made by buying in Chicago and selling in Liverpool. The additional demand in Chicago would cause price there to rise; the additional supplies in Liverpool would cause price there to fall, until prices were 'in line' in the two centres. Similarly a discrepancy between 'spot prices (for immediate delivery) and prices for forward delivery larger than the cost of holding stocks through time would encourage speculation until the 'equilibrium' difference was established between the two prices. Arbitrage operations illustrate the useful economic function of informed speculation in world markets.
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