Question

For each of the following terms, define and give an example. a) Liquidity b) Discount rate c) Adverse Selection d) Insurance e) Occupational crowding f) Complementary and substitute immigration

Answer 1

A.
Liquidity refers to the ability of the firm and other entities to meet the short term liabilities or obligation. It also means the ability to buy the goods by offering liquid money to the sellers. It means that firm has sufficient cash or near cash to fulfil the short term obligations. For example, a firm maintaining cash in the bank account, has liquidity to meet the obligations of the creditors and lenders. For this purpose, current assets of the firm should be greater than the current liability.

B.
Discount rate is the interest rate is that is either used to predict the earning through future value or discount the future earnings in the present time. It is used to make future earnings to be equivalent to the present value of the funds.

For example, discount rate = 10%
Earning after 1 year = $1000
So, present value of the earning = 1000/(1+10%) = $909.09

C.
Adverse selection refers to the phenomenon when there is asymmetry in information between the two parties, generally buyers and sellers. It causes one party to have additional information in comparison to the another person. For example, a person working in the unsafe working conditions, know the risk at work and need for the insurance, than the insurance provider. It creates asymmetry in information. As a result, adverse selection is created.

D.
Insurance refers to the promise to make the compensation when a loss to the insurance takes place. For example, a person having fire insurance, gets the compensation due to the loss of property or damages due to the fire from the insurance company.

E.
Occupational crowding refers to the segregation of people in occupations on the basis of race, sex, income and other demographic factors. For example, segregation of jobs that are more preferred by the female such as admin jobs or office job is the example of occupational crowding. It means that particular class of people joins particular types of jobs.

F.

Complementary and substitute immigration refers to the impact brought in by the immigration. If there is complementary immigration, then such immigration contributes to the increase in demand that causes supply to increase. It creates jobs. So, complementary immigration helps people. When there is a substitute immigration, then the immigrants compete for the same job that is available for the local people also. It makes lowering of the wages in the labor market.