Syllabus of Economics/Learning bricks

Net Present Value
Check out the Net Present Value Wikipedia page.

A net present value calculation seeks to estimate the total real value of a decision in terms of today's monetary unit, given costs and benefits that might be accrued in the future, and some discount rate that the decision maker uses to evaluate future benefits. A discount rate is an estimate of how much less the decision maker values the same benefit one time unit later. Often, the time unit is years, and the discount rate is an annual discount rate. Net present value is then a summation of the value of all benefits accrued over a period of time by a certain decision, where each benefit $$R_t$$ at time $$t$$ is discounted by the discount rate, often labeled $$i$$ or $$r$$.

The Net Present Value ($$NPV$$) is then
 * $$NPV=\sum\limits_{t=0}^T\frac{R_t}{(1+i)^t}$$

where $$T$$ is the total number of future periods, and $$R_t$$ is the net benefit in time period $$t$$, with $$t=0$$ corresponding to the current time period.

Nash Equilibrium
Example of Counterterrorism

In a political economy, policies towards counterterrorism play a major role in the deterrence of terrorists. Such actions display key components represented in game theory. There are two types of policies: proactive and defensive. Proactive policies are utilized as an offensive strategy attacking terrorists, their supporters and their resource base. Defensive policies use a passive approach to create a barrier surrounding potential targets. Game theory assists in explaining the payoffs of both methods in the international community.

'''Figure 1. Deterrence versus preemption - symmetric cases'''

'''Figure 2. Deterrence versus preemption - asymmetric cases'''

The Nash equilibrium in Figure 1 is either both countries deter or both countries keep the status quo. If one player chooses an option in which a larger payoff occurs, then the other player will suffer a significant loss. Choices occur simultaneously in symmetric cases. Figure 2 shows an asymmetric case in which the payoff for certain strategies benefit one player significantly more than the other. The Nash equilibrium would occur if both players deter or if one preempts and the other deters.

Such games provide a visual example as to why preferred-target countries choose a combination of offensive and defensive counterterrorism measures, while less-targeted countries resort to defensive measures.