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Economics Glossary

Some of the commonly used economic terms are defned here.


ABSOLUTE ADVANTAGE
This is the simplest yardstick of economic performance. If one person, frm or
country can produce more of
something with the same amount of efort and resources, they have an
absolute advantage over other producers.
AGENCY COSTS
These can arise when somebody (the principal) hires somebody else (the
agent) to carry out a task and the
interests of the agent conict with the interests of the principal.
AMORTISATION
The running down or payment of a loan by instalments. !n e"ample is a
repayment mortgage on a house, which
is amortised by making monthly payments that over a pre#agreed period of
time cover the value of the loan plus
interest. $ith loans that are not amortised, the borrower pays only interest
during the period of the loan and then
repays the sum borrowed in full.
ANTITRUST
%&'()*+(*T policy for dealing with +&*&,&-.. !ntitrust laws aim to stop
abuses of market power by
big companies and, sometimes, to prevent corporate +()%()/ !*0
!123I/ITI&*/ that would create or
strengthen a monopolist.
APPRECIATION
! rise in the value of an !//(T and the opposite of 0(,)(1I!TI&*. $hen the
value of a currency rises
relative to another, it appreciates.
ARBITRAGE
4uying an !//(T in one market and simultaneously selling an identical asset
in another market at a higher price.
ARBITRAGE PRICING THEORY
This is one of two inuential economic theories of how assets are priced in
the fnancial markets. The
!)4IT)!%( pricing theory says that the price of a fnancial !//(T reects a
few key risk factors, such as
the e"pected )!T( &5 I*T()(/T, and how the price of the asset changes
relative to the price of a portfolio
of assets. If the price of an asset happens to diverge from what the theory
says it should be, arbitrage by
investors should bring it back into line.
ASSETS6 Things that have earning power or some other value to their owner.
ASYMMETRIC INFORMATION
$hen somebody knows more than somebody else. /uch asymmetric
information can make it di7cult for the
two people to do business together, which is why economists, especially
those practising %!+( T8(&)., are
interested in it.
AUCTIONS
%oing, going, gone. 8olding an auction can be an e"tremely e7cient way for
a seller to set the price of its
products, especially if it does not have much I*5&)+!TI&* about how much
people may be willing to pay for
them. !uctions fascinate economists, especially those who specialise in
%!+( T8(&).. !n (nglish auction is
the most familiar. 4idders compete to ofer higher prices and drop out until
only one remains. In a 0utch auction,
the auctioneer calls out a high price then keeps lowering it until there is a
buyer.
AUTARY
The idea that a country should be self#su7cient and not take part in
international trade.
AVERAGE
! number that is calculated to summarise a group of numbers. The most
commonly used average is the mean,
the sum of the numbers divided by however many numbers there are in the
group.
BAC!ARDATION
$hen a 1&++&0IT. is valued more highly in a spot market (that is, when it
is for delivery today) than in a
futures market (for delivery at some point in the future). $hen spot prices are
lower than futures prices it is
known as contango
BALANCE OF PAYMENTS
The total of all the +&*(. coming into a country from abroad less all of the
money going out of the country
during the same period. This is usually broken down into the current account
and the capital account.
BALANCED BUDGET
$hen total public#sector spending e9uals total government income during
the same period from ta"es and
charges for public services.
BAN
/tarting out as places that would guard your +&*(., banks became the main
source of 1)(0IT
1)(!TI&*. 4anks come in many diferent forms. 1ommercial banks, also
known as retail banks, cater
directly for the general public and lend to (mostly small and medium#si:ed)
frms.
BANRUPTCY
$hen a court ;udges that a debtor is unable to make the payments owed to a
1)(0IT&)
BARTER
,aying for goods or /()'I1(/ with other goods or services, instead of with
+&*(.. It is often popular when
the 9uality of money is low or uncertain, perhaps because of high I*5-!TI&*
or counterfeiting, or when
people are !//(T#rich but cash#poor, or when T!<!TI&* or e"tortion by
criminals is high. -ittle wonder,
then, that barter became popular in )ussia during the late =>>?s.
BASIS POINT
&ne one#hundredth of a ,()1(*T!%( ,&I*T. /mall movements in the
I*T()(/T )!T(, the
(<18!*%( )!T( and 4&*0 .I(-0/ are often described in terms of basis
points. If a bond yield moves
from @.A@B to @.C@B, it has risen by A? basis points.
BEAR
!n investor who thinks that the ,)I1( of a particular security or class of
/(13)ITI(/ (/8!)(/, say) is
going to fallD the opposite of a 43--.
BETA
,art of an economic theory for valuing fnancial /(13)ITI(/ and calculating
the 1&/T &5 1!,IT!-, known
as the 1!,IT!- !//(T ,)I1I*% +&0(-, beta measures the sensitivity of the
,)I1( of a particular
!//(T to changes in the market as a whole.
BLAC ECONOMY
If you pay your cleaner or builder in cash, or for some reason neglect to tell
the ta"man that you were paid for a
service rendered, you participate in the black or underground economy. /uch
transactions do not normally show
up in the fgures for %0,, so the black economy may mean that a country is
much richer than the o7cial data
suggest.
BLAC"SCHOLES
! formula for pricing fnancial options.
BONDS
! bond is an I*T()(/T#bearing /(13)IT. issued by governments, companies
and some other organisations.
4onds are an alternative way for the issuer to raise capital to selling shares or
taking out a 4!*E loan.
BRAND
The stalking#horse for international 1!,IT!-I/+. ! focus for all the worries
about environmental damage,
human#rights abuses and sweated labour that opponents of %-&4!-I/!TI&*
like to put on their placards. !
symbol of !mericaFs corporate power, since most of the worldFs best#known
brands, from 1oca 1ola to *ike,
are !merican. That is the case against.
BULL
!n investor who e"pects the ,)I1( of a particular /(13)IT. to riseD the
opposite of a 4(!).
BUYER#S MARET
! market in which /3,,-. seems plentiful and ,)I1(/ seem lowD the opposite
of a /(--()F/ +!)E(T.
CAPITAL
+&*(. or !//(T/ put to economic use, the life#blood of 1!,IT!-I/+.
(conomists describe capital as one
of the four essential ingredients of economic activity, the 5!1T&)/ &5
,)&031TI&*, along with -!*0,
-!4&3) and (*T(),)I/(.
CAPITAL ADE$UACY RATIO
The ratio of a 4!*EGs 1!,IT!- to its total !//(T/, re9uired by regulators to be
above a minimum
(Hade9uateI) level so that there is little )I/E of the bank going bust. 8ow high
this minimum level is may vary
according to how risky a bankGs activities are.
CAPITAL INTENSIVE
! production process that involves comparatively large amounts of 1!,IT!-D
the opposite of -!4&3)
I*T(*/I'(.
CAPITAL MARETS
+arkets in /(13)ITI(/ such as 4&*0/ and /8!)(/. %overnments and
companies use them to raise
longer#term 1!,IT!- from investors, although few of the millions of capital#
market transactions every day
involve the issuer of the security. +ost trades are in the /(1&*0!).
+!)E(T/, between investors who
have bought the securities and other investors who want to buy them.
1ontrast with +&*(. +!)E(T/,
where short#term capital is raised.
CETERIS PARIBUS
&ther things being e9ual. (conomists use this -atin phrase to cover their
backs. 5or e"ample, they might say
that Hhigher interest rates will lead to lower ination, ceteris paribusI, which
means that they will stand by their
prediction about I*5-!TI&* only if nothing else changes apart from the rise in
the I*T()(/T )!T(.
CLOSED ECONOMY
!n economy that does not take part in inter national tradeD the opposite of an
&,(* (1&*&+.. !t the turn of
the century about the only notable e"ample left of a closed economy is *orth
Eorea (see !3T!)E.).
COLLATERAL
!n !//(T pledged by a borrower that may be sei:ed by a lender to recover
the value of a loan if the borrower
fails to meet the re9uired I*T()(/T charges or repayments.
COMMAND ECONOMY
$hen a %&'()*+(*T controls all aspects of economic activity (see, for
e"ample, 1&++3*I/+).
COMPETITIVE ADVANTAGE
/omething that gives a 5I)+ (or a person or a country) an edge over its
rivals.
COMPOUND INTEREST
If a deposit account of J=?? earns an I*T()(/T )!T( of =?B a year, then at
the end of the year the account
will contain J==?. If all of that money is left in the account, then the =?B
interest will be paid on the J==?, so at
the end of the second year J== of interest will be added, making J=A= in all.
This is known as compound interest.
4y contrast, /I+,-( I*T()(/T pays the =?B only on the original sum in the
account.
CONSUMER PRICES
$hat people are usually thinking of when they worry about I*5-!TI&*. The
,)I1(/ paid by whoever fnally
consumes goods or /()'I1(/, as opposed to prices paid by 5I)+/ at various
stages of the production
process.
CONSUMER SURPLUS
The diference between what a consumer would be willing to pay for a good
or service and what that consumer
actually has to pay. !dded to ,)&031() /3),-3/, it provides a measure of
the total economic beneft of a
sale.
CONTAGION
The domino efect, such as when economic problems in one country spread
to another.
CREDIT
! loan e"tended or (sometimes) taken by, for e"ample, delayed payment of
an invoice.
CREDIT CRUNCH
$hen 4!*E/ suddenly stop lending, or 4&*0 market -I23I0IT. evaporates,
usually because creditors
have become e"tremely )I/E !'()/(.
CREDITOR
! lender, whether by making a loan, buying a 4&*0 or allowing +&*(. owed
now to be paid in the future.
CURRENCY PEG
$hen a %&'()*+(*T announces that the (<18!*%( )!T( of its currency is
f"ed against another
currency or currencies.
DEFAULT
5ailure to fulfl the terms of a loan agreement. 5or e"ample, a borrower is in
default if he or she does not make
scheduled I*T()(/T payments on a loan or fails to pay of the loan at the
agreed time. Kudging the likelihood
of default is a crucial part of pricing a loan. Interest rates are set so that, on
!'()!%(, a portfolio of loans will
be proftable to the 1)(0IT&), even if some individual loans are loss#making
as a result of borrowers
defaulting.
DEFICIT
In the red . when more +&*(. goes out than comes in. ! 430%(T defcit
occurs when ,34-I1
/,(*0I*% e"ceeds %&'()*+(*T revenue. ! current account defcit occurs
when (<,&)T/ and inows
from private and o7cial T)!*/5()/ are worth less than I+,&)T/ and
transfer outows
DEMAND CURVE
! graph showing the relationship between the price of a good and the
amount of 0(+!*0 for it at diferent
,)I1(/.
DEPRECIATION
! fall in the value of an !//(T or a currencyD the opposite of !,,)(1I!TI&*.
DEVALUATION
! sudden fall in the value of a currency against other currencies. /trictly,
devaluation refers only to sharp falls in
a currency within a f"ed (<18!*%( )!T( system. !lso it usually refers to a
deliberate act of
%&'()*+(*T policy, although in recent years reluctant devaluers have
blamed fnancial /,(13-!TI&*.
+ost studies of devaluation suggest that its benefcial efects on
1&+,(TITI'(*(// are only temporaryD
over time they are eroded by higher ,)I1(/
DISCOUNT RATE
The rate of I*T()(/T charged by a 1(*T)!- 4!*E when lending to other
fnancial institutions. It also
refers to a rate of interest used when calculating 0I/1&3*T(0 1!/85-&$.
DISE$UILIBRIUM
$hen /3,,-. and 0(+!*0 in a market are not in balance. 1ontrast with
(23I-I4)I3+.
DISINFLATION
! fall in the rate of I*5-!TI&*. This means a slower increase in ,)I1(/ but
not a fall in prices, which is
known as 0(5-!TI&*.
ECONOMETRICS
+athematics and sophisticated computing applied to (1&*&+I1/.
(conometricians crunch data in search of
economic relationships that have /T!TI/TI1!- /I%*I5I1!*1(. /ometimes this
is done to test a theoryD at
other times the computers churn the numbers until they come up with an
interesting result. /ome economists are
ferce critics of theory#free econometrics.
ECONOMIC INDICATOR
! statistic used for ;udging the health of an economy, such as %0, per head,
the rate of 3*(+,-&.+(*T
or the rate of I*5-!TI&*. /uch statistics are often sub;ect to huge revisions in
the months and years after they
are frst published, thus causing di7culties and embarrassment for the
economic policymakers who rely on them.
ECONOMICS
The Hdismal scienceI, according to Thomas 1arlyle, a =>th#century /cottish
writer. It has been described in
many ways, few of them attering. The most concise, non#abusive, defnition
is the study of how society uses its
scarce resources.
EFFICIENCY
%etting the most out of the resources used. 5or a particular sort of e7ciency
often favoured by economists.
ENDOGENOUS
Inside the economic modelD the opposite of (<&%(*&3/
ENGEL#S LA!
,eople generally spend a smaller share of their 430%(T on food as their
I*1&+( rises. (rnst (ngel, a
)ussian statistician, frst made this observation in =L@M. The reason is that
food is a necessity, which poor people
have to buy. !s people get richer they can aford better#9uality food, so their
food spending may increase, but
they can also aford -3<3)I(/ beyond the budgets of poor people. 8ence the
share of food in total spending
falls as incomes grow.
EURODOLLAR
! deposit in dollars held in a 4!*E outside the 3nited /tates. /uch deposits
are often set up to avoid ta"es and
currency e"change costs. They are fre9uently lent out and have become an
important method of 1)(0IT
1)(!TI&*
E%CHANGE CONTROLS
-imits on the amount of foreign currency that can be taken into a country, or
of domestic currency that can be
taken abroad.
E%PORTS
/ales abroad. ("ports grew steadily as a share of world &3T,3T during the
second half of the A?th century.
.et by some measures this share was no higher than at the end of the =>th
century, before 5)(( T)!0( fell
victim to a political backlash.
FACTOR COST
! measure of &3T,3T reecting the costs of the 5!1T&)/ &5 ,)&031TI&*
used, rather than market
prices, which may difer because of I*0I)(1T T!< and subsidy.
FACTORS OF PRODUCTION
The ingredients of economic activity6 -!*0, -!4&3), 1!,IT!- and
(*T(),)I/(.
FACTORY PRICES
The ,)I1(/ charged by producers to wholesalers and retailers. 4ecause these
prices are eventually passed on
to the end customer, changes in factory prices, also known as producer
prices, can be a -(!0I*%
I*0I1!T&) of 1&*/3+() ,)I1( I*5-!TI&*.
FINANCIAL INSTRUMENT
1ertifcate of ownership of a fnancial !//(T, such as a 4&*0 or a /8!)(.
FINANCIAL INTERMEDIARY
! middleman. !n individual or institution that brings together investors (the
source of funds) and users of funds
(such as borrowers). +ay be increasingly at risk of 0I/I*T()+(0I!TI&*.
FI%ED COSTS
,roduction costs that do not change when the 9uantity of &3T,3T produced
changes, for instance, the cost of
renting an o7ce or factory space. 1ontrast with '!)I!4-( 1&/T/.
FLOTATION
%oing public. $hen /8!)(/ in a company are sold to the public for the frst
time through an initial public
ofering. The number of shares sold by the original private investors is called
the NoatN. !lso, when a 4&*0
issue is sold in the 5I*!*1I!- +!)E(T/.
FULL EMPLOYMENT
Kobs for all that want them. This does not mean :ero 3*(+,-&.+(*T
because at any point in time some
people do not want to work.
FUNGIBLE
.ou canFt tell them apart. /omething is fungible when any one single
specimen is indistinguishable from any
other. /omebody who is owed J= does not care which particular dollar he
gets. !nything that people want to use
as +&*(. must be fungible, whether it be %&-0 bars, beads or shells.
GEARING
! companyFs 0(4T e"pressed as a percentage of its e9uityD also known as
leverage.
GENERAL AGREEMENT ON TARIFFS AND TRADE
&r %!TT, the vehicle for promoting international 5)(( T)!0(, through a
series of rounds of negotiations
between the governments of trading countries. The frst %!TT round began in
=>C@. The last led to the
establishment of the $&)-0 T)!0( &)%!*I/!TI&* in =>>@.
GIFFEN GOODS
*amed after )obert %ifen (=LOM#=>=?), a good for which 0(+!*0 increases
as its ,)I1( rises. 4ut such
goods may not e"ist in the real world
GNI
/hort for gross national income, a term now used instead of %*, in national
accounts.
GNP
/hort for gross national product, another measure of a countryFs economic
performance. It is calculated by
adding to %0, the I*1&+( earned by residents from investments abroad,
less the corresponding income sent
home by foreigners who are living in the country.
HORI&ONTAL E$UITY
&ne way to keep T!<!TI&* fair. 8ori:ontal e9uity means that people with a
similar ability to pay ta"es should
pay the same amount.
HORI&ONTAL INTEGRATION
+erging with another frm ;ust like yours, for e"ample, two biscuit makers
becoming one. 1ontrast with
'()TI1!- I*T(%)!TI&*, which is merging with a frm at a diferent stage in
the /3,,-. chain.
8ori:ontal integration often raises !*TIT)3/T concerns, as the combined frm
will have a larger market share
than either frm did before merging.
HOT MONEY
+oney that is held in one currency but is liable to switch to another currency
at a momentGs notice in search of
the highest available )(T3)*/, thereby causing the frst currencyGs
(<18!*%( )!T( to plummet. It is
often used to describe the money invested in currency markets by
speculators.
INCOME EFFECT
! change in the 0(+!*0 for a good or service caused by a change in the
I*1&+( of consumers rather
than, say, a change in consumer tastes. 1ontrast with /34/TIT3TI&* (55(1T.
INCUMBENT ADVANTAGE
The importance of being there already. 5I)+/ that are in a market can have a
signifcant 1&+,(TITI'(
!0'!*T!%( over aspiring entrants to that market, for instance, through
having the opportunity to erect
barriers to entry.
INDE%ATION
Eeeping pace with I*5-!TI&*. In many countries, $!%(/, pensions,
3*(+,-&.+(*T benefts and
some other sorts of I*1&+( are automatically raised according to recent
movements in the consumer ,)I1(
inde". This allows these diferent sorts of income to retain their value in )(!-
T()+/
INDIFFERENCE CURVE
! curve that ;oins together diferent combinations of goods and /()'I1(/
that would each give the consumer
the same amount of satisfaction (3TI-IT.). In other words, consumers are
indiferent to which of the
combinations they get.
INDIRECT TA%ATION
Ta"es that do not come straight out of a personGs pay packet or !//(T/, or
out of company ,)&5IT. 5or
e"ample, a 1&*/3+,TI&* ta", such as '!-3(#!00(0 ta" (see (<,(*0IT3)(
T!<). 1ontrast with
0I)(1T T!<!TI&*, such as I*1&+( T!<. Indirect ta"ation has become
increasingly popular with
politicians because it may be less noticeable to people paying it than income
ta" and is harder to avoid paying.
INELASTIC
$hen the /3,,-. or 0(+!*0 for something is insensitive to changes in
another variable, such as ,)I1(.
INFERIOR GOODS
,roducts that are less in demand as consumers get richer. 5or *&)+!-
%&&0/, 0(+!*0 increases as
consumers have more to spend.
INTANGIBLE ASSETS
'aluable things, even though you cannot drop them on your foot . an idea,
say, especially one protected by a
,!T(*TD an efective corporate cultureD 83+!* 1!,IT!-D a popular brand.
1ontrast with T!*%I4-(
!//(T/.
INTELLECTUAL CAPITAL
The part of a countryFs or a frmGs 1!,IT!- or an individualGs 83+!* 1!,IT!-
that consists of ideas
rather than something more physical. It can often be protected through
,!T(*T/ or other intellectual property
laws.
INTERVENTION
$hen 1(*T)!- 4!*E/ try to inuence an (<18!*%( )!T( by buying the
currency they want to
appreciate and selling the one they want to weaken. The evidence seems to
suggest that it is at best a short#term
measure. In the longer term, governments probably do not have the
resources to beat +!)E(T 5&)1(/
INVISIBLE TRADE
(<,&)T/ and I+,&)T/ of things you cannot touch or see6 /()'I1(/, such as
banking or advertising and
other intangibles, such as copyrights. Invisible trade accounts for a growing
slice of the value of world trade.
IN!ARD INVESTMENT
Investment from abroadD the opposite of &3T$!)0 I*'(/T+(*T
'"CURVE
The shape of the trend of a countryGs trade balance following a 0('!-3!TI&*.
! lower (<18!*%(
)!T( initially means cheaper (<,&)T/ and more e"pensive I+,&)T/, making
the current account worse (a
bigger 0(5I1IT or smaller surplus). !fter a while, though, the volume of
e"ports will start to rise because of
their lower ,)I1( to foreign buyers, and domestic consumers will buy fewer
of the costlier imports. (ventually,
the trade balance will improve on what it was before the devaluation. If there
is a currency !,,)(1I!TI&*
there may be an inverted K#curve.
'OINT SUPPLY
/ome products or production processes have more than one use. 5or
instance, cows can both provide milk and
be eaten. If farmers increase the number of cows they own in response to an
increase in 0(+!*0 for milk,
they are also likely to increase, a little later, the supply of meat, causing beef
prices to fall.
LEPTOCRACY
1orrupt, thieving %&'()*+(*T, in which the politicians and bureaucrats in
charge use the powers of the
state to feather their own nests.
ONDRATIEFF !AVE
! @? year#long 43/I*(// 1.1-(, named after *ikolai Eondratief, a )ussian
economist. 8e claimed to have
identifed cycles of economic activity lasting half a century or more in his
=>A@ book, The Long Waves in
Economic Life. 4ecause this implied that 1!,IT!-I/+ was, ultimately, a stable
system, in contrast to the
+ar"ist view that it was self#destructively unstable, he ended up in one of
/talinGs prisons, where he died. !las,
there is little hard evidence to support EondratiefGs conclusion.
LABOUR INTENSIVE
! production process that involves comparatively large amounts of -!4&3)D
the opposite of 1!,IT!-
I*T(*/I'(.
LABOUR THEORY OF VALUE
The notion that the value of any good or service depends on how much
-!4&3) it uses up. 5irst suggested by
!0!+ /+IT8, it took a central place in the philosophy of E!)- +!)<. /ome
neo#classical economists
disagreed with this theory, arguing that the ,)I1( of something was
independent of how much labour went into
producing it and was instead determined solely by /3,,-. and 0(+!*0.
LAGGING INDICATORS
&ld news. /ome economic statistics move weeks or months after changes in
the 43/I*(// 1.1-( or
I*5-!TI&*. They may not be a reliable guide to the current state of an
economy or its future path. 1ontrast
with -(!0I*% I*0I1!T&)/.
LIBERALISATION
! policy of promoting -I4()!- (1&*&+I1/ by limiting the role of
%&'()*+(*T to the things it can do
to help the market economy work e7ciently. This can include ,)I'!TI/!TI&*
and 0()(%3-!TI&*.
LIBOR
/hort for -ondon interbank ofered rate, the rate of I*T()(/T that top#9uality
4!*E/ charge each other for
loans. !s a result, it is often used by banks as a base for calculating the
I*T()(/T )!T( they charge on other
loans. -I4&) is a oating rate, changing all the time.
LI$UIDITY PREFERENCE
The proportion of their !//(T/ that 5I)+/ and in dividuals choose to hold in
varying degrees of -I23I0IT..
The more cash they have, the greater is their desire for li9uidity.
LU%URIES
%oods and /()'I1(/ that have a high (-!/TI1IT. of 0(+!*0. $hen the
,)I1( of, say, a 1aribbean
holiday rises, the number of vacations demanded falls sharply. -ikewise,
demand for 1aribbean holidays rises
signifcantly as !'()!%( I*1&+( increases, certainly by more than demand
for many *&)+!- %&&0/.
1ontrast this with necessities, such as milk or bread, which people usually
demand in 9uite similar 9uantities
whatever their income and whatever the price.
MARET CAPITALISATION
The market value of a companyGs /8!)(/6 the 9uoted share ,)I1( multiplied
by the total number of shares
that the company has issued.
MARET FORCES
/horthand for the pressures from buyers and sellers in a market, rather than
those coming from a
%&'()*+(*T planner or from )(%3-!TI&*.
MARET PO!ER
$hen one buyer or seller in a market has the ability to e"ert signifcant
inuence over the 9uantity of goods and
/()'I1(/ traded or the ,)I1( at which they are sold. +arket power does not
e"ist when there is ,()5(1T
1&+,(TITI&*, but it does when there is a +&*&,&-., +&*&,/&*. or
&-I%&,&-..
MEAN REVERSION
The tendency for subse9uent observations of a random variable to be closer
to its mean than the current
observation. 5or e"ample, if the current number is M, the average is @, and
there is mean reversion, then the ne"t
observation is likelier to be P than L.
MEDIUM TERM
/omewhere between /8&)T#T()+I/+, which is bad, and the -&*% )3*, lies
the hallowed ground of the
medium term . far enough away to discourage myopic behaviour by decision
makers but close enough to be
meaningful. 4ut not many governments say e"actly how long they think the
medium term is.
MISERY INDE%
The sum of a countryGs I*5-!TI&* and 3*(+,-&.+(*T rates. The higher the
score, the greater is the
economic misery.
MONOPSONY
! market dominated by a single buyer. ! monopsonist has the +!)E(T
,&$() to set the ,)I1( of
whatever it is buying (from raw materials to -!4&3)). 3nder ,()5(1T
1&+,(TITI&*, by contrast, no
individual buyer is big enough to afect the market price of anything.
NAFTA
/hort for *orth !merican 5ree#Trade !greement. In =>>O, the 3nited /tates,
+e"ico and 1anada agreed to
lower the barriers to trade among the three economies. The formation of this
regional T)!0( !)(! was
opposed by many politicians in all three countries. In the 3nited /tates and
1anada, in particular, there were
fears that *!5T! would result in domestic ;ob losses to cheaper locations in
+e"ico. In the early years of the
agreement, however, most studies found that the economic gains far
outweighed any costs.
NAIRU
The non#accelerating#ination rate of unemployment
NATIONAL INCOME
/horthand for everything that is produced, earned or spent in a country
NOMINAL VALUE
The value of anything e"pressed simply in the +&*(. of the day. /ince
I*5-!TI&* means that money can
lose its value over time, nominal fgures can be misleading when used to
compare values in diferent periods. It is
better to compare their real value, by ad;usting the nominal fgures to
remove the inationary distortions.
NON"PRICE COMPETITION
Trying to win business from rivals other than by charging a lower ,)I1(.
+ethods include !0'()TI/I*%,
slightly diferentiating your product, improving its 9uality, or ofering free
gifts or discounts on subse9uent
purchases. *on#price competition is particularly common when there is an
&-I%&,&-., perhaps because it
can give an impression of ferce rivalry while the 5I)+/ are actually colluding
to keep prices high.
NORMAL GOODS
$hen average I*1&+( increases, the 0(+!*0 for normal goods increases,
too. The opposite of
I*5()I&) %&&0/.
NORMATIVE ECONOMICS
economics that tries to change the world, by suggesting policies for
increasing economic $(-5!)(. The
opposite of ,&/ITI'( (1&*&+I1/, which is content to try to describe the
world as it is, rather than
prescribe ways to make it better.
OFFSHORE
$here the usual rules of a person or frmGs home country do not apply. It can
be literally ofshore, as in the case
of investors moving their +&*(. to a 1aribbean island T!< 8!'(*. &r it can
be merely legally ofshore, as
in the case of certain fnancial transactions that take place within, say, the
1ity of -ondon, which are deemed for
regulatory purposes to have taken place ofshore.
OLIGOPOLY
$hen a few 5I)+/ dominate a market. &ften they can together behave as if
they were a single
+&*&,&-., perhaps by forming a 1!)T(-. &r they may collude informally, by
preferring gentle
*&*#,)I1( 1&+,(TITI&* to a bloody ,)I1( war. 4ecause what one frm can
do depends on what the
other frms do, the behaviour of oligopolists is hard to predict. $hen they do
compete on price, they may produce
as much and charge as little as if they were in a market with ,()5(1T
1&+,(TITI&*.
OPEN ECONOMY
!n economy that allows the unrestricted ow of people, 1!,IT!-, goods and
/()'I1(/ across its bordersD
the opposite of a 1-&/(0 (1&*&+..
OPTIMUM
!s good as it gets, given the constraints you are operating within. 5or the
concept of optimum to mean anything,
there must be both a goal, say, to ma"imise economic $(-5!)(, and a set of
constraints, such as an available
stock of scarce economic resources. &ptimising is the process of doing the
best you can in the circumstances.
OVER THE COUNTER
In the case of drugs, those that can be purchased without a prescription from
a doctor. In the case of fnancial
/(13)ITI(/, those that are bought or sold through a private dealer or 4!*E
rather than on a fnancial
e"change.
OVERHEATING
$hen an economy is growing too fast and its productive 1!,!1IT. cannot
keep up with 0(+!*0. It often
boils over into I*5-!TI&*.
PERCENTILE
,art of the HileI family that signposts positions on a scale of numbers (see
also 23!)TI-(). The top percentile
on, say, the distribution of I*1&+(, is the richest =B of the ,&,3-!TI&*
PIGOU EFFECT
*amed after !rthur ,igou (=LMM.=>@>), a sort of $(!-T8 (55(1T resulting
from 0(5-!TI&*. ! fall in
the ,)I1( level increases the )(!- '!-3( of peopleGs /!'I*%/, making them
feel wealthier and thus
causing them to spend more. This increase in 0(+!*0 can lead to higher
employment.
POSITIVE ECONOMICS
(1&*&+I1/ that describes the world as it is, rather than trying to change it.
The opposite of *&)+!TI'(
(1&*&+I1/, which suggests policies for increasing economic $(-5!)(.
PRECAUTIONARY MOTIVE
Eeeping some +&*(. handy, ;ust in case. &ne of three motives for holding
money identifed by E(.*(/,
along with the transactional motive (having the cash to pay for planned
purchases) and the speculative motive
(you think !//(T prices are going to fall, so you sell your assets for cash).
PRICE ELASTICITY
! measure of the responsiveness of 0(+!*0 to a change in ,)I1(. If demand
changes by more than the
price has changed, the good is price#elastic. If demand changes by less than
the price, it is price#inelastic.
(conomists also measure the (-!/TI1IT. of demand to changes in the
I*1&+( of consumers.
PRICE MECHANISM
The process by which markets set ,)I1(/.
PRICE REGULATION
$hen ,)I1(/ of, say, a ,34-I1 3TI-IT. are regulated, giving producers an
incentive to ma"imise their
profts by reducing their costs as much as possible. 1ontrast with )!T( &5
)(T3)* )(%3-!TI&*.
PRIVATE E$UITY
$hen a frmGs /8!)(/ are held privately and not traded in the public
markets. ,rivate e9uity includes shares in
both mature private companies and, as '(*T3)( 1!,IT!-, in newly started
businesses. !s it is less li9uid
than publicly traded (23IT., investors in private e9uity e"pect on average to
earn a higher (23IT. )I/E
,)(+I3+ from it.
PRODUCER SURPLUS
The diference between what a supplier is paid for a good or service and what
it cost to /3,,-.. !dded to
1&*/3+() /3),-3/, it provides a measure of the total economic beneft of a
sale.
PROFIT MARGIN
! frmGs ,)&5IT e"pressed as a percentage of its turnover or sales.
PROGRESSIVE TA%ATION
T!<!TI&* that takes a larger proportion of a ta"payerGs I*1&+( the higher
the income is.
PROTECTIONISM
&pposition to 5)(( T)!0(. !lthough intended to protect a countryGs economy
from foreign competitors, it
usually makes the protected country worse of than if it allowed international
trade to proceed without hindrance
from trade barriers such as 23&T!/ and T!)I55/.
PUBLIC SPENDING
/pending by national and local %&'()*+(*T and some government#backed
institutions. /ee 5I/1!-
,&-I1., %&-0(* )3-( and 430%(T.
$UARTILE
,art of the HileI family that signposts positions on a scale of numbers (see
also ,()1(*TI-(). The top 9uartile
on, say, the distribution of I*1&+(, is the richest A@B of the ,&,3-!TI&*.
$UOTA
! form of ,)&T(1TI&*I/+. ! country imposes limits on the number of goods
that can be imported from
another country. 5or instance, 5rance may limit the number of cars imported
from Kapan to, say, A?,??? a year.
!s a result of limiting /3,,-., the ,)I1( of the imported good is higher than it
would be under 5)((
T)!0(, thus making life easier for domestic producers.
R S$UARED
!n indicator of the reliability of a relationship identifed by )(%)(//I&*
!*!-./I/. !n )A of ?.L indicates
that L?B of the change in one variable is e"plained by a change in the
related variable.
RATE OF RETURN REGULATION
!n approach to )(%3-!TI&* often used for a ,34-I1 3TI-IT. to stop it
e"ploiting +&*&,&-. power.
! public utility is forbidden to earn above a certain )!T( &5 )(T3)* decided
by the regulator. In practice,
this often encourages the utility to be ine7cient, slow to innovate and 9uick
to spend money on such things as big
o7ces and e"ecutive ;ets, to keep down its ,)&5IT and thus the rate of
return. 1ontrast with ,)I1(
)(%3-!TI&*.
REAL BALANCE EFFECT
5alling I*5-!TI&* and I*T()(/T rates lead to higher spending
REAL E%CHANGE RATE
!n (<18!*%( )!T( that has been ad;usted to take account of any diference
in the rate of I*5-!TI&* in
the two countries whose currency is being e"changed.
REAL TERMS
! measure of the value of +&*(. that removes the efect of I*5-!TI&*.
1ontrast with *&+I*!-
'!-3(.
RECIPROCITY
0oing as you are done by. ! grants 4 certain privileges on the condition that
4 grants the same privileges to !.
+ost international economic agreements, for e"ample, on trade, include
binding reciprocity re9uirements.
REDLINING
*ot lending to people in certain poor or troubled neighbourhoods . drawn with
a red line on a map . simply
because they live there, regardless of their 1)(0IT#worthiness ;udged by
other criteria.
REFLATION
,olicies to pump up 0(+!*0 and thus boost the level of economic activity.
+onetarists fear that such policies
may simply result in higher I*5-!TI&*.
REGULATORY ARBITRAGE
("ploiting loopholes in )(%3-!TI&*, and perhaps making the regulation
useless in the process. This is often
done by international investors that use 0()I'!TI'(/ to fnd ways around a
countryGs fnancial regulations.
REGULATORY FAILURE
$hen )(%3-!TI&* generates more economic costs than benefts.
REPLACEMENT COST
$hat it would cost today to replace a 5I)+Gs e"isting !//(T/.
REPO
!n agreement in which one party sells a security to another party and agrees
to buy it back on a specifed date
for a specifed ,)I1(. 1(*T)!- 4!*E/ deal in short#term repos to provide
-I23I0IT. to the
5I*!*1I!- /./T(+, buying /(13)ITI(/ from 4!*E/ with cash on the
condition that the banks will
repurchase them a few weeks later.
RE$UIRED RETURN
The minimum (<,(1T(0 )(T3)* you re9uire from an I*'(/T+(*T to be
willing to go ahead with it.
RESERVE RATIO
The fraction of its deposits that a 4!*E holds as )(/()'(/.
RESERVE RE$UIREMENTS
)egulations governing the minimum amount of )(/()'(/ that a 4!*E must
hold against deposits.
RESERVES
+&*(. in the hand, available to be used to meet planned future payments or
if some other need arises. 5I)+/
may put their reserves in a 4!*E, as a deposit. 5or a bank, reserves are those
deposits it retains rather than
lending them out.
RESTRICTIVE PRACTICE
! general term for anything done by a frm, or 5I)+/, to inhibit 1&+,(TITI&*.
%enerally against the law.
RETURNS
The rewards for doing business. )eturns usually refer to ,)&5IT and can be
measured in various ways
RIS MANAGEMENT
The process of bearing the )I/E you want to bear, and minimising your
e"posure to the risk you do not want.
This can be done in several ways6 not doing things that carry a particular riskD
8(0%I*%D
0I'()/I5I1!TI&*D and buying I*/3)!*1(.
RIS NEUTRAL
/omeone who is insensitive to )I/E. )isk#neutral investors are indiferent
between an I*'(/T+(*T with a
certain outcome and a risky investment with the same (<,(1T(0 )(T3)*/
but an uncertain outcome. /uch
people are few and far between.
RIS PREMIUM
The e"tra )(T3)* that investors re9uire to hold a risky !//(T instead of a
risk#free oneD the diference
between the (<,(1T(0 )(T3)*/ from a risky I*'(/T+(*T and the risk#free
rate.
SDR
/hort for special drawing rights. 1reated in =>PM, the /0) is the I+5Fs own
currency. Its value is based on a
portfolio of widely used currencies.
SECURITIES
5inancial contracts, such as 4&*0/, /8!)(/ or 0()I'!TI'(/, that grant the
owner a stake in an !//(T.
/uch securities account for most of what is traded in the 5I*!*1I!-
+!)E(T/.
SEIGNORAGE
Traditionally, the ,)&5IT rulers made from allowing metals to be turned into
coins. *ow it refers in a loosely
defned way to the power of a country whose notes and coins are held by
another country as a )(/()'(
13))(*1..
SHAREHOLDER VALUE
,utting shareholders frstD the notion that all business activity should aim to
ma"imise the total value of a
companyGs /8!)(/. /ome critics argue that concentrating on shareholder
value will be harmful to a
companyGs other /T!E(8&-0()/, such as employees, suppliers and
customers.
SOCIAL BENEFITS(COSTS
The overall impact of an economic activity on the $(-5!)( of society. /ocial
beneftsQcosts are the sum of
private beneftsQcosts arising from the activity and any (<T()*!-ITI(/.
SOCIALISM
The e"act meaning of socialism is much debated, but in theory it includes
some collective ownership of the
means of production and a strong emphasis on e9uality, of some sort.
SOFT CURRENCY
! currency that is e"pected to drop in value relative to other currencies.
SOFT DOLLARS
The value of research services that brokerage companies provide HfreeI to
I*'(/T+(*T managers in
e"change for the investment managersG business. (conomists disagree on
whether or not such hidden payments
are economically ine7cient.
SOFT LOAN
! loan provided at below the market I*T()(/T )!T(. /oft loans are used by
international agencies to
encourage economic activity in 0('(-&,I*% 1&3*T)I(/ and to support non#
commercial activities.
SOVEREIGN RIS
The )I/E that a %&'()*+(*T will default on its 0(4T or on a loan
guaranteed by it.
STAGFLATION
Term coined in the =>M?s for the twin economic problems of /T!%*!TI&* and
rising I*5-!TI&*. 3ntil
then, these two economic blights had not appeared simultaneously. Indeed,
policymakers believed the message
of the ,8I--I,/ 13)'(6 that 3*(+,-&.+(*T and ination were alternatives.
STAGNATION
! prolonged )(1(//I&*, but not as severe as a 0(,)(//I&*.
STANDARD DEVIATION
! measure of how far a variable moves over time away from its !'()!%(
(mean) value.
STANDARD ERROR
! measure of the possible error in a statistical estimate.
STOCS
!nother term for /8!)(/. $hat are called ordinary shares in the 3E are
known as common stock in the
3nited /tates. It is also another word for inventories of goods held by a frm
to meet future 0(+!*0.
STRESS"TESTING
! process for e"ploring how a portfolio of !//(T/ andQor liabilities would fare
in e"treme adverse conditions.
! useful tool in )I/E +!*!%(+(*T.
SYSTEMATIC RIS
The )I/E that remains after 0I'()/I5I1!TI&*, also known as market risk or
undiversifable risk. It is
systematic risk that determines the )(T3)* earned on a well#diversifed
portfolio of !//(T/.
TANGIBLE ASSETS
!//(T/ you can touch6 buildings, machinery, %&-0, works of art, and so on.
1ontrast with I*T!*%I4-(
!//(T/.
TARIFF
&ften used to describe a ta" on goods produced abroad imposed by the
%&'()*+(*T of the country to
which they are e"ported. +any countries have reduced such tarifs as part of
the process of freeing up world
trade.
TA% ARBITRAGE
1reating 5I*!*1I!- I*/T)3+(*T/ or transactions that allow the parties
involved to e"ploit loopholes in or
diferences between their ta" e"posures, so that all involved pay less ta".
TA% BURDEN
Total ta" paid in a period as a proportion of total I*1&+( in that period. It can
refer to personal, corporate or
national income.
TA% EVASION
,aying less ta" than you are legally obliged to. 1ontrast with T!< !'&I0!*1(.
There may be a thin line
between the two, but as 0enis 8ealey, a former 4ritish chancellor, once put
it, HThe diference between ta"
avoidance and ta" evasion is the thickness of a prison wall.I
TA% HAVEN
! country or designated :one that has low or no ta"es, or highly secretive
4!*E/, and often a warm climate
and sandy beaches, which make it attractive to foreigners bent on T!<
!'&I0!*1( or even T!<
('!/I&*.
TA% INCIDENCE
$here a ta" really bites. $ho ultimately pays a ta" is often diferent from
who the ta"man collects the ta" from,
because the cost of the ta" can be passed on. 5or e"ample, by demanding
higher $!%(/ if I*1&+( T!<
rises, workers can transfer some of the T!< 43)0(* to their employerGs
customers or shareholders.
TIC
The minimum ,)I1( change possible in a fnancial marketplace.
TIGER ECONOMIES
The fast#growing developing economies of !sia, at least before their crisis in
the late =>>?s.
TRADE"!EIGHTED E%CHANGE RATE
! countryGs (<18!*%( )!T( with the currencies of its trading partners
weighted by the amount of trade
done by the country in each currency.
TRANSITION ECONOMIES
5ormer communist economies that, with varying degrees of enthusiasm, have
embraced 1!,IT!-I/+.
TRANSMISSION MECHANISM
The process by which changes in the +&*(. /3,,-. afect the level of total
0(+!*0 in an economy.
VAT
'alue !dded Ta".
&ERO BASED BUDGETING)
/etting a budget in which all spending must be ;ustifed each year, not ;ust
amounts in e"cess of the previous
year.