Economic Terms - Online Article

Must Learn Economic Terms

These economic terms will help you in the interviews of any B-School.

  1. Ad valorem: Value added. An example of an ad valorem tax would be VAT.
  3. Advances: Loans given by financial institutions.
  5. Appreciation: An increase in the value of an asset.
  7. Arbitrage: Movements of funds to take advantage of differences in exchange or interest rates, and this quickly eliminates any such differences.
  9. Average cost pricing: Setting price equal to average cost.
  11. Average propensity to consume: The proportion of disposable income spent:
      APC = C/Y
  13. Amortization: Writing down the value of an asset in a company's books to reflect its loss of value through age and use. Called depreciation in the UK. Amortization is also an accounting term to pay off a loan in gradual increments.
  15. Barter: The direct exchange of goods and services without the use of money
  17. Birth rate: The number of live births per thousand of the population in a year
  19. Black economy: Unrecorded production.
  21. Backward integration: Occurs when a company joins with a firm that is involved at an earlier stage of the production chain.
  23. Balance of payments: Statement of a country's net financial transactions with other countries. Current account measures balance of imports and exports and payments and receipts for services such as shipping, banking and tourism. Capital account measures movements of capital (bank deposits, securities, shares, property).
  25. Balance of trade: The difference between the value of visible exports and visible imports
  27. Black markets: Created when buyers and sellers meet to negotiate the exchange of a prohibited or illegal good. More generally any unofficial market in which prices are inordinately high.
  29. Bull market: Period of rising share prices; an optimistic state of affairs; the opposite of a bear market.
  31. Buyer's market: The quantity of goods for sale exceeds the amount consumers are willing and able to buy at the current market price; characterised by low prices
  33. Bonds: Certificate of debt issued to raise funds. It normally has a fixed rate of interest and is repayable at a fixed date. See also convertible bonds, mortgage-backed securities.
  35. Break-even: When a firm's short-run total revenue equals its short-run total cost
  37. Bretton Woods system: An arrangement of fixed exchange rates which operated between 1945 and 1971.
  39. Capital gains: The difference between the sale and purchase price of an asset.
  41. Ceteris paribus: All other influencing factors are held constant.
  43. Call option: The right but not the obligation to buy a security at a specified price at a specified date in the future.
  45. Call rates: The interest rate on money loaned overnight. Also known as the overnight rate. Widely used measure of money market rates.
  47. Consumer surplus: This occurs when people are able to buy a good for less than they would be willing to pay. They enjoy more utility than they had to pay for.
  49. Closed economy: An economy which does not engage in international trade.
  51. Collusion: Agreements between firms to restrict competition.
  53. Complementary goods: Two goods consumed at the same time, e.g. cars and petrol
  55. Corporation tax: A tax on a firms' profits.
  57. Consumer's price index: Measure of the change in the cost of consumer goods and services. It is used as an indicator of a nation's inflation rate.
  59. Cost benefit analysis: A method of assessing investment projects which takes into account social costs and benefits.
  61. Cost of living: The general level of prices in the economy, usually measured by the retail price index.
  63. Cost plus pricing: Setting prices by adding a profit margin to average cost.
  65. Cost push inflation: When a cost of production (e.g. wages) increases and firms put up prices to maintain profits.
  67. Credit creation: The ability of the banking sector to create money by giving advances.
  69. Crowding out: A decline in private sector spending resulting from a rise in public sector expenditure.
  71. Current account: Usually taken to mean the current account of the balance of payments.
  73. Current account balance: A record of a country's earnings from the sale of visible and invisible items minus its expenditure on visible and invisible items from abroad.
  75. Current account deficit: When a country spends more on visible and invisible items from abroad than it earns from the sale of visible and invisible items.
  77. Death rate: The number of deaths per thousand of the population in a year.
  79. Debentures: Long-term fixed interest loans to companies.
  81. Demand pull inflation: Occurs when aggregate demand exceeds aggregate supply.
  83. Depreciation of sterling: When market forces lower the value of the sterling (£) from one fixed rate to another.
  85. De-merging: One company splits up to form two new firms. These new firms are frequently companies which used to be separate prior to the initial merger.
  87. Demand curve: A graph which shows the amount of a good consumers are willing and able to buy at various prices.
  89. Demand-pull inflation: This occurs when the excess of aggregate demand over aggregate supply causes an increase in the general level of prices.
  91. Deregulation: The removal of controls on a particular market, e.g. abandonment of a licensing system for taxis.
  93. Devaluation of sterling: Occurs when the UK Government lowers the value of the sterling (£) from one fixed rate to another.
  95. Developed countries: Countries with high levels of real national income per head and relatively large tertiary sectors.
  97. Developing countries: Countries with low levels of real national income per head and relatively large primary sectors.
  99. Direct taxation: Taxes on income and wealth.
  101. Discounting: Future costs and benefits are difficult to measure. The present value (P) of future benefits less costs is found by discounting.
  103. Disequilibrium: A state of imbalance in which there is tendency for change.
  105. Double counting: Including transfer payments, intermediate expenditures or outputs and stock appreciation in national accounts.
  107. Dumping: The sale of goods in a foreign country at a price below what cost in the home market.
  109. Engel curve: A curve showing the relationship between income and consumption.
  111. Economies of scale: A reduction in long-run unit costs which arise form an increase in production.
  113. Elasticity of demand: The responsiveness of demand to a given change in price or income.
  115. Elasticity of supply: The responsiveness of supply to a given change in price.
  117. Earnings per share: Net income of a company; net of preferred dividends divided by a weighted average of total shares outstanding for the period. One of the most widely watched indicators of the profitability of a company.
  119. Exchange rate: The price of one currency in terms of another currency. More generally, the price at which any good is being traded for another good.
  121. Exchange rate mechanism (ERM): A system operated by some members of the European Union where the Central Banks of members intervene to stabilise the exchange rate of currencies within agreed limits.
  123. Factor cost: The value of output measured in terms of the cost of the factors of production used to produce it.
  125. Factor incomes: Rewards to the factors of production, e.g. labour receives wages.
  127. Fisher`s quantity theory of money: The view that changes in the money supply have a direct and proportionate effect on the price level.
  129. Forward market: A market in forward contracts of a commodity or currency, which are agreements to buy or sell the commodity or currency at a future date. The contracts are not negotiable.
  131. Free goods: A good in unlimited supply at zero price, e.g. air
  133. Free trade area: A group of countries which removes tariff barriers between member countries but allows each member to decide on its own tariff policy towards non-members
  135. GDP: The total value of all goods and services produced domestically each year by a country. It equals gross national product minus income from abroad. Most countries use this definition; US official statistics use gross national product.
  137. GNP: The total value of goods and services produced each year by a country. Real growth in GNP measures the increase in output after subtracting the effect of inflation.
  139. Giffen good: An increase in income results in a fall in demand for the good.
  141. Gross domestic fixed capital formation: Total spending on fixed investment, e.g. machines, factories, offices.
  143. Horizontal integration: Two companies merge in the same industry and at the same stage of production.
  145. Human development index: An index devised by the UN to assess comparative levels of development in countries. Its three main matrices are literacy, life expectancy, and purchasing power parity (PPP)-adjusted income.
  147. Income tax: Tax levied by the government on wages, rent, interest and dividends
  149. Indifference curves: Curves which show the different combinations of two goods which give equal satisfaction.
  151. Index: A benchmark against which financial or economic performance is measured, such as the FTSE 100 or a consumer price index. Created by statistical sampling of broad set of data. To reflect the importance of the biggest companies, stock market indices tended to be weighted either by price, e.g. the Dow Jones Industrial Average or market capitalisation, e.g. the S&P500 and most European stock indices.
  153. Index funds: Mutual fund that aims to track the performance of a specific stock market index. Such funds are passively managed and thus tend to have lower charges than actively managed funds.
  155. Indirect taxation: A surcharge on price imposed on the sale of goods and services by the government.
  157. International Monetary Fund (IMF): An organisation established to encourage international cooperation in the monetary field, the stabilisation of exchange rates and the removal of foreign exchange restrictions.
  159. International Bank for Reconstruction and Development: More commonly known as the World Bank. It gives long-term loans to member countries for high priority infrastructure, agricultural, industrial and educational projects.
  161. IS-LM: A model of income determination that integrates the goods market (represented by investment and saving) and the money market (demand and supply of money)
  163. J effect: The tendency for a fall in the value of the currency to worsen the balance of trade before it improves the position.
  165. Keynes: UK economist who urged state intervention to achieve full employment.
  167. Liabilities: Money owed.
  169. Limited companies: Companies which have limited liability.
  171. Liquidity ratio: The proportion of a commercial bank's assets which can be converted into cash quickly.
  173. Liquidity trap: When the rate of interest is so low (and the price of bonds is so high) that everyone anticipates a future fall in the price of bonds.
  175. Long-run: Period of time when all factor inputs, including capital, can be changed.
  177. Lorenz curve: A curve showing the proportion of income earned by a cumulative percentage of the population.
  179. Macroeconomic policies: Policies designed to influence the level of employment, the price level, economic growth and the balance of payments.
  181. Marginal cost curve: A curve showing the addition to total cost resulting from producing one more unit.
  183. Most favoured nation (MFN): US trade policy that gives to a trading partner the same customs and tariff treatment as the most favoured nation.
  185. Multi Fibre Agreement (MFA): Provision of GATT governing international trade in textiles that lets a country apply numerical restrictions on textile imports when it considers them necessary to prevent market disruption. MFA provides a framework for regulating international trade in textiles and apparel. It covers wool, man-made (synthetic) fibers, silk blends and other vegetable fiber textiles and apparel.
  187. Marginal propensity to consume: The proportion of each extra pound of disposable income spent by households.
  189. Marginal propensity to save: The proportion of each extra pound of disposable income not spent by households.
  191. Monopolistic competition: An industry made up of a large number of small firms who produce goods which are only slightly different from that of all other sellers.
  193. Monopsony: A market where there is only a single buyer.
  195. Marginal revenue: The income received from the sale of one extra unit.
  197. Microeconomics: The behaviour of an individual consumer, firm and industry.
  199. Monetarists: A group of economists who believe that changes in the money supply have a significant impact on the economy.
  201. Money illusion: May occur where people confuse changes in nominal balances with changes in real balances.
  203. Mutual Fund: US name for an open-ended managed fund not quoted on a stock exchange, equivalent to a unit trust in the UK. Mutual funds are a popular way for individuals to spread the risk of investing in bonds and equities and are much used for retirement savings.
  205. NASDAQ: Started in the US, 1971, as an automated over-the-counter securities quotes system — the acronym stands for National Association of Securities Dealers' Automated Quotation. Nasdaq evolved into the world's first electronic stock market.
  207. Neo-classical theory: The view that markets operate efficiently and that the way to increase output and employment is to raise aggregate supply.
  209. Net asset value (NAV): The market value of a fund share, usually calculated daily after the close of trading.
  211. North American FreeTrade Agreement (NAFTA): Free trade agreement involving Canada, the US and Mexico entered into in January 1994. It progressively eliminates almost all bilateral trade barriers between the three countries.
  213. Offer curve of labour: The number of hours of labour is prepared to work at different levels of income.
  215. Oligopolies: Markets dominated by a few sellers who account for a large proportion of output.
  217. Open market operations: Where the Bank of England sells short-term government securities and bills, thereby reducing retail banks' liquid assets and raising interest rates.
  219. OECD: The Organisation for Economic Cooperation and Development.
  221. Opportunity cost: The decision to produce or consume a product involves giving up another product; the real cost of an action is the next best alternative forgone.
  223. OTC (over the counter): Trading in shares away from organised exchanges; it is usually carried out over the telephone or via a computer network.
  225. Pareto criteria: A reallocation of resources is desirable only if someone gains and no one loses.
  227. Perfect competition: An industry made up of a large number of small firms, each selling homogeneous (identical) products to a large number of buyers.
  229. Phillips curve: Shows the relationship between the rate of unemployment and the rate of inflation.
  231. Price discrimination: When the same product is sold in different markets for different prices.
  233. Price elasticity of demand: Measures the responsiveness of demand to a given change in price.
  235. Price elasticity of supply: Measures the responsiveness of supply to a given change in price.
  237. Primary sector: That part of the economy concerned with agriculture and the extraction of raw materials.
  239. Primary markets: The placing of new stocks, shares, bonds, etc. Existing securities are traded in the secondary market.
  241. Producer surpluses: The difference between the minimum price a producer would accept to supply a given quantity of a good and the price actually received.
  243. Progressive income tax: A tax which takes a higher percentage of the income of the rich than the poor.
  245. Purchasing power parity theory: Suggests that the prices of goods in countries will tend to equate under floating exchange rates so that people would be able to purchase the same quantity of goods in any country for a given sum of money.
  247. Quantity theory of money: The view that changes in the money supply have a direct and proportionate effect on the price level.
  249. Repo rate: The interest rate at which a central bank will lend against the security of its government's paper.
  251. SDRs (special drawing rights): A form of international money created by the IMF which is acceptable in settlement of debts among the countries.
  253. Secondary sector: That part of the economy concerned with the manufacture of goods.
  255. Shadow prices: Estimated prices in situations where market prices do not exist.
  257. Shares: Securities issued by companies as a way of raising long-term capital. Holders are owners of the company.
  259. Spot market: That part of the foreign exchange market concerned with the buying and selling of currencies for immediate use.
  261. Subsidies: Payments to producers or consumers designed to encourage an increase in output.
  263. Subsistence: The minimum income needed to survive.
  265. Supply side economics: The branch of economies concerned with the productive potential of the economy and how to increase it.
  267. Tertiary sector: That part of the economy concerned with the provision of services.
  269. Trade-off: What has to be sacrificed in order to obtain a good, it is equivalent to opportunity cost.
  271. Transfer pricing: Setting internal prices to charge other branches of the same company.
  273. VAT: Value Added Tax.
  275. Zero based budgeting: Setting a budget in which all spending must be justified each year, not just amounts in excess of the previous year.

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