Marlena Niedl
EBC 2 KEYWORDS
UNIT 1
company1 (UK)
= Kapitalgesellschaft
Synonyms: Corporation (US)
The majority of large and medium sized businesses in the UK and the USA are run as companies. A
company is formed with the aim to make profit and the capital is divided in shares. The capital is
raised by each member (unlimited number of shareholders/stockholders) taking a certain number of
shares who in return shares in the company´s profits, according to the size of his holdings (cash
dividend). The company is a legal entity and can therefore exist legally separate from its members,
own all assets and is unlimited liable for all its debts. All members have limited liability, restricted to
the price of their shares. A shareholder is personally liable only for any amount remaining unpaid on
the shares held by him.
company2
-types
In the UK, companies may be incorporated…
…by registration under the Companies Acts; most common (= registered companies)
…by royal charter (= chartered companies)
…by statute, that is, by passing a special Act of parliament (statutory companies/public
corporations)
• Registered Companies: classified into unlimited companies (unlimited liability), companies
limited by guarantee (liable up to a stated limit) and companies limited by shares (liability
limited to issue price of shares held by them). Companies limited by guarantee are not
common and are most suitable for NPOs. Most for-profit businesses are companies limited
by shares and are therefore very common. There are two types of them:
à Public limited company (AG)
= the memorandum states that it is to be a public limited company, so its name must end
with public limited company (plc). Its authorised and issued capital must be not less than
50.000 Pounds of which at least 25% (plus the whole of any premium) must be paid up at
the time of incorporation. It may sell its shares privately and the shares are freely
transferable. They may also be sold to the general public e.g. by a public offering.
à Private limited company (GmbH)
= any company limited by shares that is not a public limited company and its name must end
with Limited (Ltd.). It is not allowed to offer shares/corporate bonds to the general public
and (in contrast to a GmbH) there is no minimum capital requirement. They are mostly small
family businesses run as companies to benefit from continuity and limited liability.
In the US corporation statuses generally distinguish between
à open corporations
Shares are held by many people and may dispense entirely with board of directors by including a
provision
to this effect in its articles of incorporation; equivalent to public limited company and AG
àclose corporations
with few shareholders; similar to a private limited company and an GmbH.
In newspapers “publicly held corporation” is used to describe an open corporation listed on a stock
exchange.
The term privately held corporation is used to describe an unlisted open corporation or a close
corporation.
corporation1
= Körperschaft, juristische Person
The most important type is the corporation aggregate (corporation). In this sense the corporation is
a group of people who have formed themselves into an association with separate legal existence.
corporation2 (US)
= Kapitalgesellschaft/Aktiengesellschaft/Konzern
The term is a synonym to the British company but since many corporations have subsidiaries
(Tochtergesellschaften) it may also denote a group of companies.
corporation3 (UK)
= Wirtschaftliches Unternehmen der öffentlichen Hand
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going public
In the UK the term corporation is applied to a public corporation that is created, owned and
controlled by the government.
= (erster) Gang an die Börse
Synonyms: taking a company public, floating a company, flo(a)tation, initial public offering (IPO)
Going public means that the shares are traded on a stock exchange for the first time. A public limited
company and an open corporation are allowed to list their shares on stock exchange, but in fact
most of them don’t. The process of going public can be organised e.g. as public offering/offer for
sale under which the shares are made available at a fixed price and the deal is handled by a
syndicate of securities firms.
Motives: more capital, desire of shareholders to sell shares.
Disadvantages: disclosure requirements for listed companies are stricter, pressure by investing
community to make short-time profits.
to take a company private= reversing the process of going public; buying up all the shares in
circulation and withdrawing from stock market
to privatise a company= selling a state-owned enterprise to investors in the private sector
management1
= Geschäftsleitung/Führungskräfte
Managers receive a salary from their company like other staff but are rather representatives of the
firm/owners interests vis-à-vis workers, than employees. They are rarely members of a trade union
but have their own organizations.
• Senior management (top- and senior executives):
led by the chief executive officer (CEO) and his deputy (heads of different departments) who
work with the closely with the board of directors
• Middle management:
team to whom responsibilities of the highest ranking officers are delegated
• Junior/lower management: e.g. bookkeepers, collection managers
management2
= Unternehmensführung
Particularly managers are concerned with preparing and making decisions and ensuring that they´re
carried out. There are different management styles that range from very authoritarian to very cooperative. Studies have shown that companies with a co-operative style are more likely to have
continuous record of high productivity.
Essential processes:
1. Identifying, formulating and setting objectives
2. Planning, drawing up long- and short term plans
3. Establishing, maintaining a suitable organization
4. Implementing (delegating, motivating and commanding)
5. Controlling (measuring performance/results)
6. Communicating with members of other organizations
7. Establishing and maintaining contacts with the outside world via representing and
negotiating
• Qualitative Management techniques: Management by objectives, management by results,
management by exception
• Operation research (Quantitative techniques): analysis, simulation, linear programming, risk
analysis, decision trees
executive
= Führungskraft/Spitzenmanager
Executives are top-level managers in a business organisation (CEO, CFO, … and managers reporting
to them e.g. marketing manager). However, it is common to apply the term to senior- (senior
executives) and junior management (junior executives) as well. In the US even employees at the
bottom end of the hierarchy are called executives to raise their self-esteem and motivation. There
are field executives (salespersons) and account executives (employees of banks or advertising
agencies responsible for one customer).
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incorporation
(of a
company)P1,2,6
UNIT 2
company3
-legal aspects
= Gründung einer Kapitalgesellschaft
Before a company is set up in the UK, the promoters (= people involved in formation) have to enter
in negotiations on the acquisition of land and buildings, obtain the consent of the proposed directors
to act as such and arrange for the company´s shares to be underwritten. Formally, certain prescribed
documents have to be prepared and filed with the Registrar of Companies. They include the
memorandum of association, articles of association, list of the names of the first directors and the
company secretary and a statement of the amount of capital the company is authorised to issue.
After paying the fee, the Registrar grants a certificate of incorporation, from the date of which the
company exists as a legal person. A private limited company may commence business immediately.
A public limited company may not exercise any of its borrowing powers until it has complied with
certain other requirements and received a trading certificate. After commencement, every company
has to hold a general meeting (statutory meeting) where the statutory report is discussed.
In the US, the procedure is quite similar but the documents have to be filed with the Secretary of
State in the state of incorporation. Since the laws of the states or not uniform, advantages may be
gained by incorporating under the laws of a specific state e.g. Delaware. The articles of incorporation
(charter) are similar to the British memorandum but they also contain some provisions dealing with
international affairs. They specify: the name (followed by Corporation/Corp., Incorporated/Inc. or
Company/Co.), its duration and purpose, the address of its registered office, the number and classes
of shares, the rights of different classes of shareholders and the names of the directors and
incorporators (= original subscribers of shares).
In the UK a company…
...is a legal person
…and ownership is separated from management
The company is a legal person but it can only act through its properly constituted agents. The
company´s members cannot be held responsible for its actions but the directors and officers may in
some cases (if it fails to comply with the provisions of the Companies Acts) be personally liable. The
company itself owns all its businesses and assets and is liable for debts and obligations. The liability
of shareholders is limited to the issue price of the shares held by them. At the incorporation, every
shareholder has to pay up at least 25% of the value of his shares, plus the whole of any premium. If
the company fails, each shareholder is liable for the amount remaining unpaid on his shares.
A company´s existence continues until it is brought to an end in legal manner: The formal method is
winding up or liquidation (as envisaged in Companies Acts). Winding up means that its assets are
disposed of, its creditors are paid and the remaining amount of money is distributed to its
shareholders. Liquidation may follow a decision at a general meeting of shareholders (voluntary
liquidation e.g. if it wants to merge or give up its businesses altogether) or may be ordered by court
(compulsory liquidation).
The control of a company is in the hands of the members (shareholders) who exercise it by voting at
meetings. The power of each shareholder depends on his number of shares. The principal meeting is
the annual general meeting (AGM) at which the accounts are presented. The members do not have
any power to participate in the management, that´s the duty of the board of directors, which is
elected by the shareholders. Therefore, the directors are effectively elected by those with the
largest holdings. The board of directors sets policy and supervises day-to-day management, which it
delegates to paid members.
In a superficial sense it is correct to say that a company is controlled by its shareholders but the real
distribution of power is frequently quite different because the majority of shareholders are unable
or unwilling to attend company meetings. Provided the dividends paid out are satisfactory, they are
usually content to leave control to the board.
A company affects the affairs of its shareholders and creditors in many ways. Therefore, there has
been a trend in company legislation towards increasing publicity (disclosure), meaning that they are
required to make certain information available to the public. Disclosure prevents prospective
shareholders from making investments on the basis of inadequate information and enables those
who supply goods or lend money to assess the company´s creditworthiness.
The principal disclosure requirements:
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•
•
Every year a company must send a copy of the director´s annual report, its audited balance
sheet and its profit/loss account to the Registrar of Companies. These are available for
public inspection on payment of a certain fee.
It must keep certain statutory books
à registrar of members
à minutes books
à books of account showing receipts, cash payment and assets/liabilities
company4
- advantages/
disadvantages
Advantages: continuity of existence, shares are freely transferable (easy to sell to raise capital),
limited liability (attractive for investors)
Disadvantages: disclosure requirements (= Offenlegungspflichten), divorce of ownership from
control (loss of control in larger corps), conflicts, lack of personal contact towards customers,
inflexible/slow decision making
company5
-legislation
To protect shareholders, creditors and the public from abuse of the legal entity concept, in the UK
there is Companies Act of 1948. In the US, legislation is prerogative of the individual states so each
state has its own corporation statutes to regulate formation, operation and winding up. The relevant
statutes may considerably differ between states e.g. in Delaware legal requirements are much less
stringent. Therefore, the federal government has drawn up a Model Business Corporation Act and
has recommended to adopt it in every state. More than half of the states acted accordingly, which is
a huge step towards harmonisation of America.
shareholder
= Aktionär
The members of a company are called shareholders. The method of becoming a member are by
“subscribing” the memorandum of association (à first members), by applying for an allotment of
shares or by having shares transferred from an existing member. The shareholders are often said to
be the “owners” but they are just the owners of the shares and the company itself owns all its assets
etc. Each shareholder enjoys certain rights e.g. dividends, voting, but the power of influence and
control company policy is vested in all members collectively. This power is exercised at company
meetings (general meetings). Shareholders have no power to participate in running the company (à
board of directors).
shareholder
value
= Gesamtrendite für Aktionäre/Eigentümerwert
It means basically the same as total return to shareholders (dividends +gains/-losses), expressed as a
percentage of the purchase price of the shares concerned. However, the term serves as a reminder
to corporate managers to ensure that the providers of equity capital (actual/potential shareholders)
get as much as possible of the value generated by their company. This implies that other
stakeholders like employees get less. Increasing shareholder value is often associated with costcutting, downsizing and redundancies. Investors may withdraw/withhold their support from a
company that is too nice to its workers, thus sending down its share price and possibly jeopardising
its survival. A low share price makes it hard to raise capital, makes the company vulnerable and will
reduce the value of corporate stock options. Companies may also seek to increase shareholder value
by buying back their own shares.
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corporate
governance
= Gestaltung/Umsetzung der Unternehmensverfassung
The concept of corporate governance (since 1980) has served to focus public attention on the roles
of the various stakeholders of a company and on how power is/should be distributed among them. It
is to some extent defined and determined by the legal system of a country, although many things
are left to the stakeholders´ discretion. E.g.: German and Austrian AGs have 2 boards while British
and American counterparts are governed by a unitary board.
Typical corporate governance issues:
• Shareholder involvement
• Shareholder value
• CEO duality (may the CEO also be the chairman?) à concentration of power at the
top/unchallenged authority
• Worker directors (should someone represent the employees?)
• Executive compensation (stock options?)
• Role of non-executive directors
• Appointment of auditors
• Management reactions to hostile takeover bids
board of
directors
= Führungsgremium/Aufsichtsrat
Synonyms: the board
The board of directors is a group of people (no need to be members) that is elected by the
shareholders at the AGM. The office of director is vacated in the event of retirement, resignation,
removal, disqualification or death. The articles will normally provide for reimbursement of a
director´s incidental expenses but there is no inherent right for him to be paid.
Number of directors:
à public limited company (UK): 2
à private limited company (UK): 1
à corporation (US): in general, 3 unless stipulated differently
The powers of a company´s board are stipulated in its articles of association (bylaws) and are vested
in the directors collectively, so they can only act when properly convened as a board. Mostly a
chairman is elected who takes the chair at board meeting, presides over meetings of the
shareholders and deals with the outside world as the firm´s representative.
The board is responsible for management and supervision. American and British law requires or
permits board members to be appointed as managers (executive directors). In the two-tier system in
Austria and Germany no member of the Aufsichtsrat (supervisory board) may be member of the
Vorstand (management board) at the same time.
Boards in the UK and US comprise executive and non-executive directors
à executive/full-time director: additionally carries out executive functions, enters into a service
agreement defining his powers and duties and is remunerated separately for his work as manager
à non-executive/part-time/outside director: no executive responsibilities; he should have no
contractual relationship with the enterprise; because of his great independence and experience he
makes a contribution to the strategic management and helps to safeguard its personal interests
when these conflict with the interests of individual directors (e.g. remuneration); they are like a
“supervisory board”
A company´s chairman is the head of the board. The senior executive director is the CEO (may be the
chairman at the same time). Then the second in command is the managing director (UK) or the
president (US) called chief operating officer (COO), who reports to the CEO and deputises him. In
case the CEO isn´t the chairman, the managing director/president is the CEO. Then a director must
additionally be appointed as COO. Another option is to combine chairman, director/president and
make that person CEO.
This shows how much more British and US regulations are. In Austria the roles of non-executive
chairman (Aufsichtsrat) and managing director/president (Vorstandsvorsitzender) are always kept
apart.
While CEO and his deputy (COO) are general managers with overall responsibilities, the other
directors are in charge of specific ares
à CFO (finance)
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à marketing director
à purchasing director
The word director usually indicates that they are member of the board and not just managers.
However, the title may also be used for executives who are not in the board. The term chairman
serves for male and female directors but the nowadays the term chairperson may also be used.
Annual general
meeting
UNIT 3
merger
takeover bid
= Jahreshauptversammlung
Every company must hold an AGM so members may express their collective will. It comprises
declaration of dividend, consideration of the company´s accounts and directors´ report, re-election
of directors and appointment and remuneration of auditors. Any meeting that is no AGM is an
extraordinary general meeting and may be convened by the directors or a qualified minority of
shareholders. The statutory meeting is the first meeting of the company and has to be summoned
immediately after it has commenced business.
Normally, meetings are convened by directors who give 21 days´ notice to anyone that may join. It is
usually stipulated that meetings are under the control of the chairman. Otherwise, the present
members appoint their own chair. The chairperson always has casting (second) vote. No business
may be conducted unless a specific number of members (quorum) are present (normally 2!). Each
member may attend in person or send a proxy who votes for him. Each member has one vote per
voting share on a poll (written vote) or in the case of a show of hands only one vote. The chair may
adjourn it with the consent of the members. Minutes must be kept of all general meetings and
signed by the chairperson (à minutes book in registered office, available to members).
In the US it´s roughly the same but shareholders are called stockholders and AGMs are called annual
meeting of stockholders. The term for extraordinary general meeting is special stockholder meeting.
= Fusion
The term covers 3 methods of combining business enterprises:
a. A large corporation swallows up/absorbs a smaller one, meaning that it acquires the other
company and winds it up (extinguishing its identity) (= Fusion durch Aufnahme)
b. Amalgamation: 2 or more companies merge into a new one which is specifically establishes
for that purpose; all the original companies lose their identities.
c. One company acquires a majority interest in another, effectively making a subsidiary. The
firm retains its legal existence but will be controlled by the parent company. (= unechte
Fusion)
In the UK only the second form has a real name. In the US the first and second form are referred to
as amalgamation (echte Fusion) while merger refers to the third form. For combinations where a
new company is established, consolidation can be used (e.g. second type).
The urge to merge is driven by a desire to obtain economic benefits:
à achievement of economies of scale e.g. better prices for larger orders
à economies of scope/synergies e.g. cross-selling of products when a bank and an insurance firm
merge
Dangers for merger:
à overestimate potential economies of scale or scope
à inevitable clash of corporate cultures
Mergers are only successful when the companies are “a good fit” and if there´s some industrial logic
behind it!
= öffentliches Übernahmeangebot
Synonyms: tender offerUS
Companies often try to take over others to add them to their portfolio of subsidiaries or to strip
them of their assets (break them up and sell the valuable bits). A company wanting to take over may
agree its bid with the victim´s board of directors (friendly-/agreed takeover) or it may go over their
heads and appeal to target´s shareholders direct (unfriendly-/contest-/hostile takeover). In an
unfriendly takeover the management are likely to fight back by making optimistic profit forecasts
and generally trying to convince their shareholders. Alternatively, a third, more acceptable, company
(“the white knight”) may be called in to fend off the unwelcome suitor. Another measures are called
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poison pills, meaning that the target company takes huge debts or grant existing shareholders
favourable stock options to dilute the bidder´s position.
In a takeover, payment for the shares acquired can be in cash (cash bid), in the form of securities
(paper bid) or some combination. However, the bidder will have to offer an attractive price, well in
access of what they would get on stock exchange.
Leveraged takeover/leveraged buyout= takeover financed by bank loans or junk bonds
buyout
group of
companies
= Unternehmensaufkauf
Purchasing at least a controlling percentage of a company´s stock is referred to as buyout, especially
if it´s acquired by the own managers (manager buyout) or employees (employee buyout). In these
cases, the money for purchasing is mostly raised from banks or through junk bonds (leveraged
buyouts). Companies acquired like this (more than 80% debt) may find that interest charges absorb
most of the profits. Occasionally a company is taken over by an outside management team
(management buy-in).
! When a publicly held corporation is taken over by a small number of people in a buyout, it is
effectively taken private (privately held corporation).
= Konzern
Companies may operate separate or as a group. In a group, one company (holding-/parent company)
controls one or more subsidiaries. Large groups may also have sub-subsidiaries. Often the parent
company restricts its activities to managing the subsidiaries (non-operating-/pure holding company).
In contrast, an operating parent additionally engages in production and distribution.
A subsidiary may be set up by the parent company or acquired (more than 50% of the equity capital)
by it. Subsidiaries in which the parent holds 100% are called wholly-owned subsidiaries. If the
parent´s stake is 20-50% it is called associated company.
Although a group operates for all practical purposes as a single enterprise, the separate legal
personality of each member is maintained. Subsidiaries must be distinguished from mere branches,
sales offices and similar units, which are just separate establishments. However, not only must each
group company/affiliated companyUS publish accounts relating to its activities, but the holding
company must also make public consolidated accounts relating to the whole group.
Groups may be formed by vertical integration (combining firms from different stages) or by
horizontal integration. In the case of a conglomerate group/conglomerate the subsidiaries operate in
completely unrelated industries. There is no commercial logic behind this combination but
conglomerates may be logic from a financial point of view. A multinational group is one with
subsidiaries in at least 2 countries other than that in which it is based.
Advantages:
à combine advantages of size with the flexibility of decentralised management
à overall policy is still laid down by its headquarters
holding
company
= Muttergesellschaft
The term refers to a company that holds at least one subsidiary. In journalistic sense it often refers
to a pure-/non-operating company.
monopoly
= (Angebots-)Monopol
Monopoly refers to a situation where there is only one seller of a product but in practice it is also
used to describe markets with only one buyer (monopsonies) or with one large company dominating
it by having e.g. an 80% share.
Being the only/dominant supplier on the market conveys a certain power and the elasticity of
substitution is very low. To become a monopolist, a firm may try to buy up its competitors in order
to exert control or it may join forces with them to form a cartel. Both of these measure might be
more successful in an oligopoly. Most countries have laws to prevent or break up monopolies e.g. US
antitrust law, competition law of the EU.
There are also natural monopolies (e.g. mining industry, railways) and monopolies established by the
state to avoid wasteful competition or to generate revenues (railway, post, water, gas, …).
Moreover, by granting artists, inventors and brands the exclusive right to use their works of art
(intellectual property), the government creates artificial monopolies. The Uruguay round of GATT
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(WTO) increased international protection of trade-related intellectual property rights (TRIPs) e.g.
copyrights, patents, trademarks.
cartel
= Kartell
Cartel refers to a voluntary association of firms on a contractual basis providing for the adoption of
some uniform business policy regarding sales or prices. Cartel fix prices, restrict output, carve
up/divide markets and may have their own selling organisations (cartel syndicates). They are
combinations “in restraint of trade” (intended to restrict competition).
The English term cartel does not cover all types of arrangements enumerated in the Austrian
Kartellgesetz. There are some terms describing certain aspects of what Austrian law defines as
Kartell: gentlemen´s agreement, conscious parallelism and resale price maintenance, pricing ring,
pool and trustUS.
Before world war 2 Germany and many other countries permitted or even encouraged associations
and combinations restraint of trade. Nowadays, most countries have laws prohibiting cartels and
similar practices in restraint of trade.
trust2
= Unternehmenszusammenschluss
In a commercial sense, a trust is a combination of firms formed to restrict competition. They may be
created by e.g. establishing a trust in the legal sense of the word (Treuhandverhältnis), by setting up
a holding company, or by entering into an explicit or implicit contract to restrain competition. The
term covers Massachusetts trusts, groups of companies dominating a market and certain types of
cartels.
UNIT 4
financial
management
= Kapitalwirtschaft
Synonyms: business finance
In a firm financial management is concerned with planning, implementing and controlling all inflows
and outflows of funds. This means that is deals with raising (sourcing) and allocating (using) the
funds required by the enterprise. The tendency is to regard these two aspects as equally important
and to devote time to working capital management, capital project planning and mergers and
acquisitions.
To raise funds a variety of sources can be tapped, each having certain characteristics as to
availability, cost, maturity, encumbrance of assets and others terms agreed with the providers of
capital.
- Internal finance: funds are raised internally; source: the firm´s sales revenue
The revenue is partly used up as cash expenditure while what is left over (cash flow) can be
allocated for investment purposes or to repay debts.
- External finance: outside sources like partners/shareholders (owners´ funds/equity capital) or
creditors (creditors´ funds)
The financial manager must determine the best mix of financing for the firm, always taking its
ultimate objectives in account. This involves the question of an appropriate capital structure (=
relation between debt and owners´ funds, implications on RoE (Return on equity)). Moreover, he has
to deal with the problem of maturity (= raise short-, medium- or long term funds?).
A modern financial manager is also concerned with outflow of funds, tax, interest payments, profit
distributions. Since short-term inflows and outflows cannot be perfectly coordinated, a firm needs a
pool of cash and perhaps short term credit facilities to even out discrepancies. This raises the issue
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of liquidity. The financial manager needs to conduct capital investment analysis to test the viability
of capital projects (e.g. mergers and acquisitions) in terms of cash flow and RoE.
Budgeting= The process of planning inflows and outflows
funds1
= Bargeld, finanzielle Mittel
Funds often refers to cash and other financial resources that can readily converted into cash.
E.g. “no funds” on an invalid cheque, “fund-raising campaigns” for particular purposes, …
funds2
= Kapital
The funds of a company refers to its capital e.g. shareholders´ funds.
capital
structureP1
= Kapitalstruktur
The capital structure describes the composition of a firm´s capital, mainly with regard to relative
shares of creditors´ fund (debt) and owners´ fund (equity). The relationship between these two can
be expressed in the form of capital structure ratios.
equity (capital)
= Eigenkapital
Equity refers to the owners´ funds in a business organisation. These funds do not all exist in liquid
form, they may have long been invested in various assets, but simply represent the proprietary
interest in the organisation.
share
= Aktie
Share refers to any of the equal parts into which a company is divided entitling its owner to a
proportion of the profits and giving him other rights e.g. vote at AGM, share in the proceeds of a
voluntary winding up. A company may issue many different types of shares, on which the rights of
their holder depend.
A share has a nominal value (face-/par value), which means that a certain sum of money is shown on
the face of the certificate. This does not mean that shares must be issued at par (above or below par
possible!). In Austria, issues below par are prohibited. In the US and Canada, companies are
permitted to issue no-par-value shares, which have no face value. The simply represent a given
fraction (e.g. one ten-thousandth) of the capital of the company, which means that dividends have
to be expressed as a fixed amount of money per share.
In the US, shares are often collectively referred to as stock.
• Ordinary shares/ called common stockUS
• preference shares/ preferred stockUS
• voting shares/ voting stockUS
= Dividende
dividend
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A dividend is the portion of a company´s profits that is distributed to the shareholders ranking for
dividend (annually/twice a year). It is either expressed as a percentage of the face value of the
shares or as a fixed sum per share. Although dividends are usually paid out in cash (cash dividends) it
is possible for profits to be distributed by way of shares (stock dividends).
The directors are responsible for the dividend policy while the shareholders only have an indirect
say, but there are constraints regarding amount of profits/earnings generated etc.. If there is
no/little profit the company may pass its dividend. If profits are sufficient, the directors decide which
portion should go to the shareholders.
ploughback
= Selbstfinanzierung
Synonyms: self-financing, plowbackUS
Ploughback refers to a firm´s practice of not distributing all its profits to its shareholders but
retaining a portion to be used for investments or to retire debt. By reinvesting its own profits, the
firm obviously forgoes other investment opportunities, causing opportunity costs in the form of
imputed interest, which should be allowed for in its cost accounts. This means that ploughback is not
for free.
Ploughback is a convenient form of financing but since the costs involved are not explicit, there is a
danger that internal funds will be used less wisely because management might be tempted to apply
less stringent criteria than in the case of externally raised funds. However, it is a very important
financing method, especially in the US where creditors´ funds tend to be relatively scarce and
therefore expensive.
creditors´ funds
= Fremdkapital
Synonyms: debts
Creditors´ funds/debt describes all funds supplied by an external source a while loan
capital/borrowed capital describe only medium-to-long-term variety. Creditors´ funds may come in
the form of supplier credits, overdrafts, and medium- or long-term bank loans. The may also be
evidenced by financial instruments like commercial papers or corporate notes and bonds.
In contrast to equity, they have to be repaid at maturity (= date agreed for payment). Large loans are
often repayable in instalments, so there are multiple dates (repayment schedule).
The cost of debt is the interest payable…
… in advanced (discount method)
… during its term
… or at maturity (collect method).
The interest rate applicable need not be stated explicitly (e.g. supplier credit à implicit). In addition,
there may be other costs like bank charges, compensatory balances, …
The proportion of creditors´ funds in the total capitalisation of a firm is an important factor in
achieving or failing to achieve its basic goals.
supplier credit
= Lieferantenkredit
Synonyms: trade credit
A supplier credit is a sort of short term financing. A buyer is usually not required to pay for goods on
delivery, but is allowed a specific time before the payment is due. During that period, the supplier
extends credit to his customers (extension of deferred payment terms by a seller to a buyer). Credit
can be granted on an open account basis, through the use of a time draft or by means of a
promissory note issued by the buyer in favour of the seller.
bank lending P1
= Kreditgeschäft der Banken
Lending by banks can be classified according to the maturity, the purpose for which the funds are
used, the security provided by the borrower, …. One can distinguish between short-term, mediumterm and long-term finance.
credit2
= Kredit
Synonyms: loan (of money)
In banking, credit denotes an amount of money placed at a person´s disposal (more used in the US).
In Britain the term normally refers to lending in general rather than to a specific amount lent.
Marlena Niedl
security (for a
loan)
= Kredit Sicherheit
A lender may wish to provide himself with a second line of defence on which to fall back in case the
borrower doesn’t meet his obligations. Therefore, the lender may insist on some kind of security for
the repayment in addition to the borrower´s personal liability. E.g. guarantees, pledges
Moreover, there are arrangements under which the lender retains an interest or a lien in real or
personal property (e.g. real estate mortgage).
Collateral security: any security additional to the personal liability or to shares, bonds etc. pledged
as security.
principal1
= Kreditsumme
Principal may be used to describe an amount lent exclusive of any interest payable on it. It is
frequently employed in conjunction with “interest”.
interest1 P1,P2
= Zinsen
Interest is the price charged by a lender for the temporary use of funds (… % p.a. of the principal à
interest rate). The rate set for a particular borrower is determined by his creditworthiness and
macroeconomic factors as credit supply and demand, the rate of inflation and monetary controls.
In many countries, the rate demanded by the central bank when lending to the banking system is
very important because it is an important monetary policies instrument.
à discount rate (US)
à bank rate (Canada)
à base rate (UK)
à official interest rates (EU)
overdraft
= Kontoüberziehung, Überziehungskredit
On the one hand overdraft refers to the extent to which a current account at a bank is overdrawn,
on the other it denotes a type of short term loan (bank permits customer to overdraw account to
certain amount). This is in contrast to an ordinary loan where a separate loan account is opened
from which the loan proceeds are withdrawn. The account holder can draw on his credit line (= max.
amount) at any time during an agreed period. If the overdraft is repaid before the period has
expired, he is allowed to borrow again, if the credit line is not exceeded. So the overdraft is like a
revolving credit.
Sometimes banks charge interest on the balance outstanding. Moreover, the bank involved may levy
an additional charge (monthly charge/commitment fee). This can be a fixed amount or a small
percentage of the total credit line. Although the borrower may not make use of the overdraft facility
at any given time, the bank must have sufficient funds ready and may insist that the account holder
deposits easily saleable shares etc. as security.
factoringP1, P3
= Factoring
Factoring is a service designed to assist firms selling goods on credit. Under a typical factoring
agreement, a specialised financial institution known as the factor
(1) purchases all of a seller´s accounts with or without recourse to him for credit losses,
(2) advantages an agreed percentage of the value of the receivables to its client, thus refinancing the
supplier credits concerned
(3) collects the amounts outstanding when they fall due, and
(4) frequently performs additional services.
A factor will make a separate charge for each service. Consequently, it is quite expensive but may be
worthwhile for firms whose expansion might otherwise be held up by a lack of liquid working capital.
Factors are more likely than banks to grant credits to young, undercapitalised firms, because here
the creditworthiness is less important.
accounts
receivable1 P1
= Forderungen aufgrund von L&L
Synonyms: trade accounts receivable, trade debtorsUK
Marlena Niedl
The term refers to a firm´s short time claims (open account) against trade debtors, so it denotes
amounts due from customers which are collectible within one year, are not evidenced by bills and
arise from goods sold on credit in the ordinary course of business.
leasing P1, P7
UNIT 5
investment2
= Leasing
Under a lease contract a firm or private individual (lessee) acquires from another party the right to
use the objects involved for an agreed period of time. The lessor retains ownership of the assets and
is rewarded for his services with rentals paid at regular intervals.
The decision to lease or buy is not always easy. A finance lease is usually more advantageous than a
cash purchase, the situation is less clear-cut compared to a purchase financed by a long term bank
loan repayable in instalments.
= Finanzanlage
The term refers to the acquisition of financial assets like bank deposits, shares, bonds and treasury
bills. This form of investment does not result in tangible equipment but is undertaken to generate
investment income or capital gains. The investment industry acts (stock exchanges, brokerage
houses, investment companies, banks) as an intermediary here.
investor
= Anleger
Investors are the purchasers of securities and may be private or institutional.
• private investors: rich individuals putting their money into shares, bonds, …
• institutional investors: e.g. insurance company, banks, pension- and investment funds
more money and more diverse investment policy than privates à spread risk over a wider range
of investment media (portfolio; securities and property)
Classification referring to investment strategy:
• bulls
• bears
• stags
Further, investors may be classified by whether they are interested in current investment income
(dividends, interest) or capital gains (= speculators)
yield P1,2
= Rendite
Yield is the income derived from a financial investment e.g. shares, bonds, rent from property, … (%
of investment).
!"#"!$%!
e.g. &'()$ +)(!$! (+… × 100
There is an inverse relationship between the price of that investment and its yield.
portfolio1
= Portfolio
The term denotes the collection of financial investments held by an investor. The main task involved
in managing an investment portfolio is to achieve and optimal mix in terms of return and risk.
investment
fund P1
= Investmentfond
Investment funds are institutions set up to pool the moneys of small investors, putting them into a
wide range of securities and other investment media for the benefit of their clients. They are
professionally managed and should be able to achieve a better return than private investors or a
portfolio representing the market average. They normally have more funds at their disposal than
private investors and can therefore buy a greater variety of investment media to spread the risk.
securities
= Wertpapiere
Securities are transferable certificates of ownership or indebtedness. In practical usage, the term
only refers to securities traded on stock exchange. Securities are not mere acknowledgements of the
rights to which they relate but rather embodiments of them. So, such rights, e.g. claim to payment,
can only be exercised in connection with the instrument involved.
• Equity securities: embody ownership rights (shares)
• Debt securities: represent creditor rights (bonds)
Marlena Niedl
securities
markets
= Wertpapiermärkte
Securities markets are concerned with long-term or permanent financial instruments and therefore
part of the capital market, while short-term financial instruments and deposits are traded on the
money market. Apart from loose contracts between investors and organisations, the main securities
markets are the various stock exchanges and over-the-counter (OTC) markets. Stock exchanges are
tightly organised with trading floors, strict adherence to business hours, limitations on membership
etc. while OTC markets operate more flexibly, relying exclusively on telephone and computer links.
Before a share can be traded on a larger stock exchange, it has to meet a number of stringent tests
(regarding disclosure info, amount of capital, …). Smaller exchanges are less strict and cater for the
needs of smaller, recently founded companies. In OTC markets, listing requirements are even more
lenient.
However, with the use of computerised info and dealing systems, the importance of physical trading
floors is bound to diminish.
blue chips
= erstklassige Aktien
Blue chips are top-quality large-cap stocks e.g. shares form huge companies with good reputation.
They enjoy premium status as investments.
Originally, the term is derived from poker where the blue chips represent the highest value.
bond1
= Anleihe
A bond is a debt security which means that it represents a loan made by the holder to the issuer.
Therefore, it has to be redeemed (= paid back at maturity), although there are certain exceptions
(irredeemable bonds). The amount to be repaid (redemption price) doesn´t have to be the same as
the issue price and both may vary from the nominal value of the security, because the difference
between the issue and the redemption price is an element of the return to be obtained from the
bond and can be used to modify/replace other elements (e.g. interest rate). Most bonds are
interest-bearing securities with a fixed- (fixed interest-/fix interest bearing bonds) or variable
interest rate (variable interest bonds/floaters). A zero coupon/deep discount bond is non-interestbearing and the return is merely the difference between the higher redemption and the lower issue
price.
Another feature is the maturity. Regarding this aspect one can distinguish between notes (debt
securities with 8 or fewer years to maturity at the time of the issue) and bonds, which have initial
maturity in access of 8 years. Both types are referred to as bonds. Examples of notes are Treasury
notes and floating-rate notes (FRNs).
• Government Bonds/Treasury bonds/government stocks/gilt-edged securities: bonds issued
by central governments
• Local authority stocks/corporation stocks/municipal bonds: issued by local governments
• Corporate bonds/debentures: issued by a company; may carry the option to convert them
into ordinary shares within a certain period of time (= convertible bonds), especially for
when the company performs satisfactory in terms of dividend and share price
• Bund: German central government bonds (Bundesschuldverschreibungen)
• Junk bonds: high-risk (and high-yielding) corporate bonds
Bonds may be traded on stock exchange if the issuer meets certain requirements and applies for a
listing. This segment is called bond market which comprises a section for short term to medium term
bonds (short end of the market) and one for long term bonds (long end of the market). Investors
always watch the current bond yield and the bond price closely.
Reasons to buy bonds:
- Interest income
- Capital gains (= profits from buying low and selling high)
The prices of bonds traded on secondary markets (old bonds) are very sensitive to changes in the
level of interest rates. Prices of old bonds rise when interest rates fall and vice versa because the
interest rate of most bonds is fixed and a price change is the only way to adjust bond yields.
gilt-edged
securities
= britische Staatsanleihen
Synonyms: gilts, government stocks
≠ trustee securities (mündelsichere Wertpapiere)
Marlena Niedl
These British government bonds are used by the government to raise long-term funds. They are also
an important instrument of monetary policy in the context of open-market operations.
primary market
= Primärmarkt, Emissionsmarkt
The term is usually applied to the market for new issues of securities (function of raising fresh
capital). They are much less tightly organised than stock exchanges (secondary markets). Normally,
they are not housed in dedicated buildings but consist of loose associations of specialised banks (UK:
issuing house, US: investment banks) and investors.
rights issue
= Emission von jungen Aktien (auf Bezugsrechtsbasis)
Synonyms: cash calls
A rights issue is the issue of new shares to existing shareholders, usually on favourable terms. A
company wanting to increase its capital may be forced by law to use this method (e.g. in Germany,
Britain). Alternatively, it may do so because it is often cheaper and less complicated or out of a sense
of fairness to its members. A shareholder that does not subscribe for an additional issue of shares
would not be able to maintain his proportionate interest in the company.
Effects of Dilution: since the rights issue does not change the firm´s earnings, the increase in the
number of shares (new issue price) will reduce earnings per share and the dividend per share
To protect existing shareholders from these effects, new shares are offered to them on a pro rata
basis (= one new share for every 3 shares held). Shareholders not interested in the new issue may
sell their rights. The process is often referred to as cash calls since the shareholders often do not
have any other choice than forking out large sums to protect their interest in the company.
underwriting
= Emissionsgarantie (UK), Fremdemission/Emissionsgeschäft (US)
The term underwriting refers to specialised services offered by financial institutions to companies
that wish to raise capital by issuing securities.
In Britain, it denotes the provision of a guarantee by an issuing house or a broker to take up any part
of a new issue that is not taken up by the public. In the US, this is referred to as pure underwriting
and represents only one variant of underwriting in general. American corporations prefer firm
commitment underwriting (bought deals), meaning that an investment bank buys the whole issue
outright, selling it at a slightly higher price for its own account. In Britain they are not common (legal
reasons).
All types of underwriting are offered by securities firms (issuing houses, merchant banks, …). They
usually form an underwriting syndicate/- group to pool the risks involved and to ensure a successful
distribution of the securities to be issued. It is headed by the lead underwriter who is usually the
sponsor of the issue and charged with preparing the organisational details.
underwriter2
= Emissionsmittler
An underwriter is any issuing house, broker or investment bank that engages in underwriting.
stock exchange
= Wertpapier Börse
Synonyms: stock markets
A stock exchange is a market for securities that is tightly organised (only members) and if private
individuals or institutions want to buy or sell certain securities, they have to instruct a broker. They
are mainly secondary markets, meaning that they are concerned less with issuing new securities
than with buying and selling those that have already been issued. Although stock exchanges play
only a subordinate role in the raising of fresh capital, they have a strong indirect influence on
primary markets. Many new issues would be much more difficult if investors did not know that they
could sell their newly acquired securities in a well organised market.
E.g. New York stock exchange (NYSE), London Stock Exchange
For shares from new, smaller companies:
- American Stock Exchange (AMEX)
- Alternative Investment Market (AIM) in London
Marlena Niedl
capital gain
= Spekulationsgewinn
Capital gains are profits arising from the disposal (sale at higher price than cost price) of capital
assets (e.g. houses, shares, bonds). The term is only applied to gains arising from isolated, nonrecurring transactions (outside the ordinary course of business). It is e.g. not used for profits of a
property company.
For tax purposes, capital gains are sometimes classified into short-term and long-term gains with
relevant tax laws precisely defining these two categories.
speculation
= Spekulation
When speculating, an operator tries to exploit short-term price fluctuations by buying low and
selling high (in the same market). Anything of value and subject to price changes may become an
object on speculation (commodities, properties, securities, currencies, works of art, jewels, …).
A speculator is not interested in the current income to be derived from long-term investments but
concentrates on quick capital gains. If his forecast turns out to be wrong, he will make a capital loss
(risky!). Long term investors also take risks but these are incidental to the enterprise while risks are
the essence of speculation. It is similar to gambling although, in this case the risk arises from some
underlying economic activity and is not created artificially.
While the person principally affected by the success/failure of speculation is the speculator himself,
the social costs and benefits should not be left out. Speculators benefit ultimate buyers and sellers,
who may be less experienced in risk taking, and help to even out price fluctuations. However, they
are not immune from irrational optimistic/pessimistic waves and ill-judged speculation may enhance
price movements to the detriment of the whole economy.
stock exchange
indices P1
= Börsenindize
On stock exchanges, many people are interested in general price trends, which can be measured by
index figures.
• narrow-based: Financial Times Stock Exchange 100 index, Dow Jones Industrial Average
• sectoral indices: FT Gold index
• broad-based: Standard& Poor´s index (500 widely held common stocks)
UNIT 6
commercial
bank
= Geschäftsbank
Commercial banks are non-governmental with the purpose of financing production and distribution
by lending short-term funds, accepting current account deposits and offering cheque-drawing
facilities. They are involved in many other operations (lending, credit cards, …) the term full-service
bank has been seen as more descriptive.
In the US such banks were, till the 21st century, prohibited from engaging in many types of
investment banking e.g. underwriting, due to the financial crisis in the 1930s.
retail banking
= Mengen- und Kleinkundengeschäft der Banken
Retail banking refers to standardised banking services e.g. loans, checking accounts etc. These are
offered to private individuals and small business enterprises. By contrast, wholesale banking
involves interbank transactions and financial transactions between banks and governments.
Therefore, the money market is a wholesale market for money.
bank lending P2-
= Kreditgeschäft der Banken
• Short term finance: up to 1 year
e.g. overdrafts, revolving credits, discount loans, acceptance credits, ordinary loans
advanceUK= principal forms of short-term bank finance
• Medium-term finance: 1-5 years
ordinary loans (term loansUS), extended revolving credits
• Long term: over 5 years
until recently banks were not prepared to grant long-term credits; firms usually obtain these
credits from insurance companies, pension funds or by issuing corporate bonds
- Secured loans e.g. secured by property or charge upon it, guarantee
- Unsecured loans
P5
Marlena Niedl
current
account2
= Kontokorrentkonto, Girokonto
Synonyms: cheque account, checking accountUS
Current accounts are bank demand deposit accounts from which withdrawals can be made in
cash/over the counter/through an ATM. In some countries a person wanting to open a current
account is required to provide references and may be asked to state whether it´s a private or
business account. A specimen signature is kept at the customer´s local branch.
The holder is provided with a personalised cheque book, a cheque card and is also entitled to a
number of banking services including credit transfers, standing orders, direct debits, overdrafts and
online banking. He is usually charged for the costs of handling the account.
As current account deposits earn little/no interest, many customers arrange for amounts in excess of
their current needs to be transferred to deposit accounts to receive interest.
cheque
= Scheck
A cheque is a written order to a bank, given and signed by a person who has a current account with
that bank to pay a certain sum of money to another person (individual or organisation), or to bearer.
= Dauerauftrag
A standing order is an arrangement between a buyer and a seller under which the latter delivers
goods in specified quantities at certain intervals until further notice.
In banking context, a standing order is a written instruction to pay a stated sum of money from the
customer´s current account to a named party (payee) at regular intervals until further notice/the
date indicated.
à payment of regularly occurring amounts such e.g. instalments, rents, insurance premiums or
subscriptions
The consumer only has to complete the banks standing order form (payee´s name, amount to be
paid at agreed intervals, duration of the order).
standing order
direct debiting
= Lastschriftverfahren
This is an ideal method for paying varying amount at irregular intervals. It is more flexible than a
standing order and the payee gives instructions to the bank, not the payer.
E.g. settle invoices like electricity bills
1. Debtor signs a general authority entitling his creditor to claim the amounts due from the debtor´s
bank
2. Supplier (of goods/services) sends buyer an invoice in the ordinary way
3. Supplier submits through his own bank a direct debit form for the invoice amount to the buyer´s
bank
4. Supplier debits the buyer´s account with the amount in question
5. Transfer to the supplier´s bank for the credit of his account
bank statement
= Kontoauszug
A bank statement is a printed loose-leaf summary of all transactions (customer´s account, period of
time).
- Date of payment
- Amount paid/received
- Value date
- Method of payment
Statement are supplied to customers regularly e.g. whenever a payment has been made to the
account. Moreover, customer´s may print out statements at the ATM any time.
bank charges
= Bankgebühren
In the UK and the US, customers usually pay an account charge for the conduct of a current account
and for related banking transactions, unless they keep a minimum balance in their accounts
throughout the period. Such a periodical account charge is based on the number of transactions and
is usually collected at the end of each charging period.
Marlena Niedl
Service charges: charges for specific services e.g. stopping a cheque may have to be paid when they
arise
For a long time, free banking services were used as marketing tool. Due to the decline in interest
rates and free balances, banks have become more cost conscious. The imposition of new bank
charges has provoked many customer protests. E.g. NOW accounts à interest bearing checking
accounts in the US
ban deposits
= Bank Einlagen
The term refers to an amount credited to a deposit account. Such credits may be the result of
cheques, drafts or transfers to the customers´ account.
On the basis of withdrawal, they may be classified into:
• Demand deposits/Current account deposits/sight deposits: may be withdrawn by customer
without prior notice to the bank; held by depositors who need a liquid balance; little/no
interest
• Time deposits: depositor may not make any withdrawal prior to maturity (= fixed deposit) or
prior to expiry of the agreed period of notice (= notice deposit). E.g. 30 days in the US
! cannot be withdrawn by cheque or transferred (Exception: NOW accounts)
- Savings deposits: held in passbook saving accounts
- Based on time certificates of deposits
savings account
= Sparkonto
Funds held in savings accounts are interest-bearing time deposits. Nowadays these accounts simply
form a part of the wide range of investment products. In general, very flexible savings accounts earn
lower interest rates than those which are subject to more stringent conditions (notice period,
limited number of withdrawals, …). Savers are offered special cards enabling them to make
withdrawals and sometimes even deposits at ATMs.
They are a very safe form of investment since they are mostly covered by government insurance.
The owners are typically risk-averse low to medium income earners who use the accounts to
accumulate funds e.g. to have a “nest-egg” to fall back on. Savings accounts have lost a lot of ground
to other forms of investment e.g. mutual funds, which may offer a higher return but are riskier.
merchant bank
= Merchant Bank
A typical UK merchant bank offers highly specialised services:
- Acceptance of bills of exchange connected to foreign trade (acceptance houses)
- Export and project finance (long-term credits)
- Foreign exchange dealing, advisory services
- Investment management (for privates or firms)
- Domestic and international securities underwriting and trading (issuing houses)
- Advice on mergers, acquisitions and venture capital investment
2 sub-groups:
• Acceptance houses: lend first class names to customers by accepting their acceptance
credits and arrange for these to be discounted at the finest rates
• Issuing houses (investment bankUS): may take equity positions in commercial and industrial
companies (in contrast to investment banks!)
A growing number of subsidiaries of UK clearing banks and US banks offer merchant banking
services.
investment
bank
= Investmentbank
Investment banks (US) act as intermediaries between companies and government institutions
wishing to raise capital and individual or institutional investors. They are engaged in marketing bond
and other securities issues (underwriting), syndicating international loans, selling and buying
securities on the open market, providing investment advice and assistance with mergers and
acquisitions.
Marlena Niedl
In the UK issuing houses perform a similar function. Today, most large full-service banks offer some
or all of the financial products provided by investment banks. Prior to the repeal in 1999 of the
relevant legislation commercial banks in the US were prevented from doing so.
building
societyUK
= Bausparkasse
Building societies were originally specialised financial institutions registered as mutual organisations
(like Bausparkassen and savings and loan associationsUS). They were owned by their savers and
borrowers. Their purpose was to finance the purchase or building of owner-occupied dwellings (e.g.
houses and freehold flats) by their members (à long term home loans secured by mortgages on the
properties).
The Building Societies Act of 1986 enables societies to diversify and indeed most have now become
universal banks. Some converted into public limited companies to achieve even greater flexibility.
They are facing stiff competition, even in the field of home loans.
Austrian Bausparkassen have not been converted into universal banks and in Austria a member must
have saved a specific amount with his society before he can get a loan. Also, interest paid on
Bausparkassen deposits is supplemented with a government bonus. Many Austrians use this method
because of the bonus and not because they want to build a house. British building societies play a
much more important role as they are the principal repository for the personal sector´s liquid assets
(60% of Brits have such an account).
electronic
banking
= E-Banking
Synonyms: self-service banking, e-banking
This method involves the use of computers and telecom technology in performing banking services,
with regard to eliminating paper-based records and offering customers direct access to information
systems.
- Electronic funds transfer
- Home banking facilities
- Corporate cash management services
= elektr. Zahlungsverkehr
The term EFT covers any transmission of funds initiated through customer- or teller-operated
terminal, a telephone or a computer. NOT: transfers based on cheques, bank drafts etc.
+ fast
+ paperless
electronic
funds transfer
central bank
UNIT 7
credit card
= Zentralbank, Notenbank
Every country needs a central bank looking after its monetary system. E.g. Bank of Japan, Fed (US),
ECB, …
A central bank is typically charged with the following functions:
• Adequate supply of legal tender: banknotes and coins; usually the sole note-issuing bank in
a country (but not only one for coins)
• The banker´s bank: performs tasks for commercial and specialised banks
à commercial banks keep their account with central bank
à borrow from central bank (“lender of last sort)
à supervision and regulation of banking system
• The government´s bank: manages national debt, handling or superintending issue of
government stocks and treasury bills, short-term advances to the government, advice on
financial matters
• Monetary policies: open market-operations, calling for special deposits, influencing interest
rates, operating direct controls on bank lending, intervening in forex markets to control
exchange rates, managing exchange controls, foreign exchange reserves, …
The Fed and the ESCB steer an independent course and are largely immune from the pressures of
day-to-day politics.
= Kreditkarte
Marlena Niedl
Credit cards are issued by VISA card, MasterCard, Diners Club card, American Express and may be
used to make payments in hotels, restaurants etc. provided that they are members of the
appropriate credit card scheme. These members are referred to as merchantsUS or retailersUK. Credit
cards are especially practical when buying something from a remote location e.g. internet. The card
serves as evidence that the card-issuing company has granted a line of credit to the cardholder who
must maintain a special account with it. This credit line/credit limit is the max amount he may have
outstanding at one time.
Every card bears the signature of its holder and is embossed by the issuing institution with his name,
card number and expiry date. If he wants to pay something with the card or charge it in popular
parlance, he only has to present his card. The retailer checks if it´s valid, swipes it through a machine
and then prints out a sales slip (sales voucher) which the cardholder is asked to sign. The slip
contains the expiry date, card number and amount payable. After comparing the holder´s signature
with the one on the card, the retailer returns the card. He sends the voucher to the card-issuing
institution which credits the account with the amount claimed less a discount and debits the amount
involved to the cardholder´s account. At the end of the month, the card issuer sends a fully itemised
statement to the cardholder. Provided the holder pays the whole amount outstanding within a
stipulated period after the date of statement (30 days) he is not charged any interest. If not, he is
charged interest on the amount left owing. The holder should always retain his sales vouchers
(complete record of all transactions).
Subject to the amount available within his credit limit, the holder may also use the card to obtain
cash advances at affiliated banks or ATMs. The total amount withdrawn plus a small handling charge
will appear on the next monthly statement.
In view of heavy competition among credit card companies, it is not that they should try to attract
customers by offering them benefits such as travel insurance. Another ploy is to improve wellheeled customers with special cards e.g. golden cards featuring very high credit limits.
debit card
cheque
bearer cheque
= Debit Karte
Any amount spent is immediately deducted from the cardholder´s account with the issuer bank
which means that free credit, a hallmark of the credit card system, is eliminated. The main users are
to pay for purchases in shops and to draw cash from cash dispensers Often, bank credit cards or
cheque cards double as debit cards and have the same functions.
= Scheck
A cheque is a written order to a bank given and signed by a person who has a current account with
this bank, to pay a certain sum of money to, or to the order of, a second person, or to the bearer
bank. A cheque must be paid on demand (when it is presented for payment).
à drawer: makes and signs cheque
à payee/bearer: who the money goes to
à drawee/drawee bank: bank on which it is drawn
• Order cheque: payable to a specified person or his order; transferred by indorsement or
delivery
• Bearer cheque: payable to bearer; transferred by delivery only
• Open cheque: payable in cash, (theoretically) only at the bank on which it is drawn
• Crossed cheque: cannot be cashed over the bank counter, must be paid into an account
à protect owner against theft or loss
If there are insufficient funds in the drawer´s account, the bank dishonours the cheque. The
dishonoured cheque is said to “bounce”. The holder has the right to take recourse in the same
manner as in the case of a bill of exchange.
= Inhaberscheck
This cheque is made payable to bearer. It needs no indorsement and is paid to anyone who presents
it at the drawee bank and therefore affords less security. As a safeguard against stolen cheques, a
bearer cheque may be “crossed” which means that it can be paid only into an account. This makes it
possible for a lost or stolen cheque to be traced back to the finder or thief.
Marlena Niedl
If the drawer wishes to withdraw money from his account, he only has to cash it at the drawee bank.
In this case, the drawer and the bearer are the same person. He may also cash it at another bank
showing his cheque card.
crossed cheque
= Verrechnungsscheck
A crossed cheque must be paid into an account. The bank to which such a cheque is presented will
collect the amount from the bank on which it is drawn (drawee bank) and credit this sum to its
customers account. If the holder wants cash, he must pay it into his account and then draw on his
cheque. The purpose of crossing a cheque is to protect its owner against theft or loss (easy to
trace!).
cheque card
= Scheckkarte
Synonyms: cheque guarantee card
A cheque card guarantees that any cheque made out by the cardholder up to a specified amount will
be honoured by the bank issuing the card, even if there are insufficient funds. Thus, it acts as a
safeguard for the traders because the risk is shifted to the bank issuing the card.
A cheque card may also be used to draw cash at any branch of the drawee bank. Many banks offer
cheque cards that double as cash cards of credit cards.
clearing bank
= britische Geschäftsbank
Main UK clearing banks: Royal bank of Scotland Group, Barclays, HBOS, Lloyds-TSB, Abbey National
and HSBC. With their network of branches, they dominate the British banking scene. They are
Britain’s full service banks providing the usual banking services.
The term clearing bank reflects the fact that these banks are members and co-owners of the London
Bankers’ Clearing House. Through this organisation, cheques and credit transfers involving different
members are cleared.
Clearing= claims and counter-claims arising from payment transactions carried out by clearing banks
are totalled and set off against each other by a central institution; for each pair of banks only the net
position is paid
indorsement
= Indossament
The term indorsement is mainly used in connection with the transfer of order instruments. In
contrast to bearer instruments, they are transferred (rights pass from one person to the other) by
delivery and indorsement. An indorsement must be written on the reverse side of the instrument to
be transferred.
à indorser: writes the indorsement
à indorsee: whom the instrument is indorsed to
• Blank indorsement: indorser’s signature à bearer document that can be transferred by
delivery
e.g. bills of landing, warehouse warrants, …
• Special indorsement: indorser’s signature and name of indorsee à further transfer only
possible by another indorsement (can be used to transform bearer into order instrument)
• Restrictive indorsement: prohibits further transfer of the instrument; does not affect the
rights of the indorsee against the indorser
order cheque
= Namensscheck
An order cheque is a cheque payable to a particular person or order. Like all other order
instruments, it is transferable by indorsement and delivery.
A bank requires indorsement when:
a. Payee requests payment in cash over the counter
b. Payee transfers cheque to another person (new indorsee)
If the drawer of an order cheque wants to draw cash from his account he makes it payable to himself
writing “Self” or “Cash” on the cheque. He may also cash a cheque drawn to “Self” at a bank other
than the drawee bank by showing his cheque card.
P1
Marlena Niedl
bank draft
UK
UNIT 8
currency1
= Bankenscheck
Synonyms: cashier’s chequeUS
A bank draft is a negotiable instrument drawn by a bank either on itself or on another bank at home
or abroad.
Bank drafts represent a very safe method of payment and may be used in cases where ordinary
cheques would not be acceptable (e.g. remittances to parties abroad). E.g. if a customer wishes to
make a payment to his foreign supplier, he may purchase a bank draft drawn by his bank on one in
the supplier’s country. He will then forward it to the payee and the bank will send a special letter of
advice (protection against fraud) to its foreign counterpart. Bank drafts denominated in a foreign
currency and payable abroad are a form of foreign exchange.
= Währung
• Convertible currencies: can be freely bought and sold in foreign exchange markets at the
rate of exchange; governments allow unregulated purchases and sales and the amounts
exchanged are large
e.g. US Dollar, Euro
• Non-convertible c.: circulation is restricted by the local monetary authorities; artificially
pegged, usually more expensive on the official market than on the black one
e.g. Algerian dinar, Vietnamese, dong
The world´s major currency is the US dollar, followed by the Euro, Yen and Pound. The importance of
the Dollar stems from a number of factors:
à US have the largest capital market
à invoicing for many primary commodities (oil, gas, wheat, …) is in Dollars
à dollar is the largest component for all foreign currency reserves held by the world´s most
important banks (reserve currency)
Monetary authorities:
• Eurozone: European central bank
• UK: Bank of England
• China: People’s Bank of China
• US: The US Fed
foreign
exchangeP1,P2
= Devisen, Fremdwährung(en)
Synonyms: FOREX, FX
Forex has a comprehensive meaning and is used as a synonym for foreign currency. Foreign currency
deposits held by domestic non-banks with domestic banks do not count as “Devisen”, but as
“Fremdwährung”. Transmission of foreign exchange may be by cheque, traveller´s cheque, mail
transfer, telex transfer, SWIFT transfer etc.
Forex is a country´s principal means of settling its transactions with other nations. This means that
the demand for forex depends on the imports, its uniliteral transfers to other countries and its
capital exports. A country´s supply of forex is determined by exports, uniliteral transfers received
from abroad, capital imports.
forex expenditures > forex incomes à balance-of-payments deficit
(mostly financed by forex reserves accumulated in the past)
foreign
exchange
marketP1
= Devisenmarkt
Synonyms: (foreign) currency market
The foreign exchange market is one in which convertible currencies are bought and sold. It is not a
physical location but a vast, worldwide network of currency buyers and sellers linked by computer,
telex etc. Exchange of information is rapid and to the point: quotation of exchange rates on request
and dealing those rates. Actual currency is rarely seen (usually electronic transfer).
exchange rate
= Wechselkurs
Synonyms: rate of exchange, foreign currency rate
An exchange rate is the price or value of one currency expressed in the terms of another.
• Fixed/pegged/official exchange rate: rate fixed by the monetary authority
Marlena Niedl
•
exchange rate
systemsP1
fixed exchange
rate P1-P3
floating rate of
exchange P1-P4
Floating/flexible/fluctuating exchange rate: determined by the free interplay of supply and
demand without intervention
In banking there are many different rates (Cheque rate, Telex transfer rate etc.). Exchange rate is an
inclusive term for all of those.
Quotation:
• Direct: number of units of the home currency per unit or 100 units of a particular foreign
currency
• Indirect: price of one unit of home currency in terms of a foreign currency
•
= Wechselkurssysteme
An exchange rate system is a set of rules governing the external values of currencies. They are
classified on the basis of the flexibility that the monetary authorities show towards the fluctuation in
their countries exchange rates.
à rigidly fixed exchange rates
à fixed exchange rates with bands
à adjustable pegs (with bands)
à crawling pegs
à freely floating exchange rates
= fester Wechselkurs
A fixed exchange rate may be described as not being determined by the free interplay of supply and
demand but as being officially set by the monetary authority in agreement with the International
Monetary Fund. The value established is referred to as parity/par value.
It is mainly determined by intervention in the foreign exchange market (open-market operations).
Governments and the central bank intervene to maintain the pegged rates in the face of crossborder trade and capital flows. They do so by entering the market to buy or sell the currencies in
question (à prevent fluctuations). In addition, countries may impose controls on specific types of
transactions e.g. capital exports.
+ promote growth in international trade (no exposition to exchange risk, calculation of actual sums
in the
home currencies)
- requirement to hold reserves of gold and foreign currencies to intervene in the market and finance
balanceof payments deficits
= flexibler Wechselkurs
A fluctuating exchange rate is determined by the free interplay of supply and demand in the forex,
the main factors influencing these 2 variables being:
- exports/imports of goods and services
- unilateral transfers
- export/import of capital (e.g. direct portfolio investments)
Since the price of a currency is allowed to adjust continuously, an overall balance-of-payments
deficit or surplus cannot occur. The advantage of a floating exchange rates is that they act as
automatic regulators of a country´s balance of payments. There is no need for central banks to keep
foreign currency reserves to finance deficits (with a fixed exchange rate that is the case). The
disadvantage is that they create uncertainty and may discourage trade and investment. However,
the exchange risk may be covered by means of various internal or external hedging techniques.
Two forms:
• Clean floating: exchange rates are determined without any central bank intervention
• Dirty/managed floating: although exchange rates aren´t fixed, they aren´t allowed to float
freely either (current monetary system!)
à governments intervene by influencing the supply and demand by selling and buying the
currencies concerned (open market operations)
à keep their exchange rates at a target level
à smooth fluctuations without being tied to parity
E.g. US Dollar, Euro, Yen
Marlena Niedl
For example: The US Fed might buy the domestic currency against the foreign currency in the forex
market in order to slow down fluctuations
Negative side effect: US goods/services become more expensive à less competitive internationally
devaluation (of
a currency)
= Abwertung einer Währung
The term devaluation is used when a country with fixed exchange rates officially reduces the value
of its home currency. In the case of a floating rate, this would be referred to as depreciation. Since in
practice the prevailing regime is “dirty floating”, the distinction has become blurred.
Devaluations are typical countries with soft currencies which result from balance-of-payments
difficulties. Devaluation means that a smaller amount of a foreign currency is needed to buy the
home currency. The major effects are that it makes exports of goods and services cheaper for
foreign buyers and encourages the inflow of foreign investment capital while it makes visible and
invisible imports dearer for domestic buyers and discourages the outflow of capital.
+ method of reducing a country´s balance-of-payment´s deficit, provided that other nations do not
follow suit
(competitive devaluation)
+ may provide relief in a crisis
- due to the increase in import prices, a devaluation tends to produce strong inflationary pressure
(imported
inflation). Since labour, imported elements and components are required to manufacture goods for
export,
this may offset some benefits of devaluation.
- may be counter-productive (à lead to higher deficit when demand is inelastic)
- gives rise to fears of further devaluations and loss of confidence (plans to devalue or mostly kept
secret)
- public suspicion invites speculative activity by holders of the currency and by bears (seeking to
make profits
by selling it short)
revaluation (of
a currency)
= Aufwertung einer Währung
Synonyms: upvaluation
Revaluation is used when a country with fixed exchange rates officially increases the value of the
home currency. In the case of a floating rate system, this would be referred to as appreciation.
Revaluations are typical for countries with hard currencies which are the results of balance-ofpayments surpluses. The major effects are that revaluation makes exports of goods and services
more expensive for foreign buyers (domestic goods à less competitive in foreign markets) and
discourages the inflow of foreign investment capital. Nevertheless, it makes visible and invisible
imports cheaper for domestic buyers and encourages the outflow of capital. This will reduce the
country´s balance-of-payments surplus. It also helps to bring inflation under control since it
cheapens imports.
- encourages speculative activities by bulls who aim to make a profit by buying low and selling high
à governments usually keep revaluations plans secret
Marlena Niedl
exchange
controls
= Devisenverkehrsbeschränkungen
Synonyms: foreign exchange controls, currency controls
Exchange controls are government restrictions on the free interplay of supply and demand in forex
and thus on the convertibility of currencies. The aim is to protect the external value of the home
currency.
E.g. If a country has a weak currency and suffers from a chronic shortage of forex, the central bank
may interfere to prevent a further depreciation (pushing up a strong currency even further is not so
common)
Free movement of Capital: general trend towards liberalisation on an international level (IMF and
WTO) and at a regional one (e.g. EU). Currency controls have become a standard feature in
developing and newly industrialising countries while industrialised nations have abolished or relaxed
them.
Important measures in this field:
• Compulsory surrender of all foreign currency earnings to the central bank
• Allocation of scarce forex reserves to organisations/individuals on the basis of exchange
control permits (rationing)
• Multiple exchange rates, aimed to discourage certain types of transactions
• Taxes on capital outflow
• Restrictions on the repatriation of dividends and royalties
Other ways to influence the external value of a currency are open market operations (= buying and
selling currencies by the central bank; central bank intervention in forex markets) and interest rate
policy.
E.g.: increase in domestic interest rates à more foreign capital à demand for local currency à
appreciation
exchange risk 1
= Wechselkursrisiko
The currency risk is the possibility of loss or gain arising from a change in a foreign currency rate
(foreign exchange gains/losses).
a. Transaction risk: when individual is due to receive/make a payment in a foreign currency at
some future time (trade and financial transactions)
If the exchange rate goes up/down between contract date and payment date à gain/loss
b. Translation risk
P1-P5
UNIT 9
Balance of
payments
Balance of
trade
= Zahlungsbilanz
The balance of payments of a country is a record of economic transactions between its residents
(people and legal entities) and the rest of the world over one year (à flow concept).
The old (traditional format) and the new system (IMF-based format) currently exist side by side.
à SEE HANDOUT!
A country should keep its balance of payments in equilibrium and ensure that exports equal its
import in value (long-term) and that it has the necessary foreign currencies to finance any balanceof-payments deficit (short-term). Deficits can be met from the gold and foreign currency reserves
but in the long run the country has to make more money flow in than out. It mistake efforts to raise
exports and curb its imports, e.g. by government supported export promotion, by imposing import
controls (quotas/tariffs), devaluing domestic currency (à cheaper exports). In addition, the country
could cut outward and increase inward investments, e.g. by introducing controls on capital outflows
or hiking domestic interest rates. It is important that a country does not tackle the deficit by singling
out one particular item of the balance of payments (general economic measures instead of
controlling individual items!).
= Handelsbilanz
Synonyms: visible account, trade account, merchandise account, merchandise and trade account,
goods account (IMF-based system!)
A country´s balance of trade is part of its balance of payments and records its exports and imports
during a year. Exports and imports of goods are termed visible exports and imports.
• Visible imports > visible exports à visible trade deficit/trade gap
Marlena Niedl
à balance of trade is unfavourable/in deficit/in the read
Visible imports < visible exports à visible trade surplus
à balance of trade is favourable/in surplus/in the black
• Visible imports = visible exports à trade account is in balance/in equilibrium
Other expressions: merchandise surplus/deficit, goods surplus/deficit, surplus/deficit in (on)
merchandise trade, surplus/deficit in (on) goods.
•
Current
account1
= Leistungsbilanz
Synonyms: balance of payments on current account
The current account of a country is a record of all its exports and imports of goods and services
together with unilateral transfers (à balance of trade + invisible account + unilateral transfers).
• Imports+unilateral transfers to non-residents > exports+all unilateral transfers received
à current account deficit/deficit in the current account
• Imports+unilateral transfers to non-residents < exports+all unilateral transfers received
à current account surplus/surplus in the current account
If a country´s balance of trade is in the red but there is a surplus invisibles, the result will be an
overall current account surplus!
Invisible
account
= Dienstleistungsbilanz
The invisible account of a country is part of its balance of payments and is used to record its exports
and imports of services (invisibles), e.g. air-, rail-, road transport, shipping, banking, insurance,
tourism etc., during a year. These services lead to payments in the form of freight, commissions,
charges, fees, insurance premiums, licence royalties or tourist expenditure. In addition, it includes
investment income (loans granted by domestic banks to foreigners, interest in foreign bonds held by
domestic investors, dividends on shares in foreign companies, profits from foreign branch offices).
Another item included is the cross-border flow of compensation to staff temporarily employed
abroad (e.g. salaries to expatriate managers). These last two items are recorded in the income
account of the current account.
• Invisible exports > invisible imports à invisible trade surplus
• Invisible exports < invisible imports à invisible trade deficit
Other expressions: invisibles surplus/deficit, services surplus/deficit, services account surplus/deficit,
surplus/deficit in (on) services, surplus/deficit on invisibles, surplus/deficit in (on) the services
account
A visible trade deficit may be offset by a surplus on services, the result being an overall current
account surplus!
Capital account
= Kapital(verkehrs)bilanz
The capital account of a particular country is part of its balance of payments and records the exports
and imports of capital (long term capital flows between residents and non-residents over a year).
• Capital exports= outward investments
• Capital imports= inward investments
Long-term capital transactions comprise direct investments giving investors control over their
foreign operations and portfolio investments, which do not involve any control over foreign
enterprises but are only undertaken for the purpose of earning investment income. Short-term
capital transactions include charges in bank deposits, purchases/sales of short-term securities and
similar transactions (speculative/commercial purposes). Income on foreign investments is recorded
in the visible/income account!
All capital outflows have a negative impact on the overall balance of payments, as do visible and
invisible imports as well as unilateral transfers made to foreign countries. The opposite is true pf
capital inflows.
A country which is a net exporter must generate a large current account surplus (mainly capital
exports) in order to offset the deficit on its capital account.
Under the IMF format, the new capital account does not include inflows and outflows of direct and
portfolio investments (now in the new financial account) but covers some special capital transfers
like those related tp migrants, inheritances, EU programmes and debt forgiveness.
Marlena Niedl
Financial
account
UNIT 10
Economics1
= Kapitalbilanz
The financial account (IMF format) records inflows and outflows of direct and portfolio investments
(old system: capital account) and changes in international reserve assets such as gold and foreign
exchange (old system: separate account).
= Volkswirtschaftslehre
Economics (Singular!) is a social science that involves identifying, describing, quantifying and
correlating such economic phenomena as production, saving, investment, consumption, price level,
employment and unemployment. Therefore, observations have to be made and statistics are
collected. Economic theory may be applied to concrete economic problems and used as a basis for
economic policy-making. Macroeconomic theory deals with broad aggregates (GDP, price level,
demand) while microeconomics is geared to firms, households, individual industries and markets.
Modern economic theories are often couched in purely mathematical terms. Different schools of
economic thought emphasise different elements of the economy and correlate them in different
ways.
• Neoclassical school: does not include income distribution among the factors determining the
level of national income
• Cambridge school: considers income distribution as extremely important
• Monetarists: special view on the role of interest rates and money supply
• Keynesians: special view on investment and consumer demand
• Political economists: stress the interdependence of the political and the economic system
(trade unions, employer organisations)
• Neoclassical schools: low importance of trade unions, employer organisations etc.
Since economics is a social science, class interest, ideological background and similar factors play a
greater role than in the natural sciences. Complete objectivity is impossible.
Economics2
= Rentabilitätsfaktoren
Economics (Plural!) may be used to describe the more concrete economic aspects of some operation
or activity. Economics of advertising denotes the economic aspects of promotional activity. In a
sentence like “the economics of coal mining have changed”, the term refers to the factors
determining the feasibility and profitability of this industry.
Economy1
= Volkswirtschaft
The economy comprises economic institutions and economic activities of a particular country (OR:
regional economy, global economy, …). In the Middle Ages, economic matters were much more
closely linked with social life as a whole and subject to customs and the like. The emancipation of
the economic system is an important characteristics of modern times.
The main task of economics is to satisfy human wants through the allocation of resources. The
motivation of those engaged in economic activity is typically dominated by self-interest. Operations
are obviously not guided by the invisible hand (Adam Smith). There are often cyclical (short term),
growth (long term) nd structural problems.
Market failure= when private- and public interest clash and the market fails to prevent injustice and
a waste of resources e.g. poverty, pollution, unemployment
Another meaning of economy is the idea of saving e.g. economical car, economies of scale, …
Sectors of the
economy
= Wirtschaftssektoren
One way to classify the market:
• Primary: extractive industries (mining, fishing, forestry, …)
Typically large proportion of the market in developing nations
• Secondary/manufacturing (industry): converts raw materials into goods
Some industries like motor industry hard to classify and often labeled “construction”
• Tertiary: service industries (banks, insurance, road hauliers, hairdressers, …)
• Quaternary: high-level knowledge based services as accounting, tax, consulting and
designing
Marlena Niedl
Industry1
Another way:
• Public sector: central and local government, state-owned enterprises, insurance, pension
funds, central bank
• Private sector/Private industry: private profit-making concerns
• Voluntary sector: Greenpeace, Oxfam, …
= Fertigungsindustrie
Synonyms: secondary- or manufacturing industry
Industry may denote the sector made up of manufacturing establishments. The term industry also
refers to small and medium-sized enterprises (SMEs).
Industry2
= Wirtschaftszweig
Industry may refer to any branch of economic activity e.g. chemical industry.
Service
industriesP1-P2
= Dienstleistungssektor
The service industries include all businesses and government agencies that supply services direct to
end-users. Services provided by domestic servants (Hausangestellter), by employees in
manufacturing and primary industries and by private households are NOT covered.
Services are not tangible an cannot be stored, since production and consumption coincide. These
industries are labour-intensive and thus, less amenable to rationalisation (à sharper price increases,
lower productivity). Manufactured goods are ultimately bought for the service they can offer, so the
distinction is not that clear-cut.
= Bruttonationalprodukt
The GNP is the total value of all final goods and services produced by a nation´s economy in a year.
Gross= before depreciation charges
final= intermediate inputs are excluded (= no double counting)
• Nominal GNP: GNP at current prices
• Real GNP: GNP at constant prices (deflator applied)
• Per capita GNP/GNP per head: GNP/number of inhabitants
Items included in the GNP (expenditure-/flow-of-product-method):
• Personal consumption
• Gross private domestic investment
• Government expenditure on goods and services
• Net exports (visible, invisible)
The GNP is also the sum of all types of income (wages, salaries, rents, profits) and depreciation
(income method). Another calculation is the aggregation of the values added by the various
industries which make up the economy as a whole (output-/origin method).
However, the GNP has many criticists, since it does not include the value added b non-market
activities e.g. housewives and the value of leisure. Further it does not include “regrettables” (antipollution expenditure, treatment of occupational diseases etc.). It also ignores the unwanted byproducts of the economic process which must be taken into account when assessing the benefit of
an economy (e.g. pollution). Another shortcoming is that the GNP does not allow for the wealthcreating effect of consumer durables treated as consumer expenditure (not as investment).
Therefore, several measures of national welfare have been developed e.g. NNW (net national
welfare) and indices based on social indicators e.g. suicides.
GNP (gross
national
product)
Gross domestic
product (GDP)
= Buttoinlandsprodukt
A country´s GDP includes all incomes generated by economic agents operating within its boundaries
(residents). E.g. dividends paid by an Austrian subsidiary of a British group to its parent company in
Britain would be part of Austria´s GDP but not its GNP. Incomes generated abroad but paid to
Austrians would not contribute to Austria´s GDP but to its GNP.
Unemployment
= Arbeitslosigkeit
Involuntary unemployment is regarded as unemployment in the proper sense while voluntary forms
e.g. housewives are often excluded.
• Frictional unemployment: caused by people moving from one job to another
Friction= imperfection of the labour market e.g. time lost between two jobs
à Reduction: speeding up the search process (jobcentres, agencies, …)
Marlena Niedl
•
Seasonal unemployment: results from patterns of work typical of tourism and construction
industries
à Reduction: careful planning of work by management, second season in tourism, flexibility
of worker
• Cyclical unemployment: results from ups and downs which occur regularly in the economy
(short-term)
à reduction: reflationary policies
• Growth-gap unemployment: deficiency of demand for labour (long-term)
à reduction: shorter working week, job-sharing, greater flexibility in working hours
• Structural unemployment: mismatch between type of jobs offered and qualification of
jobseekers (sub-type of frictional unemployment); periods of rapid structural changes in
economy
à reduction: retraining, increasing mobility, market forecasts, info campaigns, …
• Technological unemployment: result of the replacement of workers by machines (increase
in capital-labour ratio)
à reduction: improve qualifications of workers, shorter working week (might push up costs)
• Voluntary unemployment: workers refuse to accept jobs at going wage rates
Discouraged worker= involuntary part-time worker who cannot get a fulltime job
Unemployment
rate
= Arbeitslosenrate
Synonyms: jobless rate
The unemployment rate is the number of unemployed as a % of all labour resources available at
given wage rates. à (Number of unemployed / labour force) x 100
Since the definitions of employed and unemployed vary from country to country, national jobless
rates are often not comparable. The OECD computes standardised jobless rates for 16 countries. In
most of Europe, the OECD rate is lower than the national one.
Labour force
= Arbeitskräftevolumen
≠ workforce
A country´s labour force comprised the employed and the involuntary unemployed (excluding
children, students, pensioners, rentiers). The definition of labour force influences the
unemployment rate remarkably.
The European definition also excludes those who have not bothered to register. It does however
include those on the unemployment register who would not accept a job. In the US, Canada and
Japan, monthly surveys determine the number of people looking for work (school leavers who
cannot register as unemployed since they never had a job included).
The definition of employment also varies. In the US, armed forces (Streitkräfte) are not covered by
the definition of employed people while Germany does not include the self-employed.
The size of the labour force is determined by demographic factors and the level of wages.
UNIT 11
Marlena Niedl
Economic
indior
= Konjunkturindikator
Economic indicators are statistical series sensitive to changes in the level of economic activity.
• Leading indicators
e.g. demand for capital goods, housing starts, consumer confidence index, order intake
forecast for economic ups and downs
usually at the beginning of the business cycle
• Coincident indicators
e.g. industrial production, industrial capacity use, industrial production index
Change at the same time as the economy
• Lagging indicators
e.g. unemployment, bankruptcy rate
Move up or down after economy has altered its course
Usually at the end of the business cycle
The relationship between economic indicators and movements in the GDP are empirical, may differ
from country to country and may change with time.
inflation (rate)
= Inflation
Inflation involves a rise in the prices of goods and services over an extended period of time, leading
to a decline in the purchasing power of a given nominal sum of money. Inflation does not necessarily
mean that all prices increase but that there is a sustained increase in the general price level! The
result is a depreciation in the internal value of the currency concerned.
The inflation rate is measured either by a price index or by the GDP deflator, which is based on all
goods and services included in the GDP.
• Creeping inflation= index shows slight increase on the previous period
• Runaway inflation/hyperinflation= very high rise in the inflation rate
Causes:
• Excess of demand over supply (demand-pull inflation)
e.g. lower corporate tax levels à increase in investment by companies
• Increase in costs (cost-push inflation)
e.g. shortage of skilled labour forces employers à increase wages offered to such workers
• Structural imbalances (demand-shift inflation)
The winners of inflation are the borrowers while the losers are the lenders and recipients of fixed
incomes. Additionally, people lose confidence in the currency which may trigger a flight into tangible
assets e.g. gold, real estate and push the inflation rate even further. Moreover, high prices may lead
to higher wage demands which may increase prices even further (wage-price spiral). Governments
and the central bank try to keep inflation under control by pursuing a counterinflationary/deflationary policies (cutting government expenditure, increasing taxes, reducing
money supply, raising interest rates, freezing prices and revaluing the local currency (à cheaper
imports). Many of these policies entail trade-offs like driving up unemployment (Phillips-curve).
Indexation attempt to eliminate or mitigate the negative consequences of the inflationary process
by linking all or some economic variables to a price index. E.g. if under a system of index linking, the
CPI rises by 200% a year, wage rates will be increased by the same amount.
nominal
= nominell
Nominal/in nominal terms indicates that a monetary variable has not been corrected for price
changes. Changes in nominal terms can be converted into changes in real terms by using an
appropriate price index.
real
= real
Real/in real terms means that it has been corrected for price changes.
order intake
= Auftragseingang
Synonyms: new orders
Order intakes refers to the total amount of orders received by an enterprise during a specific period
of time. In contrast to order book, it is a flow concept. The aggregate order intake of an industry or
economy is an important leading indicator.
High rate of order intake à increase in economic activity
Marlena Niedl
Trade cycle
= Konjunkturzyklus
Synonyms: business cycleUS
Trade cycle refers to periodic fluctuations in the level of economic activity (measured by GDP)
around the trend line.
The phases:
• Two stages: expansion , contraction
• Four stages: boom, slowdown, recession, recovery
1. Boom: economic growth, employment, high demand, rising prices
2. Slowdown:
3. Recession (in the worst case: depression)
4. Recovery/revival
Two main factors for the cyclical behaviour are great hardship (e.g. unemployment) and waste of
resources (e.g. idle machines and factories). By deploying counter-cyclical policies, governments try
to eliminate the ups and downs as far as possible.
slump
= starker Rückgang
Slump is defined as a sudden severe or prolonged fall and may be applied to nearly any economic
variable (share prices, property value…). It may also be used as a synonym for severe recession or
depression.
UNIT 12
Economic
policy
= Wirtschaftspolitik
Economic policies comprises all measures planned or taken by the government to regulate economic
affairs/economic welfare of a nation.
• Direct intervention
e.g. price controls, subsidies, taxes
Aim: Achieve short-term goals (e.g. price stability)
• Indirect intervention
= changes in the legal/institutional framework e.g. antitrust law
Aim: Achieve long-term goals (e.g. economic growth)
Types of economic policy:
• Fiscal policy
influence on demand by changing the government revenue and expenditure
• Monetary policy
Control money supply and interest rates
• Incomes policy
Influence on various forms of income
• Exchange rate policy
Control exchange rates
• Industrial policy
Influence pattern of industry
• Regional policy
Control spatial distribution of economic activity
Process:
1. Determining goals
2. Analysing present situation
3. Selecting suitable instruments
4. Arranging for the instruments to be applied
5. Checking results (+corrective actions)
Goals: price stability, full employment, economic growth, equilibrium in balance of payments,
redistribution of income, ever-increasing volume and variety of goods and services, environmental
protection, careful use of resources, improvement in quality of life. The problem is, that many of
them are incompatible with one another and so trade-offs have to be accepted (e.g. price stability
vs. full employment).
Marlena Niedl
All the above is based on the assumption that economies are amenable to outside intervention and
can be guided by policy-makers.
fiscal policy
budget
= Fiskalpolitik
Fiscal policy is concerned with raising revenue through taxation and deciding on the level of
expenditure with a view to controlling demand.
E.g. cutting taxes to stimulate the economy
Increasing taxation to skim off excess purchasing power, slow down inflation
Boosting government expenditure to counter recession
The person responsible for this policy is the Minister of Finance (UK: Chancellor of the Exequer, US:
Secretary of the Treasury). A problem is posed by the Maastricht criteria and the Economic
Monetary (EMU) of the European Union, because by limiting a country´s budget deficit to a
maximum of 3% of its GDP, Brussels severely restricts what national governments can do in this
field.
= Haushaltsplan
Budget refers to the estimate revenue and expenditure for a fiscal year. A budget may show a deficit
or a surplus, or it may be balanced. So, the budget balance may be negative, positive or neutral.
Deficits have to be financed by borrowing money domestically or abroad.
Fiscal crisis= stage where repayment of principal and interest pre-empts a large proportion of
revenue, restricts the government´s room for manoeuvre and forces it to cut back in essential
expenditure.
A surplus means that the government is taking more money out of the economy that it is putting
back (à deflationary effect). A deficit means the reverse (à reflationary effect). Changes in budget
balance may e.g. be a result of other economic policy goals (higher social security benefits, fiscal
rectitude, …).
Marlena Niedl
Revenue can also be raised by selling state-owned assets (privatisation) or may derive from
dividends paid by state-owned enterprises.
monetary
policy
= Geld- und Kreditpolitik
Monetary policy attempts to achieve the goals of economic policy by controlling money supply or
interest rates (more important). Other tools are open market operations, reserve
requirements/special deposits and direct controls on the availability of credit and are typically
implemented by the Federal Reserve System.
• Policy of easy money: lower interest rates, increase money supply by open-market
operations, ease reserve requirements, relax direct controls on the availability of credit
• Policy of tight money: the opposite (credit squeeze/-crunch, …)
Quantitative easing= unconventional monetary policy in which a central bank
purchases government securities or other securities from the market in order to lower interest rates
and increase the money supply
Keynesians emphasise changes in taxation government spending while monetarists favour monetary
measures.
money supply
= Geldmenge
Money supply denotes the amount of money that exists in an economy (banknotes, coins, private
sector non-bank current account deposits/sight deposits). The latter account for 70-80% of the total
in most countries and are, in monetary theory, referred to as deposit money.
M1= money supply
M2, M3, …= wider definitions
Every country uses a different set of monetary aggregates, geared to requirements of its monetary
policy.
Open-market
= Offenmarkt-Operationen
operations
Open-market operations means a country´s central bank is buying and selling government securities
to control money supply (M1 or M2) and interest rates. They can also be used to influence
supply/demand of/for any commodity (e.g. stabilise prices of certain raw materials).
• Increase money supply: buy government securities from private sector
• Decrease money supply: selling securities to private sector
Trade policy
= Handelspolitik
Trade policy comprises all measures taken by a government to control exports and imports of goods
and services. Governments generally tend to promote exports because they provide foreign
exchange (à controls on imports).
Industrial policy = Industriepolitik
Industrial policy is an instrument to influence the industrial structure/-mix of a country. E.g. selective
investment incentives, outright subsidies, favourable loans, planning procedures, public investment
corporations for active intervention in the industrial field, government procurement policies,
protective tariffs, etc. Measures like these are especially important in times of structural change and
are prioritised by socialist or social democratic governments.
Regional policy
= Regionalpolitik
Regional policy aims at altering the spatial distribution/regional pattern of economic activity and
performance, i.e. improving the economic activity in units that suffer from low growth/income etc..
E.g. direct government grants, investment incentives, provision of low-cost loans, establishment and
operation of development agencies, …
Marlena Niedl
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Incomes policy
= Einkommenspolitik
Incomes policy is pursued by governments to restrain prices, wages, salaries, profits, dividends etc.
either together or selectively, with a view to slowing down cost-push inflation. E.g. wage and price
controls, wage and price freezes, voluntary wage and price guidelines, agreements between
government, business and labour on wage and price restraints (voluntary- und statutory measures!)
JawboningUS= governments relies on persuasion and exhortation
Incomes policy are preferable to fiscal- and monetary policies since they avoid nasty side effects
such as unemployment.
counter-cyclical
policy
= antizyklische Konjunkturpolitik
Counter-cyclical policy is aimed at eliminating/mitigating cyclical fluctuations. In a boom, deflation
will be the appropriate measure, while in times of recession reflation are called for. The
disadvantage are negative side effects such as inflation, unemployment, …
reflation
= Aufschwungphase, expansive Konjunkturpolitik
Nowadays this describes the first phase in the recovery from a slump, or the stimulatory measures
taken by governments to achieve such a recovers. To reflate the economy, fiscal policies (tax cuts,
increases in government expenditure, …) and monetary policies (lowering interest rates, expanding
money supply, …) have to be taken. Once the upswing has started, the economy tends to grow really
fast creating employment, income and more spending. Previously unemployed resources are drawn
into production to meet rising demand. When all the slack has been taken up (resources fully
utilised), no further output will be possible. If demand still increases, prices will go up moderately
(inflation).
deflation
= restriktive Wirtschaftspolitik
Deflation describes an economic policy intended to reduce the level of aggregate demand to calm
down an overheated economy. Actually, such a policy would be referred to as “disinflation” because
“deflation” aims for an absolute decline in prices. E.g. raising interest rates, contracting money
supply, hiking taxes and cutting government expenditure
The most common trade-offs are unemployment and fall in incomes. To avoid these, some
recommend incomes policies in order to get inflation under control.
controls
= Lenkungsmaßnahmen
Controls represent the most direct form of government intervention. Variables chosen for
regulation:
• Prices (price control)
• Wages (wage controls)
• Rents (rent controls)
• Interest rates (interest rate controls)
• Exchange rates (exchange controls)
Often, controls are temporary and are adopted when free market results diverge too much from
policy goals. They are tightened if they fail to produce the desired results and relaxed or abolished
when considered too harsh.