20 Basic Terms in Economics Eco 1: Basic Economic w/TLR MWF/3:00-4:00 PM 1. Financial markets • The term ‘financial markets,’ is a fairly broad one, referring to a marketplace where financial assets can be bought and sold. For example, the selling of equities, bonds and currencies. 2. Gross Domestic Product (GDP) • To measure a nation’s economic performance and activity from a very broad sense, experts usually look at their gross domestic product (GDP). • Essentially, GDP refers to the total monetary value of all the completed goods and services that have been produced within a country’s borders in a set period of time. 3. Gross National Product (GNP) • Related to GDP, gross national product (GNP) is another important economic measure used to assess a country’s growth or depreciation. It’s an estimate of the total value of all the final goods and services produced by a country’s residents. 4. Interest rates • When an individual, organisation or country borrows money, goods, or property, the lender will usually want to make financial gain from giving them the money for that period, especially because they’re offering it as support to others, rather than investing it to generate income. That is, they charge the borrower for the use of an asset. And so, they will apply an interest rate to the loan which they are supplying. 5. Inflation • When studying Economics, ‘inflation,’ is a term you’ll often stumble across. It refers to the decline of purchasing power of a given currency over time, leading to a rise of the cost of living. • In its simplest form, when there is inflation, there is a rise in the price we pay for goods and services. 6. Economic Growth • As the name suggests, economic growth is an increase in the production of economic goods and services, compared between one period of time and another. • 7. Security In Economics, the term ‘security’ refers to a financial asset or instrument that has economic value and can be purchased, sold or traded. That is, it’s a fungible asset which holds some form of monetary value. - There are three primary types of securities on the market: • Equity: Provides ownership rights to holders • Debt: Usually loans repaid with periodic payments • Hybrids: A combination of debt and equity 8. Bear Market • In stock markets, the price of stock is generally a reflection of future prospects of cash flow and profit for companies. But when prospects begin to wane and expectations fall, prices of stock can start to decline. • In these instances, the term ‘bear market’ is used to describe this negativity or pessimistic outlook on a stock market’s performance, often when prices face a prolonged decline. 9. Bull Market • In contrast to the term ‘bear market,’ a ‘bull market’ represents a much more positive outlook on a market’s current performance, indicating that stock prices have either increased or are expected to rise soon. • Generally, the term is used to refer to a stock market, but it can also be applied to anything that is traded, including bonds, currencies and real estate. 10. Business Cycle • In Economics, a business cycle refers to a series of stages in an economy as it expands and contracts. Often referred to as a “trade cycle” or “economic cycle,” the process constantly repeats, measuring the rise and fall of Gross Domestic Product (GDP) over varying periods of time in a financial year. 11. Fiscal Policy When governments decide upon their spending and taxation policies for an upcoming period, it has a significant impact on the country’s economic performance and on us as individuals. It affects our aggregate demands for goods and services, employment, inflation and long-term economic growth. - Term ‘fiscal policy’ refers to this use of government spending and taxation, and its impacts on the economy. - In economic terms, there are two main types: • Expansionary fiscal policy: Designed to boost the economy, it is commonly used in times of high unemployment and recession. Governments tend to lower taxes and increase spending, with the aim to stimulate the economy and ensure consumers' purchasing power does not weaken. • Contractionary fiscal policy: As the name suggests, this type of policy is designed to shrink economic growth in case of high inflation. To achieve this, governments tend to increase taxes and reduce their spending. • 12. Law of Supply and Demand • The law of supply and demand is a theory used to explain the interactions between sellers and buyers for a particular product, service or resource. It defines the relationship between the price of a good and the willingness of people to buy or sell it. 13. Macroeconomics • Macroeconomics is a particular branch of economics that examines the behaviour and performance of an economy as a whole. • Looking at a country’s wider economic picture, it focuses on the aggregate changes in an economy, such as unemployment, growth rate, GDP, inflation and more. 14. Microeconomics • The opposite of macroeconomics is microeconomics - a branch of economics which examines the financial decision-making process of individuals, households and businesses. • Generally, it applies to markets of goods and services, dealing with individual and economic issues, including: what buying habits people have, what factors influence their choices, and how their decisions impact the goods markets in terms of price, supply and demand. 15. Monetarism • Monetarism is a macroeconomic theory which argues that governments can maintain economic stability by targeting the growth rate of money supply. • In simpler terms, it states that the total amount of money in an economy is the primary determinant of economic growth. As the availability of money increases, so too does demand for goods and services. 16. Keynesian Economics • Another important theory you’ll often hear among economic terms is ‘Keynesian Economics.’ Developed by the economist John Maynard Keynes, this macroeconomic theory is based on the idea that government intervention can stabilise an economy. 17. Free Market • The term ‘free market’ is an economic system which is based on supply and demand, with little to no government control. Commonly referred to as a “laissez-faire” capitalist system, it is where people can buy and sell goods freely, and most companies and properties are not owned by the government. 18. Opportunity Cost • How many times have you purchased something in a shop, only to later return home and find the cost was lower if you were to purchase online? It can be frustrating - but most of the time, you’re still happy to have purchased the item you wanted. 19. Equity • In finance, equity represents the ownership “share” of an asset or company. That is, if a company and all its assets were sold, equity represents the amount of money that would be returned to a company’s shareholders. 20. Commodity • In the world of commerce, a commodity is a basic material or product which can be purchased in large quantities for the production of other goods and services. That is all for today.
