An Introduction
Economics now features in many aspects of our lives. This easy to use Dictionary is designed to help both the student of
economics and the individual with a need to have a particular question answered. The mistakes that must exist in a text of this
complexity are entirely mine. Time, space and technical problems did not allow me to include diagrams. So, I advise readers to
visit www.johnbirchall-economist.net where a number will appear in the macro and micro course notes. Because of the close
connection of business to economics I have included a number of US and European business terms.
I dedicate the dictionary to my wife Patricia and our children, Jeremy, Timothy and Anya.
John Birchall,
A shares
The use of the prefix `A' or `B' normally shows that the holder of this form of shares has less voting rights than a conventional
`ordinary' shareholder. Those holding `A' shares normally have NO voting rights. They are normally issued when the majority
shareholders want to raise additional capital without committing themselves to either a fixed annual dividend or a reduction in
their control. They are not always very popular with institutional investors, but are quite widely available on the Stock Exchange.
abatement
The act of reducing something, as in tax abatement. The person owing the sum (tax) therefore pays less than had been originally
charged.
Abilene paradox
The situation that occurs when a group decision is made without any of the individuals who take the decision being committed to
it. Each person mistakenly thinks the others wish the decision to hold and be applied . Hence they do not wish to interfere with
what they perceive other people want.
ability to pay principle (of taxation)
The principle that a person’s tax burden should increase with their relative income or wealth. This principle does not specify
HOW MUCH more those who are better off should pay that those who are considered worse off. The basic principle is based on
one of the Canons of Taxation proposed by Adam Smith -who is considered by many to be the father of modern economics.
above par
A Stock Exchange term that refers to shares whose market price is above their nominal value.
Above the line
(a) Referring to companies, this refers to normal income and expenditure before tax.
(b) Advertising for which payment is made (such as in a newspaper or on television) and for which a commission is paid to an
advertising agency.
absolute advantage (of international trade)
The ability of a country (A) to produce a commodity/product or service more efficiently (in economic terms) than another country
(B), i.e. with a greater output per unit of input. Such an advantage does not necessarily mean that A can export this commodity
more successfully than B. Country B may still have a
comparative advantage.
absolute or nominal price
the price observed in today’s money values. Also called nominal or current prices.
Absorption
(a) The total expenditure recorded on final goods and services. Domestic absorption in an economy(of either variety) is equal to
Consumption (C) plus Investment (I), plus Government Expenditure (G) `(i.e. C + I + G)' and is the equivalent of National
Income minus Net Exports.
(b) Incorporating a smaller business into part of a larger company, so the smaller no longer exists as a firm in its own right. This
often results from predator takes over that absorb a supplier or useful business acquisition into a larger organisation.
absorption costing
The practice of costing a product so as to include both the direct production costs and indirect overhead costs.i.e .both the costs
that can be attributed to the particular product or process and those that refer to no specific product or process.
absorption rate
Where absorption costing is employed, this is the proportion of the total costs of overheads which are included into a single unit
of production.
ACAS
see
Advisory Conciliation and Arbitration Service
accelerator principle
A theory of investment spending that proposes that the level of investment in an economy is governed by the rate of increase in
real GNP. That is, there will be a positive (or high) net investment when GNP is rising, and there will be zero (or low) net
investment when GNP is flat, even though current GNP is already high. The theory is used to help explain business cycles. Many
economists consider that business will reduce investment when they fear a lack of growth in the immediate future. This may result
in de-stocking as companies utilise what they have already produced to satisfy current orders. When confidence returns that
business sector will commence re-investment to cover wear and tear and new capital equipment, this will lead to re-stocking
accelerator co-efficient
The factor which determines how much investment is generated by a change in output (see
accelerator principle
). The value of this co-efficient is influenced by:
the availability of spare capacity,
the productivity of capital,
the rate of interest,
the price of labour.
(See capital-output ratio and productivity)
accelerator-multiplier model
A model of economic growth that includes the effects of both the accelerator principle and the multiplier
. This predicts that an increase in government expenditure will raise consumers' incomes, which, through the multiplier, will lead
to an increase in output, which in turn, through the accelerator, will raise investment. The increase in expenditure in the
accelerator, itself will raise incomes, and the process is repeated. The model reveals that the multiplier and the accelerator
interrelate in a way that produces a cyclical pattern of economic growth
(see Harrod-Domar Model and Samuelson)
acceptance
The act of accepting, or agreeing to honour (meet pay render payment for or to), a promissory note, such as a bill of exchange
.This means that the acceptor agrees to a specific event, item etc.
Accepting House
A financial institution specialising in the trading of bills of exchange. They can accept (buy) them, or guarantee them (initial
them, so making them acceptable by other financial institutions). This latter action makes the bill a `first class piece of paper'.
accepting houses
Institutions that specialise in accepting or guaranteeing bills of exchange. Such institutions are normally merchant banks, and their
acceptance role is merely part of their activities. The Accepting Houses Committee is the body that regulates the above, and liase
with the Treasury and the Bank of England
.Both members of this committee and, more recently, other banks, receive a slightly beneficial discount on bills bought by the
Bank of England. A new committee at The Bank of England now monitors and sets short term interest rates. This was previously
a decision that rested with The Chancellor of the Exchequer but is now made by the those not directly related the political process
-in other words an independent body. The committee is chaired by the current Governor of the Bank of England.
In the UK Houses of Parliament there is now a Committee of backbenchers i.e. those not holding ministerial positions who
monitor the work of the Treasury.
accommodation
account
1. A record of the flows of financial transactions, such as
balance of payments current account or balance sheet
.
2. An agreement between a specific buyer and seller that allows a period of
credit before payment is due. An example of this is a transaction on the Stock Exchange
, when payment may be made on an agreed date after the initial sale.
accounting period
A company's books are closed at certain predetermined times to make up accounts. Each account runs from the end of the
preceding period, and the time that it covers is known as the accounting period; normally one year, though some companies allow
interim collation, ready for half-yearly results. Some companies follow the Financial Year, which runs from April to March,
whilst others use the calendar year January to December and close their books on the 31st December. In the United Kingdom a
company must register its accounts with the appropriate authorities or face the risk of prosecution.
accounting profit
The difference between total revenue and total explicit costs
accrue
To record a transaction in a company's accounts when it actually takes place, and not when the relevant payment is made. An
example of this would be when accrued expenses are services which have been used but have not been paid for: they appear as a
liability in the company's balance sheet, and as such feature in Working Capital calculations.
accrued interest
Interest due but not yet received or paid.
accumulated depreciation
A term used in accounting for the total
depreciation written off to date on a fixed asset.
acid test ratio
The ratio of liquid assets to current liabilities. This gives an indication of a company's solvency. It is calculated by deducting
current stock levels from other current assets and expressing this as a ratio. It allows analysts to see how easily a company can
cover its short term debts from the money owed by debtors and its reserves of cash.
acquiescence problem
The tendency of job applicants to answer questions asked in psychometric tests according to the responses which they assume
best fit in with job requirements.
acquisition
The take-over by one company of a controlling interest in another. Companies are often willing to pay more than the market price
of the shares if they hope to complete an acquisition .Such a business move maybe agreed or hostile, i.e. that acceptable to the
current board members of the company being sort.
ACT
See Advance Corporation Tax
actual, cyclical and structural budget
The actual budget deficit or surplus is the amount recorded in a given year. This is composed of (a)
the structural budget, which calculates what government resources, expenditures and deficits would be if an economy were
operating at potential output and
(b) the cyclical budget, which measures the effect of the business cycle on the budget.
actuals
A Stock Exchange term for physical commodities or shares, as opposed to futures contracts or options.
actuary
An individual, often with legal training, who specialises in the calculation of risk and premiums for
Assurance purposes.
adaptive expectations
The building of beliefs about the future values of variables based on the past value and movements. This form of prediction is
often results in either an under or over-estimate.
Inflation last year was x%, so next year it will be x plus a certain figure, however if the base year of the calculation was an underestimate, then the future calculation will have an error in-built in its construction.
added value
A form of tax, that is normally paid by the final consumer that is based on the value of the improvement made to a good or service
at a specific part of its production .The addition is also considered important to the wealth creation of the producing nation. The
higher the value added within the domestic economy, the greater the amount of wealth that can be kept in the economy. The
distinct of value added by many developing economies makes their drive for wealth creation even more difficult. An example of
this is the production of coffee. Think who makes the most profit on a cup of coffee .Is it the coffee producer or the manufacturer
of the coffee powder that you make into coffee? It’s normally the coffee manufacturer as they can add the greatest value.
ad-hocracy
A term sometimes used to describe management, which are reluctant to plan and tend only to respond to urgent problems.
Management focuses its attention on individual projects rather than the progress of the enterprise as a whole. It has also been
referred to as Crisis Management.
administered prices
This is a price that is determined by a management decision, and not by negotiation between buyer and seller. Many commercial
and industrial prices are determined in this way, but may be altered by the forces of competition. The term may be used to
illustrate a price agreement negotiated by a monopoly or cartel. This type of pricing has been put forward as a contributing factor
to inflation
The term was first used by Gardner C an American economist.
adjustable peg
An exchange-rate system that centres on countries maintaining a fixed, or `pegged', exchange rates with respect to the currencies
other countries. This exchange rate is subject to periodic adjustment, however, when it becomes too far out of line with the real
rate as determined by fundamental forces. This system was used for major currencies during the
Bretton Wood
Period, from 1944(i.e. post Bretton Woods) to 1971.
ADR
See
American Depository Receipt
Ad valorem
This is a Latin phrase meaning `according to value'. In modern taxation policy it applies to a tax that is levied according to the
size of the transaction and not a fixed amount. i.e. the taxable sum will be determined by how much is involved and not by a
similar sum regardless of volume.
Advance Corporation Tax
Companies in the UK have had to pay ACT on their dividends, regardless of whether Corporation Tax is due at the time of the
distribution. These dividends are deemed to be `franked' income, which in turn is deemed to have had basic rate tax deducted.
This form of taxation is currently under serious consideration by the United Kingdom government and may eventually be
scrapped.
Advanced Industrialised Countries (AICs)
Countries with the highest levels of National income
.
Advanced notes
Drafts on ship-owners given by captains to their crews before sailing, but payable some time afterwards. They help the sailor to
provide for his family.
Adverse
Unhelpful or disadvantageous. For example, an adverse balance of trade exists where a country's imports exceed its exports.
Adverse selection
Akerlof first noted this in 1970, when he suggested that the inability of one trader to assess the quality of the moves to be made by
others make it likely that poor quality traders will predominate. The observation is sometimes known as the `lemon problem'.
The likelihood of becoming a `lemon' depends on:
(a)
The random variation in product quality in a market,
(b)
Asymmetric information about product quality between traders. The willingness of some traders to sell low quality products at
low prices. This form of selection is thought to be prevalent in the markets for Insurance and credit
.
An example centres on second hand cars. It is difficult to decide which particular car of the same type and year, as none is the
`best'. Potential buyers can't tell the quality of any car, so all cars of the same type sell for a similar price, regardless of whether
they are `lemons' or not. Depending on the buyer's perception of risk, the price will move downwards and those owning a vehicle
considered to be a `lemon' will probably not put their car in for part exchange or sale.
advertising
The practice of paying for various forms of proven techniques (usually focused on selling) that inform or persuade members of
the public to buy a particular product or products. In competitive markets, advertising is used to remind, inform, cement, engender
initial interest in the products being offered, so maximising the sales. However, advertising may cause:
Barriers to entry
As high cost commercials deter new entrants, and it enhances product differentiation and it may promote concentration
. Opponents of advertising put forward that it is costly and tends to keep out new entrants, whilst its supporters say it shows
producer confidence in their own products, and promotes choice.
Advisory Conciliation and Arbitration Service (ACAS)
This was created by an Act of Parliament in 1974. It consists of ten permanent members, 3 nominated by the TUC and CBI, three
academics and one independent chairman. It offers free advice to both sectors of business (both the public/private sectors) on all
issues relating to industrial relations. If any of the parties to a dispute asks for ACAS assistance, it can serve as an independent
arbitrator. It publishes Codes of Practice on industrial relations. ACAS findings are not binding, but decisions are normally
accepted and often form the basis of the final solution.
AFL-CIO
abbreviation of
American Federation of Labour - Congress of Industrial Organisations
An organisation which links trade unions in the USA.
African Development Bank
This is a regional development bank for the continent of Africa. It was established in 1964 to promote economic growth amongst
its member states. In 1972 an affiliated organisation was established to be known as the African Development Fund, which is
open to non-African members. This handles the `soft term’ (lower rates of interest) loans that are negotiated by member states. In
1982, membership of the ADB was widened to include non-African states. Its current membership centres on nearly sixty African
states and almost thirty other members. It loans are nearly $3.0 billion per annum. Its headquarters are in Abidjan, Ivory Coast.
after-hours trading
This phrase relates to trading in shares after the Stock Exchange has closed for the day: Its is helpful because time zones mean
that Stock Exchanges around the world are now trading for almost 24 hours of any day. Most dealers monitor the movements
experienced on other markets in the period of trading immediately before that in which they are trading. They may then adjust
their market to reflect any trends felt to be important. It is now common for dealers to open early and hold a tracking meeting that
notes the movements in other markets whilst they have not been open for business. The trend is for the big dealers to have
branches on all the major exchanges, so they in reality do not close for trading.
Agent
A person with expressed or implied authority to act on behalf of another person.
Age-earning cycle
The way in which over lifetime earnings tends to vary in a predictable way. They will probably rise early on in life, until extra
benefits of training and experience have been utilised and fall towards the end of the working life as productivity starts to
diminish.
Aggregate demand
Total planned or desired spending in the economy as a whole during a given period. It is determined by the aggregate price level,
and influenced by domestic investment, net exports, government spending and the money supply.
Aggregate demand curve (AD)
The curve showing the relationship between the quantity of goods and services that people are able and willing to buy and the
aggregate price level. As in any demand curve, important variables lie behind the aggregate demand curve, such as government
spending, exports and the money supply.
Aggregate demand shock any shock that causes the aggregate demand curve to shift inwards or outwards.
Aggregate supply
The total value of goods and services that firms would willingly produce in a given time period. Aggregate supply is a function
of the available inputs, technology and the price level.
Aggregate supply curve (AS)
The curve showing the relationship between the real output that firms would willingly supply, and the aggregate price level. The
AS curve tends to be vertical at potential output in the very long run, but may be relatively flat in the short run because of
inflexible wages and prices built into the economy
aggregate supply
shock any shock that causes aggregate supply curve to shift inwards or outwards .
Aggregates
Total amounts or quantities: aggregate demand, for example, refers to the total quantity demanded within a nation.
Aggregated rebate
Deferred rebate
Aggregation problem
see
Cambridge School
AGM
see
Annual General Meeting
Agreed take-over
A take-over where the majority of shareholders agree to a bid when it is launched. Such bids are therefore nothing more than
formality.
Agribusiness
Farmers use agriculture (farming) and making products, such as fertilisers, which. This is one of the ways in which a developing
country can attempt to keep a higher value added in their economy e.g. by canning fruit that is grown in the country, rather than
export the raw fruit.
Aid
see
Bi-lateral and multi-lateral.
alienation
The estrangement of an employee from his or her work, causing the person to fell that work is not a relevant or important part of
life.
Allais, Maurice
A French-born economist whose most famous work, known as `Allais Paradox' centres on an attempt to show the impact of
psychological factors on consumers' decision-making in conditions of risk. His paradox is
`if you offer people either œ1,000 or a lottery ticket that gives them a 10% chance of winning œ2,500, an 89% chance of œ1,000
and a 1% chance of winning nothing, they will often take the œ1,000. But if you offer them a choice between two lottery tickets,
one which gives an 11% chance of winning œ1,000 and an 89% chance of winning nothing, or another that gives a 10% chance of
winning œ2,500 and a 90% chance of winning nothing, they often take the second one.'
Actually, the effective choice being made is the same each time and consistent consumers should pick either the first option both
times, or the second option both times. The application of this work has been in shelf design and the lead on style of shopping so
common in supermarkets. `It has also featured in pricing policies and the ways in which prices are displayed. It also plays a part
in the way in which we as consumers as thought to behave, so influencing output and delivery schedules.
allocate
To divide a given sum of money and share it out between different uses. For example, a government must share its resources
between health care provision, schools and various other uses.
allocate efficiency
Also known as `Pareto Efficiency'
An economic outcome in which no reorganisation of trade could occur that would raise the Utility or satisfaction of one
individual without lowering the utility or satisfaction of another individual. This is sometimes referred to as `you cannot make
someone better off without making someone else worse off'. Such an outcome is thus on the
UTILITY POSSIBILITY FRONTIER.
The condition known as PERFECT COMPETITION may lead to this.
Allotment letter
A letter, addressed to the subscriber (person who has bid for the shares) of some shares, informing them of the number of shares
that have been allocated to them and, if necessary, when payment is due. They became more widely known to the general public
during the large privatisation floatation’s of the 1980's.
Allotment of shares
When a company issues shares, it publishes a PROSPECTUS, which describes how the shares will be allocated amongst those
who apply for them. Where applications exceed the shares available, allotment is normally made proportionately. The allocation
is formalised by a letter of allotment, which entitles the recipient to a certificate for the number of shares stated in the letter. It is
normal practice for a company to expect 25% of the nominal value, plus any premium, to be paid before releasing the allocation
to an individual investor.
Allowance, personal
When calculating the amount of income tax payable in a fiscal year certain allowances may be set against the sum payable. Single
persons receive an allowance, as do married people e.g. a person earns £10,000 per annum and has a personal tax allowance of
£4000.This means they will pay tax on £6000.If income tax is charged at a flat tare of 25%, then the individual will be liable for
tax of £1500.
Amalgamations
When companies deliberately join together to form a single trading operation. It is normally entered into to maximise trading
potential. In some industries, governments have encouraged amalgamations, as it was felt such a move would ensure the future of
the industry. Also known as Mergers
American Depository Receipt (ADR)
Issued by a US bank against shares deposited with it or an overseas bank. The ADR circulates as a bearer's document, which in
effect gives them title to the shares concerned.
AMEX
informal abbreviation for American Stock Exchange or American Express
Amortisation
The provision for the repayment of debt by the use of a `sinking fund' through regular payments which, with their accumulated
interest may be used to settle the debt in instalments over a period of time, or in a lump sum. The term can also be used to
describe depreciation
.
Andean Pact
A CUSTOMS UNION agreement entered into in 1969 by Chile, Peru, Columbia, Bolivia and Ecuador. In 1973, Venezuela joined
and Chile left. The group's main aims involve a common external TARIFF, the freeing of trade between member states and a
rationalisation of some industries onto a regional basis .It is likely that the members will eventually join the proposed South
America Trade Organisation, which will probably seek special arrangements with the North America Trading Association -the
main members of which are the USA, Canada and Mexico.
androcentrism
Use of masculine traits as criteria for evaluating the worth of individuals, for example, in performance appraisal.
Annual accounts
Financial statements showing the state of affairs of a business, or other organisation, at a particular date, and the results of
operations during the period which ends on that date.
Annual percentage rate (APR)
This is the legally correct way of presenting the RATE OF INTEREST and all other costs associated with a loan in the UK. It was
introduced as part of the CONSUMER CREDIT ACT and was designed to prevent lenders quoting low interest rates while in
effect making the loan more expensive by charging various fees, such as an arrangement charge. The APR is the COMPOUND
INTEREST you would pay if all costs associated with the loan were collected as interest. The Office of Fair Trading controls the
formula for its calculation.
Annual return
Within each calendar year, every company, whether it is public or private, must file an annual return with the REGISTRAR OF
COMPANIES. The return must be signed by the company secretary and a director (usually one of senior rank, e.g. Chief
Executive or Chairman). A return need not be filed in the year of incorporation or in the following year if, under Company Law,
the company does not have to hold an Annual General Meeting, and publish an Annual General Report during those years. In all
other cases, the return must be completed within forty-two days of the AGM.
annuity
1.
A constant annual payment.
2.
The guarantee of future payments by the immediate payment of a lump sum. An example of this is a policy taken out against
someone's life. It remains subject to payments until the death of the individual. A lump sum is then payable to relatives or to the
estate of the deceased.
Ante-date
To put a date on a document that is earlier than that on which it was issued The opposite is post-date)
Anticipated inflation
The inflation rate, which is believed, will occur. When it does, we are in a situation of fully anticipated inflation.
Anticipatory coping
A stress management method that involves identifying the situations and activities which an individual finds exceptionally taxing
and then deliberately avoiding them.
Anti-trust legislation
Laws prohibiting monopolisation, restraint of trade and collusion amongst firms to raise prices or inhibit competition.
APC
see
Average propensity to consume
Appreciation
The increase in the value of an asset or one currency's rate against another or others.
Appropriation account
A business account showing how the NET PROFIT has been appropriated, or distributed, between DIVIDENDS, RESERVES,
PENSION FUNDS, etc.
Aptitude tests
Selection tests intended to assess candidate’s promise, trainability and potential to understand their duties in the future, rather than
testing previously acquired competencies.
Arbitrage
The act of buying a currency or a commodity in one market and simultaneously selling it for a profit in another market. Arbitrage
is an important force in eliminating price discrepancies; thereby making markets function more efficiently.
Arbitration
A process which allows two disputing parties to approach a third party (the arbiter) and ask them to seek a method of resolving
the disagreement. Parties in dispute often find it easier to accept a third party's resolution. Arbitration can be binding or merely a
recommendation. Normally, both sides agree in advance to accept the decision of the arbitrator. Pendulum arbitration is another
form used and centres on the arbiter only accepting the point of view of one of the sides. The idea behind this is to encourage the
disputants to make reasonable offers to each other before the arbiter makes a decision.
Argyris, Chris
A prominent management theorist who was noted for his analysis of employees feelings of failure, inadequacy and frustration
within organisations. He argued that apathy (laziness), indifference and alienation were common amongst workers in large
enterprises, while resistance to change, unwillingness to take risks and unthinking conformity to the status quo characterised
many management’s. Argyris suggested that open relations between management and labour, and employee involvement in
managerial decision-making, could solve most of these problems.
Arithmetic progression
A sequence of numbers in which the difference between all adjacent numbers in the sequence are the same.
[GEOMETRIC PROGRESSION: would this be useful?]
E.g. 2, 4, 6, 8, 10...
Arithmetic mean
A statistical term used for the figure obtained by totalling a series of values and dividing by the number of items in that series.
Arrow, Kenneth Joseph
(B.1921)
A graduate of Columbia University, who spent a period at the Cowles Commission, Professor Arrow went to Stanford University
in 1949, where he became a professor in 1953. In 1968, he moved to a Chair at Harvard University, but returned to Stanford in
1979. He was awarded the Nobel Prize for Economics in 1972 (with Hicks). His work concentrated on showing that it was
logically impossible for a community to make a choice between a numbers of options by any method of voting which did not
contravene certain desirable features. He made important contributions to general equilibrium analysis, which consolidated the
work done earlier by Walras. Professor Arrow has also contributed to the theory of decision-making under uncertainty and to
growth theory.
Articles of association
The internal regulations for the running of a company. The company must comply with these.
Articles of partnership
The clauses in a partnership agreement.
Ascribed status
A position in an organisation that a person assumes as of right. The status is attained involuntarily and is not open to competition
from others, unlike achieved status, which is earned by an individual in open competition.
ASEAN
Association of Southeast Asian Nations trading organisation designed to encourage transactions between member states. The
ultimate ambition was altered in Jakarta in 1995 to include a customs union by the year 2020.
Asian Development Bank
This bank was set up in 1966, and is based in Manila, Philippines. It was founded to promote economic growth amongst member
states and to contribute to their development in a wider context than purely economic. It also encourages economic and financial
co-operation amongst member states. The three developed countries of the region (Japan, Australia and New Zealand) contributed
a high proportion of its initial capital. Other non-regional members include the USA, UK, Germany and Switzerland. The bank
charges realistic rates on its loans, which in turn is designed to attract INWARD INVESTMENT to the region.
The bank's affiliate, the Asian Development Fund, gives SOFT LOANS to the poorest nations of the region. The People's
Republic of China joined in 1986.
ASP
see
American selling price
Assertiveness training
Courses which actively seek to help employees develop their abilities to exercise initiative, present themselves more
convincingly, so maximising their potential. Assertiveness training aims to convince individuals that they have certain rights such as to express themselves and to have other people listen and take seriously what they have to say.
Assessable profits
The proportion of a company's profit that is liable to taxation, normally after the deduction of CAPITAL ALLOWANCES,
interest and other business expenses.
Asset
A physical property or intangible right that has an economic value. E.g. plant, equipment, patents copyrights and financial
instruments, such as money or bonds.
An intangible asset is one, which is neither physical nor financial in nature, such as the extra value given to a company that has
very good reputation sometimes called GOODWILL.
Asset demand
The desire to hold wealth or assets. They may be held as shares, property etc. or as money.
Asset-stripping
The take-over of a company, in order to realise its more valuable assets for personal financial gain.
Assisted areas
Those parts of Great Britain that are able to seek government assistance because they have recorded persistently high levels of
unemployment. This type of scheme was first introduced in the 1930s, and substantially extended after the Hunt Commission
(1969) proposed more funds for certain regions. Assisted areas account for over 30 per cent of the working population of Great
Britain. On joining the EUROPEAN COMMUNITY, the UK became a recipient of grants under the EUROPEAN REGIONAL
DEVELOPMENT FUND.
Association of South-East Asian Nations (ASEAN)
This association was founded in 1967 when five DEVELOPING COUNTRIES of Southeast Asia (Malaysia, Indonesia, the
Philippines, Singapore and Thailand) joined to promote regional interests. The Association concentrates on projects that are
considered of benefit to the region, e.g. petrochemicals, and has an emergency oil-sharing scheme to assist member states unable
to afford their minimum requirements. Brunei joined the Association in 1984. Preferential tariffs have been introduced, and now
cover nearly 90% of all intra-ASEAN trade. By the year 2020 the Association hopes to become a SINGLE MARKET.
Assurance
A section of the insurance market that specialises in paying a large capital sum to a person or persons on a specified date, or on
the death of the person assured. The former is known as an ENDOWMENT or TERM POLICY, and the latter WHOLE-OF-
LIFE. Some assurers allow individuals to pay a larger premium and then be entitled to a profit sharing form of policy. Policies
are often linked to the purchase of shares, so making the final payment subject to the performance of the stock market at the time
the policy becomes liable for payment. Life assurance is an important part of private savings.
Asymmetric information
Information concerning a particular transaction which is not equally shared between the two parties to that transaction. The most
well known example centres on the work of Akerlof and his discussions of the second-hand car market. Other important
applications relate to the principal-agent problem and moral hazard. Much of economics in the 1970s and 1980s has been devoted
to the discussion of mechanisms for coping with these types of problems. We have become interested in trying to predict how
such organisms as markets will react when only in possession of part of the total information available.
Attitude discrepant behaviour
The situation which arises when an employee behaves in a manner opposite to his or her attitudes to achieve a particular objective
or make a good impression.
Auction
A transaction in which the buyer has to compete with others to acquire the item for sale. In `English Auctions' the highest bid
normally secures the item, whilst a `Dutch Auction' sees the seller slowly lower the price until a buyer steps in. A `sealed-bid
auction' is one where the potential buyer has just one opportunity to buy. The bid is sealed and an independent party opens all
such auctions. Normally the highest bidder is successful.
Audit
A professional examination and verification of a company's accounting documents. All incorporated bodies within the UK are
required to submit annual accounts.
Auditor’s report
The report produced as a result of an audit.
Austrian School
A major source of modern economic thought came from the University of Vienna. Its influence can be traced through the work of
Menger, Von Wieser, Bšhm-Bawerk and, more recently, Hayek. Amongst the theories to have emerged from this school are
MARGINAL UTILITY (Menger), OPPORTUNITY COST (Wieser), CAPITAL and the RATE OF INTEREST Hayek was
central to the successful re-introduction of CLASSICAL MONETARIST thought and has been recognised for this by amongst
others Friedman.
Autarky
A policy that attempts to result in national economic self-sufficiency (i.e. exclusion from international trade). This is normally
attempted by the implementation of tariffs, exchange controls, and other policies pursued in a PLANNED ECONOMY. The most
experiments took place in Nazi Germany and Italy.
autonomus expenditure
The amount spent in an economy even when income is zero. It does not vary with income.
Authorised capital
The amount of SHARE CAPITAL that a company can issue, as dictated by the terms of its MEMORANDUM OF
ASSOCIATION and the ARTICLES OF ASSOCIATION, as required under the COMPANIES ACT. Also known as `Nominal
Capital' or Registered Capital'
Auto-correlation
The theory of LEAST SQUARES REGRESSION that assumes that errors terms in of the regression are not correlated. To
establish the influence of any errors, further analytical techniques have to be applied.
Automatic stabilisers
The effect of a government tax and spending programme that cushions income changes in the private sector, such as
unemployment benefits. Also known as built-in stabilisers'
Autonomous consumption
That part of consumption that is independent of, or does not depend on, the level of disposable income. Changes in autonomous
consumption shift the consumption function.
Autonomous investment
That investment expenditure which arises regardless of changes in output (i.e. the ACCELERATION PRINCIPLE). Examples of
this include government infrastructure expenditure.
Average
A single number taken to be typical of a series of numbers. There are various kinds of average.
see
arithmetic mean, median, mode.
Average adjuster
A person responsible for preparing average claims in insurance contracts, particularly marine insurance.
Average cost
The total cost of production per unit of output. It is calculated by adding total FIXED COSTS to total VARIABLE COSTS, and
dividing by the amount produced. Because of INDIVISIBLES, it is normally predicted that average cost falls as output rises, as
fixed costs can be spread over more units. However, after a certain level of output, average variable costs may rise. This is said to
give the short run average cost curve a `U' shape. In the long run, though, all costs are considered to be variable and the shape of
the cost curve will be determined by the ECONOMIES OF SCALE (or diseconomies) (if present).
Average cost pricing
A system of pricing that charges just enough to cover average costs. Firms using this type of costing will neither make a profit or
a loss.
Average due date
The average date on which several different payments become due.
/average fixed costs
total fixed costs divided by the number of units produced.
Average product
Total product (or output) divided by the quantity of one of the inputs. Hence the average product of labour is defined as total
product divided by the amount of labour input.
Average propensity to consume
The proportion of income, be it an individual's, a household's or a country's, spent on goods and services, and not invested.
[Marginal Propensity to Consume]
Average propensity to save
The proportion of income, whether of individuals, households or countries, which is not spent on consumption.
Average revenue
Total revenue of a firm divided by the total number of units sold (i.e. revenue per unit). Average revenue is generally equal to
price.
Average tax rate
the total tax payment divided by the total income. It is the proportion of total income paid in taxes.
Average total costs
total costs divided by the number of units produced.
Average variable costs
Total variable costs divided by the number of units produced.
Averch-Johnson Effect
A tendency amongst those companies whose RATE OF RETURN is regulated to acquire large stocks of capital in order to
expand the volume of their profits.
'B' shares
Ordinary shares with special voting rights.
`back door'
If the discount houses are short of funds they can, as a last resort, go to the Bank of England and sell their holdings of Treasury
Bills at the discount or bank rate. This is called a `front door' operation. However, the bank rate is considered to be high and the
discount houses are in temporary difficulties, the government broker may buy bills from them at the market rate to ease the
pressure on their liquidity. This operation is called `back door'.
back office
That part of a broking firm (or dealer in stocks and shares) or other company where paperwork is processed. The members of the
back office are supposed to monitor and check on the activities of those working out the front
back-to-back loan
A loan from one company to another in one currency, arranged in conjunction with another loan between the same two companies
but in a different currency. Such loans are used by international companies to avoid exchange controls.
backwardation
1.
In a commodity market, the amount by which the spot price (including the cost of stocking over time) exceeds the forward price.
(Spot Market; Forward Exchange Market)
2.
This occurs on the stock exchange, and is when sum of money is paid by a bear dealer to one who is bull in nature (both these two
terms refer to way in which the individual dealer views the market and are explained in more detail later in the Dictionary) for the
right to delay delivery of securities sold forward at a fixed price. A bear will have sold securities to a bull for delivery on a certain
date in the belief that, by that date, the market price will have fallen. If it does not, but in fact falls, he may consider it worthwhile
to pay a backwardation so as to defer delivery of these shares until the next account period.
3.
A temporary situation in which one market maker has a lower offer price than another's bid price.
backward integration
This arises when a company joins with another that is involved at an earlier stage in the production chain. e.g. a cocoa
manufacturer combines with a firm owning a coca plantation.
backward sloping supply curve
A curve showing that as a price of a good or service rises, so the quantity offered for sale falls. For example, a worker may use an
increase in wages to work fewer hours and enjoy more leisure time.
bad debts
An accounting term for debts known to be irrecoverable, and therefore treated as losses.
`bad money drives out good'
see
Gresham’s Law
Bagehot, Walter
(1826-77)
Bagehot graduated in mathematics from University College, London, and qualified as a lawyer in 1852. He then spent a period of
time as a banker in his father's business before succeeding his father-in-law as editor of the
Economist newspaper in 1860, a post he held until 1877. He was an influential commentator on current economic affairs and a
prolific writer who is often quoted today. He specialised in constitutional issues. His publications include:
Universal Money
(1869),
Physics and Politics
(1872),
Lombard Street. A Description of the Money Market
(1873) and
Postulates of English Political Economy
(1876).
balance of payments
The calculation in tabular form of the credit and debit transactions of a country with foreign countries and international
institutions. It is drawn up and published in a similar way to the income and expenditure accounts of a company. The transactions
are divided into groups: current account and capital account. The current account consists of visible trade (i.e. merchandise
exports and imports or as some prefer to call it tangibles) and invisible trade (i.e. income and expenditure for services such as
banking, insurance, tourism and shipping, together with profits earned overseas and interest payments). The balance on current
account is the difference between the national income and national expenditure in the period. The capital account is made up of
such items as the inward and outward flow of money for investment and international grants and loans.
The overall deficits or surpluses of a country are brought into balance by movements in the gold and foreign exchange reserves or
in the case of the United Kingdom, sterling liabilities. A balance-of-payments surplus means that there is a net demand for
sterling greater than the supply during the period, and conversely for a deficit. In broad terms this illustrates a trading situation in
which the value of exports exceeds the value of imports. It does not refer to the value of exports and imports. If sterling were to be
floated, demand and supply may be brought into balance by means of an alteration in the exchange rate (i.e. the price of sterling
relative to other currencies or gold). However, during a period of fixed exchange rates, the central authority must achieve balance
either by (if in surplus) buying foreign currency or gold in exchange for sterling or by (if in deficit) selling gold or foreign
exchange for sterling. The success of the policy depends on the size of the gold and dollar reserves. In recent times the importance
of the deficits/surpluses has diminished as markets have been more concerned with the inflow of investment to a country and its
capital reserves. Indeed, some analysts seem to ignore fluctuations in the current account unless they are of obviously high
proportions.
Much now seems to depend on whether the experts consider the deficit/surplus is persistent or temporary. The rate of interest can
also be used as a policy tool. A government may set rates at a high level, so foreigners are happy to buy domestic currency, thus
maintaining the exchange rate. Remember, you can only receive the underlying rate of interest if you hold a bank account in the
relevant country. A deficit in the balance of payments is not necessarily a bad thing, and a surplus need not be a good thing. On
the other hand if the deficit is occasioned by, for instance, an excess of aggregate demand over supply in the domestic market, it
will persist until the home market has reached equilibrium.
There are many measures which can be taken in an attempt to correct a disequilibrium in the balance of payments. If the
imbalance is expected to be temporary, borrowing (or lending) from other countries or international institutions may be possible
(International Monetary Fund)
.If the imbalance seems to be longer termed then other policies such as; Import tariffs, import quotas, import deposits and export
incentives could be applied in order to affect the visible trade balance, but such measures are subject to the World Trade
Organisation agreement. Other measures include exchange control (now seldom applied in developed economies) and operations
designed to ease the strain on the balance of payments by adjusting the level of aggregate demand in the home economy.
see also
stop-go, invisible, j-curve.
balance of payments on current account
That part of the balance of payments recording payments for currently produced goods and services.
balance sheet
An official statement of the ways in which the wealth of a business, other organisation or individual on a given date is recorded. It
is usually calculated on the last day of the financial year. It is extracted on a fixed date, so showing the corporate performance at a
specific time.
Double-entry bookkeeping
,
This records the changes in a company's wealth over the period of one year. A Balance Sheet records the value of the Assets (the
ways in which the shareholder funds have been applied) and the Liabilities (from whence the money used by the company has
come) The assets of the company (Debtors, cash, investments and property) are set out against the claims or liabilities of the
persons or organisations owning them (the creditors), lenders and shareholders (so that the two parts of the balance sheet are
equal) and this is the principle of double-entry bookkeeping. The fact that the assets and liabilities are equal does not mean that
the equity shareholders owe as much as they own as they are included among those to whom a debt is owed by the company
whose records are being compiled.
According to the basic accounting equation, Assets = Liabilities + Equity; therefore, Assets - Liabilities = Equity. Equity,
shareholders' interest or net worth (which are the same thing) calculated from the balance sheet in this way is unlikely to reflect
its true market value, since assets are normally written into the balance sheet at historical cost. The value of non-balance sheet
items, such as patents, future orders and management skills are now analysed by those assessing the probable performance of a
company.
(Book value)
Without any adjustment for appreciation
(Inflation accounting).
balanced budget
The situation where a government's planned expenditure equals its expected income. In public finance it refers to a situation
where current income from taxation and other receipts of central government are sufficient to meet payments for goods and
services, transfer payments and debt interest. The UK budget is often in deficit i.e. the expenditure of government exceeds its
ability to raise the same sum in revenue. On both current account and capital account these deficits are financed by net borrowing
and less frequently by changes in the money supply (public sector borrowing requirement) The importance of the budget balance
and how it is financed is that it may affect levels of demand and prices in the economy
see also
fiscal policy; Keynes, public sector financial deficit
balanced budget multiplier
This is the effect on the national income of equal changes in government expenditure and revenues. If government expenditure is
increased by $100m and income tax rates are increased to raise an additional $100m in revenue, aggregate demand may not, as
might be expected, remain exactly the same since, for although personal disposable income has been reduced by $100m, some of
that income would have been saved. However, it is probable that all of the increase in government expenditure will have resulted
in increased demand. If the savings ratio were 10 per cent then the additional demand would be $10m, which would have a
multiplier effect upon the national income.
balanced growth
This occurs in an economy in which there is a constant relationship between the components of aggregate national income.
Consumption expenditure, investment and employment grow at the same rate as national income. The model is applied to the
study of equilibrium conditions in growth theory
(Steady-state growth).
balance of trade the difference between the value of visible exports and imports.
balloon
A loan where the last repayment is larger than the others.
ballpark figure
An approximate general figure, which can be used as a basis for discussion. It is sometimes uses as guide figure against which
one or more parties may expect the final result to bare a close resemblance.
Baltic Exchange
Located in London, one of the oldest centres for international freight chartering by both sea and air.
Bancor
The term Keynes applied to the currency he proposed that a new central international bank should create and put into circulation
for the payment of debts between countries
(Keynes Plan).
His proposal was rejected at the 1944 Bretton Woods Conference, which established the International Monetary Fund. However,
the beginning of 1970 saw the introduction of a similar international currency in the allocation of special drawing rights through
the IMF.
bank
A business, which holds money for some clients (depositors) and makes, loans to others (borrowers).
bank account
An account at a bank, where a customer can deposit and withdrawn money.
bank bills
a bill, which is honoured on a stated date (normally 91 days) such bills, may be sold to others in order to release cash for the
original purchaser. The final holder of the bill will then present it for payment. In many ways such bills are post-dated cheques.
Also be known as commercial bills and acceptance credits.
bank charges
The sum of money charged by bankers from their customers as payment for the service of operating a current account on their
behalf.
Bank for International Settlements (BIS)
Set up to co-ordinate First World War reparation payments, the BIS has its headquarters in Basle, Switzerland. It is now a clearer
for Central Banks, and also works closely with the International Monetary Fund.
bank loan
A sum borrowed from a bank, normally for a fixed period of time. It will normally be for a specified and is usually taken out by a
commercial concern, though the changes in banking and building society regulations that were introduced in the mid 1980Õs
made it easier individual members of society to raise bank loans. The phrase is also loosely used to include overdrafts and
personal loans. In this broader sense bank loans are more commonly known as bank advances, while total bank lending includes
commercial paper (promissory note) and acceptances. Bank loans are normally secured (collateral security), repaid in regular
instalments and with interest charged at rates which vary with the bank's base rate.
Bank of England
The central bank of the UK. Set up in 1694 by Act of Parliament, the Bank was a private company formed to lend money to the
state and deal with the national debt. The Bank moved into public ownership in 1946. Today, it is the government's banker,
lending through ways and means advances and arranging borrowing through the issue of gilt-edged securities. The Bank also
implements the state's financial and monetary policy. The Bank is obliged to accept directives from the treasury, but its governor
has the right to be consulted. It also has powers to regulate the banking system, including the commercial banks. It is also the sole
issuer of banknotes in the UK. In June of 1997 it was given the responsibility of advising on interest rate alterations. This was
given to it by the incoming Chancellor of the Blair administration in response to feelings helps in some quarters that interest rate
policy should be removed from the direct control of politicians. It was felt by some that rate changes might have been overly
influenced by political decisions.
bank overdraft
The situation where the bank balance of an individual or company is negative: in other words, the customer has withdrawn more
money than he has funds in his account.
bank rate
A now obsolete term for the rate of interest at which the central bank lends to the banking system, which in practice meant the
rate at which it would rediscount `eligible paper' presented by the discount houses, or make loans to them
(lender of last resort).
In October 1971 the penal rate for assistance to the discount market became the Minimum Lending Rate and the term `bank rate'
has not been used since.
banker’s balance
the balances, or deposits, that commercial banks keep with the Central Bank, which in England in The Bank of England.
banker's draft
When a bank as draws a cheque opposed to one of its customers. A draft is drawn at the request of a customer, whose account is
charged. This is regarded as cash since, unlike personal cheques, it cannot be returned unpaid. It is commonly used for large
transactions, where a creditor may be unwilling to accept the risks associated with a personal cheque.
banker's guarantee
A 90% guarantee given by the Export Credits Guarantee Department to an exporter's bank, against non-repayment of advances by
the bank to the exporter.
banking
A business that accepts deposits and lends money. The term may also encompass building societies and finance houses, which are
increasingly becoming a part of the banking system. It is normally taken to include the commercial and secondary banks, the
central bank, the merchant banks and discount houses.
banking and currency schools
A debate, sometimes rather heated, that centred on the controversy that surrounded Sir Robert Peel's Bank Charter Act of 1844.
This Act effectively limited the creation of banknotes to the Bank of England and regulated their issue. The banking school
argued that, given that banknotes were convertible into gold, there was no need to regulate the note issue. Moreover, it was
pointless to try to regulate the issue of banknotes because the demand for currency would be met by an expansion of bank
deposits, which would have the same effect as an expansion of the note issue. The currency school, though, argued that the check
offered by convertibility would not operate in time to prevent serious commercial disruption. Banknotes should be regarded as
though they were the gold they in fact represent, and consequently the quantity at issue should fluctuate in sympathy with the
balance of payments.
banknote
A note issued by a bank promising to pay the bearer the face value of the note on demand. Banknotes in England had their origin
in the receipts issued by London goldsmiths in the seventeenth century for gold deposited with them for safekeeping. The practice
of banking had its origin in the activities of these goldsmiths, who began lending money and whose deposit receipts came to be
used as money. Later, these goldsmiths issued banknotes. Today only the Bank of England and the Scottish and Irish banks in the
UK are allowed to issue banknotes.
bankruptcy
The declaration by a court of law that an individual or company is insolvent, that is they cannot meet their debts on the due dates.
A bankruptcy petition may be filed either by the debtor or by his creditors requesting a receiving order. The receiver may then call
a Creditors' Meeting, where the creditors may vote to declare the debtor bankrupt. The debtor's assets are then realised
(liquidated/turned into cash) and shared amongst the creditors. Sometimes, it may be in the creditors' best interests to keep the
company running in receivership, in the hope of increasing its ability to repay its debts.
Barclaycard
see
credit card
bargaining theory of wages
A theory of wage determination that is based on negotiations between employers and representatives of the workforce/employees,
usually the trades union. The theory has been used as a part of a Game Theory problem in which both sides wish to divide the
firm's profits but also to maximise them: A similar exercise has been introduced to Cost-Benefit Analysis where each is aware of
the costs of a strike and the risks of participating in one. These theories are complementary to those based on supply and demand
analysis (price theory) in the sense that the bargaining is seen to be carried out within the framework of the conditions existing at
the time in the labour market.
see also
wage-fund theory, arbitration, bargaining
Barnum effect
this observation involves the tendency of individuals undergoing some form of psychometric testing to agree with a tester's
conclusions about their personalities, even if the conclusions are incorrect. This is the result of testers stating their interpretations
in extremely general terms, which could apply to anyone taking the tests.
barometric price leader
Its rivals quickly copy a price increase that once announced by one firm.
barriers to entry
Economic or technical factors which prevent or make it difficult for a firm or firms to enter a market and compete with existing
members of that market. An established member of that market may have an advantage that forms part of their trading conditions
within the market. This will afford them an absolute cost advantage. An example of this would be which the possession of a
patent right to certain production processes or a long-term contract for the supply of energy or the ownership of sources of raw
materials. Similarly, the existence of economies of scale might create the situation where a new entrant would have to invest large
sums of money and produce on a large scale in order to compete on price. If the market were small in relation to the optimum
scale of production, new entrants might calculate that the risk of entry would be unacceptably high because any new supplier
would reduce the output of all suppliers below the optimum, so that either the new or an existing supplier would fail. Another
barrier might focus on product differentiation as this will increase the cost of entry by enforcing heavy expenditure on advertising
and the support of dealer outlets to overcome significant buyer loyalty to established brands. Collusion on pricing and restrictive
practices, such as forcing the distribution link in the chain to stock the entire range of the products made or offered by the
producer and exclusive dealing, may exclude newcomer. Legislation, such as a requirement for licensing can also act as a barrier.
The existence of barriers to entry may allow established firms to charge prices above the level that would obtain in the absence of
these barriers.
see also
competition policy, contestability, monopoly, sunk costs
barter
Acquiring goods or services by means of exchange with other goods or services, rather than with money
(Also called
counter trade)
base period
The reference date from which an index number of a time series is calculated. For instance, the price index of commodities
produced in the UK has a base period of 1985. The base year may be changed to reflect any changes over time in the composition
of items making up the index.
base rate
The rate of interest which forms the base or fundamental rate for the charges for bank loans and overdrafts or deposit rates of the
commercial banks. In theory banks fix their base rates independently of one another, though obviously they cannot differ very
much for long periods.
Base rates will be generally close to short-term money market rates but change less frequently, so when, for example, rates on the
inter-bank market rise much above base rate, large companies have taken advantage of the interest-rate differential, borrowing on
overdraft and lending in that market.
base year
the year which is chosen as the point of reference for comparison in other years.
bear
A situation that arises on a stock exchange when speculator sells stocks or shares that he may or may not possess because they
expect a fall in prices and, therefore, they will be able to buy them back later at a profit. This is the opposite of a bull market. A
bear who sells securities that he does not possess is described as having `sold short'. If he does possess the securities he sells, he is
described as a `covered' or `protected' bear. A `bear market' is one in which prices are falling.
bearer bonds
Bonds whose legal ownership is vested in the holder, no transfer deed being required. An endorsed cheque, or a cheque made
payable to a bearer, or a banknote are similar in nature to bearer securities. Bearer bonds normally have dated interest coupons
attached to them, which can be presented to the issuer of the security for payment. Bearer shares are common on certain
continental European stock exchanges. Bearer securities have the attraction that the tax authorities cannot identify the owners. For
this reason the dividends and interest are usually subject to a withholding tax.
bear slide
A term to indicate a general movement of stocks and shares towards the conditions obtained in a
bear
market.
behavioural assumption
The pattern of human motivation built into any economic theory. For example, the theory of the firm assumes that entrepreneurs
are profit-maximisers.
behavioural theory of the firm
One of a number of approaches to the study of firms. This theory analyses how decisions are reached within firm. The emphasis is
on a range of influences and not a code of behaviour that assumes that behaviour conforms to the pursuit of a single goal. The
main aspects of the theory are: (a) that firms attempt to satisfice rather than adopt maximising behaviour; (b) that any firm is a set
of individuals and groups each of which has its own aspirations; these groups, sometimes in close co-operation with other groups,
are always in a state of bargaining over the decisions the firm makes, leading to the pursuit of many different and complex goals.
The theory has not displaced the traditional approach. This is probably because it does not attempt to predict specific predictions
about what firms would actually do in any particular circumstance. Its main influence on academic rigour has been to remind
economists that, in practice, maximising profits may be expensive for a firm, and institutional factors may impede the singleminded pursuit of any one goal.
(see also
firm, theory of the)
below the line
Items in an account, which is underneath the line at which a total is made. If above the line, an item is included in the total. In the
balance of payments, for example, the basic balance includes the net flow of long-term capital above the line together with the
current balance, i.e. the basic balance equals the current balance plus net long-term capital flows. In reported results for quoted
companies, extraordinary items that arise from transactions which are outside the ordinary activities of a business (for example,
the sale of an office building) may be taken below the line for the purposes of calculating earnings per share, whereas exceptional
items that do derive from ordinary activities may be taken above the line.
benefits in kind
sums of income that are received in the form of actual goods and services, e.g. medical care. In contrast with money income,
which merely increases direct purchasing power, this form of payment also increases the overall standard of living of the
individual actually transferring money directly to that person.
Benelux
The customs union between Belgium and Luxembourg and the Netherlands set up in 1948. The union abolished internal tariffs,
reduced import quotas and adopted a common external tariff. The aim of the union is the eventual merging of the fiscal and
monetary systems of the member countries. There is free movement of labour and capital within the union and a common policy
with other countries. In 1958 Benelux joined the European Community. All are now members of the Eurozone.
Bentham, Jeremy (1748-1832)
The leading philosopher of utilitarianism. Self-interest was deemed the sole stimulus to human endeavour and the pursuit of
happiness an individual's prime concern. The purpose of government should be to maximise the sum of the happiness of the
greatest number of individuals.
Bernoulli's hypothesis
A proposition by Daniel Bernoulli (1700-1782) that a decision as to whether or not to accept a risk depended not just on money
but also on utility. For instance, a bet would appear to be worth accepting if, at the toss of a coin, you won œ10 for every head but
lost only œ5 for every tail. Clearly, there is an equal chance of a head or tail turning up. However, if œ5 represented your total
wealth, the bet would seem far less attractive. The œ5 would have a very high utility attached to it and this is what, according to
Bernoulli, what counted in such decisions.
Marginal utility of money
Bertrand competition
A model of price competition between duopoly firms in which each charges the price that would be charged under perfect
competition
(marginal-cost pricing).
It is held as a model that contrasts with that of Cournot, who found that price and output in a duopoly situation would be
somewhere between the extremes of monopoly and perfect competition. The Bertrand result can be seen as a Nash equilibrium
outcome.
Big Bang
Term used to include all of the changes that took place on the London Stock Exchange before and after 27 October 1986 when the
fundamental divisions between the roles of jobbers and brokers basically removed as were the payments of a fixed commissions
on securities, purchases and sales. This brought the UK more into line with the major overseas stock exchanges. In 1983, the
government agreed to exempt the Stock Exchange from the provisions of the Restrictive Trade Practices Acts in return for lifting
a number of restrictions on competition, including fixed commissions.
Big Board
informal name for the
New York Stock Exchange
bilateral monopoly
A market in which a single seller (a monopoly) is confronted with a single buyer (a Monopsony). Under these circumstances the
theoretical determination of output and price will be uncertain and will be affected by the interdependence of the two parties
see
bargaining
bilateralism
The agreement between two countries to extend to each other specific privileges in their international trade which are not
extended to others. These privileges may, for example, be in the form of more generous import quotas or favourable import
duties. In the long run, many believe that bilateralism may have unfavourable effect s on international trade whilst under
Multilateralism, there is no discrimination. The General Agreement on Tariffs and Trade was formed in 1947, to reduce bilateral
and other restrictive practices in international trade.
bill of exchange
A document signed by a purchaser who accepts that they owe the seller money, and promises to pay the sum at a later date. If the
seller requires cash before the agreed date, they can sell the bill of exchange, at a discounted rate (less that the real surrender
value), to anybody who is willing to purchase it; the new purchaser of the bill will therefore receive the money on the originally
agreed date.
bill of lading
A document giving details of goods shipped the ship on which the goods are consigned and the names of the consignor and
consignee. Bills of lading are normally sent ahead of the ship and give proof of title to the consignor. Copies of the documents are
held on the ship and by the exporter.
bill of sale
A document that gives evidence of transfer of ownership but not of possession of goods. It is not often used nowadays, but was
once a common method of raising a loan on the security of personal possessions, the borrower retaining possession of goods until
the debt is repaid.
billion
One thousand million. In Great Britain, one billion used to refer to one million million, although it is now rarely used with this
meaning.
birth rate
The crude birth rate is the average number of live births occurring in a year per 1,000 population. When birth rates exceed death
rates, the population is normally growing. This remains one of the major problems experienced by developing nations.
black economy
A term in common use that is accepted as describing any`underground' economic activity, i.e. an activity that is not declared for
taxation purposes. It is accepted that it is impossible to measure accurately. The black economy is probably mainly concentrated
in personal services and repair work carried out by the self-employed, including those `moonlighting' from paid employment.
Although estimates of the tax revenue lost through the black economy range from 3 to 5 per cent or more of the gross domestic
product, it cannot be assumed that these activities would be viable and would all continue if captured by the tax net. Not to be
confused with a black market, which is illicit trade in goods. Some Economist now prefer to call this part of an economy the
shadow sector.
Black Friday
The first major collapse of the US stock market, on 24th September, 1869. Now often used to refer to any stock market collapse.
Black Monday
Monday, 19th October, 1987, when stock markets world-wide crashed.
Black Tuesday
Tuesday, 29th October, 1929, when the US stock market crashed.
Black Wednesday
Wednesday, 16th September, 1992, when the pound sterling was devalued and left the European Exchange Rate Mechanism
(ERM).
blue book
A digest of statistics published annually by the Central Statistical Office containing the UK national income and expenditure
statistics.
(see also
National income; social accounting)
blue chip
A first-class equity share, the purchase of which should entail little risk, even of sharp declines in earnings, in economic
recessions. The term is, of course, applied as a matter of subjective judgement. In the UK, ICI, Unilever and Shell equities, for
example, are commonly regarded as blue chip.
board of directors
GB:
A group of directors elected by shareholders to run a company.
US:
A group of people elected by shareholders to decide upon company policy and to appoint the president and other managers.
BOGOF
A slang term that is now widely accepted as semi-official and stands for Buy one get one free. It is the policy of offering for sale
two similar items for sale at the price of only one. The retailer or other form of seller hopes to secure product loyalty by allowing
the purchaser to experience the product for the longer period it takes to consume two.
bond
A type of fixed-interest security issued by a central or local governments department, major companies, banks or other
institutions. Bonds are usually a form of long-term security but they do not always carry a fixed interest and may be irredeemable
and may be secured or unsecured. The term may also be applied to types of non-fixed interest security, such as property bonds,
which provide the holder with a yield on funds invested in property, or `managed bonds', in which the funds are placed in a
variety of investments. In the USA, the term bond also includes debentures.
bonus issue
A term describing shares given without charge to existing shareholders in proportion to the shares already owned. A scrip issue
does not add to the capital employed by the firm, but is made where the capital employed has been increased by withholding
profits, and is therefore out of line with the issued capital. Consequently it is a purely bookkeeping transaction. Dividends, for
example, will, after a scrip issue, be divided among a larger number of shares, so that the dividend per share will fall in proportion
to the number of bonus shares issued.
(also called
scrip issue, capitalisation issue)
book value
The value of assets in the balance sheet of a firm. This is often the purchase price, and may be less than the market value.
boom
The peak of the trade cycle, where prices and employment are at their maximum. Booms often break quite suddenly, giving a
period of depression, slump or recession.
boomerang effect
A term used to describe the phenomenon that occurs when workers subjected to measures designed to alter their attitudes instead
change their attitudes in the opposite direction to that intended.
borrow
To take an agreed sum of money from an individual, bank or other company, agreeing to repay it at a later date, perhaps with
interest.
BOTB
British Overseas Trade Board
bottleneck
A position where the production of a firm is slowed down because one section of the process cannot cope with the amount of
work, thereby delaying other sections. It may now also be applied to an economy. An example of this is when there appears to be
a lack of a certain skill within the market. This shortage of supply causes price (wage level0 to rise, as demand can not be
satisfied. As such a restriction in the supply curve has caused the market to malfunction. In an attempt to try and remove such
problems from developed economies governments now offer training and educational opportunities to their workforce, so making
them more flexible.
brainstorming
The process of generating a large number of new ideas without considering their feasibility. All ideas put forward by participants
are listed but not discussed. A separate meeting is normally convened to discuss and evaluate the ideas.
brand loyalty
A situation when a consumer is reluctant to switch from the consumption of a favourite good.
brand name
names used to differentiate a particular product in the mind of the consumer. These may come to be linked with a certain product
or family of products and are now consider to be an important asset of the company owning them. Indeed, some take-over bids
have been launched in order to acquire brands. Some companies now capitalise their brand name in their Balance Sheets.
break-even chart
A chart used to give information about the viability of an enterprise. In simplest form, the figures charted are those of total costs
and total revenues. When these become equal, a break-even point has been reached.
Bretton Woods
An international conference that was held at Bretton Woods, New Hampshire, USA, in July 1944 to discuss the alternative
proposals relating to post-war international payments problems put forward by the US, Canadian and UK governments. The
agreement resulting from this conference led to the establishment of the International Monetary Fund and the International Bank
for Reconstruction and Development (World Bank).
(see also
Keynes Plan; Smithsonian Agreement)
bridging loan
A short-term loan to enable someone to buy a new house when they’re old one has not yet been sold.
broad measures
methods of measuring the money supply by looking at money as a medium of exchange and a temporary store of value. Such
measures provide a guide to the level of liquidity apparent in the economy.
broker
An intermediary between a buyer and a seller in a highly organised market, e.g. a stockbroker, commodity broker or a market
operator working on his own account, e.g. a pawnbroker, bill broker. On the stock exchange, a broker is the intermediary
between a market maker and the public.
brokerage
A commission or fee charged by a broker. It is characteristic of the broking profession that they operate only in highly organised
markets where margins are relatively small.
bucket shop
Slang expression to describe unlawful institutions for doubtful dealing or gambling in commodities, stocks, shares, etc.
The expression can also be used to describe a company that sells travel tickets, especially airline seats, at low prices.
budget
An estimate of income and expenditure for a future period. Budgets are an essential part of the planning and control systems of
the financial affairs of a nation or business, and are necessary because flows income and expenditure do not occur simultaneously.
A national budget sets out estimates of central government expenditure and revenue. As government spending has increased in
importance within economies so the national budget is has become an important instrument in government economic policy.
Fiscal changes are often more to do with decisions to modify the budget surplus or deficit in the interest of demand management
than with planned expenditure. In the United Kingdom, the Chancellor of the Exchequer delivers the government budget (its
annual statement of economic issues) in March.
budget constraint
resource constraints imposed on households and firms at a certain point in time
budget line
A set of combinations of different commodities which, given a consumer's income, can be afforded. If there were only two
commodities, the budget line could be drawn on a graph, which had one commodity on each axis. Given the price of each and the
consumer's income, it would be a straight downward-sloping line cutting each axis at the quantity of that commodity which could
be purchased if all income were devoted to it. The budget line represents the constraint facing the consumer when consumption
decisions are made and is used in indifference-curve analysis.
budgetary control
A system of control, which checks actual income and expenditure against a budget so that progress towards set objectives, may be
measured and remedial action taken if necessary. This has been made much easier by computerised accounting procedures.
budget deficit
When a government’s expenditure exceeds its revenue.
buffer stocks
Stocks of a commodity bought by an international body when prices are low, and held to resell later when prices have risen. The
intention is to maintain stable prices in the international commodity markets.
building society
An institution that accepts deposits, upon which it pays interest and makes loans for house purchase secured by mortgages.
Building societies are unique to Britain, though elsewhere-similar functions are performed by savings banks.
built-in stabilisers
Those forces that act within an economy which without direct government intervention automatically act to dampen down
fluctuations in employment and national income. Examples of these are (a) unemployment benefits and welfare payments, which
automatically increase in total when unemployment increases and fall when unemployment falls. So, this part of government
expenditure adjusts automatically to offset part of the changes in other components in aggregate demand. (b) Government
taxation, which falls as national income falls and vice versa. Since an increase in taxation tends to restrain expenditure, there are
automatic factors counteracting inflationary and deflationary pressures in the economy. These rarely have sufficient force to
render positive corrective policies unnecessary, so requiring government to introduce other economic policies.
(see also
fiscal drag)
bull
A stock exchange speculator who purchases stocks and shares in the belief that prices will rise and that he will be able to sell
them again later at a profit; the opposite of a bear. The market is said to be bullish when it is generally expected that prices will
rise.
bullion
Gold, silver or other precious metals in the form of ingots or bars rather than coin. Gold bullion is used in international monetary
transactions between central banks and forms partial backing for many currencies
(the gold standard).
A bullion market is a gold market.
Bundesbank
The Central Bank of Germany, based in Frankfurt. It was formally established in 1957
Bundles
A description of a fairly new way of pricing certain services such as mobile phones. The offer to buy is phrased in such a way as
to infer that for a period of the most of the facilities are available free of charge. This is often in the form of an introductory offer.
However, after an initial period the consumer may find that tariffs increase quite rapidly and that the contract contains certain
hidden costs that were not immediately obvious when the original transaction was signed.
bureaupathology
Problems arising from dysfunctional behaviour patterns often encouraged by bureaucratic forms of organisation: notably stress
resulting in resistance to change, ritualistic attachment to routines and procedures, aloofness, insistence on petty rights, etc.
Burolandschaft
The so-called landscaping of open plan offices through the use of screens dividers, plants, etc., in an attempt to minimise the
perceived lack of privacy and loss of individuality in large open plan offices.
business cycle
The tendency of economies to move, over time, brought periods of boom and slump.
business finance
Sums of money provided for commercial uses. The capital requirements of business are normally divided into short - medium and
long term. Short-term capital consists of the current liabilities of a business plus medium-term capital. Short term capital is
normally only invested in assets that are relatively liquid (easily transferred back into cash) so as they can be made available for
use in payments-if creditors press their claims for payment. Thus, these sources of short-term capital may be used for finished
goods in stock and work in progress, trade debtors, prepaid expenses, cash in hand and at the bank.
Long-term capital may be used for long-term investment in fixed assets, in goodwill, patents and trademarks, and long-term trade
investments.
There are important differences in the sources of capital open to large and small firms. The latter do not normally have access to
the stock exchange (the Unlisted Securities market does allow some small concerns to acquire capital) and rely more heavily upon
family and friends for equity capital, as well as upon the commercial banks. The main institutional sources of business finance are
the commercial banks, the merchant banks, the finance houses, the discount houses, factoring companies and the institutions
concerned with new issues. With over 200 Foreign Banks now operating in London many firms now raise money from overseas
sources.
business saving
That part of the net revenue of a firm which is not paid out as interest, dividends or taxation, but rather is kept in the business as
reserves and depreciation allowances or to finance new investment.
(Sometimes called
retention.)
Butty gang
A nineteenth century term describing a group of about a dozen labourers who would negotiate a contract for doing a job in return
for a single lump-sum payment, which the gang members then shared out among themselves.
buyer's market
A market in which prices are falling, for example, as a result of an excess of supply over demand.
buyers over
A stock exchange term for a situation where there are more buyers than sellers.
buying in
When a seller fails to hand over securities or shares which he has promised to sell, the buyer may buy in wherever he can obtain
the shares, and the seller is responsible for all additional expenses.
by-product
The output from a process designed for the production of some other product. It is a necessary outcome of the production process
and cannot be avoided. Its opportunity cost is zero.
call
The unpaid portion of the price of a share. This normally occurs when an applicant for a new share issue pays only part of the
price of the share on application and the remainder on allotment or when the issued shares of a company are not fully paid up
(see also
paid-up capital)
call money
or
money at call
Deposits placed on the Money market which are available at immediate notice.
call option
A contract giving that gives the right to buy shares from the dealer making the contract at the price ruling at the time within a
specified future period, usually three months. (the opposite of
put option)
called up capital
Share capital in a company, which has been called up but not yet paid for.
Cambridge school
A system of economic thought influenced by economists at the University of Cambridge, England. Amongst the most influential
were: Alfred Marshall (1842-1924) held the Chair of Political Economy until 1908 and AC Pigou (1877-1959) until 1944, and
during this period the school was characterised by the theory of late
classical economics
. After the end of the Second World War, the school refuted what became known as neo-classical economics and developed ideas
based on those of J.M. Keynes (1883-1946) The Cambridge school emphasised a macroeconomic approach, compared with the
microeconomic approach of the neo-classical school. In more recent times the work of the Applied Economics Department gained
a considerable reputation under the leadership of Professor Wynne Godley. He and his team produced models of predicted
behaviour within the UK economy that were often in disagreement with the Thatcher Governments.
CAP
see
Common Agricultural Policy
capacity
The physical quantity of output which a factory, can produce, firm or economy.
capital
The assets (the ways in which the capital of the business has been invested), owned by the business or individual from which can
be generated income and which have themselves come from the result of part of the productive process. . involve part of the
economic wealth generated but not consumed in a previous period Capital is one of the four factors of production, and consists of
the machines, plant and buildings which make production possible. All capital is itself, however, the product of labour and raw
materials and can be seen as holding the stored value of them. By investing in capital, a firm may gain no immediate utility from
it, but will experience that utility later on. Thus capital is representative of deferred consumption. In recent years economists have
recognised another form of capital which relates o the skills of human beings. This is normally refereed to as Human Capital
when describing basic educational ability of a group of people and intellectual capital when describing the commercial outcome
of those skills e.g. software programmes that assist in say tracing the development of a serious illness.
In more general usage, the term refers to any asset or stock of assets capable of generating income.
capital allowances
Reductions in tax liability which are related to a firm's capital expenditure. In most countries, expenditure on new capital assets is
encouraged by various kinds of allowances, and annual depreciation is recognised as an expense of the business in calculating tax
liability. The taxation authorities' methods of depreciating assets are not necessarily the same as those used by the company in the
published accounts.
capital budgeting
The process of budgeting capital expenditure by means of an annual or longer-period capital budget. Planned and actual cash
flows and capital expenditures can be compared. In recent years, the methods of selecting investment projects for inclusion in the
capital budget have been extensively refined.
(see also
Investment appraisal)
capital consumption
the amount of the depreciation of the assets of a company or country over a period of time. It is normal for this amount to be met
in full before the extra investment needed for growth has been injected.
capital employed
The capital in use in a business. The term is sometimes taken to mean net assets (i.e. fixed plus current assets minus current
liabilities), but more usually bank loans and overdrafts are included. Other adjustments are generally made for the purpose of
calculating the return on net capital employed
(rate of return),
such as the exclusion of intangible assets and the revaluation of trade investments at market prices.
capital expenditure
The purchase of fixed assets, expenditure on trade investments or acquisitions of other businesses and expenditure on current
assets; to be distinguished from capital formation.
capital formation
Net investment in fixed assets, i.e. additions to the stock of real capital. Gross fixed capital formation includes depreciation,
whereas net capital formation does not.
capital gains
A realised increase in the value of a capital asset, as when a share is sold for more than the price at which it was purchased.
Strictly, the term refers to capital appreciation outside the normal course of business.
Capital Gains Tax (CGT)
Introduced in 1965 in the UK as a tax on
capital gains.
capital intensive
The production of a commodity in which a higher proportion of capital is used in the mix of inputs compared with other inputs,
such as labour.
(see also
Factors of production)
capital market
The market that exists for longer-term loanable funds as distinct from the
money market, which concentrates on providing funds for short-term proposals. In recent years it has become more difficult to
establish a clear difference between the providers within these two markets. Few companies now lend exclusively via just one of
them. which deals in short-term funds. There is no clear-cut distinction between the two markets, although in principal capital
market industry and commerce mainly for fixed investment use loans. The capital market has become increasingly international
one and in any country it is not one institution but institutions that attempt match the supply and demand for long-term capital
(e.g. the stock exchange, banks and insurance companies). The capital market is not concerned solely with new claims on capital
(the primary, or new-issue, market), but also with dealings in existing claims (the secondary market). All advanced countries have
highly developed capital markets, but in developing countries the absence of a capital market is a major handicap to the growth of
investment. The increased globalisation of capital flows means that money saved in one country, eg Japan may be invested in the
capital markets of a country with little geographical connection eg USA.
capital-output ratio
The ratio derived by dividing the level of output into the stock of capital required to produce it. The relationship between the
investment and output is described by the
acceleration principle,
. The interdependence of capital and output play an important role in
growth theory
, in which various assumptions about the ratio are explored.
capitalism
an economic system in which individuals privately own productive resources: these individuals can use the resources in whatever
manner they choose, subject to agreed legal limitations.
capital movements
the flow os funds across international boundaries for investment in plant and machinery or in response to interest rate changes, or
the expectation that interest rates will rise in the receiving country.
capital stock
The total amount of physical capital in the economy or, sometimes, in a firm or industry. In theory, the most important valuation
of stock is the present value of the income stream it will generate in the future. Changes in the capital stock should provide a
guide to changes in the productive potential of the economy. The prices of the different components of the capital stock have to be
valued to give an estimate of the capital stock at the prices of a given year.
capital structure
The sources of long-term capital of a company. A company's capital structure is determined by the numbers and types of shares it
issues and its reliance on fixed-interest debt. A company's choice between sources of finance will be determined by their cost, the
type of business, taxation and other factors.
capital theory
That part of economic theory concerned with analysis of the consequences of the fact that production generally involves inputs,
which have themselves been produced. The existence capital has implications for the whole nature of the economic system. For
example, the production of capital requires the sacrifice of current consumption in exchange for future, possibly uncertain,
consumption.
capitalisation
(a)
The amount and structure of the capital of a company.
(b)
The conversion of profits and reserves into issued capital.
(c)
Market capitalisation is the market value of a company's issued share capital.
capitalism
A social and economic system in which individuals are free to own the means of production and maximise profits, an din which
resource allocation is determined by the
price system
. Marx argued that capitalism would be overthrown because it inevitably led to the exploitation of labour.
capitalist
A person who invests money in a business or one who believes in the principles of capitalism.
capitalise
To invest money in a working company.
capital transfer tax
see
inheritance tax
carbon tax
see
polluter-pays principle
carpetbagger
A speculator who moves money in and out of building society accounts in the hope of bonuses when they list on the stock market.
Originally the term described post-Civil War Americans who carried their possessions around in carpets.
cartel
An association of producers of a specific product eg petroleum or a range of associated products that exists to regulate prices by
restricting output and competition. Cartels are illegal in the United States, but governments to achieve `rationalisation’, as in the
1930s in Germany have promoted cartels. They tend to be unstable since a single member can profit by undercutting the others,
while price-fixing stimulates the development of substitutes. The most prominent international example is the Organisation of
Petroleum Exporting Countries (OPEC). It too suffered from member states deciding to go alone on dealsso breaking their
collective ability to control prices.
cascade tax
A form of turnover tax allied to Value added tax. It may apply to goods, which pass through two or more countries in the course
of production, collecting different rates of tax in each. It therefore follows that goods produced in a country where VAT is low
may be cheaper to the consumer. The term is also used as a synonym for turnover tax.
cash flow
The flow of money payments to or from a firm. Expenditure is sometimes referred to as negative cash flow. The gross cash flow
of a business is the gross profit plus depreciation provisions in any trading period. The net cash flow is retained earnings and
depreciation provisions before or after tax.
cash ratio
(a)
The ratio of a bank's cash holdings to its total deposit liabilities.
(b)
For a firm, the proportion of current liabilities accounted for by cash in hand, including bank deposits, and sometimes payments
due from debtors.
CBI
see
Confederation of British Industry
CD
see
certificate of deposit
central planning
When a state allocates resources and sets production targets and growth rates according to its view of what is required.
ceiling
A highest point, such as the highest potential output of a factory.
census
A statistical survey covering every member of a population.
central bank
A bankers' bank and
lender of last resort All developed and most developing countries have a central bank which manages the credit system on behalf
of the government. In a few countries, such as Germany and the United States, these banks have a measure of independence from
government control. At present the Bank of England is an independent entity but has to enact certain policies on behalf of
government. There is a move in some quarters to make the bank fully independent from all government interference. Central
banks control the banknote issue, act as the government's bank, accept deposits from and make loans to commercial banks and the
money market. They also lead the interest-rate structure, and transfer money and bullion with central banks abroad. In 1997 the
bank of England was given sole responsibility for deciding on the short-term interest rate policy of the UK.B
certificate of deposit (CD)
A negotiable claim issued by a bank in return for a term deposit. CDs are securities, which are purchased for less than their face
value, which is the bank's promise to repay the deposit. CDs thus offer a yield. CDs were first issued in New York in the 1960s.
certificate of origin
A certificate which specifies the country of origin of an import or export. Such a certificate may be required by customs
authorities to determine whether an import should benefit from a preferential tariff, as in free trade areas or customs unions, or
may be liable for an anti-dumping tax.
certeris paribus
the assumption that all other things being equal. or constant, except those under study.
CGT
see
capital gains tax
chain of production
The different stages of making, distributing and selling a good or service.
Chamberlain, Edward Hastings
(1899-1967)
An eminent American economist, who after a period at the University of Michigan, Professor Chamberlain joined Harvard as a
tutor in 1922 and became a Professor of Economics there in 1937. In
/ / Theory of Monopolistic Competition
he proposed a new emphasis for economic theory, which distanced itself from the old concepts of perfect competition and
monopoly. Chamberlain saw certain special limiting conditions; these in turn gave rise to monopolistic competition, which was
the condition under which most industries, in fact, operated. Each firm pursued a policy of product differentiation by special
packaging or advertising. He also analysed the problem of selling costs, such as advertising. Much of the subsequent work on the
Theory of the Firm has centred on trying to understand the behaviour of enterprise in conditions similar to those identified by
Chamberlain.
Chancellor of the Exchequer
The chief finance minister in the British government. In Britain the holder of this position is based at The Treasury, in Whitehall,
London. Their official London residence is at 11,Downing Street - next door to the Prime Minister, whose official title includes
First Lord of the Treasury.
chaos theory
A branch of mathematics concerned with the time path of dependent variables in systems of non-linear equations. The odd feature
of such systems is that, even though the observed variable is not subject to random selection, it does behave in a way that looks
very chaotic and unpredictable. This is because very small changes in initial conditions lead to large changes in the results,
making long-term forecasting impossible. The weather is taken as a chaotic system, and economic variables, such as stock-market
prices, might best be understood in the same way. Economist tend to use this area of research to try and predict how a small and
possibly unconnected issue can have, at some later date, a quite significant effect on a more influential variable.
chartist
An analyst (normally working within the confines of the Stock Exchange) who tries to predicts share-price movements solely
from a study of graphs on which individual share prices, price indices and sometimes trading volumes are plotted. This technique
is called technical analysis. Unlike fundamental analysis, which requires the study of financial accounts of companies, technical
analysis is based upon the belief that all the necessary information is in the share price. In contrast those who follow the efficient
markets hypothesis believe that stock-market prices adjust rapidly and fully to all information as soon as it becomes available and
that neither existing nor past price levels are of any help in predicting the future.
cheap money
A deliberate monetary policy of keeping rates of interest low, either to stimulate recovery or to reduce the cost of government
borrowing. The cheap money era ended after the Second World War.
cheque
An order written by the drawer to a commercial bank to pay on demand a specified sum to a bearer, a named person or
corporation. In the developed world, the use of cheques is slowly giving way to other forms of payment, notably credit cards and
electronic payment systems.
cheque crossings
Payments of large sums of money by cheque are not necessarily secure. A cheque made out as payable on demand could be
cashed by anybody. To minimise such a risk, it is customary to cross the cheque, by drawing two parallel lines transversely
across the cheque. Historically this would cross out the words 'on demand', so the cheque could be cashed only by the intended
recipient.
c.i.f.
see
cost, insurance and freight
circular flow of income
A simple model of the workings of an economy that shows the movement of resources between products and consumers. Within
this diagrammatic representation of an economy there are a number of flows. First, there are the wages and salaries paid by firms
to households. Secondly, there is the money spent by households and received by firms. Corresponding to each of these flows of
cash is a flow of some resource in return. The same cash is spent by one sector and then the other continuously. National income
can be measured by either of the two cash flows. In reality, though, there are leakage’s from the circular flow savings (money
received by households but not spent), imports (where money flows abroad) and taxation (money paid to governments) as well as
injections from investment, exports and government spending.
circulating capital
Capital in the form of cash or debtors, raw materials finished products and work in progress.
Clark, John Bates
(1847-1938)
Educated at Amherst College, and Heidelberg and Zurich Universities, Clark was appointed Professor of Economics at Columbia
University. He is regarded as the founder of the marginal productivity theory of distribution in the USA.
classical economics
This very important classical period of economics ranges from Adam Smith's Wealth of Nations, published in 1776, to J.S. Mill’s
Principles of Political Economy of 1848, and was dominated by the work of Ricardo. It includes the work of the French
Physiocrats, stressed the position of agriculture in the economy, claiming that this sector was the source of all wealth, which at
that time was a reasonable assumption to make. However, Smith rejected this and brought into his considerations the emerging
manufacturing sector and the importance of labour productivity. Labour was in his opinion ultimately the true measure of value.
Ricardo put forward a theory of relative prices based on costs of production, accepting that capital costs were an additional
element to labour. He believed that wages were dependent on two forces, namely, the demand for labour, derived from the
availability of capital or savings to finance wages, and the supply of labour, fixed in the short run. Another member of the School
was Malthus who in his theory of population, pointed out that population growth tended to outstrip agricultural output. Ricardo
analysed the implications of the productivity of land at the margin of cultivation. The French Physiocrats and Smith had
attributed agricultural rent to the natural fertility of the soil. Ricardo did not agree with this, proposing that rent existed because
of the poor fertility of the marginal land under cultivation. Because of competition, profits and labour costs must be the same
everywhere and therefore a surplus accrues to all land more fertile than that on the margin-this surplus was rent. The classical
economists believed in free competition and that this would result in community benefiting as a whole. They felt that government
interference should be minimised. Classical economics continues to influence modern economics, through the work of neoclassical economists including Friedman and Pigou.
classical unemployment
A situation in which the number of people able and willing to work at prevailing wages exceeds the number of jobs available. In
short, the real wage is higher than the market equilibrium wage. Classical unemployment is explained by imperfections in the
labour market that prevents the unemployed bidding down wages. This contrasts with structural or frictional unemployment,
which occurs when the wage rate is too low to attract some people into employment. In Western Europe there is now considerable
support for policies the free up the market so making it more flexible. This in turn should allow the economy to adapt more
quickly to market changes. Such reactions should reduce the impact of structural unemployment on economies.
claw back
to take back money which has been allocated.
clean bill of lading
Formerly a bill of lading free from endorsement, but now one which bears no clauses declaring a defective condition of goods or
packaging.
clearing banks
Members of the London Bankers' clearing-house. Often synonymous with commercial banks or joint-stock banks.
clearing house
An organisation which sets off the amounts owing between banks as a result of various cheques drawn on their account: thus only
one sum needs to be paid from one bank to another, avoiding numerous individual transactions.
closed economy
An economic system with little or no external trade, as opposed to an open economy in which a high proportion of output is
absorbed by exports. Similarly, imports will make up a very small proportion of expenditure.
closes shop
a business in which an employee must belong a union before they can have a job. The individual must remain in that union after
employment has commenced.
Coase theorem
This theorem states that economic efficiency will be achieved as long as property rights are fully allocated and that completely
free trade of all property rights is possible. The importance of the theorem is in demonstrating that it does not matter who owns
what initially, but only someone should own that everything. Trade will place resources in their highest-value occupation
eventually.
cobweb model
This is a dynamic model of cyclical demand and supply in which there is an agreed time lag between the responses of producers
to a change in price. Farming, because of the gap between the sowing of the seed harvest, is normally uses in such a model.
Consider the diagram (above). Equilibrium is at the point of intersection of the demand and supply curves at which Q satisfies
demand and supply at price P. Suppose in the following period (1), there is a very poor harvest and supply falls to Q1. At Q1,
prices will rise to P2, corresponding to 2 on the demand curve. Producers then initiate a new production phase influenced by the
high price and in the next period supply Q2 (point 3 on supply curve). Prices must now fall for all output to be sold. The process
repeats itself, until the path converges to equilibrium at Q0. If the demand curve were steeper than the supply curve, the
fluctuations in price and quantity would become wider, whilst equal slopes would lead to a cycle oscillating around Q0.
COD
Or
c.o.d.
abbreviation of
cash on delivery
coin
A piece of metal money.
coincident indicators
economic statistics that act as reference points for the business cycle. An example of these would be the changes in output and
stocks of raw materials.
collateral
Security put up by a borrower in addition to his own promise to repay. It may be a guarantee from a third party, or deposit of
documents of title
collective bargaining
the negotiations between management and employees (often a union) that is for the purpose of setting an agreed wage rate, other
benefits and various terms relating to employment.
collective decision making
how voters, politicians and other interested parties act and how these actions influence non market decisions..
collusion
Co-operation between independent firms so as to modifies competition. Collusion may be tacit or explicit and may involve fixing
prices. In collusive oligopoly, where two or more firms produce near-identical products, levels of price and output may be similar
to those under monopoly.
collusive oligopoly
When several large firms in an industry act to restrict price or output.
COMECON
see
Council for Mutual Economic Aid
command and control
a government approach to regulation that is executed by bureaucrats rather than markets.
command economic system
a system in which the government controls the factors of production and makes all decisions about their use and about the
distribution of income.
commercial banks
Privately owned banks operating cheque current accounts, receiving deposits, taking in and paying out notes and coin and making
loans. Sometimes referred to as retail or deposit banks. In the USA these banks are sometimes referred to as member banks,
whilst in Western Europe they may be known as credit banks, to distinguish them from investment banks
common property
property that is owned by everyone and therefore no one. Air and water are examples of this..
commission
A percentage of the value of a transaction taken by an intermediary as payment for his services, e.g. broker's commission.
commodity
In economic theory, a commodity is a tangible good or service resulting from the process of production. Differences between
commodities will determine whether or not they are close substitutes. In general usage, a commodity is a primary product, such as
coffee, wool, rubber, copper, tin.
commodity exchange
The market where commodities are bought and sold. It is not necessary for the commodities to be physically exchanged. Indeed,
in most markets it is only the right to own the commodity that is actually exchanged.) A buyer can buy a commodity in the
country of origin for delivery c.i.f. to a specified port, where he can transfer the amount directly to his own premises. The market
enables commodities to be sold `spot' or for delivery at some specified time and place in the future. The latter enables merchants
to avoid the effect of price fluctuations, by buying for forward delivery at an agreed price, which will not be affected by changes
in the spot rate in the meantime.
Common Agricultural Policy (CAP)
The system of agricultural support adopted by the European Union. The CAP covers about 90% of farm output. The policy raises
the income of farmers by keeping agricultural prices to the consumer at a high level. The EU for specified commodities fixes
target prices, and import prices are kept above the target prices by the imposition of tariffs. Intervention prices are set below target
prices. If the market price falls below this price, the EU buys into store to drive the price up.
Common Budget
The pool of funds available to the European Union, principally for intervention to support the Common Agricultural Policy.
Common Market
The European Union, an organisation, which links several European countries for trading, purposes.
Commonwealth Development Corporation (CDC)
A statutory body established by the UK government originally to channel overseas aid to the developing countries of the
Commonwealth. Since 1969, the CDC has extended aid to non-Commonwealth nations. Finance is allocated from the UK
Overseas Aid budget. There is now a strong possibility that this corporation will be privatised.
company
A business or group of people organised to buy, sell or provide a service. In the UK, companies must be created by royal charter
or Act of Parliament, or more commonly registered with the Registrar of Companies.
company reserves
Profits retained in the business and set-aside for specified purposes. Capital reserves are created when new shares are issued at a
premium over par or when the book value of existing assets is revalued to bring it into line with replacement costs or when
capital gains
are made. These capital reserves may be later transformed into issued capital
(capitalisation).
Transfers of undistributed profits into special accounts, out of which a dividend may be paid in a later year in which the company
makes a loss, create revenue, or distributable reserves.
comparative advantage
The proposal that economic forces are most efficiently applied in activities in which they perform relatively better than in other
forms. The importance of comparative advantage is that it suggests that, even if someone is very less efficient than most in a
particular activity it could still be efficient for him to pursue if he is even more inefficient at other activities. The idea is
particularly important in international trade, where it is suggested that countries should specialise in areas in which they have a
comparative advantage.
comparative static equilibrium analysis
The principle of analysing markets or economies in terms of their different equilibrium positions. This is done without reference
to the process by which the process by which adjustment between equilibria is achieved achieves adjustment between equilibria.
Most non-mathematical economics is conducted in a static environment in this sense. Most supply and demand analysis is
conducted within a framework that does not allow for the tracing of any dynamic movements between differing equilibrium.
compensation principle
The principle that total economic welfare increases from a change in the economy, if those who gain from the change could
compensate those who lose from it to their mutual satisfaction. It is not necessary for money transfers actually to take place.
However, without actual transfers, inter-personal comparisons of utility of money are implied. Actual transfers would be essential
to reveal the total worth placed by each individual on his own gains or losses.
competitive advantage
The process whereby a firm aims to have a lower cost structure than its rival or rivals, so allowing it the opportunity if it so
wishes to sell at lower price or make a larger profit at the same price.
competitive conditions
The ability of firms to enter or leave a market.
competitive market
An open market where any number of willing sellers freely offers goods for sale to any number of willing buyers at prices agreed
by both parties. In the perfectly competitive market, the price of any article will be fractionally above the cost of producing it by
the most efficient producer.
competitive process
The interaction of firms supplying goods in competition with other firms.
Competition
Rivalry among buyers and sellers of both inputs and outputs.
complement
two goods are considered to be this if a change in the price of one causes an opposite shift in the demand for the other.
complementary demand
Two goods jointly bought by consumers (e.g. cars and petrol).
complementary goods
Pairs of goods for which consumption is inter-dependent, for example cars and petrol, are known as complementary goods.
Changes in the demand for one will have a similar effect upon the demand for the other. Complements have a negative
cross-price elasticity of demand if the price of one rises, the demand for both may fall. Complementary demands create
difficulties in applying marginal utility theory, since it cannot be said that the level of utility yielded by a complementary good is
yielded directly by that good in isolation.
complementary products
Two goods used together by consumers. (E.g. bread and butter).
compliance cost
The expenditure of time or money in applying government requirements. The compliance costs of income tax include the cost of
record keeping, payments to an accountant, etc. Such costs are in addition to the costs of collection, borne by the government. The
compliance costs of regulation include the payment of licence fees for permission to trade and the costs of complying, for
example, with safety regulations.
compound interest
The calculation of total interest due by applying the rate to the sum of the capital invested plus the interest previously earned and
reinvested. In contrast, simple interest is calculated solely on the original capital investment.
communism
an economic system in which the state has disappeared and in which individuals contribute to the economy according to their
productivity and are given income based on their needs.
concentration ratio
A ratio calculated to show the degree to which an industry is dominated by a small number of large firms, or many small firms. A
pure monopoly would take the value of 1. At the other extreme, if all firms in the industry had equal market shares, the value
would be the 1/(number of firms).
Confederation of British Industry (CBI)
An organisation which represents British employers in commerce and industry.
confirming house
An agency in Britain which purchases and arranges the export of goods on behalf of overseas buyers.
conglomerate
A business organisation generally consisting of a
holding company
and a group of subsidiary companies engaged in dissimilar activities.
conglomerate merger
a joining of two firms which are not in a related business.
consolidated fund
Sums standing to a particular account of the exchequer into which the proceeds of taxation are paid and from which government
expenditures are made.
consols (consolidated stock)
Irredeemable government stock first issued in the eighteenth century as a consolidation of the national debt. Consols bear an
interest of 2.5% and have a total nominal value of œ267 million.
consortium
A group of companies which work together on a particular project.
constant cost industry
An industry whose total output can be increased without an increase in per unit cost: an industry whose long run supply curve is
horizontal.
constant prices
an expenditure aggregate or a measure of expenditure expressed in terms of real purchasing power, using a particular year as a
base or standard of comparison.
constant returns to scale
a situation in which the long run average cost curve of a firm remains flat, or horizontal, as output increases.
consular invoice
When goods are exported, the importing nation may insist an invoice certified by their consul in the exporting country
accompanies them. This enables import duties to be correctly charged.
consumer
An individual or firm which buys and uses goods and services.
consumer goods
goods that are directly used by consumers to satisfy utility. To be contrasted with capital goods.
consumer durable goods
those goods, which have a reasonable lifetime eg a fridge pr TV, set.
consumer optimum
a choice of a basket of goods that maximises the level of satisfaction for each consumer.
consumers
the buyers of goods and services who’s spending in a free market economy directs what is produced.
Consumer Association
An independent, non-profit-making organisation established in the UK in 1956 to protect the interests of consumers.
consumer credit
Short term loans to the public for the purchase of specific goods. Consumer credit takes the form of credit by shopkeepers and
other suppliers, credit accounts, personal loans and hire purchase. Overdrafts are not referred to as consumer credit, as they do
not relate to a specific purchase.
Consumer Credit Act 1974
This UK Act is concerned with the hiring of goods by consumers as individuals, or the sale of such goods on credit terms. The
aims of the Act include giving greater protection from unlawful suppliers to innocent consumers.
consumer good
An economic good or commodity purchased by households for final consumption. Such products maybe consumed immediately,
or could be durable goods, which provide a flow of services over a period of time, for example a car. However, a computer
bought for a factory is a producer good, but when bought for home use is a consumer good.
consumer loyalty
The concept that goodwill (allegiance) between a consumer and a producer is a measurable feature of business life. Produces aim
to persuade/influence/nudge consumers into continuing to buy it in the future, for no other reason than having bought it
previously. It is assumed that such loyalty is based on the satisfaction recorded from the first purchase.
consumer surplus
The amount by which consumers value a product over and above what they pay for it.
consumers' expenditure
This comprises of expenditure by households, but excludes house purchase and major house improvements, which are regarded as
capital expenditure. It also includes an imputed rent for owner-occupied houses, and expenditure on durables such as motor
vehicles. In the UK, consumer expenditure accounts for around 60% of gross domestic product.
consumers' preference
The attitudes of consumer which determine their choices between alternative commodities. If one good is preferred to another, it
will have greater utility to the buyer, so consumer preference and relative prices will determine the allocation of expenditure
between the alternatives. These preferences will therefore help determine the allocation of scarce resources to the production of
various goods.
consumers' sovereignty
A fundamental belief amongst some economists that consumer behaviour determines resource allocation. In a free-market
economy consumers determine the pattern of production and consumption, although income distribution will affect the outcome.
consumption
The use of resources to satisfy current needs and wants. It may be measured by the sum of consumers' and governments’ current
expenditure, the remainder of national income being made up by investment. For instance, expenditure on durable goods in a
given period may exaggerate consumption in that period, because they have a long life span.
consumption function
The relationship that exists between consumption and income. As income increases, other things being equal, so consumption will
increase, though not at the same rate as income. As income rises, so consumers tend to save proportionately more, and spend
proportionately less. The reverse will occur as income falls. This relationship between income and consumption assumes that a
number of possible influences remain neutral.
contango
The payment of interest by a stockbroker for permission to carry payment for shares from one account to the next.
contagion theory
One of the reasons put forward for causing cost-push inflation. It is based on the observation that one government policy, eg. a tax
increase, may at some later date, actually promotes inflationary pressures-so having an adverse effect on the performance in the
next time period. It can also be used to describe a situation in which the events in one economy have an influence on the
immediate economic conditions in another country. An example of this was in the economies of the Far East in early 1998,when
adverse movements in one stock exchange caused downward movement in the indices of other countries. Dealers felt that the
close relationship of one economy to another meant that the adverse conditions apparent in one must spill over onto others.
contingency
A possible state of emergency when decisions have to be taken quickly.
contestable markets
A contestable market is one in which there are no barriers to entry and exit.
contract
A statement of the rights and obligations afforded to each party to a transaction. A contract is a formal written statement of the
terms of a transaction or relationship. But most transactions and relationships are conducted without formal contract: the
contractual terms when you buy goods in a shop, for example, is simple enough that written terms and conditions are unnecessary.
Many business relationships thus work on the basis of mutually beneficial trust.
contracting out
the transference of once publicly provided facilities to private contractors, usually through competitive tendering.
contractionary policy (deflation)
the use of tax increases and expenditure cuts to reduce inflationary pressures, or overheating in the economy, or to reduce a
balance of trade deficit
contract of employment
A legal document setting out legally enforceable terms of employment between an employer and employee.
contribution
A term used in the insurance markets, which applies when one insurance company claims contribution from another in settling a
claim. This may happen in marine insurance and situations where the insured party deals with two separate companies for the
same property.
conversion
Issue of a new stock to replace another. This may arise where a debenture or warrant is convertible into equity shares or where
holders of government stock at or near redemption are offered a new stock in exchange for existing stock.
convertible loan stock
Loan stock issued with a right to convert the stock into ordinary shares or preference shares at a stated time in the future.
convertibility
Currencies ar said to be convertible when they may be exchanged freely for gold or another currency. During the Second World
War sterling was inconvertible, and it was made a condition of the Washington Agreement of 1945 that it should be made fully
convertible by July 1947. In fact, it was not until 1958 that sterling was fully convertible for non-residents. All foreign exchange
controls were completely removed by the UK in 1979. The convertibility of US dollars into gold was abandoned in 1971.
corporate
This refers to something that applies to a whole company; for example, corporate image or culture, corporate profits.
corporate hospitality
Free entertainment and gifts offered by a firm to its consumers or to persons in a position to influence its prospects.
corporation tax
The tax which is levied on the assessable profits of companies. It is calculated after interest and Inland Revenue allowances, but
before final dividend distribution. Because UK corporation tax is an imputation system, companies are obliged to `impute' to the
shareholders a tax on their dividends. This amount is remitted to the Inland Revenue as advance corporation tax, and is deductible
from liability for mainstream corporation tax. The shareholder receives his dividend without tax deductions and with a credit for
the amount of tax `imputed' to him. The purpose of this complex arrangement is to ensure that shareholders paying the standard
rate of income tax will be in the same position after tax whether their company retains its profits or distributes them. As a result of
the 1998 Budget this system of advanced corporation tax is now under change and may eventually be discontinued.
corset
Banks were set overall limits to the funds the can lend. This is an unpopular but effective means of controlling the money supply.
cost
The amount of money which has to be paid for something.
cost and freight
A kind of foreign trade contract, which is similar to a cost, insurance and freight contract, except that the importer looks after the
insurance. The seller must give the buyer sufficient notice to enable him to do this.
cost-benefit analysis
The range of techniques that attempt to appraise of an investment project which includes all social and financial costs and benefits
accruing to the project. The techniques are used in order to evaluate and decide whether a proposed project should proceed. .
However, monetary evaluation of social costs and benefits poses problems (for example, the costing o congestion cannot
effectively be achieved).
cost-effective
Giving a high value, especially when compared with the cost.
cost, insurance and freight
Foreign trade contracts where the seller of a good must pay the costs of carriage to the seaport of destination specified in the
contract of sale and must also insure the good against loss or damage during transit.
(Compare with f.o.b. (free on board)
cost, insurance, freight and interest
A foreign trade contract, similar to
cost, insurance and freight but where the exporter also pays interest on the value of the goods.
cost of living
Money which has to be paid for food, heating, rent, etc.
cost-plus
A method of setting a price in which the contractor charges the actual cost of the goods he supplies or the work he carries out plus
either a percentage or an agreed absolute amount for his services. Used for some government contracts, this formula provides no
incentive for the contractor to minimise costs, and where a percentage service charge is applied, he actually has an incentive to
inflate them. This is justified for projects where it is not possible to estimate costs in advance. This is also applied in retailing,
where a gross margin or mark-up is added to the cost of buying in goods. If one retailer charges more than another does, though,
he may lose custom, forcing him to reduce his profit margins.
cost-push inflation
Forms of inflation that induced by a rise in the costs of production of goods and services. These pressures on prices appear to
exist irrespective of any conditions that are normally considered the causes of demand pull inflation. As such these cost increases
may come from overseas and will lead to higher prices of imported raw materials having caused price rises. The rapid escalation
in oil prices in the 1970s accelerated price inflation in the period, although the rate of inflation had begun to rise before this. The
cost-push argument for inflation is generally held to contrast with demand-pull inflation, but cost-push cannot lead to inflation
without monetary growth being sufficient to support it. Other push factors include: wages (where Earnings are exceeding
productivity) profits (where net returns to capital are growing faster that real output).
(see also
monetarism)
cost schedule
A table showing the total costs of production at different levels of output and from which marginal costs and average costs can be
calculated. A price schedule would give information about prices at different levels of sales or output. In practice these schedules
are not easily constructed, especially over wide ranges of output where the production function may not be linear.
Council for Mutual Economic Aid (COMECON)
A council set up in 1949 comprising six eastern European countries, followed later by the German Democratic Republic,
Mongolia, Cuba and Vietnam. Its aim was, by means of central planning, to develop the member countries economies on a
complementary basis for the purpose of achieving self-sufficiency. In 1990, agreement was reached for a fundamental change in
its policies. Multilateral co-operation between member states based on five-year plans and inconvertible roubles was to be
abandoned in favour of a free market, bilateral trade and convertible currencies. In 1991, COMECON was replaced by the
Organisation for International Economic Cupertino, which continues to encourage trade between member countries and advise on
regional economic problems.
council tax
A tax designed to finance a proportion of UK local government spending. It was proposed as a replacement to the community
charge or poll tax in 1991. It is a tax on the occupation of property (in contrast to the old rates, which taxed the ownership of
property), with the amount to be paid loosely determined by the market price of the occupied property. All dwellings are put into
groups (bands) based on there values, and homes in each group are charged the same amount. Homes occupied by only one
person receive a discount.
counter trade
A form of barter in international trade in which the buyer requires the seller to accept goods (of the buyer's choosing) in lieu of
currency. The seller has the task of marketing the goods. Another form of counter trade is the agreement by a seller of plant and
machinery to `buy back' the products produced by the plant and machinery in settlement of the debt. This developed rapidly as a
favoured trading method by Communist states and developing countries, when there is a shortage of foreign exchange. This may
take the form of the exchange of one commodity for another, or the exchange of a mixed selection of commodities. Transnational
firms and banks have specialist divisions to advise on counter trade, and firms have been established to specialise in advising on
counter trade.
counter cyclical policy
the use of fiscal and monetary policy to offset booms and slumps by contracting and expanding the economy accordingly.
countervailing power
The balancing of the market power of one economic group by another. The concept was advanced by Galbraith in the first of his
books on the domination of the modern economic system by large firms, along with economies of scale and technological
development and the need for planning, to meet the criticism that this system of monopolistic competition is inferior to perfect
competition. The power of large manufacturers was, he suggested, balanced by that of large retailing groups; the power of large
employers by that of the trade unions.
craft union
A union with membership restricted to those having the same skill or craft (for example, machinists, electricians, etc.)
crawling peg
A technique for managing a nation’s exchange rate that allows the exchange rate (or the bands around the rate) to crawl up or
down by a small amount each day or week, say 0.25% per week.
credit
The use of someone else’s funds in exchange for a promise to pay (usually with interest) at a later date. The major examples are
short-term loans from banks, credit allowed by suppliers to their customers, or commercial paper.
credit cards in the 1960s
There are many forms of credit cards, but they are all designed to allow individuals. or in certain cases, corporations, to obtain
credit for the holder in certain circumstances, although the party with whom they are dealing are probably unknown to him. They
are sometimes issued by shops for use in various branches. The customer can obtain credit up to a stated amount. The
commonest form is that issued by a bank. Bank credit cards fall into two basic categories. Firstly, there is the card, which states
that the bank will honour the cheques of the holder up to the amount stated on the card. The holder's signature and number
appears on the card with the name of the bank. The person taking the cheque should see that the signature on the cheque agrees
with that on the card. If he does not do so, this would be negligence and might relieve the bank from responsibility. The second
type of bank credit card is the card, which is put into a machine with the invoice: the machine imprints details on the invoice,
which is then sent to the bank by the creditor. Some can now be used in countries other than that in which they were introduced.
credit squeeze
A popular term for the State's interference with normal market forces in an attempt to lower the level of economic activity by
reducing the money supply. It is effected by making credit more expensive in the following ways: through direct instruction to
banks; by raising the minimum lending rate or Bank of England base rate so as to force other organisations linked to the money
market to increase their rates accordingly; by making changes to the hire purchase regulations so as to deter prospective
purchasers.
credit union
A non-profit organisation accepting deposits and making loans operated as a co-operative. Credit unions exist in the USA and
some European countries.
creditor
A person or firm to whom another individual or firm owes either money or some other form of. The accounts of all businesses
will include, in the balance sheet, a figure for creditors. Companies must, in their accounts, distinguish between creditors payable
within the coming year and those payable after longer periods. Additionally, the 1981 Companies Act required specific indication
in the accounts of amounts not due for payment until after five years beginning from the day following the date of the accounts
together with terms of repayment in such cases and details of any interest payable.
creeping inflation
a period in which the real level of prices move for ever upwards but a pace less than was once recorded or a speed that does not
engender panic in the economic systems held within the economy.
critical path analysis
An operational research technique used in management to establish the most efficient way, in terms if time, in which a particular
process can be achieved. The process under scrutiny is broken down into its component parts at a time place on its completion and
most importantly where it fits into the overall process. Management is then charged with the responsibility of adhering to the
critical path that emerges.
cross-elasticity of demand
A measure of the influence of a change in one good's price on the demand for another good. More precisely, the cross-elasticity
of demand equals the percentage change in quantity demanded of good A when the price of good B changes by one per cent,
assuming other variables are held constant.
cross section date
empirical observations about one or more variables gathered at particular point in time.
crowding out
The proposition that government spending or deficits, or government debt, reduces the amount of loanable funds available for
business investment. For the situation to formally arise in two forms (and it is subject to some debate as to whether it actually
exists) general conditions in which genuine crowding out may occur. First, government spending may crowd out investment
because of resource limitations (if the economy is at full employment). Second, deficits may raise interest rates and choke off
interest-sensitive investment (the marginal borrower may be deterred from negotiating for loanable funds, so reducing the real
level of investment in the economy.
cum dividend and ex dividend
When the price of a share is quoted it is quoted cum div or ex div. This indicates that the price includes or does not include the
right to receive the next dividend. Quotations are normally cum div; i.e. the buyer receives the next dividend. Ex div prices are
generally given only for the period immediately before the payment of the dividend. When a share goes ex div, the price
naturally drops rather suddenly.
currency
Coins and paper money.
currency crisis
a situation in the international money markets that occurs when a country no longer has the foreign exchange resources to support
the price of its curency. A currency crisis brings forced devaluation under a fixed exchange rate system.
currency depreciation
The extent to which the value of a currency has fallen in terms of its exchangeable value for other currencies. If the currency of
one country is tied to another the extent of its depreciation is reflected in the increase in the cost of the other. If, on the other
hand, a country's currency is said to be floating freely in the foreign exchanges then the extent of its depreciation will vary
according to with which other currency is compared.
Currency of a bill
A term used with reference to bills of exchange. It relates to the time between the drawing of a bill and the date it becomes
payable. If the bill is payable after sight then the time only runs from the date of acceptance.
current accounts
The term is also used in bookkeeping with reference to proprietor’s personal accounts, which are not their capital accounts.
current assets
The accounting term to describe assets that are continually turned over in the course of business. They should be distinguished
from fixed assets and other assets bought for permanent use. Examples of current assets are debtors, stock, work in progress, cash
and also perhaps investments, which are not trade investments. The phrase net current assets is often used and refers to the total
of current assets less the total of current liabilities. Another name for this difference is working capital.
current liabilities
The accounting term that refers for those sums of monies owed in the near future, usually within the next accounting period.
These will include trade creditors, current taxation and dividends declared and due. They should be distinguished from long-term
liabilities and share capital or loan capital.
current prices
when prices are expresses in terms of their nominal or money value and do not take into account inflation.
customs union
An agreement between a number of separate countries to standardise and/or abolish restrictions on mutual trade. This normally
incorporates a desire to equalise or dismantle barriers to trade between the countries concerned. In addition to this basic ambition,
those countries within the union agree to present a common external tariff to the rest of the world. In a pure customs union there
would be completely free trade between the participating countries and a single tariff wall for the outside world, so that any nonmember country would face the same restrictions on its exports whichever country within the union it approached.
cyclical unemployment
This was once considered to a form of temporary unemployment that resulted from a lack of aggregate demand in a downswing in
the business cycle. In recent times concern has grown that such unemployment may have more long term effects on an economy
and could result in some workers removing themselves from the job market as they convinced that they will not gain meaningful
employment again.
It is sometimes referred to as mass unemployment.
.
dated securities
Bonds, bills of exchange or other securities, which have a stated date for redemption (collection or payment).
dawn raid
A term used when a company is trying to gain control of another firm and tells its brokers to buy all available shares in that
company as soon as the stock exchanges open for business9indeed, some unofficial trading may take place before normal trading
hours have commenced). Such a tactic will normally allow them to buy at lowest the current prices. If sufficient shares have been
acquired, then the buying company may make a formal take-over bid for the other. Dawn raids launched after a bid are less
frequent since rules were introduced prohibiting significant market purchases until at least seven days after the announcement of
the take-over bid. Most Stock Exchanges now operate a limit of share holdings before trading must stop, lest a take-over bid be
about to be announced. In the UK this is 5% of the ordinary share capital.
days of grace
The additional time allowed by custom for payment of a bill of exchange or insurance premium after the actual date on which the
amount was due. With bills of exchange, three days of grace are usually allowed.
DCF
see
discounted cash flow
deadweight loss
The loss of consumer surplus or producer surplus that arises when output is not at the most efficient level.This can arise when a
monopolist raises its price, the loss in consumer satisfaction is more than the gain in the monopolistÕs revenue ÐÊthe difference
being the deadweight loss to society of the monopoly.
dead cat bounce
a term used to describe a market that appears to reach its bottom position but despite apparent growth refuses to get off the botts
to bounce along without actually moving upwards in real terms.
dear money
Money is said to be dear when loans are difficult to obtain and interest rates are very high.
debenture
a document setting out the terms of a loan. In the case of a single loan it will be held by the lender. Where the loan is in the form
of an issue of debentures, that is to say where many people lend money to a business rather than buy shares in it, the debenture
deed will be held by trustees for those people. The deed will state the terms of the loan, when it becomes payable, and the powers
of the debenture holders. Debenture holders receive a fixed interest annually, and this must be paid or provided for before any
dividends can be paid to shareholders. The issue of debentures is one of the popular ways of raising money available to a limited
company. It may be particularly favoured for certain projects that require finance for a limited period only, since debentures can
be easily redeemed by the company.
debit
An accounting term signifying an increase in assets or decrease in liabilities. In balance of payments accounting, a debit is an
import item.
debt
A sum of money or other property owed by one person or organisation to another. Debt comes into being through the granting of
credit or through raising loan capital. Debt servicing consists of paying interest on a debt. Debt is an essential part of all modern,
capitalist economies.
debt management
The process of administering debt, for example the national debt. This involves providing for the payment of interest, and
arranging the refinancing of maturing bonds.
debtor
A person or business who owes money.
debt ratio
see
gearing
deed
A legal document or written agreement.
deferred shares
Share issued when ordinary shares have a fixed dividend and which entitle the buyers of such shares to all the profits after prior
charges have been met. They are litle used in modern share dealing.
deficiency of aggregate demand
When aggregate demand is insufficient to support the natural level of real income.It included consideration for the current rate of
inflation (and inflationary expectations). In laymans terms too few people are spending the amount of money needed to keep
everyone in work.
deficit
A situation whereby spending is higher than income. A balance of payments deficit exists where imports exceed exports.
deficit financing
A situation in which a government has deliberately planned excess an of expenditure over income. Most governments encounter
periods of time when they spend more than they raise in taxation, the differenceis normally financed by borrowing. The term is
normally used to refer to a planned budget deficit incurred in the interests of expanding aggregate demand by relaxing fiscal
policy, and thus injecting purchasing power into the economy.Such apolicy may be used to promote sufficient growth to reduce a
growing unemployment figure.
deficit spending
Government expenditure on goods, services and transfer payments in excess of its receipts from taxation and other revenue
sources. The difference must be financed by borrowing from the public.
deflating
The process of converting nominal or current-dollar variables into real terms. This is accomplished by dividing current-dollar
variables by a general price index.
deflate
To slow down economic growth by reducing injections into the circular flow, such as government spending.
deflation
A fall in the general level of prices. Also sometimes used incorrectly to mean a fall in GNP or an increase in unemployment.
deflationary gap
A state in an economy where there are unemployed resources and there is no inflationary pressure. It is a state first highlighted by
Keynes and in more modern literature identified as Keynesian unemployment, characterised by a chronic shortage of aggregate
demand.An over supply exists which normally leads employers to reduce capacity,so making resources idle.The most emotive of
these is labour and the resultant rise in unemployment.
De-industrialisation
A marked decline in the share of the manufacturing sector in national income. Although a decline in the manufacturing ratio is
common to most advanced countries, as the economy switches to services,the situation may undermine an economies ability to
export.The process of decline could continue to the point where a large imbalance on visible trade could not be offset by the
growth of invisible exports without a decline in real income.
de-jobbing
Another term for the downsizing age. This one is now prevalent in Canada, where some corporations are de-jobbing people,
rather than simply firing them.
demand curve
A schedule or curve showing the quantity of a good that buyers would purchase at each price, other things being equal. Normally
a demand curve has price on the vertical axis and quantity demanded on the horizontal axis.
demand-deficient unemployment
Those workers without a job because of a lack of aggregate demand
demand for money
A summary term used to explain why individuals and businesses hold money. The major motivations for holding money rather
than assets are:
a) transactions demand:
people need to have money in order to buy things;
b) asset demand:
relating to the desire to hold a very liquid, risk-free asset. Note that the demand for money is a demand for a stock, not a flow.
demand-pull inflation
Price inflation induced by a persistence of an excess of aggregate demand in the economy over aggregate supply. The balance of
aggregate supply and demand does not reach equilibrium because supply reaches a capacity limit at the full employment level.
The excess demand persists because there is a growth in the quantity of money either through the creation of money by
government, or because the quantity of money is allowed to expand to accommodate the rise in prices.
demand and supply analysis
The study of consumer and producer behaviour with regard to price
demerger
The separation of one company into various separate parts.
demography
The study of the behaviour of a population.
denationalise
To put a nationalised industry bank into private ownership. Also known as
privatisation.
depletion theory
That part of economics, which is concerned with the rate at which natural resources are consumed over time. An example of this
would be research to establish what determines the speed at which the world does (or ought to) consume its finite stock of oil?
The fundamental principle of depletion theory is that consumption should occur at a rate, which ensures that profits to be made
from not depleting stocks of the resource are equal to those on other forms of investment. In reality, many other factors reduce
the ability of economists to accurately assess depletion.
deposit
Money placed in a bank for safekeeping or to earn interest.
depreciation
1. of an asset:
a decline in the value of an asset. In both business and national income accounts, depreciation is the dollar/£ estimate of the
extent to which capital has been used up or worn out over the period in question. Also referred to as
capital consumption
.
2. of a currency:
a nation’s currency is said to depreciate when its value declines relative to other currencies. For example, if the foreign exchange
rate of the dollar falls from six to four French francs per dollar, then the dollar has undergone depreciation. The opposite of
depreciation is an appreciation, which occurs when the foreign exchange rate of a currency rises. If flexible exchange-rate
systems, currencies depreciate and appreciate largely as a result of market forces of supply and demand.
depression
A prolonged period of high unemployment, low output and investment depressed business confidence, falling prices and
widespread business failures. A milder form of business downturn is a recession, which has many of the features of a depression
to a lesser extent. The precise definition of a recession is a period in which real GNP declines for at least two consecutive
calendar quarters.
deregulation
The reduction of government control over an industry.
derivatives
Any form of security, such as option contracts, which are derived from ordinary bonds and shares. In recent years they have been
traded in large amounts that are bought against substantial market changes. Winners in such circumstances can make enormous
profits but as Barings Bros. in Singapore discovered, you can also loss heavily.
derived demand
The demand for a factor of production that results from, or is derived from, the demand for the final good to which it contributes.
Thus the demand for tyres is derived from the demand for road vehicles.
devaluation
A decrease in the official price of a nation's currency, as expressed in the currencies of other nations or in terms of gold. The
opposite of this is where a nation raises its official exchange rate and is referred to as a revaluation.
developing country
A country that has yet to reach the stage of economic development characterised by the growth of industrialisation. It will also be
characterised by a level of national income that is insufficient to yield the level of domestic savings required to finance the
investment necessary for further growth. The attempt by developing countries during the 1980Õs and 90Õs to obtain significant
increases in their real incomes has been frustrated by the deterioration in their terms of trade and the rapid expansion of their
populations. They have also been affected by large debt repayment problems.
differentiation
Distinguishing essentially the same products from one another by real or illusory means, as in petrol, washing powder or coffee.
The significance of product differentiation in economic theory is that by reducing the degree of product homogeneity assumed
under perfect competition we can begin to identify the level to which each supplier may charge a premium for their product and
make greater profits.
diminishing balance method
A method of calculating depreciation. The cost or agreed value of the asset is written off over its expected life by the application
of a percentage to the written-down value. The percentage is calculated so that the asset will be written down to scrap value after
a stated number of years. The annual depreciation is charged against profit. This method means that much higher charges are
made in the initial years, thus reducing profit artificially. It may also tend to show the value of assets at an artificially low figure,
thus making it difficult to estimate the capital employed for the purpose of calculating certain ratios.
diminishing marginal utility, principle of
The principle which says that, as more and more of any one commodity is consumed, its marginal utility declines.
diminishing returns, law of
The law of production stating that the incremental increase in output from each successive increase of one unit of input will
eventually diminish if other inputs are held constant. Technically, the law is equivalent to saying that the marginal product of the
variable input declines after a certain point.
direct investment
Investment in the foreign operations of a company, hence foreign direct investment (FDI). Direct investment implies control and
managerial, and perhaps technical, input and is generally preferred by the host country to portfolio investment.
direct labour
Labour which can be directly associated with manufacturing a product or receiving a service.
direct taxation
Taxation on the income and resources of individuals or companies. Direct taxation is levied on wealth or income, in contrast to
indirect taxation, which is levied on expenditure. It has been argued that a shift in favour of indirect taxation would improve
incentives for higher earnings and capital accumulation; however, an indirect tax may be regressive and may distort resource
allocation. In most developed economies this form of taxation remains the largest single source of government revenue: with
Income Tax being the largest contributor.
directors emoluments
The sums of money and benefits in kind received by directors of a company. These may include fees, salaries for acting as
director (or some other capacity) for the company, the use of company prop expense allowances. The Companies Acts require
that the accounts of a company shall distinguish between amounts received in respect of services as director of the company or
any of its subsidiaries, and remuneration received for management of the company's affairs or the affairs of any subsidiary.
direct taxes
Direct taxes are those which are levied directly on individuals or firms, such as taxes on income and profit. Direct taxes contrast
with indirect taxes, which are levied on consumption of particular products.
discount broker
A broker who neither buys nor sells bills of exchange but acts as intermediary between those who wish to sell and those who wish
to buy. If a broker deals on his own account he becomes a discount house.
discount house
One of the oldest institutions located in the City of London. Their business is the discounting bills of exchange. Business is done
on a large scale and funds are obtained principally from the clearing banks. To keep the interest rate as low as possible and be
able to vary the amount borrowed at short intervals, a great deal of money is borrowed on an overnight loan. This suits both the
bank and the discount houses. To the bank, it is money at short notice, earning interest. It is lent on the security of bills of
exchange that have not yet matured.
discount rate
The interest rate charged by a central bank on any loan that it makes to a commercial bank. It is also the rate used to calculate the
present value of an asset.
discounting
A process of in which the future income from a project or investment is converted into an equivalent present value. This process
takes a future dollar/£ amount and reduces it by a discount factor that reflects the appropriate interest rate. For example, if
someone promises you $121 in two years, and the appropriate interest rate or discount rate is 10 per cent per year, then we can
calculate the present value by discounting the $121 by a discount factor of (1.10 x 1.10). The rate at which future incomes are
discounted is called the discount rate.
discount store
A term used to describe a retail establishment, which offers goods, usually consumer durable goods, at prices well below those
normally obtainable in the high street. Similar to a supermarket in operation, it is usually located in an out-of town warehouse
where rent and rates are low and the scale of operations is very large. This scale enables the owners to take advantage of bulk
buying at high discounts and the emphasis is on the fast turnover of expensive goods. Another factor, which contributes to
profitability, is the practice of concentrating on cash sales and thereby avoiding the cost of setting up credit control systems or
hire purchase arrangements. Needless to say, such stores are not popular with the small trader.
discounted cash flow (DCF)
All profitable investments, whether they be the purchase of shares or an income-earning asset, must generate a cash flow. The
investment will provide the investor with a cash return over a period, the return being the monies earned from the asset after the
deduction of the costs of making the asset capable of earning or productive. Because this return is spread over a future period
whereas the acquisition cost is incurred in the present, setting the purchase price against the present value of its future net
earnings can only assess the value of the investment. A process known as discounting back arrives at this present value. The
discounted future cash flows are then compared, in total, with the present cost of acquisition. If they show a higher figure the
investment would, prima facie, be acceptable but if they showed a lower figure then it would appear the project could only be
carried out at a loss.
discrimination
Differences in earnings that arise because of personal characteristics that are unrelated to job performance, especially those related
to gender, race or religion.
diseconomies of scale
A situation where increased production increases unit production costs. This may occur as a result of inefficiencies in large firms,
particularly if communication between workers becomes difficult.
disequilibrium
An economy not in the state of equilibrium. This may arise when shocks to incomes or prices have shifted demand or supply
schedules, but the market price or quantity has not yet adjusted fully. In macroeconomics, unemployment is often thought to stem
from market disequilibria.
disguised unemployment
A situation in which more people are available for work than is shown in the unemployment statistics. Married women, some
students or prematurely retired people may register for work only if they believe opportunities are available to them. Also
referred to as concealed unemployment.
disinflation
The process of reducing a high inflation rate.
disintermediation
Flows of funds that move between borrowers and lenders without the use of financial intermediaries. Companies may lend
surplus funds to each other without the use of the banking system or may issue bills guaranteed by the banks but sold to nonbanks. Disintermediation may make it more difficult to measure and control the money supply since the authorities' measures to
do so are focused upon financial intermediaries which can avoid controls based upon deposits by lending through parallel money
markets.
disinvestment
A period of time in which negative investment occurs. This may arise when part of the capital stock is destroyed or when gross
investment is less than capital consumption, i.e. capital equipment is not replaced as it wears out. The continued disruption of
warfare can be a major cause of this.
disposable income
The take-home pay of individuals, or that part of the total national income which is available to households for consumption or
saving. It is equal to GNP less all taxes, business saving and depreciation, plus government and other transfer payments and
government interest payments.
disinvestment
The process of reducing investment by not replacing capital assets when they wear out.
dissaving
Negative saving : spending more on consumption goods during a period than the disposable income that is available for that
period (the difference being financed by borrowing or drawing on past savings).
distribution
The ways in which total output is distributed among individuals or factors (for example, the distribution of income between
capital and labour). National income theory recognises five categories of income (hence, five groups of recipients): wages and
salaries, interest, rental income, corporation profits, and earnings from other forms of private business.
distribution, theory of
A collection of theories that attempt to explain the determination of the incomes of factors of production. It is one of the oldest
branches of economic theory, and is still dominated by the basic theoretical structure of neo-classical economics. The incomes of
land, labour and capital are determined by the supply and demand for them, which in turn is a derived demand for commodities.
In the factor markets, the owners of the factors will seek to maximise their incomes and the purchasers will seek to maximise their
profit from the use of the factors in the production process. Companies will adjust their output and employment of each factor to
the point where the marginal cost and marginal revenue of each additional unit of the factor are equal. The second part of the
theory describes the share of total output accruing to different groups, for example the amount going to workers equals the wage
rate multiplied by the number of workers employed. When the number of workers increases, the marginal product of labour is
assumed to fall and the wage level will fall, but as the total number of workers has risen, the share of output going to labour may
not fall. The third part of the theory states that with total output divided in this way, there will be nothing short and nothing over.
This is, in fact, true in conditions of perfect competition with constant returns to scale.
diversification
Adding another quite different type of business to a firm’s existing trade.
divestment
The liquidation or sale of parts of a firm. Divestment is, in effect, the opposite of acquisition or merger.
dividend
The share of a company’s profit paid to a shareholder. The amount received will depend on the number of shares held. Unlike
interest, dividends are optional payments made at the discretion of the directors. Failure to pay dividends will have an adverse
effect on the market value of the shares, as very few will be interested in purchasing a non-earning investment. Those paid to
preference shareholders have priority, unless the company’s articles state otherwise. Dividends are usually expressed as a
percentage of the nominal value of the shares, whatever the category. The rate for preference shares is normally predetermined,
being contained in the title of the shares, e.g. 5% preference shares. The rate paid on ordinary and deferred shares will depend on
the funds available and the amount of profits that the directors see fit to distribute. Often it is paid in two or more instalments,
known as interim and final dividends for a particular year.
division of labour
A method of organising production in which each worker specialises in one small stage of production. This specialisation of
labour yields higher total output as labour can become more skilled at a particular task and more specialised machinery can be
introduced to perform more efficiently. It was first put into an applied form by Adam Smith, in his book ‘The Wealth of Nations’,
published 1786.
dollar
An Anglicisation of the thaler, a silver coin of Germanic origin once widely used in European countries, which has become the
unit of currency of the USA. . Due to the economic strength of the USA, the dollar has long been seen as an attractive currency to
hold. The UK reserves were referred to as gold and dollar reserves. With the growth of other hard currencies such as the
Deutschmark and the yen, the dollar lost its absolute domination in the currency market, but it is still much sought after, because
of its general acceptability in world trade. Many international commodities, such as gold and oil, are officially quoted in US
dollars.
domestic credit expansion
A measure of monetary growth that accommodates any changes in the balance of payments. It is equal to the public sector
borrowing requirement minus public-sector borrowing from the domestic non-bank private sector, plus the increase in bank
lending to the private sector in domestic currency at home and overseas. The importance of this measurement is that it nets out
changes in the money supply created by overseas capital flows on capital and currency account.
double taxation relief
This deals with the relief afforded to a company or other business against its earning of profits overseas. The profit earned from
this source of funds being taxable in the other country. The two principal forms of relief are: (1) the tax payable in the UK will
only be enough to make the total tax payable equivalent to the UK rate. This applies where there is a double tax agreement with
the other country. (2) The tax payable abroad is allowed as a deduction when calculating taxable profits. When the full UK tax
rate is not paid on profits earned overseas, only the UK proportion, known as the net UK rate, can be reclaimed by persons
receiving these profits and entitled to make repayment claims. Most companies state 'net UK rate' when this applies to tax
deducted from net dividends.
Dow Jones Index
Any of several indices published by the Dow Jones Company based on the prices on the New York Stock Exchange.
downsizing
Reducing the size of something, especially reducing the number of people employed in a company to make it more profitable.
downward-sloping demand, law of
The rule that says that when the price of some good or service falls, consumers will purchase more of that good when other things
are held equal.
dumping
A term used in international trade for the unloading of large quantities of a particular product into another country at a low price.
This may be done as the first country is over-producing and wishes to sell at a low profit rather than at none at all (or even to sell
at a loss, so that it may get a foothold in the other market). Where there is a monopoly at home, output is restricted and a high
price charged. The bulk of the output is then sold into another country at prices which producers in that country cannot match.
Governments therefore dislike dumping, and steps are often taken to prevent it happening. Such steps may be direct, for example
by duties, or indirect, such as by retaliatory action.
duopoly
A market structure in which there are only two sellers.
duopsony
A market structure in which there are only two buyers.
durable goods
Equipment or machines that are normally expected to last several years: e.g. computers and cars.
Dutch auction
An unusual form of auction often used with reference to charities, where the auctioneer starts the bidding at a very high price and
then reduces the price until he receives a bid.
earned income
That part of any person’s income, which has been acquired from their own labour, either as an employee, or as a self-employed
person. The distinction between earned and unearned income is very important for tax purposes, although since the introduction
of the unified system of taxation in 1973, the degree of importance has been reduced.
earnings
Salary or wages, profits and dividends, or interest received.
earnings-related pensions
Most pension schemes in both the private and the public sector aim to relate the final value of the pension entitlements to the
average wages or salaries earned by the recipient. To try and achieve this regular contributions made by the employee during his
working years are geared to earnings, increasing as those earnings increase. Such contributory pension schemes are referred to as
earnings-related.
earnings yield
A term used on the stock exchange. It is a good guide to the true worth of an investment. It relates that portion of divisible net
profit or earnings of a company applicable to a particular investment to the present market price of the investment. It is normally
contrasted with the dividend yield as this relates to the dividend paid to the market price. It is the reciprocal of the price-earnings
ratio.
easy-money policy
The policy of a central bank to increase the money supply to reduce interest rates. The purpose of such a policy is to raise
investment, thereby raising GNP. In some circles of thought such a policy has been blamed for causing serious inflationary
pressures.
ECGD
see
Export Credit Guarantee Department
econometrics
The branch of economics that uses the methods of statistics to measure and estimate quantitative economic relationships.
economic development
The growth of national income per capita of developing countries. Such countries need to generate saving and investment to
diversify their economies from agriculture to industry, with the necessary supporting infrastructure. By establishing higher real
growth rates they can concentrate on providing the more advanced facilities of health, social welfare and education that are
common in the developed economies.
economic efficiency
The creation of a situation within an economy when no one individual can be made better off without someone else being made
worse off. Three types of efficiency are normally considered to be needed for this state of affairs to exist and continue. They are:
productive efficiency, in which the output of the economy is being produced at the lowest cost, allocate efficiency, in which
resources are being allocated to the production of the goods and services which society requires and distribution efficiency, in
which output is distributed in such a way that consumers would not wish, given their levels of disposable income and market
prices, to spend those incomes in any different way. In a two-person, two product economy with two factors of production, these
three types of efficiency are achieved when three conditions are apparent within the economy - these are: (a) productive efficiency
requires the rate of technical substitution for the two products to be equal, so ensuring that a unit of one factor of production is
worth the same amount in terms of the other factor regardless of which product it is used in. The marginal rate of substitution
must be equal for both consumers: otherwise, they could swap products for mutual benefit. Allocative efficiency requires that the
marginal rate of transformation must equal the marginal rate of substitution. However if, consumers feel one clementine is worth
two apples, and producers can make one extra clementine at the sacrifice of only one apple, it would be beneficial to produce one
apple fewer, and one extra clementine. Economic efficiency would exist in an economy where perfect competition exists in every
sector. A further measure of efficiency is known as dynamic and centres on how resources are used to promote continued levels
of economic growth. An economy that is dynamic in character is consuming fewer resources but creating greater amounts of final
output. As such it is becoming more efficient and producing real increase in economic wealth.
economic good
A good that is scarce relative to the total demand for it. It must therefore be rationed, usually by charging a positive price.
economic growth
The increase in the total output of a nation over a period of time. Economic growth is usually measured as the annual rate of
increase in a nation's real GNP (or real potential GNP).
economic rent
The difference between the return earned by a factor of production and the return necessary to keep that factor in its current
occupation. As such we are really measuring the opportunity cost of a particular Examples include a brain surgeon earning
£80,000, whose only other possible occupation is nursing on £8000: economic rent equals £72,000.A firm making abnormal
profits is earning economic rent. Economic rents normally arise where changes in supply are not possible, especially in the short
term, so a brain surgeon with rare skills, or a monopoly producer are protected by barriers to entry and therefore can charge extra
amounts over their personally acceptable level of earnings. In theory, pure economic rents can be taxed without distorting
production decisions.
economic sanction
When the government of one nation, or many acting together, wishes to make token objection to the policies being followed or
applied by another An attempt is made to disrupt the economy of the offending nation by imposing of boycotts and embargoes on
trade with that country. Such economic sanctions were employed against Cuba by the United States in 1961 and against Rhodesia
by the UK and other countries to try to force it to retreat from nationalist policies.
economies of scale
Increases in productivity, or decreases in average cost of production that occur when increasing the size or scale of the plant being
used. An example of this would be a firm operating at a large volume of production would be able to secure discounts on large
purchases, so reducing their unit production costs.
economies of scope
The advantages that arise from producing multiple goods or services. So, economies of scope exist if it is cheaper to produce both
good X and good Y together rather than separately. An example of this would be economic advantages to a rail provider of
charging for both the outward and return journey. A company only offering a one way service would incur higher proportionate
charges than that operating in both directions.
ecu
or
European Currency Unit
A monetary unit used within the European Union. The value of the ECU is calculated as a composite of various European
currencies in certain agreed proportions. The ECU varies in value as the value of the various currencies change. The ECU is
used for internal accounting purposes within the EU; it is available in some countries as a metal coin, but this is not yet legal
tender.It was replaced by the Euro on 1 st january 2002.
effective exchange rate
The exchange rate of a country's currency measured by applying a weighted average of the exchange rates of the currencies of the
country's trading partners. The weights are chosen to correspond to the relative importance of each trading partner in the
country's domestic as well as overseas markets.
efficiency
The use of economic resources that produces the maximum level of satisfaction possible with the given inputs and technology. A
shorthand expression for allocative efficiency.
efficiency-wage hypothesis
A hypothesis which states that employers may benefit from paying their workers wage that are higher than their marginal revenue
product. This may arise because richer workers are healthier and therefore more productive, are better motivated and are keener
to avoid unemployment, so work harder, more effectively and therefore generate more profitable output. This may be one
explanation for the failure of wages in labour markets to fall to their clearing level which in turn maybe one of the causes of
persistent unemployment.
efficient markets hypothesis
The idea that the prices operating in a certain market make it impossible for an entrepreneur to earn abnormal profits by trading in
that market on some specified amount of information. This hypothesis is normally applied to financial markets. It states that if
the price of an asset is expected to rise tomorrow, traders will buy the asset today, in anticipation. Their action will drive up the
price until it is no longer expected to rise in subsequent trading. this therefore reduces the opportunity for a quick capital gain to
be made. If the market were not efficient, the possibility of making arbitrage profits would exist, and a clever trader could make
speculative gains.
EFTA
abbreviation for
European Free Trade Association
Egalitarian
The belief that all individuals are equal and deserve to be identically treated
EIB
abbreviation for
European Investment Bank
elastic demand
The situation in a market for any product or good in which price elasticity of demand exceeds one in absolute value. This means
that the percentage change in quantity demanded is greater than the percentage change in price. In addition, elastic demand
implies that total revenue (price times quantity) rises when price falls because the increase in quantity demanded is so large.
elasticity
A term used to describe the responsiveness of one variable to changes in another. Thus the elasticity of X with respect to Y
means the percentage change in X for every 1% change in Y.
elasticity of supply
The responsiveness of supply to a given change in price. It is normal for the responsiveness to increase as the time span broadens.
This is because it is thought that supply is normally less able to respond to say a price increase that is demand.
eligible
An eligible bill or paper is a bill which will be accepted by the Bank of England or the US Federal Reserve, and which can be
used as security against a loan.
embargo
A government order which stops a type of trade, or trade with a particular nation.
embezzle
To use money which is not yours, or which you are looking after for someone
emoluments
Pay, salary or fees, or the earnings of directors who are not employees.
empirical testing
The exercise of checking theories against facts. Unlike physical sciences, it is rarely possible to conduct controlled experiments in
economics. From such exercises economists make positive statements.
employed
According to official definitions, people are employed if they perform any paid work, or if they hold jobs but are absent because
of illness, strike or vacations.
employee
A worker, or person employed by a company.
employer
A person or company which has regular workers and pays them.
employer's organisations
A group of representative of firms owners or managers, either within one industry or across several industries
employment
Regular paid work, either full-time (for all of each working day) or part-time (for part of the working day); full employment = a
situation in which everyone in the labour force who is willing to work at the market rate for his type of labour has a job, except
for those who are switching from one job to another.
EMS
abbreviation for
European Monetary System
endogenous variable
A variable whose value is determined by other variables within a system.
The quantity of a good that is demanded is seen as endogenous within the normal framework of demand theory, as it is affected
by price, while consumer tastes are not seen as endogenous.
endowment
Giving money to provide a regular income. An endowment insurance policy is one where a sum of money is paid to the insured
person on a certain date or to his heirs if he dies earlier. An endowment mortgage is a mortgage backed by an endowment policy.
Engel's law
A law of economics that states that, with given tastes or preferences, the proportion of income spent on food diminishes as
incomes increase.
enterprise
A system of carrying on a business. Free enterprise is a system of business free from government intervention.
enterprise zone
A region of the country where businesses are encouraged to locate and develop, by offering special conditions. These might
include easy planning permission for buildings, reductions in business rates and environmental enhancement.
Entrepreneur
In general terms, the person who organises production. The person who performs this function hires inputs, manages day-to-day
operations and bears risk. An important role is to take risks by engaging in innovation.
EOC
abbreviation for
Equal Opportunities Commission
EOQ
abbreviation for
Economic Order Quantity
equilibrium
The state in which an economic entity is at reset or in which the forces operating are in balance so that there is no tendency for
change.
1. for a firm:
The level of output where the firm is maximising its profit, subject to any constraints it may encounter, and therefore it has no
incentive to change its output or price level. In the theory of the firm, this means that the firm has chosen an output at which
marginal revenue is equal to marginal cost.
2. for the individual consumer:
That position in which the consumer is maximising utility: i.e. he has chosen the bundle of goods which, given income and prices,
best satisfies the consumer's wants.
3. for the economy:
A GNP level at which intended aggregate demand equals intended aggregate supply. At the equilibrium, desired consumption,
government expenditures, investment and net exports just equal the quantity that businesses wish to sell at the going price level.
equipment leasing
The increasingly popular practice of renting very expensive equipment to save large and immediate cash outlay. The rental
agreement is usually accompanied by a maintenance agreement.
equilibrium price
The price at which the amount supplied equals the amount demanded
equilibrium rate of interest
The rate at which the amount of money people want to borrow equals the amount of money others are prepared to lend
equity
The right to receive dividends as part of the profit of a company in which you hold shares. Ordinary shares are sometimes
referred to as equities.
equity capital
Funds supplied by the owner of a business. Such an investment yields a share in the ownership along with the corresponding risk
of loss and the chance of profit.
equity/efficiency trade-off
The problem that is said to exist between the maximising of average consumption and making that consumption equal across the
population. A free market economy is normally recognised as producing economic efficiency, but it seldom results in equality of
earnings. An alternative income distribution can be installed by the introduction of a progressive tax. However, it is possible that
high taxes have a negative effect on the incentive to work, and thus depress output. Hence the need of some form of socialwelfare function to achieve the optimal combination.
ergonomics
The study of people at work and there working conditions.
ERM
abbreviation for
Exchange Rate Mechanism
escalator clause
Provisions in a contract that ties payments to a price index. Some of these agreements allow for a complete correlation (i.e. when
a 10% increase in the price index results in a 10% increase in the contract price). The most common escalators are cost-of-living
adjustments in wage contracts, which raise wage levels when the consumer price index increases.
estate agent
An agent or broker is a person concerned with the sale, letting, management and valuation of real and leasehold property. The
agent works on an ad valorem commission. He is not legally bound to belong to any organisation or to have any special
educational qualifications.
EU
abbreviation for
European Union
Eurobond
A long-term bearer bond issued by an international corporation or government outside its country of origin and sold to purchasers
who pay in a Eurocurrency. Such sales take place on the Eurobond market.
Eurocurrency
European currencies used for trade within Europe but outside their countries of origin
Eurodollar
US dollar in a European bank, used for trade within Europe.
Euromarket
The European Union had seen as a potential market for sales.
European Atomic Energy Community (Euratom)
In 1957 the Common Market countries set up a common agency for the development of atomic energy for peaceful purposes.
The idea was to pool the skills and knowledge of each member so as to be better able to compete with the superpowers: the USA
and the USSR. The resulting agency became known as Euratom.
European Bank for Reconstruction and Development (EBRD)
An international bank set up in 1990 to promote private and entrepreneurial initiative in the Central and Eastern European
countries committed to applying the principles of multi-part democracy, pluralism and market economics. It was established to
help the previously planned economies of to develop free markets which would have a minimum of government intervention and
whose governments would be freely elected on a multi-party basis. It may lend at market rates of interest or invest in equities.
European Coal and Steel Community
Established by the Treaty of Paris in 1951, the European Coal and Steel Community was formed with the object of pooling the
coal, iron ore and steel resources of the six founder members of the European Economic Community: France, Germany, Holland,
Belgium, Luxembourg and Italy. The treaty was based on the Schuman Plan, originally conceived by Jean Monnet, which aimed
to unite the coal and steel industries of France and Germany. Such industries were considered essential to growth and the
maintenance of peace across Europe. Britain was invited to join but refused invitation. The Community was soon to be followed
by the far more comprehensive Common Market (the EU) in 1957.The signing of the Treaty of Rome created the rules by which
the EU is governed.
European Commission
The administrative body of the European Union.
European Community (EC)
The former name of the European Union.
European Communities Act
The British Act of Parliament which gave effect to the various agreements made in the Treaty of Accession and which made the
UK a full member of the EEC (now EU).
European currency snake
Precursor to the European Monetary System. The countries of the European Community agreed in 1972 to manage their
currencies so that their exchange rates moved in relation to one another, and, within certain narrow bands, in relation to the dollar.
European Currency Unit
see
ecu
European Economic Area (EEA)
An agreement on trade between the EU and EFTA.
European Economic Community (EEC)
The former name for the European Union (EU).
European Free Trade Association (EFTA)
This was formed in 1959 to encourage freedom of trade between member states. The original participating countries were
Austria, Finland, Iceland, Liechtenstein, Norway, Sweden and Switzerland. The main emphasis was on eliminating tariff barriers
between members but not, as was the case with the European Union, presenting a common tariff to the outside world. It has other
aims, such as improvements in both productivity and standards of living. These are sought through the friendly exchange of ideas
rather than by the enactment of laws. The UK was a member of EFTA until 1972, before joining the Common Market the
following year.
European Monetary Agreement (EMA)
This was formed in 1958 to replace the European Payments Union (EPU). It was created to serve the function of a supranational
clearinghouse. It performed a similar function to the EPU with regard to the clearing of balances, however with the advent of free
convertibility; settlements had to be effected in gold or freely convertible currencies. The credit facilities of the old EPU were
abolished and replaced with a special European fund, tied in with the IMF, to cover temporary balance of payments problems.
European Monetary Institute
the European Central Bank which co-ordinates monetary policy in theEuropean Union
European Monetary System (EMS)
The system of controlled exchange rates between some of the member countries of the EU.
European Regional Development Fund (ERDF)
A fund set up to provide grants to underdeveloped parts of Europe.
European Union (EU)
The organisation links several European countries together for the purposes of trade and closer political links.
ex ante
This is used to describe something that is expected or intended before the event, as distinct from ex post, which is the result after
the event. As the future is normally regarded as largely unpredictable, expectations and outcomes will sometimes differ. The
concepts are mainly of use in studying the process of moving towards equilibrium. An example of this might be that if investors
expect security prices to rise today ex ante, this would increase demand for them and their price now, so that ex post and ex ante
prices may become similar.
excess capacity
The difference between actual output and maximum possible output in a firm, industry or economy. Excess capacity exists when
there are unemployed resources: for a national economy it implies the existence of a deflationary gap.
excess demand
The state of a market for a commodity in which consumers would choose to buy more of the commodity than is available at the
prevailing price. Excess demand will be equal to zero at the equilibrium price. The situation can result from price control in
which suppliers are legally prevented from raising their prices in response to higher consumer demand.
excess supply
The state of the market for a commodity in which more of the commodity is available for purchase than consumers chooses to
buy at the prevailing price. Usually such a situation leads to a price fall and excess supply disappears. In a market in which
minimum price control is applied it can persist: if trade unions prevent wages from falling enough, some argue that there can be
an excess supply of labour (i.e. unemployment) at the prevailing wage.
exchange control
The protection and conservation of gold and foreign exchange reserves. Its legal basis was the Exchange Control Act 1947.
Removed in the UK in 1979/80.
exchange equalisation account
An account opened by the government at the Bank of England, and managed by the Bank. Its main objective is to control and
stabilise the value of sterling on the foreign exchange markets. Buying or selling sterling as necessary effects this.
exchange rate
The price at which one currency is exchanged for another currency or for gold. These transactions are carried out on the foreign
exchange markets. The actual rate at any one time is determined by supply and demand conditions for the relevant currencies in
the market. These in turn depend on the balance of payments deficits or surpluses of the relevant economies and the demand for
the currencies to meet obligations and expectations about the future movements in the rate. Were no government control, there
would be an entirely free or floating exchange rate in operation. With a freely floating system, no gold and foreign exchange
reserves would be required as the exchange rate would adjust itself until the supply and demand for the currencies were brought
into balance.
Exchange Rate Mechanism
A system operated by some members of the European Union where the Central Banks of members intervene too stabilise the
Exchange Rate of currencies within agreed limits
exchange rate system
The set of rules, arrangements and institutions under which payments are made among nations. Historically, the most important
exchange rate systems have been the gold exchange standard, the Bretton Woods system and today's flexible exchange rate
system.
Exchange Rate Parities
Exchange rates expressed in terms of gold or dollars
Exchequer
The fund of all money received by the UK government from taxes and other revenues. The term is also applied to the British
government department, which deals with this public revenue. The Chancellor of the Exchequer is the chief British finance
minister.
excise duty
An excise duty is a tax levied on the purchase of a specific commodity, such as alcohol or tobacco. This is distinct from a sales
tax, which is levied on the majority of commodities, although with some exceptions.
Exit Voice Theory
A theory which distinguishes between different reactions to worsening conditions in a market (e.g. given worsening pay
conditions employees may exit the industry to look for other jobs or stay and voice their grievances).
exclusion principle
A criterion by which public goods are distinguished from private goods. When a producer sells a commodity to a person, and can
easily exclude all other people from enjoying the benefits of the commodity, the exclusion principle holds and the good is a
private good. If, as in national defence, people cannot easily be excluded from enjoying the benefits of the good's production,
then the good has public-good characteristics.
exclusive dealing
A tie under which a retailer or wholesaler contracts to purchase from a supplier on the understanding that no other distributor will
be appointed or receive supplies in a given area. Examples are tied petrol-filling stations and public houses.
ex dividend (ex div)
see
cum div
exempt
Not covered by a law. If a particular good is exempt from tax, no tax is payable on the supply or purchase of that good.
ex gratia payment
A payment made as a gift, with no other obligations.
exogenous variable
A variable whose value is not determined within the set of equations or models established to make predictions or test a
hypothesis.
expand
To increase or get bigger. An expanding economy is one in which national output is increasing.
expectations
Views or beliefs about uncertain variables (such as future interest rates, prices or tax rates). Expectations are said to be rational if
they are not systematically wrong and use all available information. Expectations are adaptive if people assume that the future
will be similar to the past, but change their expectations if they have made forecast errors in the past.
Expectations-Augmented Philip's Curve
A Philips curve shows combinations of unemployment and inflation at given points in time. As consumers adjust to higher
anticipated levels of inflation the Phillips curve shifts to the right.
expenditure
Amounts of money spent.
expenses
Money paid to cover the costs incurred by somebody when doing something.
Export Credits Guarantee Department (ECGD)
A section of the Department of Trade and Industry. It attempts to encourage exports of British goods and services by offering
guarantees, in the form of insurance against bad debts, and incentives, in the form of assistance in setting up a credit sales system
abroad. The insurance cover given will, in addition to protecting the seller from non-payments of a trading debt, it also offer
protection against losses arising from political causes or exchange rate fluctuations. The cover is for all transactions, not single
contracts.
Export-Import Bank
A US government agency established in 1934 for the purpose of encouraging US trade by supplying credit at subsidised rates of
interest and financial guarantees to customers of US exporters. It also gives US exporters insurance cover.
exports
Goods or services that are produced in the home country and sold to another country. These include merchandise trade (like cars)
and services (like transportation or interest on loans and investments). Imports are simply flows in the opposite direction into the
home country from another country.
external
Existing or taking place outside a country or company. External trade refers to trade with foreign countries, whilst a company's
external growth is achieved by buying other companies, rather than by expanding sales of existing products; external deficit = a
balance of trade deficit.
External Benefits
The spillover advantages of production or consumption for which no money is paid by the beneficiary e.g. the sight of a well-kept
garden
Extenal Constraints
Factors beyond the control of a consumer or firm which influence economic behaviour
External Cost
negative spillover effects of production or consumption for which no compensation is paid
external diseconomies
A firm's actions that impose uncompensated costs on other parties. Steel factories that emit smoke and sulphurous fumes harm
local property and public health, yet the injured parties are not paid for the damages. The pollution is an external diseconomy.
external economies
Economies that occur if a firm's operations yield positive benefits without those others are paying. A firm that hires a security
guard scares thieves from the neighbourhood, thus providing external security services. Together with external diseconomies,
these are often referred to as externalities.
External shocks
Unexpected adverse changes to an economic variable, which takes place outside a given economy. For example, an increase in
the price of oil caused by war.
External vs. induced change
External change is any change in a variable that is caused by circumstances outside the system. It is contrasted with induced
change, which is caused by the internal workings of the economic system. Changes in the weather are external, whilst changes in
consumption are often induced by changes in income.
Externalities
An activity which affects others for better or worse, without those others paying or being compensated. For example, pollution is
a negative externality, or external diseconomy. Where externalities exist, the private costs or benefits do not equal social costs or
benefits. Some are positive, e.g. education, which bring benefits to the whole of society. Others are negative, e.g. congestion and
are a cost that all members of the community have to pay.
extractive industry
Industry concerned with the extraction of raw materials from the soil or sea, such as mining, agriculture and fishing.
Ff
face value
Commercially speaking, the face value of an item is its nominal value, i.e. the value written on it or, as in the case of a share,
contained in its normal description. This is a quite different thing from the market value, which is the price that a willing buyer is
prepared to pay for it. A 200-year-old coin may be sold for $100, but its face value may be only one cent. Similarly the market
value of a $1 ordinary share need not be $1. Face value should also be distinguished from intrinsic value which, for example,
refers to the value of the metallic content of a coin.
facsimile (fax)
By dialling a subscriber's fax number customers of British Telecom possessing the necessary equipment can transmit facsimile
copies of documents to other parties through the national or international telephone network.
factoring
The business activity in which a company takes over the responsibility for the collection of the debts of another. It is a service
primarily intended to meet the needs of small and medium-sized firms. Typically, the client debits all his sales to the factor and
receives immediate payment from him, less a commission of about 2-3 per cent and interest for the period of trade credit given to
the customer. This improves the client's cash flow.
factors of production
Productive inputs: the machinery, equipment, tools, labour services, land and raw materials needed to produce goods and services.
factor endowment
The relative availability of the different factors of production in a country. An important determinant of the pattern of
international trade.
factor markets
The labour market, the capital market and other markets in which the factors of production are bought and sold. The theory of
distribution attempts to explain how the prices of factors are determined and how they are allocated between alternative uses.
Fair Trading Act 1973
Passed to provide protection for the public against unfair trading practices and to provide for the proper implementation of prior
legislation by the appointment of a Director General of Fair Trading with ancillary staff. The Director General, whose task is also
to encourage fair competition, is neither a politician nor a civil servant, but is ultimately accountable to the Secretary of State for
Trade and Industry. Shortly after the first Director General was appointed, the Office of Fair Trading was established; the
former's role then became that of supervising the performance of this Office in carrying out the various duties initially given to
him personally.
fallacy of consumption
The fallacy of assuming that what holds for individuals also holds for the group.
fall back on
To have to use money kept for emergencies.
family income supplement
An additional benefit payable in respect of children of families, including single-parent families, whose income is below a
prescribed amount. The supplement is related to the amount by which total family income, excluding child benefit, falls below
that prescribed minimum, though there is a maximum payable to any one family. Now absorbed within the Working families tax
Credit system.
farm subsidies
At one time there were many grants and subsidies available to farmers for the production of meat and cereals and for farm
improvement. The entry of the UK into the Common Market has entailed considerable revision of these policies, which are now
dictated by the EU's Common Agricultural Policy.
feasibility
A feasibility study is an investigation of costs and revenues to establish whether or not a project should be undertaken.
the Fed
informal abbreviation for the
Federal Reserve Board
federal
Referring to a system of government where a group of states are linked together in a federation, as in the central government of
the United States.
Federal Reserve Bank
One of the twelve central banks in the USA which are owned by the state and directed by the Federal Reserve Board.
Federal Reserve Board
The government organisation which runs the central banks in the USA.
Federal Reserve notes
Paper money, issued by the Federal Reserve System, which today comprises almost all the paper money in the United States.
Federal Reserve system
The system of federal government control of the US banks, where the Federal Reserve Board regulates money supply, prints
money, fixes the discount rate and issues government bonds.
feelgood factor
The general feeling that the economy is going well, leading to growth in consumer spending. It has grown in supposed political
importance and politicians now try to induce in the electorate such a feeling, especially when a general election is expected.
Fiat money
Money, like today's paper currency, without intrinsic value but decreed to be legal tender by the government. Fiat money is
accepted only as long as people have confidence that it will be accepted.
fictitious assets
Assets, such as prepayments, which do not have a resale value, but are entered as assets in the balance sheets.
fiduciary issue
That part of the note issue of the Bank of England that is backed not by gold but by government and other securities. The total is
controlled by Parliament. Any profits on the sale of these securities go to the government, being paid into the Exchange
Equalisation Account.
FIFO
abbreviation for
first in first out
FIMBRA
abbreviation for
Financial Intermediaries, Managers and Brokers Regulatory Association.
final accounts
The term that normally refers to annual accounts, i.e. the presentation of the results of the financial year of an organisation and the
state of affairs at the year end to the members of that organisation. There are other meanings relating to particular circumstances.
At the end of a liquidation, the liquidator presents his final accounts to the person or persons for whom he acts Ð which, in a
compulsory liquidation, could be the court dealing with the liquidation or the Department of Trade and Industry. It could also
merely refer to the final settlement between the parties to a transaction or series of transactions.
final good
A good that is produced for final use and not for resale or further manufacture. Compare with intermediate goods.
finance
The provision of money when and where required. Finance may be required for consumption or for investment.
Finance Act
The annual act of parliament in the UK, which gives the government the power to obtain money from taxes as, proposed in the
Budget.
Finance Bill
The bill which lists the proposals in a UK Chancellor's budget and which is debated before being voted into law as the Finance
Act.
finance company
An imprecise term covering a wide ranges of financial intermediaries, most commonly a synonym for finance house.
Finance Corporation for Industry Ltd.
Formed by the Bank of England, London and Scottish clearing banks and many large insurance companies and investment trusts.
It’s authorised capital and issued capital was £30 million. The Corporation may borrow up to four time the nominal value of its
issued capital. Most of its finance is by borrowed funds and these are obtained almost entirely from the banks. The object is to
supplement other forms of finance with a view to rehabilitating industry. The minimum loan is £1 million. The borrower must
show that he cannot obtain funds elsewhere and that the loan is in the national interest. Loans tend to be large and few. Rates of
interest vary but generally are low.
finance house
A term covering finance companies, merchant banks, industrial banks, etc. Many are owned by the clearing banks themselves.
Their principal function is the finance of hire purchase transactions. Retailers and dealers offering hire purchase facilities do so
through a finance house or finance company. The latter takes on the responsibility of collecting the instalments from the
purchaser and handing over the purchase price less an agreed commission to the retailer. In this way the retailer is able to greatly
increase the scale of his business without the attendant cash flow problems which rising turnover based on credit transactions
would bring. The finance houses themselves get funds from the clearing banks and the investing public, either directly or through
the issue of bills of exchange. The Finance Houses Association supervises the operations of finance houses.
financial
Concerning money.
financial adviser
person or company which gives advice on financial matters for a fee.
financial assistance
help in the form of money
financial intermediary
An institution that receives funds from savers and lends them to borrowers. These include depository institutions (such as
commercial or savings banks) and non-depository institutions (such as money market mutual funds, brokerage houses, insurance
companies, or pension funds).
Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA)
The self-regulatory body set up in the UK to regulate the activities of financial advisers, insurance brokers, etc., who give
financial advice or arrange financial services for small clients. The Personal Investments Authority (PIA) is replacing it (along
with LAUTRO).
financial ratios
1.
Specifically measures of creditworthiness. The principal measures are the current ratio, the debt or net worth ratio (long-term
debt to net worth), dividend cover, interest cover and the net tangible assets ratio (total tangible assets less current liabilities and
minority interests to long-term debt). All these ratios are measures of the asset or income cover available to the sup-pliers of
capital to the business.
2.
Generally calculations based on company accounts and other sources such as stock exchange share prices, designed to indicate the
profitability or other financial aspects of a business.
Financial Times (FT)
An important British financial daily newspaper (printed on pink paper). The FT-SE 100 share index (the Footsie) is an index
based on the share prices of a hundred leading UK companies, and is the main London index.
Financial Times Actuaries Share Indices
A detailed series of price indices, earnings and yield averages for British securities on the London stock exchange published daily,
with some history, in the Financial Times newspaper.
financial year
A fairly general term normally meaning the year of account, or accounting period. The Companies Act 1948 defined the term as
any period in respect of which any profit and loss account was made up, whether that period was a year or not.
fine-tuning
Making small adjustments to interest rates, tax bands, the money supply and other instruments of fiscal and monetary policy, in
order to improve a nation's economy.
firm
The basic, private production unit in a capitalist or mixed economy. It hires labour and buys other inputs in order to make and
sell commodities.
firm, theory of the
The study of the behaviour of firms with respect to the inputs they buy, the production techniques they adopt, the quantity they
produce, and the price at which they sell their output. Two basic approaches may be identified:
(a)
The traditional approach assumes that producers main aim is to maximise profits; whether they are monopolists or perfect
competitors, they produce at a point where marginal cost equals marginal revenue and employ inputs to a point at which their
marginal revenue product is equal to the cost of employing them.
(b)
More modern theories attempt to explain the complications of the large institutions, which form much of the business community.
They give prominence to the separation of ownership from control of firms, which, it is suggested, may lead to objectives other
than profit maximisation. These alternative theories suggest propose that the major driving features are the maximisation of sales,
growth or management utility, with profit merely held to some satisficing level. The behavioural theory of the firm postulates the
existence of a multiplicity of conflicting objectives. It is not clear whether the alternative theories actually contradict the claim of
the traditional approach that firms maximise profits because in the long run the maximisation of, for example, sales growth, might
merely amount to the maximisation of profit. As a single goal, profit maximisation perhaps betters and more simply approximates
to the behaviour of firms than any other single objective. It is thus usually accepted that the insights of traditional theory are
useful despite their dependence on apparently unrealistic assumptions.
first class paper
When bills of exchange, government securities, consoles, etc., carry the signature of a well-known bank, finance house or
discount house, they are called first class papers.
first in first out (FIFO)
One of a number of methods accepted by the accountancy profession and the taxation authorities for the valuation of stock-intrade at a particular date. It adopts the principle that items of stock are issued to factory or retail outlets in the same order as that
in, which they were purchased. Items in stock at any time will therefore be valued at the most recent prices at which purchased.
Stocks will be priced for accounting purposes at the figure on the most recent purchase invoice, any surplus being priced
according to the preceding invoice. This system should be carefully distinguished from the last in first out (LIFO) system, which
presupposes that the most recently bought items will have been issued first and that stock-in-hand at any time will therefore
consist of goods bought at older, and usually lower, prices.
fiscal drag
The effect of inflation upon effective tax rates. With progressive income tax systems, increases in earnings may push taxpayers
into higher tax brackets, even though their real income might be declining. This could result in an unintended shift in fiscal
policy, with a depressing effect upon the growth of demand and output. A similar process can work in reverse and under
conditions of deflation; for example, if prices fall tax rates may also fall even though real incomes have increased. Fiscal drag
can therefore have the effect of a built-in stabiliser.
fiscal-monetary mix
Refers to the combination of fiscal and monetary policies used to influence macroeconomic activity. A tight monetary-loose
fiscal policy will tend to encourage consumption and retard investment, while an easy monetary-tight fiscal policy will have the
opposite effect.
fiscal neutrality
The idea that the tax system should be designed so that as few distortions are caused to economic behaviour as possible. Fiscally
neutrality will not exist if a government applies value-added tax to some items but not others, for this causes consumers to switch
spending from taxed items to untaxed ones. This distortion of behaviour is economically inefficient. Despite the economic
efficiency of applying the principle of fiscal neutrality, it is often argued that distributional or other objectives are served by
manipulating different taxes. For this reason, lump-sum taxes, which are the most neutral, are rarely applied in practice and fiscal
neutrality is seen as only one of a number of desirable features of a tax system.
fiscal policy
A government's programme with respect to the purchase of goods and services and spending on transfer payments, and the
amount and type of taxes. Fiscal policy is, along with monetary policy, a major tool used by governments to regulate the macro
economy.
fiscal year
The official government year of account ending on 5 April.
Fisher equation
see
quantity theory of money
fixed assets
Those business assets, which are purchased for continued use in earning, profit, including land and machinery. They are written
off against profits over their anticipated life by charging an annual amount calculated so as to eliminate the original cost, less
scrap value, over that period.
fixed cost
The cost a firm would incur even if its output for the period in question was zeros. Total fixed cost is made up of such individual
fixed costs as interest payments, mortgage payments, and directors' fees.
fixed-interest
The term applied to investments, securities or loans that have an interest rate, which does not vary.
flat yield
A yield on a fixed-interest security calculated by expressing the annual interest payable as a proportion of the purchase price of
the security. It omits any allowance for the difference between purchase and redemption prices.
flexible
Adjective applied to something, which can be easily changed. Under a system of flexible working hours, workers can start or
stop work at different hours of the day, provided that they work a certain number of hours per day or week.
flexible exchange rates
System of foreign exchange rates between countries, whereby the exchange rates are predominantly determined by private market
forces of supply and demand, without the government's setting or maintaining a particular pattern of exchange rates. Also
sometimes called floating exchange rate. When the government refrains from any intervention in exchange markets, the system is
called a pure floating exchange-rate system.
flexible trust
The most common form of unit trust, in which the portfolio of securities purchased by the trust, can be varied at the discretion of
the managers. Also called a 'managed' trust. Flexible trusts were developed in the 1930s to overcome the problems raised by the
inflexibility of fixed trusts.
flexitime
A system where workers can start or stop work at different hours provided they work a certain number of hours per day or week.
float
1.
Cash taken from a central supply and used for running expenses.
2.
To start a new company by selling shares in it on the Stock Exchange.
3.
To allow a currency to find its own exchange rate on the international markets.
floating charge
A loan to a business that is secured on assets generally rather than on a particular item, there is said to be a floating charge. The
lender has priority of repayment from the fund of assets that exist when, say; a receiving order is made against the business. At
this time the charge is said to be frozen.
floating debentures
A type of debenture in which the loan is secured by a charge on the assets of a firm generally. Where specific assets secure a
debenture loan, it is known as a fixed debenture.
floating exchange rates
see
flexible exchange rates
flotation
Traditionally the establishment of a public company and the raising of the necessary capital for it, by (a) an open offer to the
public or (b) by offer for sale or by a placing. Modern usage has slightly altered this meaning, particularly when the company
obtains its capital after and not at the same time as its formation. The term is now more often applied to the process of floating
off capital, either by a new company or a private company which is going public, through the medium of a merchant bank or
some other intermediary which will offer the shares to the public in the manner it considers most appropriate. The law
concerning the need for a prospectus will, of course, always applies.
flow vs. stock
A flow variable is one that has a time dimension or that flows over time (like a stream). A stock variable is one that measures a
quantity at a point in time (like the water in a lake). Income represents money per year, and is therefore a flow. Wealth as of
December 1995 is a stock. Similarly, investment is a flow, while the total inventory of computers is a stock.
flow chart
A chart which shows the arrangement of processes in a series.
FOB
see
free on board
Food and Agricultural Organisation (FAO)
An organisation set up in 1945 within the framework of the United Nations, which has its headquarters in Rome. It conducts
research and offers technical assistance with the aim of improving the standards of living of agricultural areas. It is concerned
with the improvement of productivity and distribution networks for the agricultural, forestry and fishing industries. It conducts
surveys, issues statistics, produces forecasts of the world food situation and sets minimum nutritional standards.
Footsie
The Financial Times-Stock Exchange 100 index: an index based on the prices of 100 leading companies this is the leading
London index.
forecast
A description or calculation of what will probably happen in the future.
foreclose
To sell a property because the owner is unable to repay a loan for which the property has been used as security.
foreign bills
Bills of Exchange other than those designated bills by the Bills of Exchange Act 1882. The Act defines an inland bill as one both
drawn and payable within the British Islands, or drawn within the British Islands upon some person resident therein. All other
bills are foreign bills.
foreign exchange
Currency or other financial instruments that allow one country to settle amounts owed to other countries.
foreign exchange market
Market where dealings are made which, in the absence of controls, determine the exchange rate of one currency with another.
The market is not in any single place, but consists of a web of dealings between banks and various dealers in bills of exchange
and foreign currency. In the UK, its operations are monitored and manipulated by the Bank of England, which acts on behalf of
the State through the exchange equalisation account or on its own account, and by the operation of any prevailing system of
exchange control.
foreign exchange rate
The rate, or price, at which one country's currency is exchanged for the currency of a another country. For example, if one pound
sterling costs $1.80, then the exchange rate for the pound is $1.80. A country has a fixed exchange rate if it pegs its currency at a
given exchange rate and then stands ready to defend that rate. An exchange rate, which is not fixed, is said to float.
forex
see
foreign exchange
forward
In advance or to be paid at a later date; forward buying involves buying shares, currency or commodities at an agreed price for
delivery at a later date.
forwarding agent
A general agent specialising in the transport of goods to or from a port.
forward exchange market
Market in which contracts are made to supply certain currencies at fixed dates in the future at fixed prices. Currencies may be
bought and sold in the foreign exchange market either 'spot' or 'forward'. In the former case the transaction takes place
immediately, and it is in this market that exchange rates are kept at their managed levels by government intervention. In the
forward exchange market, currencies are bought and sold for transacting at some future date, i.e. in three months' or six months'
time. The difference between the 'spot' rate and the 'forward' rate of exchange is determined by the rate of interest and the
exchange risk: that is, the possibility of appreciation or depreciation of the currencies transacted. Therefore the size of the
premium or discount of, for instance, forward sterling compared with spot sterling indicates the strength of the market's
expectation of an appreciation or depreciation of sterling and its extent.
Fr
abbreviation for
Franc.
fractional-reserve banking
A regulation in modern banking systems whereby financial institutions are legally required to keep a specified fraction of their
deposits in the form of deposits with the central bank (or in vault cash). In the United States today, large banks must keep 12 per
cent of checking deposits in reserves.
franchise
1.
A licence to trade using a brand name and paying a royalty for it.
2.
To sell licences for people to trade using a brand name.
free enterprise system
Usually has the same meaning as
capitalism
.
free exchange rates
see
floating exchange rates
free goods
Those goods that are not economic goods. Like air or seawater, they exist in such large quantities that they need not be rationed
out among those wishing to use them. Thus, their market price is zero.
free market economy
An economic system in which the allocation of resources is determined solely by supply and demand in free markets, though in
practice there are some limitations on market freedoms in all countries.
free on board
When an exporter delivers goods 'free on board', he pays all charges involved in getting them actually on to the ship. his
responsibilities include putting the goods in a condition for shipping, taking them to the ship and loading them. The buyer must
provide the ship and the seller's responsibility ends when the goods are on board. The seller must notify the buyer to enable him
to insure the goods; otherwise he may himself be liable for damage at sea. Property in the goods normally passes with risk,
though the buyer may reserve the right to reject the goods if he has no previous opportunity to examine them and they are not up
to specification or quality when he receives them.
free port
To facilitate the flow of international trade and to help the balance of payments of the countries operating them, a number of free
ports have been established around the world, and six have now been established in the UK. The advantage of a free port is that
goods can be moved through the area of the port without being subject to any customs of tariff charges or barriers. The absence
of customs barriers does not permit the landing of cargoes that are prohibited by the country operating the port.
free-rider problem
The problem that no individual is willing to contribute towards the cost of something when he hopes that someone else will bear
the cost instead. The problem arises whenever there is a public good. Everybody in a row of houses may want a faulty light
repaired, but nobody wants to bear the cost of organising the repair themselves. They would each rather 'free ride' on the effort of
someone else.
free trade
A policy whereby the government does not intervene in trading between nations, by tariffs, quotas or other means.
free trade area
A group of trading countries, normally inspired by geographical proximity, may join to create an area of free trade by scrapping
tariff barriers between themselves. By doing this, the hope to increase not only mutual trade but also the internal efficiency and
economic expansion of each individual country.
free-trade zone
A customs-defined area in which goods or services may be processed or transacted without attracting taxes or duties or being
subjected to certain government regulations. A special case is the free port, into which goods are imported free of customs tariffs
or taxes. In the case of free trade zones in the USA, customs duties are not paid until, and if, the goods are sold in the USA
outside the zone. The Russian Republic planned in 1990 to set up in Vyborg the first free-trade zone in the former USSR.
frictional unemployment
Temporary unemployment caused by incessant changes in the economy. It takes time, for example, for new workers to search
among different job possibilities; even experienced workers often spend a minimum period of unemployed time moving from one
job to another. Frictional is thus distinct from cyclical unemployment, which results from a low level of aggregate demand in the
context of sticky prices and wages.
Friedman, Milton
(1912-)
Professor of Economics at the University of Chicago and leading member of the Chicago school, and recipient of the 1976 Nobel
Price in Economics. Friedman has contributed to the theory of distribution, arguing for an approach in which high incomes are
regarded as a reward for taking risks. He has also been a leading defender of the Marshallian tradition in Microeconomics, and
made a defence of classical economics that stimulated controversy for a decade. His permanent-income hypothesis was also an
important contribution to the theory of the consumption function. His main work, however, has been the development of the
quantity theory of money and its empirical testing. Friedman has advocated strict control of the money supply as a means of
cutting inflation.
friendly society
A group of people who pay regular subscriptions to a fund which is used to help members of the group when they are ill or in
financial difficulties.
fringe benefits
Extra items given by a company to workers in addition to a salary (such as company cars or private health insurance).
full employment
Historically, it was taken to be that level of employment at which no (or minimal) involuntary unemployment exists. Today,
economists rely on the concept of the natural rate of unemployment to indicate the highest sustainable level of employment over
the long run.
full-line forcing
The exercise of market power to oblige a buyer to take a whole range of products rather than only one of them. Also known as
tie-in sales, which more strictly means that sale of a product carries with it a condition that some other item will be purchased at
the same time.
function
A description of the relationship which governs the behaviour of two or more related variables. Functions can be expressed in
different ways. If consumption (C) is 0.9 x income (Y), we can represent this information as an equation (C = 0.9Y), a graph (C
on one axis, Y on the other), or a tabulation (with certain values of C in one column and the corresponding values of Y in the
other). The function is an important feature of many different areas of economics.
fund
1.
Money set-aside for a special purpose, such as a contingency fund.
2.
Money invested in an investment trust as part of a unit trust or given to a financial adviser to invest on behalf of a client.
funded
Backed by long-term loans. Funded debt refers to that part of the National Debt, which pays interest, but where there is no date
for repayment of the principal.
funding
Providing money for spending. Governments may achieve this by changing a short-term debt (treasury bills) into a long-term
loan (gilts).
funding operations
The conversion of short-term fixed-interest debt (floating debt) to long-term fixed interest debt (funded debt). It is normally used
in relation to the work of the national debt commissioners, but the Bank of England's operations in treasury bills and government
bonds approaching maturity are also covered by the term. Private companies with bank overdrafts or other short-term sources of
capital may also decide to convert them to long-term debt by funding operations.
funny money
strange types of shares or bonds offered by companies or their brokers, which are not the usual forms of loan stock.
futures
Contracts made in a 'future market' for the purchase or sale of commodities or financial assets, on a specified future date. Many
commodity exchanges have established futures markets, which permit manufacturers and traders to hedge against changes in the
price of the raw materials they use or deal in.
G
galloping inflation
Very rapid inflation which is almost impossible to reduce.
game theory
Theory seeking to draw a parallel between the behaviour of participants in games of chance and strategy (such as poker and
chess) and behaviour of firms or people in small groups, particularly oligopolies.
gearing
1.
The ratio of capital borrowed by a company at a fixed rate of interest to the companyÕs total capital.
2.
Borrowing money at fixed interest which is then used to produce more money that the interest paid.
General Agreement on Tariffs and Trade (GATT)
The former General Agreement on Tariffs and Trade, which has now been superseded by the World Trade Organisation (WTO).
The GATT was signed in 1947 by more than forty countries to campaign against the imposition of tariff barriers and quota
restrictions, with the long-term aim of liberalising trade between participating nations. The provisions of the agreement have no
legal force, though there is usually no advantage in flouting them. See also World Trade Organisation
general equilibrium
State for the economy as a whole in which prices of all goods and services are such that all markets are simultaneously in
equilibrium. Since at these prices producers want to supply exactly the amount of goods that consumers want to buy, there are no
pressures encouraging any agent in the economy to change behaviour. By contrast, a partial equilibrium is an equilibrium
condition in only one market.
general equilibrium analysis
1.
Study of the behaviour of economic variables taking full account of the interaction between those variables and the rest of the
economy. A general equilibrium approach to the study of mechanic’s wages would concentrate both on the demand and supply in
the market for mechanics, and the effects of wages or unemployment in other markets more generally. This contrasts with partial
equilibrium analysis.
2.
The study of simultaneous equilibria in a group of related markets. The prime focus is whether there is a set of prices that would
ensure that equilibrium exists in each market. If so, is such an equilibrium stable -if disruptions occurred, would there be a
tendency to return to equilibrium? And is such an equilibrium unique, or are there many sets of prices at which all markets clear?
The analysis is attributable to Walras, who limited his consideration to a theoretical economic system in which all consumers
were utility-maximisers and firms perfectly competitive. A unique, stable equilibrium can exist in such an economy.
generalised system of preferences
The elimination or reduction of import tariffs by the advanced countries on specified products exported by approved developing
countries. The scheme was first introduced in 1971. In 1995 there were thirty such schemes. The intention is to encourage the
development and diversification of developing countries’ exports. However, the value of such tariff preference has been eroded
by the reduction of import tariffs on international trade.
geometric mean
A statistical term and form of average, and multiplying together the n numbers in a series and then finding the nth root. The
geometrical mean of the numbers 1, 8, 16 and 32 is therefore the fourth root of the product of those numbers. The product is
4,096, so the geometrical mean is 8. Geometrical means are used statistically in the averaging of ratios and are usually calculated
logarithmically. They should not be confused with the arithmetic mean.
Giffen good
A commodity for which demand increases at higher prices and falls at lower prices. This odd feature, that price rises cause
demand to increase, was observed by Sir Robert Giffen (1837-1910) of basic commodities in the budgets of the nineteenthcentury poor. As the price of bread rose, the poor, who always relied on it as their staple diet, could simply no longer afford to
buy other relatively more luxurious food items, which they had to replace with increase purchases of bread. Similarly, because
bread constituted the bulk of their spending, when its price fell, they enjoyed such a large increase in their real income that they
could then afford to substitute for bread in their diet other more palatable food. The paradox is explained within the normal
framework of demand and supply analysis. When the price of any good rises, it has two effects: it changes the relative
attractiveness of other goods, increasing the desire of consumers to buy more of items whose price has not risen - the substitution
effect. It also has an effect on the spending power of consumers, who can buy less with their money than they could before prices
rose, as though their income had fallen and no prices has changed. This is called the income effect. Two features explain the
characteristics of a Giffen good. First, demand rises as consumer income falls (it is always inferior). But secondly, this income
effect on the demand for the good outweighs the substitution effect which for all commodities causes consumers to switch
purchases from items whose prices rise.
gilts
Government securities.
gilt-edged securities
Term used to describe stocks and bonds issued by the UK government and quoted on the stock exchange. Theoretically, they are
non-risk investments, as it is assumed that the State will never renege on its debts. In reality, the low capital risk makes the
market value of such securities totally dependent on prevailing interest rates and, consequently, an investor may be forced to sell
them at a price lower that that which he paid for them. The securities in question may or may not be redeemable and the
redeemable variety may be short-term, middle-term or long-term, depending on the monetary policy of the government at the date
of issue and its forecast of its cash flow requirements. High interest securities, because of the annual interest burden, are more
likely to be short-term than are low-interest bonds. Consols, an abbreviation for Consolidated Annuities, issued by the UK
government, are the best-known example of irredeemable securities.
gilt-edged market-makers
The reorganisation of the Stock Exchange and the emergence of firms dealing in a number of aspects of the financial market has
led to a complete reordering of the regulations applying to members and the business entities which they represent. The Bank of
England has insisted that the making of markets in gilt-edged securities should be limited to a category of dealers, to be known as
gilt-edged market-makers, which will be supervised by the Bank and will be expected to make daily, weekly and quarterly reports
on various transactions and balances. Gilt-edged market-makers will be restricted to the gilt-edged market and will not be
allowed to deal in any other type of security or become part of a firm operating in other types of securities without the permission
of the Bank. Additionally, every director or partner in a gilt-edged business must be a member of the Stock Exchange.
Gini coefficient
A coefficient based on the Lorenz curve showing the degree of inequality in a frequency distribution such as personal incomes. It
is measured as G = (area between Lorenz curve and 45¡ line) Ö (area above the 45¡ line). If the frequency distribution is equal,
the Lorenz curve coincides with the 45¡ line, so G=0.
giro
The banking system in which money can be transferred from one account to another without writing a cheque. The money is first
removed from the drawerÕs (payerÕs) account and then credited to the payeeÕs account.
Girobank
A bank in a giro system.
Globalisation of trade
The increased volume of trade that now enters a world market.Most countries now have to accept that they are selling out into
markets that cover most of the globe.As such BOTH price and non-price competition have become more important.This is
particularly the case when goods of similar style/type are being sold.It is now paramount to have your goods accepted by the
majoruty of buyers as the best value they can acquire.These markets tend to be dominated by multi national corporations who
SOURCE markets from certain locations(often low wage cost economies) selling out in high income markets such as the
European Union or the USA.
gold
Metals have long been acceptable as a form of currency, partly because of their durability Of the many metals, gold and silver
have proved to be the most popular; they do not corrode and are fairly scarce, all of which accounts for their frequent use in the
making or ornaments and jewellery. The predominance of gold over silver could be attributed to its colour and the consequent
link with the many ancient cults of sun worship. Gold has been used as an almost universally accepted currency since the
beginning of recorded history. Gold is found in many parts of the world but the major sources lie in South Africa. There are gold
mines in the northern part of the USA, in the USSR and even in the UK, where there is a tradition that the wedding ring of the
reigning monarch is made from the small gold mine in the principality of Wales.
gold and foreign exchange reserves
All nations have what might be called last-ditch reserves with which to pay their international debts. They tend to be accumulated
in the natural course of foreign trade. However, when it comes to settling a particular debt it is obviously necessary to have the
appropriate currency. For this reason national reserves need to be held in a currency that is internationally recognised and the only
commonly accepted currency is, traditionally, gold. Thus gold-producing nations have a valuable natural source of international
exchange, though they have to take care not to devalue that asset by overproduction. After 1945 and until quite recently, the US
dollar was virtually on a par with gold in the international exchange market, as it was a currency that was always acceptable,
particularly as its value in exchange was more likely to increase than to fall. In recent years the dollar has lost a great deal of its
attraction due to the lack of confidence in the stability of the American economy, and the emergence of other currencies backed
by the economic strength of their countries of origin, including West Germany and Japan.
gold bullion
Bars of gold
gold exchange standard
A special form of the gold standard. In this system the central bank will not exchange its currency for gold on demand (as under
the gold standard), but will exchange it for a currency which is itself on the gold standard. The central bank holds the parent
country’s currency in its reserves along with gold itself. The Scandinavian countries adopted this system in respect of sterling
until 1931, when the UK came off the gold standard.
golden handshake
A large, usually tax-free, sum of money paid to a director who retires from a company before the end of his service contract.
gold standard
A system under which a nation declares its currency unit to be equivalent to some fixed weight of gold. The nation also holds
gold reserves and will buy or sell gold freely at the price so proclaimed, and puts no restriction on the import or export of gold.
With two or more countries on the gold standard, this sets a gold parity price, or exchange rate, between their currencies. If the
Ògold contentÓ of the pound is five times that of the dollar, then the pound will sell for $5 in the foreign exchange market. Great
Britain in the latter half of the nineteenth century was a classic example of the gold standard, but no nation is even close to the
gold standard today.
good
An item which can be moved and is for sale. Consumer goods are those bought by the general public and not by businesses,
whilst capital goods are the machinery, buildings and raw materials purchased by businesses in order to make other goods.
Finished goods are those manufactured goods which are ready to be sold to consumers.
goodwill
A term for that part of the value of an asset or business arising from factors not directly associated with the assets or business.
For instance, goodwill may arise from the good reputation of the business.
go-slow
The slowing down of production by workers as a protest against the management.
government
The organisation which administers a country.
government debt
The total of government obligations in the form of bonds and shorter-term borrowing. Government debt held by the public
excludes bonds held by quasi-governmental agencies such as the Federal Reserve System.
government securities
Fixed interest securities issued by the government. They may be i bonds or other types of security, and may or may not be
redeemable. They may be issued banks and other institutions in the money market or to the general public through banks or the
post office. The treasury bill is a specific type of government security which is issued only within the money market, and
particularly to discount houses, which tender for these bills each week. The rate of discount at which they are allotted is a pointer
to the underlying trends of the economy can influence the current basic lending rate.
governor
The person in charge of an important institution, such as the Bank of England.
graduated
Rising in steps. A graduated taxation system is one where the percentage of tax paid rises as the income rises ÐÊthis is also
known as progressive taxation.
graduated pensions scheme
A scheme introduced by the State by which retirement pensions could become earnings-related. Although the idea of graduated
State pensions was introduced as far back as the National Insurance Act 1959, the scheme here referred to is the far more
comprehensive one set up by the Social Security Act 1975, which cam into force in April 1978. When fully operational, the
scheme will pay pensions on a scale determined by the earnings of the recipient prior to retirement; it will be funded by
contributions deducted on a sliding scale basis in the same manner as PAYE deductions are made. People not paying tax by
PAYE pay their contributions directly at the same time they pay their tax.
grant
Money given by the government to help pay for something.
graph
A diagram which shows statistics in a drawing.
gratuity
Often referred to as a tip, this is a sum paid without obligation for services rendered. It is normally taxable in the hands of the
recipient. In some industries, gratuities are an important source of income, and basic salaries may be adjusted accordingly.
green card
1.
A special British insurance certificate to prove that a car is insured for travel abroad.
2.
A work permit for a person going to live in the USA.
green currency
A currency used in the EU for calculating agricultural payments. Each country has an exchange rate fixed by the Commission, so
there are green pounds, green francs, green marks, etc.
Green Paper
A report from the British government on proposals for a new law to be discussed in Parliament.
Gresham’s Law
Before paper money (banknotes)became universally accepted as a means for settling debts precious metals were the most
common forms of money. Gold and silver coins were struck bearing a face value equivalent to the value of their metal content.
Debasement of the coinage occurred when the face value was of the correctly valued coinage became unwilling to exchange for
the debased coinage because they would obtain less metal in exchange than if they bought direct. The result was that the `good',
non-debased coinage did not circulate. Gresham therefore stated that ‘bad money drives out good’, i.e. that if the public is
suspicious of one component of the money supply, it will hoard the good money, trying to pass off the bad money to someone
else.
grey market
An unofficial market run by dealers, where new issues of shares are bought and sold before they officially become available for
trading on the Stock Exchange (even before share allocations are known).
gross
Total, or with no deductions.
gross domestic product (GDP)
Measure of the total flow of goods and services produced by the economy over a specified time period. It is obtained by valuing
outputs of goods and services at market prices, and then adding these together. Intermediate goods are excluded, and only goods
used for final consumption or investment goods or changes in stocks are included. This is because the values of intermediate
goods are implicitly included in the prices of the final goods. The word ‘gross’ means that no deduction for the value of
expenditure on capital goods for replacement purposes is made. Because the income arising from investments and possessions
owned abroad is not included, only the value of the flow of goods and services produced in the country is estimated; hence the
word ‘domestic’ to distinguish it from gross national product. Since no adjustment is made for indirect taxes and subsidies, the
measure here defined is often referred to as gross domestic product at market prices’.
gross domestic product at factor cost
In measuring GDP, market prices are used to value outputs. As market prices include indirect taxes and subsidies, the value of
output will not equal the value of incomes paid out to factors of production. This is because it is the revenue received by firms
after indirect taxes which is distributed as factor incomes. So by subtracting the total of indirect taxes and by adding subsidies
from the GDP we obtain an estimate of GDP at factor cost, which is consistent with the value of incomes paid to factors of
production.
gross investment
Investment expenditure inclusive of replacement of worn-out and obsolescent equipment, i.e. inclusive of depreciation.
gross national product (GNP)
The value of all final goods and services produced within some period by a nation, without any deduction for the depreciation of
capital goods. Nominal GNP represents the value at current market prices, whilst real GNP is found by correcting nominal GNP
for inflation.
gross national product at factor cost
GNP at market prices minus all indirect taxes plus subsidies.
gross national product at market prices
Gross national product with all flows valued at market prices. Since market prices include indirect taxes and subsidies (regarded
simply as transfer payments) it is often preferable to measure national output excluding these. This gives the measure of national
output, net of tax and subsidies, known as gross national product at factor cost.
gross national product deflator
The price of GNP, that is, the price index that measures the average price of the components in GNP relative to a base year.
GNP gap
The difference or gap between potential GNP and actual GNP; in Keynesian macroeconomics, taken to measure the
macroeconomic loss due to inadequate aggregate demand. Also known as
inflationary gap.
gross profit
Where the buying or selling of goods is concerned, it refers to the proceeds of sale, less the cost of putting the goods into a
condition for sale. Where the goods are also manufactured, this cost will include part of the overhead expenses. Otherwise,
overheads concerned with distributing or selling the goods and administering the business generally are charged after gross profit
(also known as gross profit on trading) to produce net profit on trading. This will then be adjusted for exceptional items or items
not connected with the major objects of the business, to produce the actual net profit.
ground rents
Rent paid for land as opposed to rent paid for the buildings on the land. Rights to receive ground rents can be bought and sold.
Group of Five (G5)
The group of five major industrial nations (France, Germany, Japan, UK and the USA).
Group of Seven (G7)
The central group of seven major industrial nations who meet regularly to discuss problems of international trade and finance.
They comprise France, Germany, Japan, UK, Canada, Italy and the USA.
Group of Ten (G10)
The major world economic powers working within the framework of the IMF. There are now in fact eleven members: Belgium,
Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK and the USA.
growth
Increase in size.
growth accounting
A technique for estimating the contribution of different factors to economic growth. Using marginal productivity theory, growth
accounting decomposes the growth of output into growth in labour, land, capital, education, technical knowledge and other
miscellaneous sources.
growth theory
An area of economics concerned with the development of models which attempt to explain the rate of economic growth in an
economy. The most important questions in growth theory are about the optimal level of growth and whether the economic system
has a natural tendency to achieve balanced growth, i..e. a position in which all variables grow at the same rate. If the growth in an
economy is balanced, it can be shown that n = s/v, where n is the rate of growth of the labour force, s the average propensity to
save, and v the ratio of capital in the economy to output produced. For balanced growth to be sustained with investment equal to
savings and with constant full employment, some mechanism has to exist to cause one of these three factors to change when one
of the other two moves out of balance. In the neo-classical approach to growth, it is the capital-output ratio, v, which alters. If,
for example, the labour force was growing too fast to maintain full employment, the capital-output ratio would fall as
entrepreneurs switched from employing capital to labour in response to the lower wages that the excess supply of labour caused.
The fixed relationship between the three factors would thus still hold. In the Harrod-Domar model, none of the three variables is
endogenous, and thus there is no tendency for balanced growth to occur at all. The capital-output ratio is assumed to be fixed by
technological factors or by sticky interest rates. In models associated with the Cambridge School, it is the propensity to save
which is the endogenous variable; in particular, if there is a difference between the inclination for profit-earners and wage-earners
to save, growth can lead to redistributions from one group to the other in such a way as to alter the savings necessary to maintain
a full employment steady-state growth path.
Hh
haggle
To wrangle when settling a bargain.
hallo
golden hallo = cash inducement paid to someone to encourage him to change jobs and move to anoter company
handshake
golden handshake = large, usually tax-free, sum of money given to a director who resigns from a company before the end of his
service contract; when the company was taken over, the sales director recieved a golden handshake of £25,000
hard currency
In foreign trade, this term is commonly used to describe any currency which is generally thought to be safe, or in no apparent
danger of losing its value by loss of confidence or by devaluation. The demand for a hard currency will normally exceed the
supply. The dollar was looked upon as a hard currency, but its role has been reduced by others, including the Deutschmark and
the Japanese yen.
harden
prices are hardening = are settling at a higher price
hardening
Prices are said to be hardening when they are settling at a higher level.
hardness
hardness of the market = being strong or not being likely to fall
hard sell
Giving a product the hard sell means that great efforts are being made to persuade people to buy it.
hardware
physical units, components, integrated circuits, disks and mechanisms that make up a computer or its peripherals
Harrod-Domar model
A theory of economic growth which suggests that there is no natural tendency for an economy to produce balanced growth. In
this model, developed by R.F. Harrod in 1939 and independently by E.D. Domar, shortly afterwards, there are three concepts of
growth. The first is known as warranted growth: the rate of output growth at which firms believe they have the right amount of
capital and donÕt feel it necessary to increase or decrease investment, given their expectations of future demand. The second is
reffered to as the natural rate of growth, which corresponds to the increase in the labour force: if the labour force rises, growth
must rise to maintain full employment. The third is actual growth: the change in aggregate output that finally materialises. In the
model, two problems are seen to arise in the growth pattern of an economy. The first concerns the relationship between actual
and natural growth; the second concerns the relationship between actual and warranted growth. The first is that the factors
determining actual growth are quite independent of the factors determining natural growth, and so there is no reason that an
economy will achieve a level of growth necessary to maintain full employment. The natural rate of growth is determined by
factors such as attitudes to birth control, and the tastes of the population with respect to family size. Actual growth, however, is
affected by the propensity to save (the more saving, the more investment and the more growth) and the increase in output caused
by each poundÕs worth of investment. Neither the capital-output ratio nor the propensity to save will adjust to meet the
requirements of the labour market, however. The second problem is that, in the model, if entrepreneurs expect output to grow
they will increase their investment to meet the anticipated demand. If the increase in demand is forthcoming, the aspirations of
firms will be met and warranted growth will be equal to actual growth and no problem arises. If, however, actual growth exceeds
expectations, then entrepreneurs will discover they have not invested as much as they would have wanted to if they had known
what was coming. In response, they will increase their investment to the level warranted by actual growth; but this increase in
investment will cause actual growth to rise even more. A reverse story can be told when actual growth falls short of warranted
growth: entrepreneurs, in the model, set up a vicious circle, by which any discrepancy between their expected growth and actual
growth magnifies as they attempt to change the level of their investment to the level warranted. The result is instability. The
conclusion of the Harrod-Domar model is that the economy will not naturally find a full-employment, stable-growth rate.
haven
A safe place. A tax haven is a country where taxes are low, encouraging companies to set up their main offices there.
headhunt
To look for managers and offer them jobs in other companies. Also called executive search.
headline inflation
The British inflation figure which includes all items, such as mortgage interest and local taxes, which are often not included in the
inflation figures for other countries.
headline rate
the change in the retail price index that is announced by the CSO and widely quoted in the press. It contrasts with the underlying
rate of inflation, which is adjusted to exclude mortgage interest payments
Health and Safety Commission
A statutory authority set up under the Health and Safety at Work Act 1974. It has partly taken over the responsibilities of
inspectors appointed under the Factories Acts for the protection of people at work from employment hazards, particularly in
industry. It oversees the provision of safeguards from accidents fro both employees and the general public; in doing so it heeds
the standards set by government. With the collaboration of employers, trade unions and local authorities it makes representations
to the Secretary of State concerning the maximisation of safety precautions.
hedge
1 protection against a possible loss (by taking an action which is the opposite of an action taken earlier); a hedge against inflation
= investment which should increase in value more than the increase in the rate of inflation; he bought gold as a hege against
exchange losses 2 to protect oneself (against the risk of a loss); to hedge one’s bets = to make an investment in several areas so as
to be protected against a loss in one of them; to hedge against exchange rate losses = to buy foreign currency forward so as to
avoid losses caused by adverse movements in exchange rates; to hedge against inflation = to buy investments which will rise in
value faster than the increase in the rate of inflation
hedging
A technique for avoiding a risk by making a counteracting transaction. For example, if a farmer produces wheat that will be
harvested in the fall, the risk of price fluctuations can be offset, or hedged, by selling in the spring or summer the quantity of
wheat that will be produced.
Herfindahl index
A measure of concentration of market power for an industry. It is calculated as the sum of the squares of the market shares of
each individual firm.
Hicksian demand function
The relationship between the consumer’s demand for a commodity and the price of that commodity, when the total level of
consumer utility is held constant. Hicksian demand curves are also known as compensated demand curves as, when the price of a
product changes, it is the consumer is compensated so that he feels no less satisfied than before. They contrast with Marshallian
demand functions.
hidden
Cannot be seen. A hidden asset is one which is valued much less in the company’s accounts than its true market value. Hidden
reserves are those which are easy to identify in the company’s balance sheet; whilst reserves which are illegally kept hidden are
called secret reserves.
hidden unemployment
official unemployment statistics are not 100% accurate since people may be incorrectly included or excluded
high income
Which gives a large income; high income shares; a high-income portfolio.
highly
very; highly-geared company = company which has a high proportion of its funds from borrowings; highly-paid = earning a high
salary; highly-placed = occupying an important post; the delegation met a highly-placed official in the Trade Ministry; highlypriced = with a large price; she is highly thought of by the managing director = the managing director thinks that she is very
competent
hire purchase (HP)
A type of consumer credit in which the purchaser pays a deposit on an article and pays the balance of purchase price plus interest
in regular instalments over periods of months or years. The credit is usually arranged by the seller. In an HP contract, unlike a
credit sale, ownership of the goods does not pass from the seller to the buyer until the final payment is made, i.e. the goods are
security for the loan.
hive off
To split off a large company to form a smaller subsidiary.
hoard
to buy and store food in case of need; to keep cash instead of investing it
hoarder
person who buys and stores food in case of need; person who holds gold or cash without investing it
hoarding
The buying up of large quantities of money or food to keep in case of need.
holding company
A company which owns more than 50% of the shares in another company; company which exists only or mainly to own shares in
subsidiary companies
hold out for
to wait and ask for; you should hold out for a 10% pay rise = do not agree to pay rise of less then 10%
home banking
system of banking using a computer terminal in ones own home to carry out variuos financial transactions (such as paying
invoices)
homogeneous products
Goods and services purchased by consumers which the latter consider to be perfect substitutes.
honorarium
money paid to a professional person, such as an accountant or lawyer, when he does not ask for a fee. Note: plural is honoraria
horizontal integration
The joining together of similar companies in the same type of business at the same stage in the production process.
hot money
Hot money is a term sometimes used in the sphere of international finance to refer to funds that move quickly from one country to
another in search of the highest rates of interest.
household
An economic unit which is defined as a single person living alone or a family or group voluntarily living together. Because of the
fact of shared use, which is a household’s characteristic, it is an important economic statistic when considering the market
potential for certain consumer products.
household name
A brand name which is recognised by a large number of consumers.
HP
see
hire purchase
human capital
The stock of technical knowledge and skill embodied in a nationÕs work force, resulting from formal education and on-the-job
training.Often considered to be one of the main reasons for the slow growth rates recorded in te developing economies.
human resources
The workers which a company has available (seen from the point of view of their skills and experience).
hyperinflation
An inexact term applied to inflation when it is running at extremely high levels, for example in Hungary in the period following
the end of the Second World War.
hypothesis
A theoretical explanation of the behaviour of phenomena which can be tested against the facts. A hypothesis can be refuted,
unlike a tautology, which is true, by definition, but it may not be possible to prove that it is correct. An example of a hypothesis
is that saving is a function of disposable income such that when disposable income doubles, savings will also double. The
statement that saving equals income minus expenditure, however, is a tautology.
Ii
IBRD
see
International Bank for Reconstruction and Development
illiquid
1.
(of an asset:) Not easily convertible into cash.
2.
(of a company:) Having no cash.
ILO
abbreviation for
International Labour Organisation
IMF
abbreviation for
International Monetary Fund
imperfect competitor
Any firm that buys or sells a good in large enough quantities to be able to affect the price of that good.
imperfect market
A market in which the forces that are thought to lead to the productive and allocative efficiency of resources are reduced in their
ability to perform such functions. In a perfect market, three characteristics predominate: prices equal marginal cost, there are no
abnormal profits (i.e. average cost equals average revenue), and production takes place at minimum average cost. Although price
acceptance by consumers and firms, and free entry and exit of firms, are the important features to ensure these hold, underlying
them are a number of other conditions. These include rational consumers, profit-maximising firms, homogeneous products made
without economies of scale, a smooth pattern of demand without peaks, a smooth pattern of supply where the quantity of output is
easily adjusted, no collusion between producers and the existence of complete and no-cost market information. In the absence of
any of these, imperfect markets exist and fail to act efficiently.
implicit-cost elements
Costs that do not show up as explicit money costs but nevertheless should be counted as such. For example, if you run your own
business, then in reckoning your profit you should include as one of your implicit costs the wage or salary you could have earned
if you had worked elsewhere. Sometimes called opportunity cost, although this has a broader meaning.
import restrictions
Restrictions on the importation of products into a country may be effected by means of tariffs, quotas or import deposits, and are
generally imposed to correct a balance of payments deficit. Their purpose, as with devaluation, is to divert expenditure away
from foreign-produced goods towards the purchase of goods produced at home. The size of this switching effect will depend on
the elasticity of demand for the imports in question. Import duties may also be applied to protect the market of domestic industry
whilst it is being established. Non-tariff barriers include revenue duties such as value-added tax, which, being imposed as a
percentage on landed, duty-paid value, increase the cost of imported goods more than locally produced goods and thus
discriminate in favour of the latter. Other examples include domestic taxes applied according to the technical characteristics of
goods, such as engine capacity, which may subtly discriminate against imports. Some governments have rules that insist on
purchases being made by departments that are solely of national produced items and these are referred to as procurement
arrangements.
imports
Goods or services purchased from other countries, involving the use of foreign exchange. Imports, like exports, may be visible or
invisible. Duty rates on goods vary according to the type of product and the nature of any existing agreement with the supplying
country. Tendencies to impose restrictions are countered both by fear of reprisals by the other country, by particular trading
treaties and by the World Trade Organisation. Some goods may be subject to quotas, whereby only a certain quantity may be
imported in any one year. All nations have a list of goods, the importing of which is prohibited, and these vary widely from
country to country.
imputed cost
The cost attributed to an asset, which is owned by its user. The opportunity cost of not putting an asset to its best alternative use.
For instance, a shopkeeper who owns his own shop forgoes rent, which he could earn if he did not use the shop for his own
business. This loss of income is an imputed cost, which he would compare against the revenue from his business when
considering whether it were truly profitable. Similarly an imputed income is the amount an owner would pay not to put his asset
to an alternative use. If the shopkeeper had to pay £20 a day to rent an alternative to his own shop, he would willingly forgo £10
to keep it, and he thus enjoys an imputed income of £20 from his shop.
inactive money
Money which is not in circulation, i.e. not on deposit or invested in other financial assets or being used for transactions. Inactive
money is also referred to as idle money or idle balances. According to Keynes' theory of liquidity preference the amount of idle
balances will depend, among other factors, upon the rate of interest.
incidence
The final economic burden of a tax (as opposed to the legal requirement for payment). Thus a retailer may pay a sales tax, but it is
likely that the incidence falls upon the consumer. The exact incidence of a tax depends on the price elasticities of supply and
demand.
income
The flow of wages, interest payments, dividends and other receipts accruing to an individual or nation. Annual income - money
received during a calendar year; disposable income = income left over after tax and national insurance deductions; earned income
= money received as a salary, wages, fees or rental income; fixed income = income which does not change from year to year;
gross income = income before tax has been deducted; net income = income left after tax has been deducted; private income =
income from dividends or interest or rent which is not part of a salary; personal income = income received by an individual
person; real income = income adjusted for inflation; retained income = profits which are not paid out to shareholders as dividends;
unearned income = money received from interest or dividends; lower income bracket or upper income bracket = groups of people
who earn low or high salaries considered for tax purposes.
income effect
The change in quantity demanded of a commodity because a change in its price has the effect of raising or lowering a consumer's
real income. Thus it supplements the
substitution effect
of a price change.
income elasticity of demand
The demand for any given good is influenced not only by the good's price, but also by buyers' incomes. Income elasticity
measures this responsiveness. Its precise definition is percentage change in quantity demanded divided by percentage change in
income.
income statement
A company's statement for a specified time period (usually a year), showing sales or revenue earned during that period, all costs
properly charged against the goods sold, and the profit (net income) remaining after deduction of such costs. Also called a profitand-loss statement.
income tax
The tax levied on the income received by individuals, either in the form of wages and salaries (earned income), or income from
property, such as rents, dividends or interest (unearned income). In most countries, personal income tax is'progressive' so that
people with higher incomes pay taxes at a higher average rate than people with lower incomes.
income tax allowances
These are various deductions from income, which can be claimed when calculating tax payable. The claim is made by taxpayers
when completing their annual tax return.
income tax codes
Employed persons taxed under PAYE each receive a tax code number. This is determined by the allowances against tax to which
the person is entitled, those with more allowances receiving higher tax code numbers. When the employer calculates the tax
payable, he first deducts from the gross wage or salary an amount known as free pay. This figure is taken from tables supplied by
the Inland Revenue and the appropriate amount will be shown against the employee's code number. A second table provided then
shows tax payable on the balance remaining after deduction of free pay. This tax will be at the prevailing rate.
incomes policy
A government policy that attempts directly to restrict wages and price change in an effort to slow inflation. Such policies range
from voluntary wage-price guidelines to outright legal control over salaries, wages and prices. They are not often used in their
direct form, though some may argue that cash limits in the public sector have a similar effect. In the United Kingdom they were a
popular piece of economic policy in the 1970Õs.
inconvertible
An inconvertible currency is one, which cannot easily be converted into other currencies.
increasing relative costs, law of
The law of scarcity for an economy states that if a society wants more of good it must sacrifice some output of another good, B.
The law of increasing relative costs says that if a society wants more and more of good A, the quantity of B that must be
sacrificed, for each extra unit of A, will increase as the production of A increases. In terms of a production possibility frontier,
this law is illustrated by a curve that is bowed outward like a dome.
increment
Regular automatic increases in salary.
indemnification
payment for damage
independent goods
Goods whose demands are relatively independent. More precisely, goods A and B are independent when a change in the price of
good A has no effect on the quantity demanded of good B, when all other factors are held equal.
independent variable
A variable from which the values of other variables are derived.
index-linked
An index that is attached to a recurring payment or receipt or to a fixed sum payable at some future date, this means that the
payment or sum is to be adjusted when the time for payment arrives. This adjustment will accord with movements in a specified
index number, usually the retail price index, in order that the real value of the sum originally agreed is maintained. For example,
an index-linked pension of £1,000 will rise to £1,100 if there is a 10 per cent rise in the index of retail prices.
index number
A number which measures relative changes. It may be used with reference to price or quantity or anything, which can be stated
numerically. One specified point of time or quantitative level is taken as a base (usually given the value 100) and each
subsequent measurement will be expressed as a number above or below this figure, to be determined by the percentage change
during the interval. For example, if the retail price index (RPI) is 120 (base year given), then since that year the index of has risen
by 20 over whatever the base year was. The retail price index (RPI) is intended to show movements in the general cost of living.
This is a weighted index, where attention is paid to the fact that the effect of a rise in the price of one item may be greater, or less,
than a rise in the price of another. This is because two items can represent quite different proportions of total living expenses.
indicator
Economic indicators are statistics, which provide information as to how the economy is performing.
indifference curve
A curve drawn on a graph whose two axes measure amounts of different goods consumed. Each point on one curve (indicating
different combinations of the two goods) yields exactly the same level of satisfaction for a given consumer. That is, the consumer
is indifferent between any two points on an indifference curve.
indifference map
A graph showing a 'family' of indifference curves for a consumer. In general, curves that lie farther Northeast from the graph’s
origin represent higher levels of satisfaction.
indirect taxation
The part of total tax revenue collected by means of a levy charged on expenditure on goods or services. The present principal
source of indirect taxation is value-added tax (VAT), but others include duties payable on imports and certain home-produced
goods. Prior to the introduction of VAT, indirect taxation included purchase tax, which was paid over by the manufacturer. VAT
is levied on the value added at each stage in the provision of goods and services for the consumer, and is collected from all parties
concerned from the manufacturer to the retailer. It is essentially a sales tax in that it is only payable when goods are sold to the
public and not, as with purchase tax, when the goods are made and passed to the retailer for sale.
induced investment
That part of investment, which is determined by changes in output, as opposed to autonomous investment such as government
expenditure on infrastructure capital.
industry
All factories or companies or processes involved in the manufacturing of products. A boom industry or growth industry = an
industry which is expanding rapidly; heavy industry = industry which deals in heavy raw materials or makes large products; light
industry = industry making small products; primary industry = industry dealing with the extraction of basic raw materials such as
coal and wood, as well as agriculture; secondary industry = industry which uses basic raw materials to produce manufactured
goods; service or tertiary industry = industry which produces neither raw materials nor manufactured products, but offers a
service such as banking.
industrialisation
The development of an economy from being dependent primarily on agriculture to earning most of its wealth from manufacturing
industry.
inefficiency
Lack of efficiency
inelastic demand
The situation in which price elasticity of demand is below 1 in absolute value. This signifies that when price changes by 1
percent, the quantity demanded changes by less than 1 per cent. Alternatively, when price declines, total revenue declines, and
when price is increased, total revenue goes up. Perfectly inelastic demand means that there is no change at all in quantity
demanded when price goes up or goes down.
ineligible
not eligible; ineligible bills = bills of exchange which cannot be discounted by a central bank.
infant industry
In foreign-trade theory, an industry that has not had sufficient time to develop the experience or expertise, or that has not
developed sufficiently to exploit the economies of scale needed to compete successfully with more mature industries producing
the same commodity in other countries. Infant industries are often thought to need tariffs or quotas to protect them while they
develop.
inferior good
A good whose consumption goes down as income rises; that is, its income elasticity of demand is negative. A good, which is not
inferior, is called a normal good.
inflate
(a)
to inflate prices = to increase prices
(b)
to inflate the economy = to make the economy more active by increasing the money supply.
inflation
The inflation rate is the percentage annual increase in a general price level. Hyperinflation is inflation so severe, a thousand, a
million or even a billion per cent per year, that people try to get rid of their currency before prices rise further and render the
money worthless. Galloping inflation is a rate 200 per cent annually. Moderate inflation is a price-level rise that does not distort
relative prices or incomes severely.
inflationary
Tending to increase inflation; anti-inflationary measures = measures taken to try to reduce inflation.
inflationary gap
A situation in which aggregate demand is at an equilibrium level in excess of the full-employment level of output. If it exists, all
resources in the economy are fully used and prices have to rise to eliminate the excess demand. Based on Keynesian models of
the economy, the inflationary gap leads to a demand-pull inflation, which can be removed by deflation. Persistent inflation has
been combined with high unemployment and in recent years in developed countries other theories of inflation have been
developed.
inflow
flowing in; inflow of capital into a country = capital which is coming into a country in order to be invested.
infrastructure
Roads, airports, sewage and water systems, railways, the telephone and other public utilities. Also called social overhead capital,
infrastructure is basic to economic development and improvements in it can be used to help attract industry to a disadvantaged
area.
inheritance
Property which is received when a person dies; inheritance tax = tax on wealth or property inherited after someone's death.
injunction
A court may order someone to perform or not to perform some action. Injunctions are often issued to prevent someone from
continuing to act in a certain capacity or in a manner harmful to someone else.
innovation
A term particularly associated with Joseph Schumpeter, who meant by it the bringing to the market of a new and significantly
different product, the introduction of a new production technique or the opening up of a new market.
input-output analysis
The analysis of an economy in terms of the relationship between all inputs and outputs. The output of a good or service in an
economy is either used in the production of goods and services or it goes into final consumption. Each output in an economy can
be represented by an equation, which output equal to its final consumption plus the sum of its inputs used in all production
activity throughout the economy. The amounts used in production will depend on the production functions for each.
insider
Person who works in an organisation and therefore knows its secrets; insider dealings or insider trading = illegal buying or selling
of shares by staff of a company, or other people who have secret information about the company's plans.
insolvency
A person or organisation is insolvent when he or it is unable to pay debts when they become due. Insolvency is not the same as
bankruptcy or liquidation of a company (though they may follow from it). A very rich man could be insolvent if his assets cannot
be realised at the time he needs cash.
instalment credit
A US term for hire purchase, also sometimes used to refer to a credit sale when payment is made in instalments.
institution
Organisation or society set up for a particular purpose; financial institution = bank or investment trust or insurance company
whose work involves lending or investing large sums of money.
institutional economics
A school of economic thought which developed in the 1920s in the USA. Economists holding these views criticise orthodox
economists for relying on theoretical and mathematical models which not only distort and oversimplify even strictly economic
phenomena, but, more important, ignore their non-economic forces, especially the institutional environment. The political and
social structure of a country may block or alter the normal economic processes. Institutionalists believe that there is a need for
economists to recognise the relevance of other disciplines, such as sociology, politics and law, to the solution of economic
problems. Veblen, Mitchell and Myrdal have been the leading economists sympathetic to institutionalism.
institutional investors
A collective term for organisations, which invest large sums of money in both government securities and the private sector,
particularly through the stock exchange. The emergence in recent years of so many organisations representing other people's
savings (such as pension funds, unit trust and trade union funds) together with the steady increase in insurance companies has
tended to make institutional investors a major force in the stock market. Very often it is their vote that determines the future of
many a private or public enterprise. They normally employ specialists in the investment field to keep a careful eye on the market
and the portfolios they hold with the object of maximising benefits. They effective power was considerably reinforced by the
Trustee Investment Act 1961, which gave wider powers to trustees of other people's money to invest in quoted shares of public
companies. Most managers of publicly quoted companies are keen to impress the institutional shareholdres; less they sell their
hiolding. Such an action may cause others to copy the action and the share price could fall considerably.
insurance
The payment of a sum of money by one person on the understanding that in specified circumstances the second person will make
good any loss suffered by the first.
insurance premium
What the insured agrees to pay to the insurer annually. It is payable on a stated date although a number of days of grace are
normally allowed.
intangible assets
An accounting term for those unseen assets which have a value to the business and perhaps also a saleable value, including
goodwill, patents, trademarks and copyrights. These are sometimes called invisible assets, but should be distinguished from
fictitious assets.
integration
The production process of most products is one of stages such as iron ore into steel ingots, and then a number of other subprocesses before the production of an automobile body. Vertical integration is the combination in a single firm of two or more
different stages of this process. Horizontal integration is the combination in a single firm of different units that operate at the
same stage of production.
intensive
intensive farming = farming small areas of expensive land, using machines and fertilisers to obtain high crop yields; capitalintensive industry = industry which needs a large amount of capital investment in plant to make it work; labour-intensive industry
= industry which needs large numbers of workers, and where labour costs are high in relation to turnover.
inter-bank market
The money market in which banks borrow or lend among themselves for fixed periods either to accommodate short-term liquidity
problems or for lending on. The interest rate at which funds on loan are offered to first-class banks is called the inter-bank
offered rate. This rate my also be called the inter-bank lending rate, and is used as a guide to probable interest rate changes in the
short term. The three month inter bank rate is followed closely by those dealing in money matters.
intercap
To capitalise a letter in the middle of an invented word such as WordPerfect or CompuServe, so those readers may be more likely
to notice the product name. This is common in the computer industry.
interest
The amount paid by a borrower to a lender in payment for a loan. Interest may be simple or compound. Simple interest is a fixed
rate on a stated sum. The same amount is paid or accumulated each year irrespective of the amount borrowed. If the interest
were not paid when due, it would not itself earn interest. But if a sum is invested at compound interest and the interest is allowed
to accumulate, the interest is calculated each year on the capital and interest already accumulated.
interest, classical theory of
In this theory, the rate of interest was simply regarded as the rate of return on capital invested. However, interest rate
determination is thought to be more complex than this. The rate was arrived at by the interaction of the supply of and demand for
funds. The strength of demand was determined by businessmen's expectations regarding profits, connected in turn with the
marginal productivity of investment. On the other hand, the supply was dependent upon the willingness to save. In the classical
system, therefore, it was the rate of interest, which brought savings into balance with investment. Keynes attacked this
assumption in his General Theory of Employment, Interest and Money. The balance was brought about, he argued, by means of
changes in income and output.
interest rate
The price paid for borrowing money for a period of time, usually expressed as a percentage of the principal per year. Thus if the
interest rate is 10 per cent per year, then $100 would be paid for a loan of $1000 for one year.
interface
The link between two different computer systems or pieces of hardware, or to meet and act with.
interim accounts
Usually these are half-yearly accounts, probably unaudited, produced by a company or other association.
interim dividend
Dividends are paid on shares when the profits for the year have been declared and passed by the shareholders. This may be some
time after the end of the year. It is therefore a common practice to declare part of the dividend, before the end of the year. This is
known as an interim dividend. It will not normally be very large in relation to the total dividend, but it is an indication of the
probable total dividend and the way business is going. The shareholder also receives some return earlier than he would otherwise
do.
interim report
It is becoming common for public companies to issue interim reports to shareholders and the press with a view to keeping them
informed of the progress of the business and preparing them for the final audited annual report. Such interim reports are normally
small in format and give little more than the unaudited results of the first half-year, with comparative figures for the same period
in the preceding year or years. Improvements over the comparative figures are intended to suggest an upturn in the company's
fortunes, which will be revealed when the official annual report is published. Interim reports are sometimes issued to support the
declaration of an interim dividend. They could be necessary for such a purpose where lengthy audits delay the publication of the
annual accounts until long after the end of the company's financial year.
intermediary
A person who is the link between parties who are negotiating; financial intermediary = an institution which takes deposits or loans
from individuals and lends money to clients, or a person or company which arranges insurance for a client, but is not itself an
insurance company.
intermediate goods
Goods which have undergone some manufacturing or processing, but which have not yet reached the stage of becoming final
products. For example, steel and cotton yarns are intermediate goods.
International Air Transport Association (IATA)
This association has the aim of trying to ensure that all international airline traffic moves with the maximum speed possible,
consistent with both convenience and efficiency. It is a means of promoting co-operation between various independent or
national airlines by crossing language barriers and, as far as possible, the legal requirements of the various countries represented
as well as overcoming procedural differences. Attempting to standardise documentation and handling procedures has approached
the latter, particularly where hazardous cargo is involved. One innovation is the standard IATA air waybill. This makes the
transfer of cargo between member countries far easier by enabling it to be routed from supplier to receiver without the difficulties
that might otherwise be encountered in re-documentation during transfers from one airline to another. Problems have arisen,
however, in the attempt of IATA to impose standard tariffs in that this is seen to be contrary to free competition.
International Bank for Reconstruction and Development (IBRD)
The Bretton Woods Agreement of 1944 set up this sometimes better known as the World Bank, together with the International
Monetary Fund. Its main purpose was to help finance post-war reconstruction by making loans to governments or guaranteeing
outside loans. The loans are normally for fifteen to twenty-five year periods. The Bank is a specialised agency of the United
Nations. A little over one-third of the funds comes from Europe. Members must also be members of the International Monetary
Fund. Two offshoots of the Bank are the International Finance Corporation (1960) and the International Development
Association (1961). Both of these place particular emphasis on aid to less-developed member countries, which have become
more demanding in recent years.
International Commodities Clearing House (ICCH)
A part of the commodities market which is operated by the Terminal Market Traders Association on the floor of the London
Commodities Exchange. The ICCH was established in 1888 for the purpose of providing a clearinghouse for transactions in
commodities entered into at the Exchange. It establishes rules for admission to membership and codes of conduct that members
should observe. All terminal market associations must be members of the ICCH and traders from these associations register
contracts made with the clearing house, which will then, on payment of a stated margin, guarantee those contracts. The ICCH is
independent of both the LCE and the TMA and is owned principally by the leading UK clearing banks.
International Development Association (IDA)
An institution which operates under the umbrella of the International Bank for Reconstruction and Development and established
in 1960. It gives long-term loans to governments at little or no interest for projects in the poorer of the developing countries. It is
intended for investments for which finance cannot be obtained through other channels without bearing uneconomically high
interest charges and is mainly for items of infrastructure.
International Finance Corporation (IFC)
Another part of the International Bank for Reconstruction and Development, but whereas the latter tends to operate at government
level the IFC was developed to provide aid for private investment projects, either by making or guaranteeing loans or by actual
purchase of equity. Any equity involvement is, however, subject to a 25 per cent limit. Although its capital base is much smaller
than that of the IBRD, it may borrow from that organisation and re-loan to private investors without the necessity of governmental
approval.
International Labour Organisation (ILO)
Part of the United Nations, which tries to improve working conditions and workers' pay in member countries.
international liquidity
The amount of gold, reserve currencies and special drawing rights available for the finance of international trade. In 1958, when
sterling became convertible, the leading reserve currencies were the dollar and sterling.
International Monetary Fund (IMF)
An organisation that emerged from the Bretton Woods Agreement in 1944. The Fund was formed in 1946 and began to operate
in 1947. Its main objective is to maintain and stabilise rates of exchange and facilitate multilateral clearing systems, and also to
eliminate unnecessary restrictions on foreign trade. It has the power to advance money to countries in balance of payment
difficulties; it will supply a country with the currency it needs in return for that country's own currency. There is a repayment
period of about five years. It also gives countries credit guarantees, that is, without actually lending, it agrees to lend if asked.
These facilities are only available to member countries. Members finance the fund by making contributions according to an
estimate of their means. The higher the contribution the higher the voting rights. The amount paid in is partly in gold and partly
in the currency of the country. It also has a special fund available for those countries adversely effected by oil price rises. Control
over its loans is now much tighter, and borrowing nations have to accept IMF presence in the Finance Ministry both before and
after the loan has been negotiated. Part of the agreement may involve a Structural Adjustment Prigramme, which includes cuts in
expenditure, withdrawal of subsidies and increases in base interest rates.
international trade
The exchange of goods and services between one country and another. This exchange takes place because of differences in costs
of production between countries, and because it increases the economic welfare of each country by widening the range of goods
and services available for consumption. Ricardo showed by the law of comparative advantage that it was not necessary for one
country to have an absolute cost advantage in the production of a commodity for it to find a partner willing to trade. Even if a
country produced all commodities more expensively than any other did, mutually beneficial trade could occur provided that the
relative costs of production of the different commodities were favourable.
intervention
An activity in which a government buys or sells its currency in the foreign exchange market in order to affect its currency's
exchange rate. For example, the US government would by US dollars when it wants the exchange rate of the dollar to rise, or
appreciate.
intrinsic value of money
The commodity value of a piece of money (for example, the market value of the weight of copper in a copper coin).
invention
The creation of a new product or discovery of a new production technique. To be distinguished from
innovation.
inventories
Term for stocks of raw materials, work in progress and finished goods. Inventories represent capital tied up in unsold goods and
require storage space, insurance and incurred costs, but are an inevitable part of the process of production and distribution. This
is because customers are not generally willing to wait for goods to be produced and it is not possible to accurately forecast sales,
and goods may need to be dispatched in batches.
invest
(a)
To put money into shares, bonds, a building society, etc., hoping that it will produce interest and increase in value.
(b)
To spend money on something which will help generate future income, such as machinery in a factory.
investment
1.
The economic activity that foregoes consumption today with the aim of increasing output in the future. The major forms of
investment are in tangible capital (structures, equipment and inventories) and in intangible investments such as education or
human capital, research and development and health. Net investment is the value of total investment after an allowance has been
made for depreciation. Gross investment is investment without allowance for depreciation.
2.
In financial terms, investment has an altogether different meaning: the purchase of a security such as a stock or a bond.
investment allowance
An allowance made to companies, for taxation purposes, in addition to the initial and annual capital allowances.
investment appraisal
The evaluation of the prospective costs and revenues generated by an investment in a capital project over its expected life. Such
appraisal includes the assessment of the risks of, and the sensitivity of the project's viability to, forecasting errors. The appraisal
enables a judgement to be made whether or not to allocate resources to a project.
investment bank
A US term for a financial intermediary, which purchases new issues and places them in smaller parcels among investors. In
Britain, a merchant bank or issuing houses.
investment company
Any company which uses its funds to acquire shares or securities rather than engage in business on its own account. They are
usually referred to as investment trusts, but theoretically this is a misnomer, as directors of investment companies are not legally
trustees and there is no trust instrument. Some securities are held on trust for the benefit of others, but this is a different matter
and takes the form of a trust rather than that of a company.
investment demand
The schedule showing how the level of investment responds to the cost of borrowing (or, more specifically, to the real interest
rate). Behind this relationship lies an assumption that firms select only profitable investment projects, and that as the cost of
borrowing rises, fewer projects can earn a profit.
investment grants
Government grants available to industry for specified purposes, such as the purchase of machinery used for certain qualifying
industrial processes.
investment income
In the context of business accounts this refers to income from outside investments, as opposed to income from normal trading
operations.
investment portfolio
The collection of various stocks, bonds, shares, etc., held by persons or institutions investing money on behalf of others. They
may be unit trust managers, investment companies or merely personal trustees. The spread of the investments contained in any
particular portfolio will usually be determined by the deed or instrument appointing the managers or trustees or, in the latter
instance, by trust law. The principal aim is to maximise the income of the fund on which the portfolio is based or its capital value
whilst at the same time preserving the initial value and attempting to increase it as far as possible without taking undue risks.
Portfolio investment is the ideal form of group investment because it enables investment to be spread over a number of different
areas of risk, thereby hedging possible losses; it also means that money can be frequently switched to take advantage of any
profitable investment opportunity that arises in the short term. These advantages make it a good basis not only for unit trusts and
institutional investors but also for humbler investment clubs.
investment trusts
Companies formed to invest the collected funds of shareholders. They invest in other companies, the spread of holdings being
very wide. Investment trusts help small investors by giving them the benefit of spreading their risks and enjoying the advantages
of experienced management. Investment is normally in quoted securities, but these companies will show interest in smaller or
unquoted businesses where they are offered good security. They may also underwrite issues of shares or help to form specialist
finance companies, perhaps with a view to investment in smaller businesses.
invisible
invisible assets = assets which have a value but which cannot be seen (such as goodwill or patents); invisible earnings = foreign
currency earned by a country by providing services, not selling goods; invisible imports or invisible exports or invisible trade =
services which are paid for in foreign currency or which earn foreign currency by selling a service such as banking, insurance or
tourism, rather than a physical good.
invisible hand
A concept introduced by Adam Smith in 1776 to describe the paradox of a laissez-faire economy. The invisible-hand doctrine
holds that, with each participant pursuing his or her own private interest, a market system nevertheless works to the benefit of all
as though a benevolent invisible hand were directing the whole process.
invisible trade
The part of international trade, which relates more to services rendered than to transactions in visible goods. Earnings from
invisible trade are a very important factor in the UK balance of payments. This could be true of any other nation that relied
heavily on other countries for both its food and raw materials. For many years the UK has covered a deficit on the visible portion
of this international trading by earnings from services provided through its insurance companies, shipping agents and banks.
These invisible exports are effectively the bread and butter of the UK.
invoice
The document tendered by a seller to a purchaser setting out details of goods or services supplied and the charge, together with
any taxation applicable to the transaction. The invoice also usually indicates any discounts available to the purchaser, whether
trade discounts or additional cash discounts for early settlement. It may also detail any particular terms of trade, which apply to
the transaction.
IOU
This is a note indicating a debt owed by one party to another, and has no other legal significance. It is normally a statement of
liability signed by a debtor. It is not a negotiable instrument, needs no stamp, and can be used as evidence of an account stated
but not as proof of money lent.
iron law of wages
In the economic theory of Malthus and Marx, the theory that there is an inevitable tendency in capitalism for wages to be driven
down to subsistence level.
irredeemable bonds
Government bonds, which have no date of maturity, and which provides interest but can never be redeemed at full value.
IS-LM model
A model developed by Hicks shortly after the publication of Keynes' General Theory, providing a framework for analysing the
factors determining the level of demand in an economy. It has become the standard framework for studying macroeconomics,
primarily because it has been seen to encompass widely differing views on how the economy works. Its strength is that it
combines events in the financial market with events in the market for goods and services to establish an equilibrium level of
overall demand. Two variables - aggregate expenditure and the interest rate - adjust to ensure that the demand for investment
goods matches the supply of savings, and the demand for cash (or liquid assets) matches the supply. On a graph with the interest
rate on the vertical axis and the level of spending on the horizontal axis, two curves can be plotted. The I-S (investment-savings)
curve slopes down from left to right. For each level of the interest rate, there is a unique level of spending which ensures that
planned investment equals planned saving. The second curve, L-M (liquidity-money supply) plots combinations of interest rates
and income levels which ensure the demand for money equals the supply. This curve usually slopes upwards. Where the two
curves intersect there is an equilibrium level of both aggregate demand and the interest rate. Much of the dispute between
monetarists and Keynesians can be interpreted as arguments over the relative slopes of the I-S and L-M curves. However, the ISLM model says nothing of the factors determining the aggregate supply of goods and services.
isoquant
A graphical representation of combinations of inputs each of which produces the same output. Isoquants are downward sloping,
because as one factor is removed, another factor must be added to maintain the old level of output. Second, they are convex to the
origin, because increasing amounts of a second actor are required to compensate for unit decreases in the first, according to the
law of diminishing returns.
issue
To give out new shares; bonus issue or scrip issue = new shares given free to existing shareholders; debenture issue = borrowing
money by giving debentures to lenders; rights issue = giving shareholders the right to buy more shares at a lower price; issue price
= price of shares when they are offered for sale for the first time.
issued capital
The amount of capital actually issued by the company. Capital is issued normally in the form of shares. These may be ordinary
shares, preference shares, etc. Issued capital is distinct from called-up capital or paid-up capital.
issuing house
A financial institution which acts as an intermediary between those seeking capital (usually industries) and those able to provide
it. These houses handle issues of shares on behalf of companies, either by full prospectus or by an introduction or placing. They
also often double as underwriters of share issues or as merchant banks.
Jj
J curve
A line on a graph shaped like a letter ‘J’, with an initial short fall followed by a longer rise. This is used to describe the effect of a
falling exchange rate on a country’s balance of trade.
JIT
abbreviation for
just-in-time
jobber
A person who bought and sold shares from other traders.
joint demand
Demand where two or more commodities or factors of production which are used together so that a change in demand for one will
sooner or later be reflected in a change in demand for the other; for example, cloth and thread. Another term for complementary
goods.
joint products
see
joint supply
joint stock company
These companies grew out of ventures entered into by several people, usually on the agreement that the profits would be shared
out in relation to the individuals original investment. The ventures were generally connected with overseas trade and the
regulations regarding the companies so set up were informal. These early attempts at company formation were abandoned,
however, after the scandal of the South Sea Bubble, which had one fortunate result in drawing attention to the need for effective
control of companies by the law with protection for members and creditors. Joint stock companies should be distinguished from
the still existing informal partnerships known as joint ventures where two or more persons get together, with no legally binding
written contract, in a once only trading venture. Although the two types of enterprise have common roots, the joint venture
proper is distinguished by the fact that it is limited to one objective and is not intended as a permanent association.
joint supply
Commodities which are produced in such a way that a change in output in one of them necessarily involves a change in the output
of the other are said to be in joint supply. For example, in refining crude oil into petrol, fuel oil and other heavier oils, limits are
set to the relative proportions of each product that can be achieved. Under conditions of joint supply or production, the allocation
of costs between the products will be arbitrary.
joint venture
A business arrangement in which two companies invest in a project over which both have partial control. It is a common way for
companies to collaborate - especially on risky high-technology ventures - without engaging in full-scale merger. The growth of
international joint ventures has been striking in the past two decades and raises many public policy issues analogous to those
raised by acquisitions for which joint ventures may often be a strategic substitute.
jumpy
nervous or excited; the market is jumpy = the stock market is nervous and share prices are likely to fluctuate.
junk bond
In the United States the loan stocks of companies are generally referred to as bonds. The attractiveness of loan stock to an
investor will always be directly related to the element of risk. This risk factor is itself usually judged by the known creditworthiness of the company and, from the investors’ viewpoint, that creditworthiness is a function of the credit rating afforded the
company by financial institutions or agencies which specialise in such matters. These credit-rating agencies classify corporate
bonds according to the degree of risk they carry and many well-established US companies have found that at one time or another
their bonds in issue have received a low investment rating. Because many institutions are only permitted to buy high-rated bonds,
the companies which lose their rating find a sudden fall-off in the stability of their bonds and the securities themselves become
known as junk bonds. Because so many of these junk bonds are in fact the loan stock of essentially reputable companies, the high
return they carry can be very attractive and the actual risk is very small.
just-in-time (JIT)
JIT production = making goods to order just before they are needed, so as to avoid having too many goods in stock; JIT
purchasing = a purchasing system where goods are purchased immediately before they are needed, so as to avoid carrying high
levels of stock.
Kk
Kennedy Round
Extensive re-negotiation of multilateral tariff agreements, within the limits set by the General Agreement on Tariffs and Trade,
instigated by the late President Kennedy. Emerged from the American Trade Expansion Act 1962, which attempted to increase
the level of international trade by seeking major reductions in tariff levels around the world. Although other renegotiations had
previously been attempted, this one was on a particularly large scale, and was further distinguished in that it tried to obtain
general percentage reductions right across the board, rather than to renegotiate tariffs on various goods individually, with all the
haggling that would involve.
Keynes, John Maynard
(1883-1946)
Founder of Keynesian economics, Keynes published his major work, The General Theory of Employment, Interest and Money, in
1936.
Keynesian economics
The body of thought developed by John Maynard Keynes culminating in his General Theory. The central theme was that
(primarily because of sticky wages) a capitalist system does not automatically tend toward a full-employment equilibrium.
According to Keynes, the resulting ‘underemployment equilibrium’ could be cured by fiscal or monetary policies to raise
aggregate demand.
Keynesian unemployment
A situation in which the number of people able and willing to work at prevailing wages exceeds the number of jobs available and,
at the same time, firms are unable to sell all the goods they would like. Excess supply thus exists in both the labour and goods
markets. Keynesian unemployment is one of four possible regimes in an economy in which quantity rationing exists, i.e. that
markets are not in equilibrium. Its important distinguishing feature is in its possible cures. For classical unemployment, a cut in
wages should make it possible for employers to take on new workers. The Keynesian case puts forward that firms are already
unable to sell all their output. This induces them to cut their prices at the same time that workers will be trying to price
themselves into jobs by accepting lower wages. When both prices and wages fall, real wages remain constant, and it is real wages
which determine the level of employment. Thus, when both the labour and goods markets are in excess supply, even if prices and
wages are flexible, there will be no natural tendency for the economy to lift itself out of recession. In this case, the most obvious
solution is for the government to inject some demand through higher borrowing.
kickback
Illegal commission to someone (especially a government official) who helps in a business deal.
knock-for-knock agreement
A term used in automobile insurance. To save the time and cost of apportioning blame in an accident involving two or more cars,
the insurance companies concerned each pay out on the claim made by their own client. This does not apply, of course, when one
party has, as a result of a court action in civil law, been deemed totally responsible for the accident, or has admitted liability, and
the innocent party has successfully claimed from that party’s insurers.
Kuznets, Simon
(1901Professor Kuznets made important contributions to the development of applied econometrics through the compilation of
macroeconomic statistics. His analysis and statistical identification of fifteen-to-twenty year fluctuations in time series of
production and prices initiated a continuing debate in the analysis of trade cycles. He has completed major studies in income
distribution, exploring the relationship between growth in income per head and the distribution of income.
Ll
Labour
Labour is a factor of production. The term includes not only the numbers of people available for or engaged in the production of
goods and services, but also their physical and intellectual skills and effort. The demand for labour is generally held to be
determined by the marginal revenue product theory, although the efficiency-wage hypothesis may dispute this.
labour force
In official statistics, the population sixteen years of age and older who are either working or seeking work. It excludes those still
in education.
labour-force participation rate
Ratio of those in the labour force to the entire population aged sixteen years or over.
labour-intensive
A production technology is labour-intensive if relatively more labour value is required as input per unit of output than other
factors of production.
Labour market
The market in which wages, salaries and conditions of employment are determined in the context of the supply of and demand for
labour.
labour mobility
The degree to which workers(labour) are able and willing to move between jobs in different occupations and areas. A lack of
labour mobility may manifest itself in high frictional and structural unemployment and has been an object of policy to encourage
workers to move to areas where jobs are available, and to take on jobs in new occupations requiring skills different from those in
which they were first trained. Policies could include a faster rate of house-building, making it easier to find homes in different
areas, removing taxes like stamp duty on house transfer, providing full information on what jobs are available and where,
providing training for the unemployed, and the abolition of restrictions to entry to certain occupations.
labour theory of value
The view, often associated with Karl Marx, but developed earlier, that every commodity should be valued solely according to the
quantity of labour required for its production.
labour turnover
The number of employees who leave a firm in a year as a proportion of the firm’s total employment.
Laffer curve
A graphical illustration of the proposal that there exists an optimum rate of tax at which government tax revenue is maximised. If
tax rates are low, revenues will be increased if tax rates are increased; however, if rates are raised beyond the optimum point, the
loss of incentive caused by the resultant low net incomes discourages production and tax revenues fall. The curve is named after
the American economist Arthur Laffer, who argued that the economy could be expanded without government budget deficits.
Lower taxes lead to lower prices, higher output and therefore higher government revenues. The same author is often put forward
as the modern originator of ‘supply-side economics’, which was first tried on a national scale in the Reagan administration of
1980-84.The curve argument has yet to find full empirical justification.
laissez-faire
The view that government should not interfere in economic activity. As expressed by classical economists like Adam Smith, this
view held that the role of the government should be limited to the maintenance of law and order, national defence and the
provision of certain public goods that private firms would not undertake.
lame duck
A term normally used against members of the Stock Exchange who, not being able to meet their debts, were due to be hammered,
it has recently been accorded a much wider use in the industrial sphere. The term lame duck is now commonly applied to
companies which can only be kept from complete ruin by being propped up by public funds. The State has interfered more than
once in recent years to save public companies from the natural consequences of their inability to compete successfully with
foreign manufacturers in both home and export markets. This may have been caused by bad planning, itself due to State
interference, by over-manning due to trade union intransigence or merely by bad management. Whatever the cause of the
impending collapse, it may be decided that rather than lose an industry which is considered vital to the country’s image and/or
create, or increase, considerable unemployment, it is in the public interest to prop up the company using taxpayers’ money.
Unfortunately, the matter is too often concerned with politics rather than economics, and the real lame ducks are often hidden
under the cloak of nationalised industries, to which normal standards of efficiency cannot be applied.
land
In classical and neo-classical economics, one of the three basic factors of production (along with labour and capital). More
generally, land is taken to include land used for agricultural or industrial purposes as well as for the natural resources taken from
above or below the soil.
last in first out (LIFO)
see
first in first out
launder
To pass illegal profits, money from selling drugs, money which has not been taxed, etc., into the normal banking system.
LBO
abbreviation for
leveraged buyout
leading
Most important; leading indicator = indicator such as manufacturing order books which shows a change in economic trends
earlier than other indicators.
lead time
The time between deciding to place an order and receiving the product.
leakage
The amount of goods lost in storage by going bad or being stolen or escaping from the container.
leap-frogging pay demands
Pay demands where each section of workers asks for higher pay to do better than another section, which then asks for further
increases in turn.
lease
An agreement whereby the legal owner of real property gives another person the possession of that property with freedom to sue
it as he wishes, though possibly under certain conditions, in return for a regular specified payment referred to as rent. Although
personal, as opposed to real, property can also be lent to another, that type of transaction is normally referred to as an agreement
to hire. The real property is freehold or leasehold land and/or buildings and is normally accompanied by such rights of way as are
necessary for free access. The person obtaining possession is said to be the owner of leasehold property which can, unless the
original agreement forbids, be sublet to another person, who in turn may sublet the property.
lease back
To sell a property or machinery to a company and then take it back on a lease.
least-cost production rule
The rule that the cost of producing a specific level of output is at its minimum when the ratio of the marginal revenue product of
each input to the price of that input is the same for all inputs.
legal tender
Money that by law must be accepted as payment for debts.
lender
A person or institution lending money.
lender of last resort
Within the financial structure of any economy there are many institutions prepared to lend money. In order to lend, these
institutions must first borrow, and those from whom they borrow must themselves have sources of funds on which to draw. There
must then obviously be a lender who can, in the last resort, create or originate funds. This role is usually played by the central
bank, and this central bank is often referred to as the lender of last resort. It must always make money available if called upon to
do so, and in the UK such money is provided through the discount houses, either by repurchasing treasury bills or lending on
other paper assets or, when amounts required are larger, by direct loans to the discount houses. In exercising this ultimate
responsibility it will charge such interest rates as it judges sufficiently high to discourage borrowing, rates which will most
certainly be in excess of those at which the borrowing houses are able to lend.
letter of credit
A document issued by a bank or other financial institution to a prospective borrower, for an agreed amount and for a definite or
indefinite period. It allows the borrower to draw bills of exchange on the institution up to that amount the bills will be accepted
automatically. The purpose for which the money is required is stated initially and the bills drawn must conform to this. Letters of
credit are also used in foreign trade. The buyer arranges with his bank to open a credit in the country of the seller, who may then
obtain payment by presentation of the relevant documents when these have been accepted and returned by the buyer. When the
seller is informed of the credit it becomes irrevocable.
less developed country (LDC)
A country with a per capita income significantly below that of a developed nation (the latter usually includes most nations of
North America and Europe, Japan and Australia). This term is now losing acceptance amongst developing nations.
letter of indemnity
When a manufacturer exports goods he sometimes sends a letter of indemnity agreeing to make good any loss due to faulty
packing, short loading, etc. In doing this he ensures a clean bill of lading.
leveraged buy-out
A form of take-over engineered from within a company either by management or by a minority shareholding group, with or
without the backing of institutional investors, banks and finance houses. Control is sought by making an offer, conditional on
acceptance by sufficient shareholders, whereby high interest stock is offered in exchange for existing equity shares with the object
of obtaining a controlling interest.
levy
Money which is demanded and collected by the government; import levy = tax on imports, especially in the EU a tax on imports
of farm produce from outside the EU.
liabilities
In accounting, debts owed to other firms or persons.
libertarianism
Also sometimes called liberalism, this is an economic philosophy that emphasises the importance of personal freedom in
economic and political affairs. Libertarian writers, including Adam Smith in an earlier age and Milton Friedman and James
Buchanan today, hold that people should be able to follow their own interests and desires; government activities should be limited
to guaranteeing contracts and to providing police and national defence, thereby allowing maximum personal freedom.
licensed dealers
Stock and share dealers licensed to buy and sell shares by the Department of Trade and Industry, they deal in quoted and
unquoted shares, are not members of the Stock Exchange and are neither bound by its regulations nor entitled to enjoy its
protection. They do, however, have their own specific rules governing dealings with the public in the same way as does the over
the counter market.
life-cycle hypothesis
A theory which suggests that consumers during their lifetime will save when their income is high and spend more than they earn
when their income is low. In this way, they smooth their consumption flow, despite the fact that incomes vary over a lifetime.
The theory, attributable to Modigliani, complements the permanent-income hypothesis.
light dues
Levies payable by ships as contributions to the maintenance of lights, beacons, buoys or other navigational aids in rivers or roads.
The dues are paid to Trinity House, through Her Majesty’s Customs and Excise. The ship-owner pays them on the basis of ten
home trade voyages, eight foreign ones or a combination of each.
limited liability
The restriction of an owner’s loss in a business to the amount of capital that the owner has contributed to the company. This
limitation allows people to invest in a corporation without fear of losing all their personal assets should the corporation become
unprofitable. Limited liability was an important factor in the rise of large corporations. By contrast, owners in partnerships and
individual proprietorships generally have unlimited liability for the debts of those firms.
liquid assets
In a general sense liquid assets refer to the immediate purchasing power of an individual. In a business context liquid assets are a
subdivision of current assets and are sometimes referred to as quick current assets. They refer to that part of current assets which
consists of cash or items that can be quickly converted into cash, e.g. money at call. The total of liquid assets is essential to the
calculation of the liquid ratio.
liquid ratio
The ratio of liquid assets to current liabilities. Liquid assets are cash, and items readily convertible into cash, but not stock or
work in progress, though stock could be included if it consisted of goods bought for resale for cash rather than credit.
liquidate
To sell stock or other assets in order to raise cash.
liquidation
This term is applied to the winding-up of the affairs of a company when it ceases business. In most publicised instances it
indicates bankruptcy, but it is equally applicable to the winding-up of a company by its shareholders when the purpose for which
it was initially founded has been completed. When a liquidation results from the effectual bankruptcy of a company the rules that
apply are set out in the Companies Act. These rules differ according to whether the winding-up of the companyÕs affairs is
instigated by shareholders or by creditors and, in the latter instance, whether it is voluntarily supported by the company,
commanded by the court or conducted by the creditors under court supervision.
liquidity
The degree to which an asset can be quickly and cheaply turned into money(or cash) which, by definition, is completely liquid. A
current account bank deposit is a liquid asset because it can be withdrawn immediately at little cost; and office building by
contrast will take a considerable amount of time to dispose of and estate agent’s fees and other costs will be incurred. A company
or individual is said to be liquid if a high proportion of its or his assets are held in the form of cash or readily marketable
securities.
liquidity preference
The desire to hold money rather than other forms of wealth, such as stocks and bonds. It can be thought of as stemming from the
transactions motive, speculative motive and precautionary motive for holding money, and will be influenced by levels of income
and wealth, rates of interest, expectations and the institutional features of the economy which determine the velocity of
circulation.
liquidity ratio
1.
The proportion of total assets of a bank which are held in the form of cash and liquid assets. These assets consist, in general, of
money lent out to the money market at call and short notice, short-term bonds issued by the government and other borrowers and
balances at the Bank of England.
2.
The ratio of liquid assets to the current liabilities of a business. Also called the cash ratio, it is a very crude test of solvency.
liquidity trap
A situation in which the rate of interest is so low that nobody wants to hold bonds, and people only want to hold cash. The
interest rate can fall far enough for everybody to expect it to rise. If it rises, bond prices will fall, and because nobody wants to
hold an asset whose price will fall, everyone will hold cash rather than bonds. In this situation, the interest rate can fall no further:
liquidity preference is absolute. If the government expands the money supply, instead of the usual fall in interest rates occurring,
there is no effect at all. There is no need for the interest rate to drop to entice people to hold the extra cash available.
lira
The currency used in Italy. NOTE: lira is usually written L before figures: L50,000.
list price
Usually the manufacturer’s recommended retail, or wholesale, selling price. Where price maintenance agreements do not apply,
prices may sometimes be dropped below list price to encourage custom and/or increase turnover. This is a practice much
favoured by discount stores, supermarkets, hypermarkets and cash-and-carry warehouses.
listed company
A company of which the shares or other securities are listed on a recognised stock exchange. Such companies are always public
companies and are also referred to as quoted companies.
Lloyd’s
The popular name for the Corporation of Lloyd’s. It started in a coffee house in Tavern Street in 1689, and moved, via Lombard
Street and Pope’s Head Alley, to the Royal Exchange in 1774. Subsequently it moved into its own building, where it remains.
Members are brokers or underwriters. The latter are sole traders although they normally operate in syndicates. The Corporation
itself has not liability for the defaults of its members. However, a member must deposit a substantial sum of money before he is
accepted. Premiums received by underwriters are placed in a trust fund. Claims are paid out of this fund. Annual audits are
compulsory. The Corporation provides standardised documents, shipping intelligence services, a daily newspaper, a claims
bureau, and Lloyd’s agents in nearly every important port in the world. Lloyd’s Register of Shipping classifies vessels and gives
comprehensive information regarding them. Lloyd’s deals with a vast part of all annual insurance in this country, though not with
life assurance. Its principal business is marine insurance.
loan
Money which has been lent; bridging loan = short-term loan to help someone buy a new house when he has not yet sold his old
one; soft loan = loan with no interest payable; unsecured loan = loan made with no security.
loan capital
That part of the capital of a company or other organisation subscribed for a fixed period or for a period determinable by either
party or on the happening of a stated event. It is entitled to fixed interest and may be secured on the property of the business or on
a guarantee by a third party. It must be distinguished from share capital. The most common form of loan capital is a debenture.
loan stock
Money lent to a company at a fixed rate of interest.
lobby
A group of people who try to influence MPs, members of town council, etc.
logo
A symbol, design or group of letters used by a company as a mark on its products and in advertising.
London Commodity Exchange (LCE)
The London Commodity Exchange Company Ltd. is essentially a co-ordinating rather than a trading organisation. It provides and
administers premises in which individual terminal market associations conduct dealings in the commodities with which they are
concerned. The LCE also provides a very sophisticated system of telecommunications for the benefit of those authorised to deal
on its premises, together with a real-time video price reporting facility. It is a non-profit-making company owned by the Terminal
Market Associations. Each of these is responsible for its own dealings And procedures; the LCE is in no way involved in any
market contracts, nor does it accept responsibility for any breach of duty or obligation on the part of its TMA members.
London Inter-Bank Offered Rate
see
inter-bank market
London International Financial Futures Exchange (LIFFE)
Forward buying of currency in anticipation of future requirements Sellers of foreign currencies usually quote forward as well as
spot rates. The LIFFE, housed in London’s Royal Exchange, was established for trading in these forward exchange contracts.
This market is quite distinct from forward dealings in specific goods and commodities. An investor has bought a currency
forward can use LIFFE to sell that contract. He may have bought initially to cover a future transaction for purchase of particular
goods or he may merely have bought the option on that currency with a view to disposing of it at a profit when exchange rates
move in his favour. LIFFE also offers the opportunity to buy bonds to be delivered at some fixed date in the future. Though
much LIFFE business is speculative, it does provide facilities for financial institutions to hedge against losses on forward
currency dealings.
London Metal Exchange (LME)
Metals are one of the basic commodities traded at their own special exchange, the London Metal Exchange, at Plantation House
in London. The LME is unique to the UK and deals in zinc, lead, tin, aluminium, copper-nickel and silver. Prices of these metals
traded daily at the LME are considered to represent prevailing world prices and traders include representatives of overseas
companies. The Exchange was established in the second half of the nineteenth century to provide a central market for the
increasing supply of non-ferrous metals throughout the world and to establish standards of quality for those metals. Dealings are
for spot cash or in futures and the daily official price of each metal traded is announced after the first dealing session of the day at
1.10pm.
London Stock Exchange
see
stock exchange
long-dated bills
Bills which are payable in more than three months’ time.
long run
A period of time in which all variables are able to settle to their equilibrium or final dis-equilibrium levels and all economic
processes have time to work in full. Its most common application is in the theory of the firm, in which it is the period of time in
which the quantities of all factors of production employed are allowed to vary and all entry and exit that can occur into or from an
industry has occurred. The duration of the ‘long term’ clearly vary with the context in which the term is applied.
long-term liabilities
An accounting term for amounts borrowed by a business and not repayable within the next accounting period.
Lorenz curve
A graph showing cumulative percentage of population on the horizontal axis and cumulative percentage of income received on
the vertical axis. It is used to show the degree of equality or inequality in income distribution. The greater the departure of the
Lorenz curve from the 45¡ line, the more unequal the distribution of income.
loss leaders
Goods deliberately offered at prices well below normal and usually at a loss to the vendor, to attract customers into the premises
in the belief that they will more than make up the initial loss by boosting the sales of other lines. The offer of very low-price
butter in a supermarket may, for instance, attract the eye of a customer who, once inside, may then complete the rest of their food
purchases for the week.
loyalty
brand loyalty = the feeling of a customer who always buys the same brand of product.
lump sum
Money paid in a single amount, not in several small sums.
lump-of-labour hypothesis
The belief that there is only a fixed amount of work to be done, so that if you work faster or if new and better machines are
introduced, the only result can be to raise unemployment.
luncheon voucher
A ticket given by an employer to a worker in addition to his wages, which can be exchanged for food in a restaurant.
Lutine bell
In 1799, the Lutine, insured at Lloyd’s, went down in the North Sea with a large cargo of bullion, much of which was never
recovered. The Lutine bell is the ship’s bell taken from the Lutine and is suspended above the rostrum in the underwriting room
at Lloyd’s. It is rung when important announcements are to be made in the Market. Two strokes mean good news, one stroke
bad. Nowadays it is not often used, not because of the scarcity of news, but because more sophisticated means of communication
have been developed.
Mm
M0, M1, M2, etc.
see
money supply
macroeconomics
Analysis dealing with the behaviour of the economy as a whole with respect to output, income, the price level, and
unemployment. To be contrasted with microeconomics, which deals with the study of individual firms, people or markets.
mail order firm
A firm selling a very wide range of goods, but by post rather than through retail premises. It employs agents who take orders,
which are dealt with by a central organisation. The agent has an elaborate catalogue and is paid a commission on his sales. The
goods are sold at competitive prices, the economies in marketing enabling the firm to allow the customer to pay in instalments
without necessarily charging him a higher price.
Malthusian theory of population growth
The belief, first expressed by Thomas Malthus, that the ‘natural’ tendency of population is to increase at a geometric rate (1, 2, 4,
8...), whilst food supply tends to increase at an arithmetic rate (1, 2, 3, 4...). Per capita food production would thus decline over
time, thereby putting a check on population.
managed currency
A currency is said to be managed if the exchange rate is not fixed by market forces, i.e. if the government influences the rate by
buying and selling its own money. Most currencies are managed in some sense today, even when allowed to float.
management accounting
The control of a business by refined and economic means: collecting relevant information, analysing it and applying the results
for the benefit of the business. Various techniques include standard costing and budgetary control.
management buy-out (MBO)
The acquisition of all or part of the equity capital of a company by its directors and senior executives, usually with the assistance
of a financial institution. Competitive pressures upon large companies in the 1980s have led to the disposal of many weak or
peripheral subsidiaries in this way. In a management buy-in, an outside team of managers acquires a company in the same way.
manager
Head of a department in a company; area manager = manager who is responsible for the companyÕs work in a particular area;
general manager = manager in charge of the administration of a large company; managing director = director in charge of a whole
company.
manufacturer
Person or company which produces machine-made products.
manufacturing industries
Industries concerned with taking raw materials and making them into finished products.
margin
The difference between the money received when selling a product and the money paid for it; gross margin = percentage
difference between received price and the unit manufacturing cost or purchase price of goods for resale; net margin = percentage
difference between received price and all costs, including overheads; squeezing margins = reducing margins in order to keep
prices low and remain competitive.
marginal
Referring to the last unit of output produced.
marginal analysis
The study of variables in terms of the effects that would occur if they were changed by only a small amount. For example, rather
than analyse whether or not it is in the interest of an individual to spend money on food at all, attention can sensibly be focused on
whether or not welfare could be enhanced by spending slightly more or less on food. This is perhaps best demonstrated by the
concept of the paradox of value: although water is more necessary to man than diamonds, it has a much lower price. This is
because man usually has so much of it that extra water is worthless. This is not true of diamonds.
marginal consumer
The consumer for whom the purchase and consumption of a product is only just worthwhile at the current price. If the price were
increased, then the marginal consumer would no longer consume the product.
marginal cost
The cost of making a single extra unit above the number already planned; marginal costing = costing a product on the basis of its
variable costs only, excluding fixed costs.
marginal cost pricing
Basing the selling price of a product on its variable costs of production, plus a profit margin, but excluding fixed costs.
marginal product
The extra output resulting from one extra unit of a specified input when all other inputs are held constant.
marginal productivity of capital
The value of the output that would be created by the employment of one extra unit of capital. As a major part of the cost of
capital is the interest that has to be paid to buy the capital, the marginal cost of capital can be measured by the internal rate of
return, the interest rate at which the marginal productivity has a present value of zero.
marginal product theory of distribution
A theory of the distribution of income proposed by John B. Clark, according to which each productive input is paid according to
its marginal product.
marginal propensity to consume (MPC)
That fraction of an additional dollar of disposable income which a family or community would spend on additional consumption
(the remainder being saved). Not the same thing as the
average propensity to consume (APC) which is the ratio of total consumption to total disposable income.
marginal propensity to import
In macroeconomics, the increase in the dollar value of imports resulting from each dollar increase in the value of GNP.
marginal propensity to save (MPS)
That fraction of an additional dollar of disposable income which a family or community would save rather than consume..
marginal revenue (MR)
The additional revenue a firm would obtain if it sold one extra unit of output. In perfect competition, marginal revenue equals
price. Under imperfect competition, MR is less than price because in order to sell the extra unit, the price must be reduced on all
prior units sold.
marginal revenue product (MRP)
The marginal product multiplied by marginal revenue. It is the extra revenue that would be brought in if a firm were to buy one
extra unit of an input, put it to work, and sell the extra product it produced.
marginal social product
The effect on social welfare of employing one additional unit of a factor of production. When new workers are taken on, for
example, the physical output which they build has a private value to their employer, measured as the marginal value product, or
the price at which the output is sold. However, to measure the value of their output to society, two other factors must be taken
into account. The first is consumer surplus, the amount by which consumers value something in excess of what they pay for it.
The second factor is any externality which is present: a benefit or cost which accrues to those other than the purchaser of the item.
marginal tax rate
For an income tax, the percentage of the last dollar of income paid in taxes. If a tax system is progressive, the marginal tax rate is
higher than the average tax rate.
marginal utility
The additional or extra satisfaction yielded from consuming one additional unit of a commodity, with amounts of all other goods
consumed being held constant. The theory of diminishing marginal utility suggests that as extra units of a commodity are
consumed by an individual, the satisfaction gained from each unit will fall.
marginal utility of money
The satisfaction gained by a consumer from an extra unit of money. The rational consumer should ensure that the marginal utility
of money with respect to the different things he consumes is the same: if someone would get more utility from spending an extra
pound on clothes that they would get from spending it on books, by transferring some of their budget from books to clothes they
would costlessly increase their utility. They should go on transferring until they have so many clothes that they no longer value
them, pound for pound, more than books. The marginal utility of money diminishes the greater the quantity of money available to
a consumer.
marginal value product
The market value of the output generated by the employment of one additional unit of a factor of production. It is equal to the
marginal product of a factor multiplied by the unit selling price of the output produced. It is thus comparable to the marginal
revenue product, which is marginal product multiplied by marginal revenue; in perfect competition, where price is equal to
marginal revenue, the two are identical.
mark-down
The reduction of the price of something to less than its usual price.
mark-up
An increase in price, or the amount added to the cost price to give the selling price.
market
The arrangement whereby buyers and sellers interact to determine the prices and quantities of a commodity. Some markets take
place in physical locations, whilst others are conducted over the telephone or are organised by computers; black market = buying
and selling goods in a way which is not allowed by law; capital market = place where companies can look for investment capital;
closed market = market where a supplier deals with only one agent or distributor and does not supply any others direct; foreign
exchange market = places where currencies are bought or sold; open market = market where anyone can buy and sell; stock
market = place where shares are bought and sold; market value = a term for the amount that an asset would realise if sold in a
completely free market.
market capitalisation
The value of a company calculated by multiplying the price of its shares on the Stock Exchange by the number of shares issued.
market economy
An economy in which resource allocation is primarily determined by supply and demand in markets. In this form of economic
organisation, firms, motivated by the desire to maximise profits, buy inputs and produce and sell their outputs. Households,
armed with their factor incomes, go to markets and determine the demand for commodities. The interaction of firmsÕ supply and
households’ demands then determines the prices and quantities of goods.
market failure
An imperfection in a price system that prevents and efficient allocation of resources. Important examples are externalities and
imperfect competition.
marketing
A term defined by the Institute of Marketing as Ôthe management function which organises and directs all those business
activities involved in assessing and converting customer purchasing power into effective demand for a specific product or service
to the final consumer or user so as to achieve the profit target, or other objectives set by a company; that is, the presentation and
distribution of goods and services in the manner best designed to benefit the producer, the distributor and the public.
market leader
The company which has the biggest share of the available market for a specified product. The phrase is normally used in the
context of sales in one country or region: for example, the market leader for product X in the UK may be an American company
which, in its home market, is merely another competitor ranked no higher than an ‘also ran’.
market maker
A broker-dealer who is prepared to buy and sell specified securities at all time, and is thus ‘making a market’ in them. Prior to the
Big Bang, this function was performed by the jobbers, who were not allowed to deal with the public. Since the Big Bang all
members of the stock exchange have been able to deal with the public as broker-dealers, some of whom specialise as market
makers and others as stockbrokers.
market penetration
see
market share
market power
The degree to which a firm exercises influence over the price and output in a particular market. Under perfect competition, all
firms are assumed to have zero market power: they have to take the going price, and cannot hope to alter it on their own.
Wherever firms represent a non-negligible portion of the whole market, however, instead of facing a flat demand curve, they will
face a downward-sloping one. This means that, in contrast to the perfect competitor, if they raise their price they do not lose all
their sales. It also means that if they wish to increase their sales, they have to reduce their price. Market power is related to the
availability of substitute items.
market price
The equilibrium price, at which supply and demand meet, where all output can be sold, but there is no excess output.
market power
The degree of control that a firm or group of firms has over the price and production decisions in an industry. In a monopoly, the
firm has a high degree of market power while firms in perfectly competitive industries have no market power. Concentration
ratios are the most widely used measures of market power.
market research
examining the possible sales of a product before it is put on to the market.
market share (or penetration)
The fraction of an industry’s output accounted for by an individual firm or group of firms.
market socialism
A socialist economy in which most microeconomic questions are left to the market mechanism. The state would own most capital
and land, and would direct investment, but the techniques of production, pricing and the exact composition of the output would be
left to supply and demand.
market value
The value of a product or company if sold today.
Mark-up pricing
The pricing method used by many firms in situations of imperfect competition; under this method they estimate average cost and
then add some fixed percentage to that cost in order to reach the price they charge.
Marshall, Alfred
1842-1924
Educated at Merchant Taylor’s School, Marshall graduated in mathematics at St John’s College, Cambridge. In 1882 he moved
to the Chair of Political Economy at Bristol. In 1885 he returned to Cambridge as Professor of Political Economy, a post he
retained until his retirement in 1908.
Marshall Aid
With the end of the Second World War, only the USA had the necessary productive capacity to make good the losses experienced
by other countries. European countries had heavy balance of payments deficits with the USA. In 1946, in order to alleviate the
resultant shortage of dollars, the USA and Canada made substantial loans, including £1,000 million to the UK. It was expected
that these loans would be sufficient to cover requirements over the short period which was all that was expected to be necessary
for the world economies to recover. However, in 1948 a general liquidity crisis was avoided only by further loans made under the
European Recovery Programme, through which the UK received loans amounting to £1,500 million between 1948 and 1950.
This programme was called Marshall Aid, after the then US Secretary of State General G.C. Marshall. The loans were allocated
under the direction of the Organisation for European Economic Co-operations.
Marshall-Lerner criterion
A rule which states the elasticity conditions under which a change in a country’s exchange rate would improve its balance of
trade. A.P. Lerner set out the appropriate formulae in his book Economics of Control on the basis of the elasticity concepts
developed by Marshall. In its simplest form, the rule states that the price elasticities of demand for imports and exports must sum
to greater than unity for an improvement to be effected. The volume of exports increases and the volume of imports decreases in
response to a fall in the price of the former and rise in the price of the latter when a currency is devalued (assuming that no other
factors, such as supply restrictions, influence the market). However, what is important for the balance of payments is the impact
of devaluation on the value of trade. If the price elasticity of exports plus the price elasticity of imports is less than unity, it means
that the increased cost of imports in terms of the domestic currency outweighs the value of the growth in exports.
Marx, Karl
1818-83
Born in Trier, Marx studied philosophy at Bonn University and at the Hegelian Centre at Berlin University, and took a doctorate
at Jena. For a time, he was editor of Rheinische Zeitung, but the paper was suppressed, and in 1843 he fled to Paris. There he
began his friendship and close association with Friedrich Engels, who encouraged in him an interest in political economy. After a
brief return to Germany he was banished and in 1849 he settled in London where he remained until his death in 1883. The
Communist Manifesto, written jointly by Marx and Engels, was published in 1848. In 1859 the first fruits of his long, painstaking
research at the British Museum appeared: the Critique of Political Economy. The first volume of Das Kapital appeared in 1867.
The remaining volumes, edited by Engels, were published posthumously in 1885 and 1894.
Marxism
The set of social, political and economic doctrines developed by Karl Marx in the nineteenth century. As an economic theory,
Marxism predicted that capitalism would collapse a s a result of its own internal contradictions, especially its tendency to exploit
the working classes. The conviction that workers would inevitably be oppressed under capitalism was based on the
iron law of wages, which holds that wages would decline to subsistence levels.
mass production
The manufacturing of large quantities of products, enabling the producer to benefit from economies of scale.
matrix
An array of numbers displayed in row and columns. The numbers are called the elements of the matrix. The order of a matrix is
given by the product of the number of rows times the number of columns. An algebra exists for the manipulation of matrices,
with rules for addition, subtraction, multiplication and division. Matrix algebra has found many useful applications in
econometrics, in particular in input-output analysis and linear programming.
maximin strategy
A decision rule in game theory. The rule states that a player with a number of optional strategies to chooses considers first the
minimum payoffs that could be gained from each depending on the reaction of his opponents. The player should then choose the
strategy which corresponds to the maximum of all the minimum payoffs to him that are possible.
MD
abbreviation for
managing director
Meade, Sir James Edward
1907-95
Educated at both Oxford and Cambridge Universities, Professor Meade was appointed Professor of Commerce at the London
School of Economics in 1947. He was appointed to the Chair of Political Economy at Cambridge University in 1957, a post he
held until 1969. Professor Meade was awarded the Nobel Prize in Economics (jointly with Ohlin) in 1977.
mean
1.
arithmetic mean: In statistics, the mean is the most commonly-used method of calculating the average. It is calculated by
summing the individual values, and dividing by the total number of values. So, for the numbers 1, 3, 4, 6, 7 and 9, the mean is
given by 30 divided by 6, which gives 5.
2.
geometric mean: a statistical term for the average of a series of n numbers, derived by finding the nth root of the product of those
numbers.
mean deviation
A simple and easy measurement of dispersion used in elementary statistics. When considering a series of values, the arithmetic
mean is first determined. Then the differences between the actual values and the mean value are added together, and divided by
the number of items in the series. The result is the mean deviation.
means test
The assessment of wealth or income as, for example, when determining the eligibility of a claimant for welfare benefits. Meanstested benefits contrast with those such as child benefit which are universal - given to all families irrespective of income.
mechanisation
The use of machines (capital) in place of workers; also known as capital-labour substitution.
median
In statistics, the median is a form of average. It is defined as the figure in the middle of a series of numbers ordered from lowest
to highest. Thus for the numbers 1, 5, 6, 9 and 12, the median is the middle value, 6..
memorandum of association
A legal document setting up a limited company and giving details of its name, aims, authorised share capital, conduct of
meetings, appointment of directors and registered office.
mercantilism
Mercantilists emphasised the importance of balance of payments surpluses as a device to accumulate gold. They therefore
advocated authoritarian control of economic policies, believing that laissez-faire policies might lead to a loss of gold.
merchandise
Goods which are for sale or which have been sold.
merchant bank
A rather vague term for banks who are not merchants, merchants who are not banks, and houses who are neither merchants nor
banks. In the City of London, the term is applied to members of the Accepting Houses Committee and the Issuing Houses
Association.
merger
The acquisition of one corporation by another, which occurs when one firm buys the stock of another. Vertical mergers occur
when the two firms concerned are at different stages of the production process (such as iron ore and steel). Horizontal mergers
occur when two firms produce in the same market (for example, two car manufacturers), whilst conglomerate mergers involve
two firms operating in completely unrelated markets (for example, catering and steel production).
merit goods
A commodity, the consumption of which is regarded as being socially desirable irrespective of consumers’ preference.
Governments are readily prepared to suspend consumers’ sovereignty by subsidising the provision of certain goods and services,
for example education.
microeconomics
Analysis dealing with the behaviour of individual elements in an economy, such as the determination of the price of a single
product. To be contrasted with
macroeconomics, which deals with economic aggregates such as inflation, total employment and money supply.
Mill, John Stuart
1806-73
John Stuart Mill’s was the prolific son of James Mill. He was acquainted with the major works of economics of the day by the
age of twelve, and was correcting the proofs of his father’s book, Elements of Political Economy, when he was thirteen. He learnt
Ricardian economics and Benthamite utilitarianism from his father. In 1823 he joined the East India Company, where he
remained for 35 years. For three years, before moving to France to spend his retirement, he was a Member of Parliament. He
was an extraordinarily prolific writer, especially when it is remembered that he had a full-time job to hold down.
Minimum Lending Rate
The rate at which the the Bank of England used to lend to other banks. It replaced the bank rate, and is itself no longer applied.
minimum wage laws
Legislation preventing the payment of wages below some specified level. The aim of such a prohibition is to boost the incomes
of the low paid. Economists, however, frequently doubt the efficacy of this method of income support because it amounts to a
form of price control. If the wage is set too high, employers may simply decide that they cannot afford to employ as many staff.
If, on the other hand, the minimum wage is set too low, it will not succeed in alleviating poverty. In defence of such laws, it has
been argued that the demand for labour is in practice very inelastic and that minimum wage laws do not give rise to the problem
of the poverty trap.
mixed economy
The dominant form of economic organisation in non-communist countries. Mixed economies rely primarily on the price system
for their economic organisation, but use a variety of government interventions to cope with macroeconomic instability and market
failures.
mobility
The extent to which something can move about; geographical or spatial mobility of labour = the extent to which workers are able
and willing to move from one place to another, usually in an attempt to find work; occupational mobility of labour = the ability of
workers to move from one type of job to another.
mobility of capital
The ability of investment funds to flow across international borders. Restrictions to capital mobility may take the form of
restrictions on the inflow of investment funds to a country (restrictions on the rights of foreigners to buy property or companies
for example) or exchange control, limiting the ability of domestic citizens to invest overseas. If capital is mobile, investors can
lend money to those borrowers who are willing to pay the highest rate of return (after taking into account any expected changes in
exchange rates). If they do this enough, and if the purchasing-power parity theory holds, real interest rates should converge
across countries. In practice they deviate, but not by very much.
mode
A statistical form of average, being simply the most commonly occurring number or numbers in a set of data.
model
A formal framework for representing the basic features of a complex system by a few central relationships. Models may take the
form of graphs, mathematical equations, or highly complicated computer programs.
Modigliani-Miller theorem
A proposition that the market value of a firm is independent of the way it chooses to finance its investment. If a firm wants to
expand, it can choose between three methods of financing its investment: borrowing, issuing shares and spending profits rather
than giving them to shareholders in the form of dividends. Modigliani and Miller showed that in a perfectly functioning capital
market the method of financing which a firm chooses will ultimately not affect the cost of capital. It is the risk and expected rate
of return of the expanded firm that will determine how attractive investors find it, not the way the firm raises money.
momentary run
The period of time that is so short that production is fixed.
monetarism
A school of though which holds that changes in the money supply are the major cause of macroeconomic fluctuations. For the
short run, this view holds that changes in the money supply are the primary determinant of changes in both real output and the
price level. For the longer run, real output tends towards potential GNP, whilst prices tend to move proportionally to the money
supply. Monetarists often conclude that the best macroeconomic policy is one with a stable growth in the money supply of 3 to 5
per cent per year.
monetary base
The net monetary liabilities of the government held by the public. In the United States, the monetary base is equal to currency
and bank reserves. Sometimes called high-powered money.
monetary policy
The objectives of the central bank in exercising its control over money, interest rate and credit conditions. The instruments of
monetary policy are primarily open-market operations, reserve requirements and the discount rate.
monetary sector
Defined by the Bank of England to include its own banking department, the retail banks, accepting houses, other British and
foreign banks and the discount houses. Other financial intermediaries such as the building societies, insurance companies and
pension funds are not counted as part of the monetary sector.
money
Anything that serves as a medium of exchange, or that is widely accepted as a means of payment; money at call or call money =
money loaned for which repayment can be demanded without notices (used by commercial banks, placing money on very shortterm deposit with discount houses); cheap money = money which can be borrowed at low rates of interest; danger money = extra
money paid to workers in dangerous jobs; dear money = money which has to be borrowed at a high rate of interest; easy money =
money which can be earned with no difficulty; hot money = money which flows rapidly from country to country, largely
according to interest rates and expectations of economic performance, in order to earn maximum returns; idle money = money not
being used to earn interest; near money = assets such as treasury bills which can easily be liquidated (converted into money);
ready money = cash or money which is immediately available.
money at call and short notice
In Britain, money loaned to the discount houses, i.e. to the money market, on a short-term basis by the commercial banks. These
loans are regarded as part of the liquid assets of the banks because they can be withdrawn immediately or at periods of notice of
up to fourteen days. They also include overnight loans. The terms of the loans vary, and in practice the money may not be called
in for long periods. The discount houses use the money to purchase treasury bills and other short-term paper, so that the callmoney rate is normally below the treasury bills rate. If the banks do call in their loans, then the discount houses may be forced to
borrow from the Bank of England. The commercial banks are willing to loan their liquid funds to the money market in this way,
because they know that the Bank of England will act as a lender of last resort. In most other countries the major commercial
banks invest directly in short-term paper and have direct access to the central bank for loans.
money broker
A person who puts banks, with money to lend from day to day, in touch with people or institutions wishing to borrow on such
terms, such as a discount house looking for an overnight loan. The broker neither lends nor borrows: he is an intermediary
earning a commission.
money demand schedule
The relationship between holdings of money and interest rates. As interest rates rise, bonds and other securities become more
attractive, lowering the demand for money.
money funds
Shorthand expression for very liquid short-term financial instruments whose interest rates are not regulated. The major examples
are money market mutual funds and commercial bank money market deposit accounts.
money illusion
The confusion of changes in money values and changes in real values. If someone’s salary is increased by 10 per cent over a
period when consumer prices have risen by 20 per cent, he is suffering from money illusion if he thinks he is better off in real
terms.
money in circulation
Money in use to finance current transactions as distinct from idle money.
money market
A term denoting the set of institutions that handle the purchase or sale of short-term credit instruments such as treasury bills and
commercial paper. Unlike a stock market, the money market is not located in a place ÐÊit is rather a network of brokers, buyers
and sellers.
money supply
Many of the current monetarist economic policies are geared to what are referred to as money targets, which are various measures
of the total sum of money in the economy. The underlying assumption is that price levels, i.e. inflation and the general level of
economic activity, are closely related to the quantity of money in circulation. That quantity is consequently controlled by the
Treasury, both directly through government financial policy and indirectly through the banking system. There are various
measures of the money supply, the lower the M number,e.g. M0,the narrower the measurement and the nearer to real liquidity.
M0 consists of the total circulating currency (i.e. coins and notes); M1 is M0 plus the total of private sector current accounts with
clearing banks; SM3 is M1 plus both public sector current accounts and all deposit accounts; M3 is SM3 plus also brings in
foreign currency bank deposits in the UK. M4 and indeed M5 are broad measureemts, that encompass most ways in which
monetary wealth can be held, e.g. Building Society deposits.
money-supply multiplier
The ratio of the increase in the money supply (or of deposits) to the increase in bank reserves. Generally, the money-supply
multiplier is equal to the inverse of the required reserve ratio. For example, if the required reserve ratio is 0.1, then the moneysupply multiplier is 10.
monopolistic competition
A market structure in which there are many sellers who are supplying goods that are close, but not perfect, substitutes, In such a
market, each firm can exercise some effect on its product’s price.
monopoly
A market structure in which a commodity is supplied by a single firm. The elimination of competition can enable the producer to
dictate prices and thereby earn super-normal or monopoly profits. The fact that the producer is the major customer for the raw
materials often means that potential competitors can be prevented from obtaining supplies of those materials, strengthening the
producer’s control. Private monopolies are usually unacceptable in democratic societies, and legislation generally exists to keep
them in check. The UK system is regulated by the Monopolies and Mergers Commission, whilst the USA has anti-trust laws.
See also
natural monopoly.
monopsony
A market structure in which there is only a single buyer, often the government. The buyer can therefore set each seller against the
others and obtain supplies at the lowest possible price. By being able to obtain raw materials at an unrealistically low price the
buyer may in certain circumstances, such as competing in a world market, be able to sell his end products at a price which will
produce an excess profit.
moratorium
A temporary cessation of the repayments of interest on loans or capital owed.
mortgage
An agreement where someone lends money to another person so that he can buy a property, the property being the security for the
loan; endowment mortgage = a mortgage backed by an endowment policy; repayment mortgage = a mortgage where the borrower
pays back both interest and capital over the period of the mortgage.
most favoured nation (MFN)
A country which has most favourable trade terms; most favoured nation clause = agreement between two countries that each will
offer the best possible terms in commercial contracts.
motivation
Encouragement to staff, and eagerness to work well or sell larger quantities of the product.
moving average
A statistical term used to show trends in a series of figures. It attempts to iron out casual fluctuation by showing the movement in
an n year average. For example, if total assets are shown for fifty years, the average for, say, the first five years would be taken.
The second would be the average after dropping the first year and adding in the sixth. The process continues until the fiftieth year
is included. This type of average is rather rudimentary and tends to be of value only when the series is particularly long. In any
event, the initial figures are often unreliable.
Multi-Fibre Arrangement (MFA)
An international arrangement within which individual importing and exporting countries agreed that specified textile and clothing
goods would be subject to import quotas. The aim was to protect the textile industries in high-wage countries from being
overwhelmed by imports from low-wage countries. The first MFA was put in place in 1974 and renewed in 1978, 1982 and 1986.
The fourth expired in 1991. In 1990 and 1991 discussions were held in the context of the Uruguay Round of Tariff Negotiations
initiated by the General Agreement on Tariffs and Trade for the abolition of the MFA, but subject to a transitional period of up to
fifteen years.
multilateral
Taking place between several parties; multilateral aid = ; multilateral trade = trade between several countries.
Multilateral Investment Guarantee Agency
An agency of the World Bank which was established in 1986 and is open to all members of the World Bank and Switzerland.
The Agency gives guarantees and insurance cover for private direct investment in developing countries against non-commercial
risks such as the imposition of foreign exchange restrictions, war and the expropriation of assets. The Agency is financed from
incomes from insurance premiums and contributions made by member countries, amounting to US$1 billion.
multilateralism
International trade and exchange between more than two countries without discrimination between those involved. In contrast to
bilateralism.
multiplier
A term in macroeconomics denoting the change in an induced variable (such as GNP, money supply or imports) per unit of
change in an external variable (government spending, exports or bank reserves). The investment multiplier refers to the increase
in GNP that would result from a $1 increase in investment. In the simple multiplier model, the investment (or government
expenditure) multiplier exceeds 1, because original spending increases will set off a series of further ÒinducedÓ spending
increases.
multiplier model
In macroeconomics, a theory developed by J.M. Keynes that emphasises the importance of changes in autonomous expenditures
(especially investment, government spending and net exports) in determining changes in output and employment.
multi-product firm
A business producing two or more different commodities or products. Most large firms produce more than one product and are
often engaged in more than one industry, although for simplicity the basic theory of the firm is couched in terms of a singleproduct firm.
mutual (insurance) company
A company which belongs to insurance policy holders.
Nn
narrow money supply
national debt
see
government debt.
National Economic Development Council (NEDC or ‘Neddie’)
Set up by the UK government in 1962 with the aim of encouraging economic growth and keeping a watch on industrial
development generally. It draws its membership from representatives of government, employers and trade unions, and is chaired
by a leading government minister. In order to achieve greater coverage of national industrial problems, sub-committees were set
up in 1964, with responsibilities for particular industries and with power to make representations to the Council. These subcommittees became known as ‘Little Neddies’. Their number varies according to the needs of the moment, and whilst new ones
may be formed others may be disbanded when they are no longer relevant. The NEDC has been part of the British Technology
Group since 1981.
National Girobank
A bank established within the Post Office in 1968 and sold to the Alliance and Leicester Building Society in 1990. The Girobank
provides a credit transfer service, current accounts, deposit accounts and personal loan facilities.
national income
The total incomes of residents of economy in a given period after providing for capital consumption. It can also be referred to as
net national product at factor cost. Incomes will include all payments for the use of the factors of production, i.e. wages, salaries,
profits, rents and net income from abroad but excluding transfer payments. The national income may be calculated in this way or
as the sum of value added in all sectors of the economy at factor cost, or as the sum of expenditure on final consumption and
investment goods, plus exports and minus imports. These three methods should, in theory, yield the same figure since all incomes
should equal total expenditure plus net saving or investment, which in turn should also equal the value of output (provided output
is defined as value added, i.e. intermediate expenditure is excluded). In practice, each of the three methods involves estimation
and the totals never agree exactly, so an averaging procedure is used. Comparisons of output and expenditure will be affected,
among other things, by the shadow economy. National income before capital consumption is equal to the gross national product
and if net income from abroad is also excluded it is equal to the gross domestic product. National income or other aggregates
from the national accounts are regarded as an indicator of welfare in the market economy but they are not unambiguous in this
respect. Some activities which contribute to welfare are not included because they are not valued in markets, for example the
services of housewives (though may soon be included in some calculations to be produced in the UK), and externalities are
excluded. Comparisons between national incomes of various countries are subject to too many qualifications: the distribution of
income will differ and so too may methods of estimation; moreover the exchange rates used may not reflect purchasing-power
parities.
national income and product accounting
A set of accounts that measures the spending, income and output of an entire nation for a given time period, often a quarter of a
year.
National Insurance
The UK state insurance scheme which pays for medical care, hospitals, unemployment benefits, etc. National Insurance
contributions (NIC) must be paid by both employer and employee according to earnings.
National Loans Fund
A government account opened in 1968 for the domestic lending of government and all the transactions relating to the national
debt. The payments of the Fund include interest, management and expenses of the national debt, deficit on the consolidated fund
and loans to the nationalised industries and public corporations, local authorities and the private sector. Receipts include interest
on loans, profits of the Issue Department of the Bank of England, interest transfer from the Consolidated Fund and borrowings.
nationalised industries
These are industries owned by the public, in the direct control of the government. There are no shareholders apart from the
government, though to raise money to buy the shares or to provide additional finance, the government may issue bonds.
National Savings Bank (NSB)
A savings bank administered by the Department for National Savings, and operating through the Post Office network. The NSB
provides a deposit-taking and withdrawal service through two types of account namely, ordinary accounts, on which interest is
paid and from which withdrawals may be made on demand, and investment accounts, which offer a higher rate of interest, though
withdrawals require one month’s notice. Interest on deposits in ordinary accounts is tax-free up to an annual limit. The NSB was
formerly called the Post Office Savings Bank.
national savings bonds
These are available in the UK either through the Post Office or directly from the Deposit Bond Office. They are designed for
longer-term savings at high interest rates. The main distinction between deposit bonds and income bonds is that the former are
intended for capital accumulation, interest being added annually, and the latter for both capital security and a regular monthly
income related to interest earned. In both cases, interest is paid without deduction of tax, the relevant tax being paid by the
recipient. Repayment of monies invested in either category of bond is subject to three months, notice.
national savings certificates
A UK government security introduced in 1916 (when it was called a War Savings Certificate) and obtainable at Post Offices. No
income tax is payable on interest from these Certificates, nor does capital gains tax apply to an increase in their value.
natural monopoly
A firm or industry whose average cost per unit of production falls sharply over the entire range of its output, as for example in
local water production and distribution. Thus a single firm, or monopoly, can supply the industry output more efficiently than can
multiple firms.
natural rate of growth
The rate of growth of the labour force, plus the rate of growth of labour productivity. Thus, if the labour force is growing at 1 per
cent per year, and output per labour-hour is growing at 2 per cent per year, the natural rate of growth of the economy is 3 per cent
per year.
natural rate of unemployment
The rate of unemployment at which pressures on wages are in balance, so they neither increase nor decrease the rate of inflation.
Equivalently, the unemployment rate at which the long-run Phillips curve is vertical.
natural resources
Commodities or assets with some economic value which do exist as a result of an ‘accident’ of nature. Their value is usually only
realised, however, when they are exploited by human labour that is, dug out of the ground, processed or refined. Natural
resources are a necessary ingredient of all economic activity. Natural resources can be of three types. The first are nonrenewable, like oil and coal, stocks of which will eventually run out. The second are renewable, like water and fish, which are
reproducible. The third are non-expendable: they are not used up in the consumption process. An example is a landscape of
outstanding beauty, which yields utility for those that see it, and tourist income for the owner.
near money
Financial assets that are risk-free, and so readily convertible into money that they are close to actually being money for example,
treasury bills.
negative equity
A situation where a house bought with a mortgage becomes less valuable than the money still owing to the lender, because of
falling house prices.
negative income tax
A plan for replacing the current complex set of income support programmes with a unified programme. Under such a plan, poor
families would receive an income-support payment (or negative tax), whose size would depend on their income.
negotiable
Subject to negotiation; Ônot negotiableÕ = words written on a cheque to show that it can be paid only to the stated payee;
negotiable cheque = a cheque which is made payable to the bearer (i.e. to anyone who holds it).
negotiate
To discuss a conflict or problem with another party, so as to reach an agreement.
net
Price or pay or weight, etc., after all deductions have been made; net earnings = total earnings of a business or individual after tax
and all other deductions; net price = price of goods or services which cannot be reduced by a discount.
net assets
A term often used in published accounts for the total of fixed plus net current assets, or fixed plus current assets less current
liabilities. The significance of this total may be somewhat doubtful, depending on whether one considers it equal to capital
employed it is often described as this.
Net Book Agreement
An agreement between publishers and booksellers which came into force in the UK in 1900. The agreement laid down that books
designated by publishers as net books should be subject to the terms of the agreement. Under this agreement, net books are not
supplied to a bookseller unless he agrees to sell them at not less than their published price. Any default by a bookseller could lead
to him being stop-listed collectively by the publishers, and his source of supply of books on trade terms cut off. In a judgement
delivered in 1962 under the Restrictive Trade Practices Act of 1956, it was deemed to be in the public interest that resale price
maintenance should be continued on books, though it has recently again come under challenge from within the publishing and
book selling industry. It has recently been challenged by several large book shops. The likely outcome of this action is that the
agreement will slowly disappear.
net economic welfare
A measure of national output that corrects several limitations of the GNP measure.
net exports
In the national product accounts, exports of goods and services minus imports of goods and services.
net investment
Gross investment minus depreciation capital goods.
Net Inward Investment
The amount of investment attracted to a country that exceeds the investment the country makes elsewhere on the globe. So, a net
situation means that that the country has attracted more investment to its territory than it in turn has invested elsewhere.
net national product (NNP)
GNP less an allowance for the depreciation of capital goods.
net present value
A term used with reference to investment control. When a project is being considered, various devices are employed to discover
whether it will be profitable. One method is to take the net present value of expected income, i.e. the net income for the years the
plant will be productive. This is discounted back at a rate of interest consistent with the risk involved, to the date of investment.
If the total exceeds the capital to be invested, the project may be profitable.
net worth
In accounting, total assets minus total liabilities.
neutrality of money
This concentrates on the inability of changes in the stock of money in an economy to affect anything except the general level of
prices. If money is neutral, an increase in the money supply causes inflation, but stimulates no growth in the real level of output.
The issue of whether money is neutral or not is central to debates in macroeconomics. It has become central to the debate between
so called monetarists and Neo Keynsians. In Classical economics and under monetarism, money is held to be neutral. However,
Keynes and his followers, have had a more complicated attitude to monetary neutrality. They have downgraded the importance of
money in influencing aggregate demand; arguing that aggregate demand has an important role in influencing real variables;
because of this, modern Keynesian economics is associated with asserting that money is not neutral. It would be more accurate to
say that they believe aggregate demand is not neutral. The degree to which money can have some real impact on the economy
depends on the degree to which certain prices or wages are fixed in nominal terms. For example, suppose a large High Street
shop decides to never raise their prices. If the money supply authorities drop freshly printed £10 notes over the countryside (an
increase in the money supply), people will have high money balances which they may attempt to spend in shops such as that
keeping its prices stable. Under classical economics, this increase in demand for their goods should inducesuch shops to raise
their prices to the point at which the same number of items sell as would have sold before the money supply increased. However,
if such shops cannot raise their prices, they will sell more of their products than otherwise and will have to ask their suppliers to
produce more, causing a real increase in output. The view that money is neutral stems from a belief that market forces function
reasonably effectively (i.e. that large high street shops don’t fix their prices) and that economic agents are rational.
new classical economics
A development of classical economics associated with monetarism. The theory centres on macroeconomics and emphasises the
role of rational expectations in decision-making and the natural rate of unemployment in equilibrium growth. Unlike the
monetarists, the proponents of this theory argue that no government demand-management intervention is effective even in the
short run. Growth can only be enhanced by influencing supply.
New Deal
The US Federal government under President Roosevelt began, in 1933, a number of projects designed to give financial assistance
and work to the large number of people thrown out of employment by the Great Depression, which followed the stock-market
collapse on Wall Street in 1929. This change of policy was called the New Deal. It met with a certain amount of opposition,
because it led to budget deficits.
The introduction by the Blair government in 1998 of a series of measures to encourage people off benefit and into work.
new-issue market
That part of the capital market which serves as the market for new long-term capital. Institutions needing capital offer shares and
securities which are then purchased by each other and the general public. Internally generated funds provide about 70% or more
of the capital required and the new-issue market is not large, accounting on average for about 5 per cent, although it is of some
importance. This market does not include certain other sources of new long-term external finance, e.g. mortgages and other
loans from financial institutions.
newly-industrialised country (NIC)
A country which is not a developing country but has not yet achieved the status of the advanced countries. Singapore, Taiwan
and Brazil, for example, are usually counted as NICs.
niche marketing
establishing a product, often a new one in part of a market that was not previously served by a product.
Nikkei Dow Index
The index of prices on the Tokyo Stock Exchange, based on around 200 leading shares.
no-claims bonus
A reduction of premiums on an insurance policy because no claims have been made.
nominal
The face value of a share, coin or banknote, with no adjustment made for inflation. Contrast with
real.
nominal interest rate
The interest rate paid on different assets. This represents a dollar return per year per dollar invested. Compare with the real
interest rate, which represents the return per year in goods per unit of goods invested.
nominal gross domestic product
The value of the gross domestic product at current prices. Many economists, notably Meade, have suggested that the government
should set a target for nominal GDP; if workers take low pay rises, this target will be reached by real output increases; if workers
take high pay rises, then the nominal GDP rise will almost entirely consist of inflation.
nominal value
The face value of a share or bond, which may be more or less that its market price.
nominal yield
The return or yield on a security in which dividend or interest is expressed as a percentage of the nominal value of the security as
opposed to its market price.
non-price competition
A policy of attempting to attract business from rivals by means other than selling at lower prices, for example by the use of
advertising or product differentiation. Non-price competition is commonly found under conditions of oligopoly, where pricecutting could lead to a damaging price war, thus the use of free gifts, coupons and special offers.
non profit-making organisation
An organisation such as a charity which is not run to make a profit.
non-tariff barriers (NTBs)
A set of obstacles to imports other than quotas or tariffs. Examples include safety and the use of regulations that favour domestic
over imported products; legal requirements that providers of insurance services should be domiciled within national boundaries;
and deliberate delay or obstruction at customs facilities.
normative
Normative economics considers what ‘ought to be’, and therefore involves value judgements or goals of public policy. This
contrasts with positive economics, which deals with facts and data.
Oo
.
occupational mobility
The ability of workers to move from one area of employment to another.
offer
A term used in the law of contract. The offer is the first part of the process of developing a contractual agreement between two or
more parties. Other things being equal, acceptance of the offer can bind the offeror. The offer may be conditional or
unconditional. The acceptance must be in the same terms as the offer. An offer is not operative until communicated to the other
party. An offer should not be confused with an invitation to make an offer. A shopkeeper who marks his goods with a price in
the window is not offering to sell at that price, or to sell at all: he is inviting persons to come into the shop and offer to purchase
the goods. An offer does not necessarily have to be in writing.
Office of Fair Trading
The UK government department which protects consumers against unfair or illegal business.
off-the-job training
Training given to workers away from their place of work, such as at a college or school.
off-the-shelf
Ready-made according to a regular design; off-the-shelf company = a company which has already been registered by an
accountant or lawyer, but does not trade until it is sold to someone who wants to begin trading quickly.
oligopoly
A market which is dominated by a few large suppliers. Oligopolistic markets are normally characterised by large-scale product
differentiation. This is usually attempted through advertising and other marketing ploys, with long periods of price stability
intermittently disrupted by keen price competition. Petrol sales , soap powder and coffee are notable oligopoly industries in the
UK in which free offers, competitions and advertising are more heavily used than price competition for attracting custom. There
is no single theory of oligopoly equivalent to that of perfect competition or monopoly because the behaviour of oligopolistic firms
is determined by the reaction and behaviour of their rivals, and the assumptions they make about those reactions. Instead, there
are a number of alternative theories. The first theories/observations were made by Cournot, who assumed that each firm sets its
price and output on the assumption that its rival does not react at all. In this situation, each firm will leap-frog past the other,
lowering price and increasing output to achieve a higher market share. The result is a market in which prices are higher and
output lower than they would be if the firms were perfect competitors. A second approach is that of Bertrand Competition, in
which keen price competition drives firms to the perfectly competitive outcome. The third theory is that the firmsare aware of
their interdependence, and one among them leads in price setting with others following. Here the leader enjoys higher profits than
any followers but all firms benefit from price stability. A fourth case is that in which all firms attempt to act as leader; then they
all earn lower profits than they would under Cournot’s solution. A fifth case is that firms assume their rivals will follow their
prices down but not follow their price if it rises; in this situation, firms will be very reluctant to change their price. It could
account for the fact that prices are often stable in oligopolistic industries despite large changes in costs. A sixth case is that in
which firms collude and between them achieve the outcome that would occur if a monopoly existed in the industry, except that
economies of scale cannot be achieved to the same extent. However, if one firm colludes, it always pays another to cheat and sell
more than agreed, so that maintaining collusive agreements may be difficult in cases where firms cannot monitor each other’s
behaviour. Otherwise, hefty state penalties for collusion can deter oligopolists from making agreements that have negative effects
on consumers. Other approaches exist; notably game theory.
ombudsman
A Parliamentary Commissioner, an official who investigates complaints made by the public against government departments or
other large organisations. In fact, the ombudsman’s powers are very limited and, in dealing with complaints, he relies on the
inclination of government departments to avoid adverse publicity rather than on any ability to force the government to act
differently. Complaints against local authorities were also made possible by the establishment of local commissioners with
powers of investigation into complaints against abuse of authority by local government bodies.
oncosts
Fixed costs or money paid in producing a product which does not vary with the quantity of the product made.
on-the-job training
Training given to workers at their place of work, as opposed to at colleges or schools.
OPEC
abbreviation for
Organisation of Petroleum Exporting Countries
open economy
An economy that engages in trade of goods and capital with other countries. A closed economy is one that has no imports or
exports.
open market
Open markets are those where offers to buy or sell are made to the public at large and not to a restricted number or behind closed
doors.
open-market operations
The activity of a central bank in buying or selling government bonds to influence bank reserves, the money supply and interest
rates. If securities are bought, the money paid out by the central bank increases commercial bank reserves, and the money supply
increases. If securities are sold, the money supply contracts.
opening prices
The prices at which dealings start at the commencement of daily business in a market. In the Stock Exchange, for example, at the
time of official opening dealers must begin by quoting prices before the have a full appreciation of the relative strength of supply
and demand. If they have reason to think that demand will be heavy where favourable news has been released overnight, they
will mark up their opening prices, compared with the closing prices of the previous day.
operating costs
The costs of the day-to-day running of a business.
operating profit
The profit on current activities; the difference between total revenue and total operating costs and before the deduction of fixed
costs.
operating ratios
Various measures of the efficiency of a business, such as the operating rate or capacity utility rate, the stock-sales ratio, labour
turnover ratio, the creditor-debtor ratio and other financial ratios.
operational
Referring to how something works; operational budget = forecast of expenditure on running a business; operational costs = costs
of running a business; operational planning = planning how a business is to be run; operational research = study of how a
company operates, to see if it can be made more efficient and profitable.
opportunity cost
The value of the next best use (or opportunity) for an economic good, or the value of the foregone alternative. So, the inputs
used to mine a ton of copper could have been used to grow ten bushels of corn .The opportunity cost of a ton of corn is the ten
bushels of wheat that could have been produced, but were not. Opportunity cost is particularly useful for valuing non-marketed
goods such as environmental health or safety.
optimal-growth theory
The area of economics concerned with analysing the level of economic growth which maximises social welfare.ItÕs starting point
is known as the golden rule of capital accumulation which, under a large number of assumptions, proposes that the optimalgrowth path will be the one which maximises consumption per worker over time. To alter consumption per worker, society can
vary its stock of capital per worker: if there is too much capital, maintaining the capital-labour ratio will require such high levels
of investment that workers would have to save a lot and refrain from consumption. If there is too little capital, however, while it
is easy to maintain the stock, the product of workers is low because they are poorly equipped. The theory suggests that the
optimal position is one in which the rate of growth of population equals the marginal productivity of capital. The golden rule is
limited in its application to a society where balanced growth is achieved from an ideal starting-point. It does not suggest how
growth should proceed in the absence of an optimal starting-point, nor whether balanced growth is itself desirable.
optimum
The position which is the aim of any economic unit for it being used as effectively as it possibly can be,i.e. within the constraints
applying. Where a situation is not optimal, gains in welfare can be made for some without any sacrifice by others. It is essential
to the meaningful application of the concept that there is in the existence of some objective (such as maximisation of utility) and
some constraint on the pursuit of that objective (such as a specified set of prices and a given income). While it is possible to have
two conflicting objectives (for example, money and leisure), an optimum can only be attained with respect to both of them if
some desired trade-off can be expressed. Individuals, trade unions, firms and countries are generally assumed to be rational in
economic theory and thus exhibit optimising behaviour.
option
A contract allowing a party to buy or sell a commodity or a security at a given price during a specified period of time. Options
today are widely traded for common stocks, bonds, foreign exchange and many raw materials.
order
A request for goods or services to be supplied; to have a full order book = (of a company) having enough orders to work at full
capacity.
ordinary
Normal or not special; ordinary shares = normal shares in a company, which have no special bonuses or restrictions.
organisation
A group or institution which is arranged for efficient work.
Organisation for Economic Co-operation and Development (OECD)
An organisation representing the industrialised countries, aimed at encouraging international trade, wealth and employment in
member countries.
Organisation of Petroleum Exporting Countries (OPEC)
A group of countries who are producers and exporters of oil. Set up in 1960, the organisation acts as a forum for the negotiation
of the level at which the member countries should fix the price of their crude petroleum exports by production quotas. The
organisation acts as a coordinator for determining the level of aid to developing countries granted by the members. The member
countries accounted for about 60 per cent of total world crude-oil production and about 90 per cent of total world exports in the
early 1970s. However, their high oil prices led to substitution by other fuels, and the expansion of supplies from non-OPEC
producers. As a result, OPEC share of world exports fell to around 40 per cent by 1990.
other things being equal
Often quoted as its Latin equivalent, ceteris paribus, this phrase signifies that a factor under consideration is changed whilst all
other factors are held equal or constant. For example, a demand curve states that the quantity demanded of a good will normally
decline as the price rises, as long as other things (such as incomes) are held equal.
output
The amount which a company, person or machine produces.
outsourcing
Obtaining services from outside specialist companies, rather than employing staff to provide them.
outstanding
Not yet paid or completed; outstanding debts = debts which are waiting to be paid; outstanding orders = orders received but not
yet supplied.
overbooking
The booking of more people than there are seats, rooms, etc., available.
overcapacity
Unused capacity for producing something.
overcapitalised
With more capital in a company than it needs.
overcharge
To charge too much money for a product.
overdraft
1.
GB: An amount of money which a company or person can withdraw from a bank account with the bankÕs permission, and which
is more than there is in the account.
2.
US: The amount of a cheque which is more than the money in the account on which it is drawn (American banks do not offer
overdraft facilities in the same way as British banks).
overdue
Something which has not been paid on time is said to be overdue.
overheads
The costs of the day-to-day running of a business.
overmanning
Having more workers than are needed to do a company’s work.
overspend
To spend too much; to overspend a budget = to spend more money than is allowed in the budget.
overstaffed
With more workers than are needed to do the work of the company.
overstock
To have more stock than is needed.
oversubscription
Where a new issue of shares is made and the demand for the shares exceeds the number on offer, the issue is said to be
oversubscribed. It is, difficult for the issuing house to estimate precisely the price at which a share issue will be fully subscribed,
and new issues are usually either over or under subscribed. Some highly attractive new issues are ver oversubscribed, especially
if they attract purchases by stags - speculators who subscribe to new issues in the expectation that they will be oversubscribed and
that dealings will begin at a premium. Very often new issues that start at a premium fall back to below the issue price as a result
of profit-taking by stags.
over-the-counter sales
Legal selling of shares which are not listed in the official Stock Exchange listings.
overtime
Hours worked in excess of the normal working time; overtime ban = an order by a trade union which forbids overtime work by its
members.
overtrading
A firm is said to be overtrading when it has insufficient working capital to meet the needs of its present level of business. e.g. a
firm which doubled its production, and then found that it could not cover all its current expenditure because too much capital was
held in stocks and work in progress, would be overtrading, even though it had correctly forecast the demands for its products. In
such circumstances, the firm’s current ratio would probably be less than unity.
overvalue
To give a higher value than is right; the pound is overvalued against the dollar = the exchange rate gives too many dollars to the
pound.
owe
To have to pay money; he owes the bank £250,000.
own brand goods
Products specially packed for a store with the store’s name on them.
ownership
The act of owning something; collective ownership = situation where a business is owned by the workers who work in it; joint
ownership = situation where two or more parties own the same property; public or state ownership = situation where an industry
is nationalised; private ownership = situation where a company is owned by private shareholders.
Pp
Paasche index
An index number which employs weights derived from current statistics rather than from those of some past period of time which
is the Laspeyres index. An example would be, an annual Paasche price index would calculate the price change (the price relative)
of each commodity or service included in the index, between the current year and a base year, and then derive the weighted
average of these price relatives; each weight being the amount spent on each commodity in the current year.
paid-up
Paid in full; paid-up share capital = the amount of money paid for issued capital shares (it does not include called-up capital
which has not yet been paid for); paid-up shares = shares which have been completely paid for by the shareholders.
paper money
Documents with a value stated on them but having no value in themselves.
paper profit
An unrealised money increase in the value of an asset or assets. An individual, for example, will have made a paper profit on his
house if it is worth more now that it was when he bought it.
paradox of thrift
A paradox, first noted by J.M. Keynes, that a community’s decision to save more (to be more thrifty) may result in its actually
saving less. To save more is to spend less on consumer goods; to spend less on consumer goods may reduce aggregate demand
and GNP; this may lead to lower induced investment, lower incomes and lead ultimately to reduced saving.
paradox of value
The paradox that many necessaries of life (such as water) have a low market value, whilst many luxuries (such as diamonds) have
high market prices, in spite of having little practical use. It is explained by the fact that a price does not reflect the total utility of a
commodity, but its marginal price.
parallel imports
A flow of imports into a high-price country additional to the normal flow of imports generated by the manufacturers and traders.
If retail prices in one country are sufficiently lower than in another, people will travel to the low-price country from the high-price
country to shop. This arbitrage would eventually reduce the differences in prices between countries, unless there were technical,
legal or other obstacles to this trade. It might be expected that with the completion of the Single European Market in 1992, price
differences in identical products, which previously existed in the European Community, would be reduced.
parallel money markets
Markets in short-term securities other than treasury bills, bills of exchange and bonds dealt with on the discount market. Until the
mid-1950s the discount market alone provided the main market for short-term money. Since 1955, when local authorities were no
longer allowed to borrow at will from the Public Works Loan Board, a large market in short-term loans to local authorities has
developed. Other markets have developed in Eurocurrency, certificates of deposit, finance-house deposits and inter-company and
inter-bank loans.
Pareto efficiency
see
allocative efficiency
Pareto’s Law
The theory that a small percentage of a total is responsible for a large proportion of value or resources (also called the 80/20 law,
because 80/20 is the normal ratio between majority and minority figures: so 20% of GDP may enrich 20% of the population).
parity
The state of being equal; the pound fell to parity with the dollar = the pound fell to a point where one pound was worth one dollar.
Parkinson’s Law
The law that, in business, the amount of work will increase to fill the time available for it.
part
A piece or section; part-owner = person who owns something jointly with one or more other persons; part exchange = giving an
old product as part of the payment for a new one; part-time = not working for the whole working day.
partial-equilibrium analysis
Analysis that concentrates on the effect of changes in an individual market, holding other things equal e.g. disregarding changes
in income). Partial-equilibrium analysis might be used to assess the effect of apetrol price rise on demand for petrol.But if the
price rise causes GNP to decline, this will feed back into the petrol market; partial-equilibrium analysis does not consider this
feedback effect.
participation rate
The proportion of the population who are in work or unemployed. In the UK the labour force participation rate, or economic
activity rate exceeds 75% of males and 53% of females. The participation rate for women has risen compared with that for men,
which has the result that the labour force has grown faster than the population. The participation rate is sometimes defined as the
proportion of the population aged 16-65 who are in the labour force.
partnership
An association of two or more people to conduct a business which is not in corporate form and does not enjoy limited liability;
sleeping partner = a partner who provides money but takes no active part in the management or organisation of the business.
par value
The price at which a share or other security is issued, i.e. the face value of the investment. A share is said to be standing above
par if its quoted price on the stock exchange is greater than that at which the share was issued. The term was also used to describe
the official fixed exchange rate of currencies in terms of gold and US dollars, as declared to the International Monetary Fund.
patent
An exclusive right granted to an inventor to control the use of an invention lasting, in the US, over a period of seventeen years.
They create temporary monopolies as a device for rewarding inventive activity and are the principal tool for promoting invention
amongst individuals and small firms.
pawnbroker
A person who lends money against a pledged article which he is free to sell if the loan is not repaid with interest within a stated
period. The article, which is a form of collateral security, might be clothing, jewellry or the tools of a man’s trade. Pawnbrokers
today are principally traders in used goods, and, as a credit institution, pawn-broking is of very small and declining significance.
pay
Salary or wage, money given to someone for regular work; back pay = salary which has not been paid; basic pay = normal salary
without extra payments; pay round = annual series of wage bargaining negotiations in various industries; take-home pay = pay left
after tax, national insurance and other deductions have been made; unemployment pay = dole, money given by the government to
someone who is unemployed.
pay as you earn (PAYE)
The tax system in the UK where income tax is deducted from the salary before it is paid to the employee.
payback
Paying back money which has been borrowed; payback period = period of time over which a loan is to be repaid or an investment
is to pay for itself.
payee
Person who receives money from someone, or the person to whom a cheque is made payable.
payment
The procedure of giving money in return for something; payment in kind = paying by giving goods or food, but not for money;
deferred payment = money paid later than the agreed date, or paid by instalments over a period of time; down payment = part of a
total payment made in advance; balance of payments = the international financial position of a country (see balance of payments);
payment in advance = an accounting term for money paid for goods and services not yet received, and where the cash cannot
normally be recovered. Examples are rates and rents paid for a period ending after the date to which the accounts are made up.
payroll
The list of people employed and paid by a company or money paid by a company in salaries.
P/E or P/E ratio
abbreviation for
price/earnings ratio
peg
To hold something at a certain point; to peg prices = to fix prices to stop them rising; pegged exchange rates = exchange rates
fixed at a certain level to prevent currency fluctuations.
penalty clause
A clause which lists the penalties which will be imposed if the contract is not obeyed.
penetration
market penetration = the percentage of a total market which the sales of an individual company cover.
pension
Money paid to someone who no longer works; retirement pension = state pension given to a person after the legal retirement age;
government pension = pension paid by the state; occupational pension = pension which is paid by the company by which a worker
has been employed; pension plan or scheme = plan worked out by an insurance company which arranges for a worker to pay part
of his salary over many years and receive a regular payment when he retires; contributory pension scheme = scheme where the
worker has to pay a proportion of his salary; graduated pension scheme = pension scheme where the benefit is calculated as a
percentage of the salary of each person in the scheme; non-contributory pension scheme = a scheme where the employer pays in
all the money on behalf of the worker; pension fund = fund which receives contributions from employers and employees, being
the money which provides pensions for retired members of staff; SERPS = state earnings-related pension scheme.
per annum
In a year.
per capita
For each person; GNP per capita = the GNP of a nation divided by its total population, giving income per person.
per cent
For each hundred; 10 per cent = ten in every hundred.
perfect competition
A market situation in which the number of sellers and buyers is very large and the products offered by sellers are homogeneous
(basically the same/indistinguishable). When such conditions exist, no firm can affect the market price, and each firm faces a
horizontal (or perfectly elastic) demand curve. A perfectly competitive market is considered to be efficient in three ways. In the
short run, profit maximisation ensures that each firm sets output so that marginal cost equals marginal revenue, hence marginal
cost equals price, achieving allocative efficiency. In the long run, free entry and exit ensures that new entrants are attracted to
industries where high profits are made: zero profit means that no entrepreneur earns more than his transfer earnings. Again, in the
long run, as average revenue equals marginal cost and average revenue equals average cost, we deduce that average cost equals
marginal cost, hence ensuring minimum-cost production. Whilst the features of perfect competition are an unrealistic description
of modern industry, it is realistic for world commodity markets where many traders deal in a homogeneous product. The simple
model provides a good starting point for illuminating the forces underlying the real behaviour of firms.
performance
The way in which someone or something acts; company performance = a measure of how good or bad a company’s results are;
performance-related pay = pay which is linked the quality of an employee’s work; performance review = yearly interview
between a manager and each worker to discuss how the worker has worked during the year.
perishable goods
Goods which can go bad or become rotten quickly or easily.
perk
An extra item given to workers by their employer in addition to their salaries, including company cars and private health
insurance.
perpetual debentures
Debentures which the holder cannot redeem by demanding repayment are called perpetual debentures. When they cannot be
redeemed in any event, they are called irredeemable debentures.
Personal Equity Plan (PEP)
A government-backed scheme to encourage share-ownership and investment in industry, where individual taxpayers can each
invest a certain amount of money in shares each year, and not pay tax on either the income or the capital gains, provided that the
shares are held for a certain period of time.
Personal Identification Number (PIN)
A number allocated to the holder of a cash card or credit card, by which he can enter an automated banking system, such as a cash
machine.
Personal Investment Authority (PIA)
The self-regulatory body, which began operation in July 1994, to take over the activities of FIMBRA, regulating financial
advisers, insurance brokers, etc., who give financial advice or arrange financial services for their clients, and LAUTRO whose
members provide financial products such as unit trusts, endowment insurance, etc.
personal loan
A bank loan made without collateral security to a private customer for specific purposes. Personal loans are granted for a fixed
period, normally up to two years, and are repaid in monthly instalments.
personal pension
A regular income after a certain age and usually after retirement from work provided by a state or private scheme. The flat-rate
state retirement pension is paid to over-65s who have paid appropriate national insurance contributions. There are two broad
types of private pension schemes. Occupational schemes are provided by employers, which usually involve ‘contracting out’ of
the State Earnings Related Pension Scheme (SERPS) and provide a guaranteed minimum pension. The schemes are based on
trust funds in which contributions are invested either directly or through financial intermediaries such as life insurance companies.
Personal annuity schemes exist for the self-employed or others who are not members of an occupational scheme.
personnel
The people who work for a certain company; personnel department = the section of a company which deals with its staff;
personnel management = the effective organisation and training of staff so that they work well and profitably.
petrocurrency
Foreign currency which is earned by exporting oil.
petty cash
A small amount of cash kept in an office to pay small debts.
Phillips curve
A graph first devised by A.W. Phillips (when a Professor at the London School of Economics), showing the trade-off between
unemployment and inflation. The view that first came from Phillips’ work and suggested that the lower the rate of
unemployment, the higher the rate of inflation. In modern Macroeconomics, the downward-sloping Phillips curve is generally
held to be valid only in the short run. In the long run, the Phillips curve is usually thought to be vertical at the natural rate of
unemployment, an observation the Friedman applied in his augmented curve.
YOU ARE REMINDED TO LOOK ON WWW.BIZED.AC.UK and visit the Diagram Bank, where all the major diagrams
used in economics are available.
phoenix company
A company formed by the directors of a company which has gone into receivership, which trades in the same way as the first
company and, in most respects (except its name) seems to be exactly the same as the first company.
physical controls
Direct controls on production and consumption, licensing of buildings or imports, and the rationing of goods are examples of
physical controls. These are alternatives to the use of monetary or fiscal measures which control production and consumption
through the price mechanism.
Physiocrats
A group of eighteenth-century French economists, led by Quesnay, who later became known as the Physiocrats Economistes’.
They believed in the existence of a natural order..
picket
Striking workers who stand at the gate of a factory to try to persuade other workers not to go to work.
piece rate
A rate of pay for a product produced or a piece of work done, and not paid for at an hourly rate.
pie chart
A diagram where information is shown as a circle cut into sections of different sizes.
Pink Book
An informal name for the annual publication, United Kingdom Balance of Payments. The Pink Book appears in the late summer
of each year, and gives estimates of the balance of payments in detail over the previous ten years and in summary for the previous
twenty-one years.
pirate
A person who illegally copies a patented invention or copyright work and sells it.
placing
Finding a single buyer or a group of institutional buyers for a large number of shares in a new company or a company that is
going public.
plaintiff
Person who starts a legal action against someone.
planned economy
A system of economic management where the government plans all business activity and the allocation of resources.
planning
Organising how something should be done, especially how a company should be run to make increased profits; corporate
planning = planning the future financial state of a company or a group of companies; planning permission = official document
allowing a person or company to build new buildings on empty land.
plant
Machinery or a large factory.
plastic money
Credit cards and charge cards.
plough back
to plough back profits into a company = to invest a company’s profits in the business by using them to buy new equipment or
create new products, rather than paying out the profits to shareholders.
poison pill
Action taken by a company to make itself less attractive to a potential take-over bid.
policy
Decisions on the general way of doing something; economic policy = the approach taken by a government to run the economy;
insurance policy = a document which shows the conditions of an insurance contract; all-in or comprehensive policy = an
insurance which covers all risks; endowment policy = policy where a sum of money is paid to the insured person on a certain
date, or to his estate if he dies earlier.
poll
A vote at a shareholders’ meeting. It is usually taken by ballot and members have votes in proportion to the number of shares
they hold. Preliminary voting is by show of hands, but the articles of association may provide that a certain minimum number of
members can demand a poll on any matter except the election of chairmen or adjournment. A member with several shares may
vote one way with some shares and another with others. A proxy can vote in a poll but not on a show of hands unless the Articles
provide otherwise. The Companies Act 1980 provided that at a class meeting of shareholders any member of that class present
personally or by proxy may demand a poll.
polluter-pays principle
The idea that polluting emissions should be taxed in order that those who create them pay for the costs of their actions. The
principle of allowing pollution to occur, but taxing it, derives from Pigou in 1932. It is an approach which contrasts with the total
banning of pollution or allowing it within certain limits. The advantage of taxing is that if the tax rate covers the damage or
suffering caused by the pollution, it will pay firms to pollute only if the benefits of doing so outweigh the costs. The tax will also
generate revenue that can be used to compensate those who suffer most from the pollution that is caused. An example of a
pollution tax would be a tax on the carbon content of fossil fuels to offset the atmospheric warming effect of the carbon dioxide
they produce, a carbon tax. While under perfect information, pollution taxes can produce economic efficiency, if may be difficult
to set the tax level correctly, and the cost of making mistakes, of allowing too much pollution for example, may be very high.
population
1.
The number of people living in any defined area.
2.
A term applied to any class of data of which counts are made or samples taken, such as a car population.
population census
A count of the number of inhabitants that has been taken in the UK since 1801. It now takes place every ten years All developed
countries have regular censuses, but many developing countries are now in the process of organising them for the first time.
portable pensions
This term is used with reference to pension schemes which do not terminate when the beneficiary changes employment. All
privately funded schemes are essentially portable and occupational schemes within the public sector are portable within that
sector, e.g. pension entitlements earned by teachers in State schools are portable provided that the person to whom they apply
remains a teacher within the State system.
portfolio
portfolio of shares = all the shares owned by somebody.
portfolio theory
An economic theory that describes how rational investors allocate their wealth among different financial assets, that is, how they
put their wealth into a portfolio. For example, a family might have a portfolio of £50 in cash, £400 in an investment account, and
£2500 in a money market fund.
positional goods
Goods that are necessarily scarce and whose scarcity cannot be reduced by increased productivity. They were described by Fred
Hirsch in his book The Social Limits to Growth (1977). He distinguished those positional goods as those whose value derived
from their intrinsic usefulness, but which are limited in their supply (like holiday homes in exotic places), and those which do not
yield pleasure from their absolute qualities, but from their scarcity (like original paintings by famous artists). Allocation of these
goods is a zero-sum game. Their importance is in explaining the observation that, as people become richer, their levels of
material frustration do not appear to diminish.
postdate
To put a later date than the current date on a document, such as a cheque.
potential GNP
The maximum level of GNP that can be sustained with a given state of technology and population size without accelerating
inflation; sometimes called ‘high-employment output’. Today, generally taken to be equivalent to the level of output
corresponding to the natural rate of unemployment.
poverty
A situation that faces those in society whose material needs are least satisfied. Poverty can be defined by some absolute measure
(those who cannot afford to buy what the majority consider to be the basic food requirements of the society) or in relative terms
(the poorest ten per cent of households, for example). Poverty exists not merely because incomes are low, but also because the
needs of certain low-income households are high.
poverty trap
The combination of losing state benefit entitlements and paying tax that can ensure that poor families keep very little of any extra
money they earn. Under any means-tested social security system, as the poor earn more, they lose state benefits. Apart from the
inefficiency of suppressing the incentive for people in the poverty trap to work, concern exists over the debilitating effects of
removing from people the power to alter their own living standards.
power
Strength or ability; purchasing power = the quantity of goods which can be bought by a group of people or with a sum of money;
bargaining power = strength of one person or group when discussing prices or wages; earning power = the amount of money
someone should be able to earn if he so wished.
practice
A way of doing things; business practices = ways of managing or running a business; restrictive practices = ways of working
which make people less free (such as stopping workers from doing certain jobs or not allowing customers a free choice of
produce).
precautionary motive
The factor which causes people or firms to hold a stock of money to finance unforeseen expenditures. It is one of the three
motives for holding money outlined by Keynes. A firm may know what its average bills are for each month, but if these
payments fluctuate, given that there are costs to being short of the cash necessary to finance them, firms will keep some money in
excess of what they need for the average month. The amount they keep will mainly depend on the interest rate. This represents
the cost of keeping money which would earn a return if it was invested. Secondly, it will depend on the probability of
overshooting the foreseeable expenditures - the higher the probability the more money firms will hold. Thirdly, it will depend
upon the size of the firm’s average spending - a big firm will keep more than a small firm. Finally, it will depend on the cost of
not having cash to meet unforeseen pay-outs: the higher the cost, the more precautions a firm will take.
predatory pricing
Setting prices at very low levels with the objective of weakening or eliminating competitors or to keep out new entrants to a
market. Since prices will be raised again once these objectives have been achieved, there is no permanent benefit to the consumer.
Predatory pricing is a means of establishing or maintaining monopoly power.
preference
Thing which is preferred; preference shares = shares (often with no voting rights) which receive their dividend before all other
shares and which are repaid first (at face value) if the company is liquidated.
preferential
Showing that something is preferred more than another; preferential creditor = creditor who must be paid first if a company is in
liquidation.
premises
Buildings and the land on which they stand; business premises or commercial premises = building used for commercial use;
licensed premises = shop, restaurant or public house which is licensed to sell alcohol.
premium
Payment to encourage someone; insurance premium = annual payment made by a person or a company to an insurance company;
premium bonds = government bonds, part of the UK national savings scheme, which pay no interest, but give the owner the
chance to win a monthly prize.
prepayments
Payments for services such as rent and rates made in one accounting period for consumption wholly or partly in a following
period and written into the balance sheet as a current asset.
present value (PV)
Today’s value of an asset that yields a stream of income over time. Valuation of such time streams of returns requires calculating
the present worth of each component of the income, which is done by applying a discount rate (or interest rate) to future incomes..
pre-tax
Before tax has been deducted or paid; pre-tax profit = profit before tax has been paid.
price
Very generally, the total amount of money that must be handed over in exchange for an article or service that is being purchased.
This does not necessarily have anything to do with the value of the item.
price control
Direct intervention by the government to keep prices stable during an emergency situation. There was an extensive and complex
system of price control during the Second World War in the UK. Intervention may also be made necessary by runaway inflation.
Price control is a remedy rather than a cure and is used normally on a short-term basis only.
price discrimination
The selling of the same commodity to different buyers at different prices. Several conditions must exist for it to be profitable.
First, there must be a separation between markets that does not allow buyers in one to resell the item in another (no arbitrage must
be possible). Secondly, the seller must possess some degree of monopoly power in at least one market, for under competitive
conditions, prices will be driven down to the level of costs in all markets. Thirdly, buyers in different markets must have a
different level and elasticity of demand for the good. The monopolist who discriminates will set output for each market where
marginal cost is equal to the marginal revenue in that market. Sales will be at a higher price in markets where elasticity is
generally low than where it is high. The monopolist, in effect, takes advantage of the fact that in one market consumers are
prepared to pay more for his item than in the other, without losing sales in the other market. In perfect price discrimination, the
monopolist charges a different price o every individual consumer and effectively has a sales revenue equal to the area under the
demand curve for his product.
price/earnings ratio (P/E ratio)
The ratio between the current market price of a share and the earnings per share (profit after tax divided by the number of shares
in issue) calculated by dividing the market price by the earnings per share.
price elasticity of demand
A measure of the degree to which quantity demanded by buyers responds to a price change. The elasticity coefficient, or
quantitative measure of elasticity, is: percentage change in quantity demanded divided by percentage change in price.
price elasticity of supply
Conceptually similar to price elasticity of demand, except that it measures the responsiveness of supply to a price change. Supply
elasticities are particularly useful in perfectly competitive markets, where suppliers are price-takers, with no individual influence
in the setting of market price.
price flexibility
Price behaviour in auction markets, for example for many raw commodities or the stock market, in which prices immediately
respond to changes in demand or in supply. In contrast, see administered prices.
price index
An index number that shows how the average price of a bundle of goods has changed over a period of time. In computing the
average, the prices of different goods are generally weighted by their economic importance (often by each good’s share of total
consumer expenditures).
price regulation
A form of regulation, common in public utilities control in the United Kingdom, in which the prices of the supplier are not
allowed to rise above a pre-announced level. The regulation is designed to prevent the abuse of a monopoly position. Price
regulation has applied to telephone, gas, electricity and water providers. In each case the policy has certain common features: (a)
allowed price rises are set out for a few years in advance; (b) there is a review at the end of each period, at which the regime
governing the next period is decided; (c) allowed prices are specified relative to the retail price index, protecting the regulated
firm against inflation. With price regulation, if firms can keep their costs low they can earn big profits. This gives them an
incentive to be efficient that does not exist under rate-of-return regulation. But it has been suggested that, in each review, the
regulator looks at the rate of return to decide what new price formula should be applied, thus reducing the difference between the
two types of scheme.
prices and incomes policy
A longer-term and less precise form of price control with a major feature being a restraint on incomes. The principal objective of
such a policy is to attempt to keep inflation in check by holding down both prices and wages. It is seen mostly in the sphere of
wages, where any agreement to minimise wage increases is made ultimately with the trade unions individually and the TUC
overall. The assumption is that if wage levels are kept in check then, in so far as prices are determined by them, the overall cost
of living will also be controlled.
price support
A system of agricultural support by which market prices are fixed at above free market levels and the government buys unsold
surpluses, thus supporting the price and raising farmers’ incomes.
price system
The mechanism which moves prices up when demand is in excess and prices down when supply is in excess. The mechanism
referred to is not some co-ordinated control from a central authority, but relies on the vast range of decisions made by
independent agents; it is the mechanism which makes a butcher reduce the price of a leg of lamb he is unable to sell, or an icecream salesman raise the price of cornets on a hot day. It is usually assumed that one price eventually settles in each market until
some disturbance in costs or demand occurs. The price system serves as a means of rationing supplies amongst consumers and
signals to producers where money is to be made, and thus what they ought to be producing.
price theory
The area of economics that is concerned with the determination of prices in individual markets. It is an area of microeconomics
and is not directly connected to the study of inflation. The two components of price theory are the demand side and the supply
side; it is the interaction of the two that determines equilibrium output and price in any market. On the demand side, the theory of
demand explains consumer behaviour in terms of rational agents maximising utility. On the supply side, various alternative
market structures are investigated: perfect competition, monopolistic competition, oligopoly and monopoly. There are also
alternative theories of the behaviour of firms which do not assume that profit maximisation is the sole goal of producers.
pricing policy
The method used by firms for determining their prices. In this area there appears to be a discrepancy between the proposals of
theory and the observed practice of firms. The theory of the firms behaviour in perfect competition predict that the market price
will equal the marginal cost of production ,and no individual supplier will e able to influence price. A monopoly or any firm in
monopolistic competition first determines its output and only then sets a price at the level that just sells the output. In practice,
though, firms seem to use ‘rules of thumb’ rather than accurate assessments of marginal revenue and costs. Cost-plus pricing, for
example, involves charging the average cost of producing an item, plus a profit margin determined loosely by market conditions.
Much debate on pricing policy has surrounded the appropriate policy for nationalised industries; in particular whether they should
attempt to emulate the marginal-cost pricing of perfect competition.
primary
Basic; primary commodities = raw materials or food; primary industry = industry dealing with producing basic raw materials such
as coal, wood and farm produce; primary products = products such as coal, wood and farm produce which are basic raw materials.
prime costs
The prime costs of production are direct materials, direct labour and direct expenses, i.e. those which can be directly associated
with the cost of producing a specific item.
prime rate
The best rate of interest at which an American bank lends to its customers.
principal
A sum of money borrowed on which interest is calculated and paid.
prior charges
Debenture and preference shareholders have a prior claim over ordinary shareholders to profits or capital repayments. The
amount of these claims is known as prior charges on the company.
private
Belonging to individuals, not the state; the private sector = all companies which are owned by private shareholders, not the state.
private good
Any good which is not a public good.
privatisation
The sale of government-owned equity in nationalised industries or other commercial enterprises to private investors, with or
without the loss of government control in these organisations. Where public utilities have been privatised, leaving them in a
monopoly position, new forms of regulation have been introduced.
probability
The average number of times an event occurs as a proportion of the number of times it could occur. In six throws of a dice, a six
could occur up to six times. On average, however, it will be thrown only once. The probability of a six in any given throw is,
therefore, one in six. All probabilities take a value from zero to one.
procedure
The way in which something is done; accounting procedures = a set of ways of doing the accounts of a company.
procurement
The action of buying equipment or raw materials for a company.
producer goods
A commodity used in the production of other goods and services as distinct from final or consumer goods. Whether or not a good
is a producer good will depend not upon the good but upon the use to which it is put. For example, a pencil bought for use in a
drawing-office is a producer good, but one bought for a child is a consumer good. Producer goods are also known as intermediate
goods.
producer price index
The price index of goods sold at the wholesale level (such as steel, wheat and oil).
Producer’s surplus
The excess of the revenue received by a supplier of a commodity over the minimum amount he would be willing to accept to
maintain the same level of supply. It is a similar concept to consumer surplus.
product
Something which is made or manufactured; by-product = a product made as a result of manufacturing a main product; end, final
or finished product = product made at the end of a production process; product development = improving an existing product line
to meet the needs of the market; product liability = liability of the maker of a product for negligence in the design or production of
the product; product line or range = series of different products made by the same company which form a group (such as cars in
different models, pens in different colours, etc.); product management = directing the making and selling of a product as an
independent item; gross domestic product (GDP) = annual value of goods sold and services paid for within a country; gross
national product (GNP) = value of goods and services in a country, including income from other countries.
product differentiation
The existence of characteristics that make similar goods less than perfect substitutes. For example, location differences make the
petrol sold at separate locations imperfect substitutes. Firms enjoying product differentiation face a downward-sloping demand
curve instead of the horizontal demand curve of the perfect competitor.
production
Marking or manufacturing goods for resale; domestic production = production of goods in the home market; mass production =
manufacturing of large quantities of goods; production line = system of making a product, such as a car, where each item moves
slowly through the factory with new sections added to it as it goes along; production unit = separate small group of workers
producing a certain product.
production, census of
In the UK, the survey of output that has been carried out annually since 1970. The census covers all firms in manufacturing,
construction, utilities and extraction industries employing twenty people or more. Although still referred to as a census, sampling
techniques are used for firms employing fewer than 100 people. The results are used in compiling national accounts, input-output
tabulations and the weights used in calculating the index of production and producer price index numbers.
production function
A relation (or mathematical function) specifying the amount of output that can be achieved with given inputs. Applies to a firm
or, as an aggregate production function, to the economy as a whole.
production possibility frontier (PPF)
A graph showing the menu of goods that can be produced by an economy. In a frequently cited simple case, the choice is reduced
to two goods. Points outside the PPF (to the north-east of it) are unattainable. Points inside it would be inefficient since resources
are not being fully employed, resources are not being used properly or outdated production techniques continue to be utilised.
production, theory of
The economic analysis of the transformation through a production function of inputs such as labour and capital into outputs.
Production possibilities will depend on technology, the mix and level of factor prices and marginal productivities, and the level
and price of the output demanded.
production function
The mathematical relationship between output of a firm or economy and the inputs used to produce that output. In mathematical
notation it is written q = Ä (L, C, É) where q is the dependent variable (output) and L, C, É are independent variables (inputs).
The amount of inputs required to make a given output depends on technology and this will be reflected in the form of the
function. It may, for instance be linear or non-linear.
productive
productive capital = capital which is invested to give interest; productive efficiency = producing goods at the minimum point of
its average cost curve.
productivity
A term referring to the ratio of outputs to inputs (total output divided by labour inputs is labour productivity). Productivity
increases if the same quantity of inputs produces more output. Labour productivity many be increased because of improved
technology, improvements in labour skills or
capital deepening.
productivity growth
The rate of increase in productivity from one period to another. For example, if an index of labour productivity is 100 in 1995
and 106 in 1996, the rate of productivity growth is 6 per cent per year between 1995 and 1996.
profit
1.
In accounting terms, total revenue minus costs, properly charged against the goods sold.
2.
In economic theory, the difference between sales revenue and the full opportunity cost of the resources involved in producing the
goods.
profit, falling rate of
The early classical economists believed that it was a feature of the economic system for the general rate of profit to fall. It was
Adam Smith who argued that capital accumulation took place at a faster rate than the growth of total output. Although the
absolute level of profits rose, competition lowered the rate of return on capital. Ricardo considered that the decline of the general
rate of profit was induced by the decline in the marginal productivity of land, to which all profits were linked. Marx took up ideas
similar to Smith’s, and predicted a fall in the rate of profit because of an intensification of competition between capitalists. There
would follow, he concluded, a strong pressure to reduce real wages.
profit-sharing
The name given to any scheme under which workers in a firm receive a remuneration which is conditional upon the future profits
of the firm. Profit-sharing schemes give workers a profit-related bonus at the end of the year, or pay workers an amount based on
a formula in which profit was a component. Two primary motivations underlie arguments for profit-sharing. First is the desire
for workers’ wages to be flexible and reflect the performance of their company. If remuneration automatically falls when profits
fall, the need for redundancies will be minimised. The second motivation is the desire for workers to identify their interests with
those of their employer - to feel that they have a personal stake in the success of the company. Against profit-sharing, it can be
argued that workers desire stable income and that any risk of company failure should be borne by the shareholders. Secondly,
that in a properly functioning free labour market, wages would be flexible anyway.
profit-taking
The sale of shares on the stock exchange in order to realise capital appreciation. When share prices rise and then fall back again
as sellers appear, including those who bought the shares in the expectation that the price would rise, the fall off in prices is said to
be the result of profit-taking.
programme evaluation and review technique (PERT)
Closely related to critical path analysis, this is a continual review of the procedures developed by critical path analysis, with a
view to maximising efficiency and making necessary alternations at the earliest opportunity.
programme, planning, budgeting system (PPBS)
An approach to the activities of government and other non-profit-making operations which attempts to take into account the
objectives they are expected to achieve, the resources available and the way these interrelate so as to use limited resources in the
most effective way. It proceeds by (a) breaking down broad programmes (health, education, defence, etc.) into detailed
programmes, (b) devising methods of measuring the level of output of the sub-programmes and of evaluating the resources
required to provide this output, (c) clarifying the objectives laid down by the policy-makers in respect of the broad programmes,
and possibly the sub-programmes, and (e) clarifying the opportunity costs of these objectives - for example, on extra university
may imply fifty fewer secondary schools - and thus in turn helping to formulate future policy options. It is an attempt to
introduce rational methods of management into an area where considerable difficulties of measurement and evaluation exist.
progressive, proportional and regressive taxes
A progressive tax is one which weighs more heavily on the rich, whilst a regressive tax does the opposite. More precisely, a tax is
progressive if the average tax rate (i.e. taxes divided by income) is higher for those with higher incomes. Conversely, a tax is
regressive if the average tax rate declines with higher incomes. A graduated income tax is progressive, whilst a sales tax on food
is regressive. If the average tax burden is equal at all income levels, the tax is said to be proportional.
promissory note
Document stating that someone promises to pay an amount of money on a certain date.
propensity to import
The relationship between income and import levels. It would expected that the demand of a household for foreign goods to
depend on its income as does its demand for domestically produced goods. Similarly, we would expect firms’ demands for
foreign goods to depend on their output. The whole economy’s demand for imports thus depends on national income. The
average propensity to import is the ratio of the total value of imports to national income. The marginal propensity to import is the
proportion of an increase in national income which would be spent on imports. These propensities will be influenced by the
relative prices of foreign and domestic goods, and the willingness of domestic agents to borrow from abroad to finance spending.
proportional tax
A tax levied at the same rate at all income levels. Hence it is intermediate between a progressive tax and a regressive tax.
proposed dividends
Dividends proposed to be paid. When the annual accounts of a company are printed they usually contain an item for dividend on
ordinary shares. This is the amount recommended by the directors, but does not become payable until it has been approved by the
shareholders at the annual general meeting.
Proprietors’ income
In national-income accounting, the net income earned by the owners of unincorporated firms.
proprietorship, individual
A business firm owned and operated by one person.
pro rata
At a rate which varies according to the size or importance of something.
prospectus
A document which gives information to attract buyers or customers, or which gives information about a company whose shares
are being sold to the public for the first time.
protectionism
Any policy adopted by a nation to protect domestic industries against competition from imports (most commonly by a tariff or
quota imposed on such imports).
PSNCR
abbreviation for
Public sector net cash requirement. This replaced the PSBR. When it is + the government has received more revenue than it
intends to spend. The government plans to spend more than it will raise in revenue if a - appears.
public
Referring to all people in general; public ownership = situation where an industry is nationalised; public transport = transport such
as buses or trains which is used by any member of the public.
public choice
A branch of economics and political science dealing with the way that governments make economic choices. The theory differs
from the theory of markets in emphasising the role of vote maximising played by politicians, which contrasts to profit maximising
by firms.
public company
An incorporated business enterprise with limited liability which is not a private company. A private company may be quoted or
unquoted. Under the 1985 Companies Act in the UK, the memorandum of association of a public company must state that it is a
public limited company, there must be at least two subscribers and the nominal share capital must be at least £50,000.
public enterprise
Economic activity in the market carried on by state-owned or controlled enterprises.
public expenditure
Spending by general government. Final consumption of goods and services by the public sector accounted for over 19 per cent of
UK GDP at market prices in 1989. The control of public expenditure involves the publication of forward plans. The formal
request to Parliament for funds is in the supply services estimates presented at the time of the Budget.
public finance
A branch of economics concerned with the identification and appraisal of the means and effects of government financial policies.
It attempts to analyse the effects of government taxation and expenditure on the economic situations of individuals and
institutions, and to examine their impact on the economy as a whole. It is also concerned with examining the effectiveness of
policy measures directed at certain objectives, and with developing techniques and procedures by which that effectiveness can be
increased.
public good
A commodity whose benefits may be provided to all people at no more cost than that required to provide it for one person. The
benefits of the good are indivisible and people cannot be excluded from using it. For example a public health measure that
eradicates smallpox protects all, not just those paying for the vaccinations. To be contrasted with private goods which, once
consumed by one person, cannot be consumed by another.
public limited company (plc)
A company in which the general public can invest and whose shares and loan stock can usually be bought and sold on the Stock
Exchange.
public relations (PR)
Keeping good relations between a company and the public so that people know what the company is doing and can approve of it.
public sector
Consists of the central government and local authorities, together with the nationalised industries or public corporations. Central
government includes all those departments and other bodies for whose activities a minister of the Crown or other responsible
person is accountable to Parliament.
.
public utility
An industry supplying basic public services to the market and sometimes having a monopoly position in its particular market.
The most common are electricity, gas, telephones, postal services, water supply and rail and often other forms of transport are
regarded as public utilities. These services all require specialised capital equipment and elaborate organisation.
pump priming
An injection of small amounts of government spending into a depressed economy with the aim of boosting business confidence
and encouraging larger-scale private-sector investment. It was the policy pursued by Roosevelt in the United States during the
1930s before the main aspects of Keynesian economics were accepted by policy-makers.
purchase tax
An indirect tax levied at different percentage rates for different commodities on their wholesale prices. This tax was abolished in
the UK on the introduction of a value-added tax in 1973.
purchasing
Buying; purchasing department = section of a company which deals with buying of stock, raw materials, equipment, etc.;
purchasing power = quantity of goods which can be bought by a group of people or with an amount of money.
purchasing-power parity theory
A theory which states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing
powers at that particular rate of exchange are equivalent. e.g. the rate of exchange of £1 = $1.50 would be in equilibrium if £1
will buy the same goods in the UK as $1.50 will buy in the USA. If this is the case, then purchasing-power parity exists. The
theory first appeared the mercantilist writings of the seventeenth century, but came was re-introduced to mainstream economics in
1916 by the writings of the Swedish economist, Gustav Cassel. The basic mechanism of the theory is that, given complete
freedom of action, if $1.50 buys more in the USA than £1 does in the UK, it would pay to convert pounds into dollars and buy
from the USA rather than in the UK. The switch in demand would increase prices in the USA and lower them in the UK, and at
the same time lower the UK exchange rate until equilibrium and parity were re-established. Cassel interpreted the theory in terms
of changes in, rather than absolute levels of, prices and exchange rates. He argued that the falls in the foreign-exchange markets
in the post-war period were a result of inflation due to unbalanced budgets increasing the quantity of money. In reality, the theory
has only limited validity because exchange rates, which are determined by the demand and supply of currency in the foreignexchange markets, are related to such forces as balance of payments disequilibria, capital transactions, speculation and
government policy. A number of goods and services do not enter into international trade, so their relative prices are not
considered in the determination of the exchange rate. Moreover, it is impossible to measure satisfactorily what purchasing power
a currency in one country has relative to that in another because of the difficulty of determining the appropriate mix of
commodities, and also of measuring their average price level. This means that international comparisons of standards of living,
etc., based on current exchange rates have to be interpreted with great care.
pyramid selling
A practice of selling goods which has fallen into much disrepute and invited direct legislation to prohibit its use. The basic
system is tied up with the selling of franchises. The ‘promoter’ invites applications for the sole rights to sell certain products.
These rights are in turn hived off to subsidiary franchisees at a predetermined price. Again, these franchisees sub-let their
franchises at a price on a lower level. The process ends up in door-to-door selling by the last in the line. Generally speaking, the
only person to profit is the original instigator of the system; the persons down the scale earn little but bad will and indebtedness to
those above them.
Qq
q theory
A theory of investment behaviour which suggests that firms invest for as long as the value of their investment exceeds the
replacement cost of the physical assets of the firm. Developed by Tobin, q theory encompasses other theories of investment in a
simple framework. The q referred to is the ratio of two numbers. The first is the value of a firm to its shareholders; this is
equivalent to the expected future profits of the firm. The second number is the replacement cost of the assets of the firm: the
machines, buildings, etc. If the first number exceeds the second (i.e. q is greater than one) the firm should want to expand, as the
profits it expects to make from its assets are greater than the cost of the assets. If q is less than one, the shares are worth less than
the assets, and it will pay the firm to engage in divestment: to sell the assets rather than try to use them. What should happen is
that firms invest or divest until q is approximately equal to one.
quality
What something is like or how good or bad something is; quality control = checking that the quality of a product is good; total
quality management =
quango
An official body set up by a government to investigate or deal with a special problem (quango stands for quasi-autonomous nongovernmental organisation).
quantify
to quantify the effect of something = to show the effect of something in figures.
quantity equation of exchange
A tautology, MV=PQ, where M is the money supply, V is the income velocity of money, and PQ (price times quantity) is the
money value of total output (nominal GNP). The equation must always hold exactly since V is defined as PQ/M.It is considered
by many to be central to the theories now broadly reffered to as ÔmonetaristÕ.
quantity rationing
A name given to one of four situations within an economy that can exist when excess demand or excess supply persists in the
market for labour or for goods and services. Quantity rationing is an area of macroeconomics in the tradition of Keynes, focusing
on the study of disequilibrium. The theory is based on the assumption that in both the labour and goods markets prices are not
flexible. The wage level should adjust to clear the labour market, and the price level to clear the goods market. If wages or prices
are inflexible in the short run, disequilibrium arises because prices or wages fail to adjust to clear markets. This leaves either
buyers or sellers rationed in how much they can trade. Once quantity constraints apply in markets, the effectiveness of price
signals can be undermined. Four different regimes arise in the following situations:
(a)
Repressed inflation: excess demand exists in both the labour and goods markets, so developing a situation where buyers are
rationed in both markets.
(b)
Keynesian unemployment: excess supply exists in both the labour and goods markets which leads to sellers being rationed in both
markets, as they can’t sell as much as they would like.
(c)
Classical unemployment: excess supply exists in the labour market and excess demand in the goods market
(d)
Under-consumption: excess demand exists in the labour market and excess supply in the goods market
Despite the assumption that prices and wages are inflexible or sticky in the short run, the most important aspect of quantity
rationing is that, even if prices are flexible in the long run, under Keynesian unemployment, there will be little or no tendency for
the economy to move towards an equilibrium, so allowing the market to clear. This contrasts with other economic doctrines
which hold that, as long as prices and wages are flexible, all markets clear eventually.
quantity theory of prices
A theory of the determination of output and the overall price level which states that prices (P) move proportionately with the
money supply. The theory begins with the quantity equation, MV=PQ. It then assumes that velocity (V) is a constant or
smoothly growing trend, while output (Q) is always at full employment. Under these assumptions, any increase in M will
produce a proportionate increase in P. Although few macroeconomists actuall apply this theory in its literal sense, they doaccept
some validity in its findings during periods when the money supply changes greatly. A more cautious approach put forth by
monetarists holds that the money supply is the most important determinant of changes in nominal GNP.
quasi-rent
A term applied by Marshall to the earnings of capital, the supply of which is fixed in the short run. It is the excess or surplus
made in the short run by a firm from the difference between the selling price and the prime cost of the product. For example,
suppose a firm can make pens at a cost of 25 pence in labour and raw materials, and can sell them at 55 pence. A quasi-rent of 30
pence is therefore earned. Quasi-rent is analogous to economic rents, because it represents a return in excess of that necessary to
keep the firm in production - whenever price exceeds avoidable costs. It differs from economic rent, however, in that it is a
temporary phenomenon. It can exist because, in the short run, price may differ from marginal cost, because firms take time to
enter an industry and reduce excess profits.
quorum
The minimum number of people who have to be present at a meeting to make it valid.
quota
A form of protectionism in which the total quantity of imports of a particular commodity during a given period is limited.
quotation
The privilege granted to the issuer of a security by a stock exchange of placing the price of that security on the official list. A
quoted security is for this reason referred to as a listed security.
quoted company
A company whose shares can be bought and sold on the Stock Exchange
r
random sample
A sample in which every member of the population or some subset of the population being tested has an equal chance of being
included in the sample. The purpose of sampling is to be able to infer, from the sample taken, the attributes of the population as a
whole. Only if the sample is random can the probability be calculated that a sampled attribute applies to the population as a
whole.
rate
Money charged or paid; all-in rate = price which covers all items in a purchase (such as delivery, tax and insurance, as well as the
goods themselves); fixed rate = a charge which cannot be changed; the going rate = the usual or current rate of payment.
rate of interest
That proportion of a sum of money that is paid over a specified period of time in payment for its loan. It is the price a borrower
has to pay to enjoy the use of cash which he does not own, and the return a lender enjoys for deferring his consumption or doing
without the liquidity that the cash possess. The rate of interest is a price that can be analysed in the normal framework of demand
and supply analysis. It may be seen as a price in two different markets:
(a)
The market for investment funds. It equalises the demand for such funds, which is for investment, and the supply, which is
saving. The rate of interest thus ensures a balance between savings and investment, with saving reflecting the weight people
attach to current consumption over future consumption, and investment the amount of extra future production that can be
expected to result from building new plant and machinery.
(b)
The market for liquid assets. Firms and consumers may prefer their assets to be in a readily available form. Thus interest must be
paid to compensate people for giving up ready access to the money they lend.
rate of return
The yield on an investment or a capital good. Thus an investment costing $1000 and yielding $100 annually has a rate of return
of 10 per cent per year.
rate of turnover
An accounting term for the speed with which stock is turned over. In a retail business, for instance, if stock averaged £20,000 and
annual sales £100,000, the stock would be turned over five times per annum.
rational expectations macroeconomics
A hypothesis of behaviour of individuals by which their predictions contain no systematic errors. Though it is accepted that
complete accuracy of predictions is impossible, someone with rational expectations will construct their expectations in a way that
on average makes them correct. The disadvantage of other ways that predict the ways in which individuals may be assumed to
predict the future is that they allow them to make systematic errors. For example, adaptive expectations suggest that individuals
predict next year’s price inflation on the basis of last year’s, and the rate of change up to last year, but at a time of increasing
inflation, their expectation will constantly lag behind the actual or true rate of inflation - however, under adaptive expectations,
everyone carries on using this predictive method although it produces biased forecasts. The theory of rational expectations has
some controversial implications. Firstly, it appears to demolish any case for government demand-stimulating activity; for if the
government expands the money supply, everyone will automatically believe that prices will rise as a consequence of this course
of action. This will lead them to seek increase in their wage demands and inflation will occur without any positive benefit on
output or employment. Secondly, it implies that the markets behave efficiently. The price of shares, for example, will reflect the
profits the company is predicted to make. If expectations are rational, the price at any point in time is based on expectations
which have taken into account all possible information available on the company. So new information will cause an immediate
change in the share price. Yet, as the news that is released can only reflect random, not systematic, events, the price of the
company’s shares must follow a random path (random walk). Rational expectations may not therefore seem a plausible
description of human behaviour. However, the model provides a benchmark or baseline from which to try and judge which way
people’s behaviour will evolve in the real world.
rationalisation
Streamlining or making an operation more efficient.
raw
In its original state or not processed; raw data = data as it is put into a computer, without being analysed; raw materials =
substances which have not been manufactured (such as wool, wood, sand).
real
Shown in terms of money adjusted for inflation; real GNP = GNP adjusted for price changes: real GNP equals nominal GNP
divided by the GNP deflator; real interest rate = the interest rate measured in terms of goods rather than money: it is thus equal to
the money (or nominal) interest rate, less the rate of inflation; real wages = the purchasing power of a worker’s wages in terms of
goods and services, measured by the ratio of the money wage rate to the consumer price index.
realise
(a)
To make something become real; to realise a project = to put a plan into action.
(b)
To sell for money; realisable assets = assets which can be sold for money.
rebate
A reduction in the amount of money to be paid, or money returned to someone because he has overpaid.
receipt
A piece of paper showing that money has been paid or that something has been received.
receiver
A government official who is appointed to run a company which is in financial difficulties, to pay off its debts as far as possible
and close it down; the company went into receivership = the company was put into the hands of a receiver.
recession
Downturn in real GNP for two or more successive quarters. Recessions are a feature of the trade cycle.
reciprocal
Applying from one country, person or company to another and vice versa; reciprocal trade = trade between two countries.
reciprocity
The practice by which governments extend to each other similar concessions or restrictions on trade. It is reflected in US trade
policy in the Reciprocal Trade Agreements Acts of 1934, the Trade Expansion Act of 1962, which made possible the Kennedy
Round of Trade Negotiations under the General Agreement on Tariffs and Trade, and the Trade Act of 1974.
recommended retail price
Producers or manufacturers of consumer goods do not, unless an agreement has been registered under the Restrictive Trade
Practices Act, have the power to control the price charged by an independent retailer. They do, however, attempt to circumvent
this by recommending a price at which the product should be sold and by advertising this price as ‘recommended’. If goods are
introduced to the public by a manufacturer’s advertisement which gives a suggested price, it will be difficult for the retailer to sell
at a figure above that stated, although he can always sell below it. The advertised price is referred to commercially as the
recommended retail price or the manufacturer’s recommended price (MRP).
recovery
Movement upwards of shares or of the economy after a period of decline.
red
in the red = showing a debit or loss.
redeemable preference shares
Preference shares which the company reserves the right to redeem. The fact that the shares are redeemable must be stated in the
balance sheet, together with the earliest and latest dates for redemption and any premium payable. The shares may only be
redeemed out of distributable profits or the proceeds of a further issue of shares. Where redemption is made out of profits, a sum
equal to the amount redeemed must be put into a capital reserve, and this cannot be distributed.
redeploy
To move workers or resources from one place to another, or to give workers totally different jobs to do.
redistribute
To move items or work or money to different areas or people; redistribution of income or wealth = transferring income or wealth
from one income group (normally the well-off) to another (normally those on lower incomes).
reducing balance
A means of recording depreciation expenses in which the original cost of an asset is ‘written down’ by a fixed fraction each year.
Although the reducing balance system gives a lighter depreciation charge in later years when maintenance and repair costs, as
well as the risk of obsolescence, may be higher, it is unlikely to accord very closely with actual depreciation. however, the
taxation authorities in Britain and other countries base tax allowances for certain capital investment on a reducing balance.
redundancy
Being no longer employed because the job is no longer necessary; voluntary redundancy = situation where the worker asks to be
made redundant, usually in return for a large payment.
refinance
To replace one source of finance with another, or to extend a loan by exchanging it for a new one; refinancing of a loan = taking
out a new loan to pay back a previous loan.
reflate the economy
To stimulate the economy by increasing the money supply or by reducing taxes, leading to increased inflation.
refresher course
A course of study to make you practice or update your skills in order to improve them.
regional policy
A set of measures taken to reduce disparities between economic development and unemployment among different part of the
country. Nearly all countries have prosperous and depressed regions; in most cases, depressed areas result from the decline of
previously important industries, for example mining and shipbuilding in the UK. Governments have attempted to restore
prosperity by creating incentives for new industry to move into these areas, and by improving local infrastructure, although the
policies have had only limited success. More recently attention has shifted towards the scope for stimulating self-regeneration
capacity by the promotion of small businesses.
register
An official list; companies’ register = list of companies, showing their directors and registered addresses; register of debentures =
list of debenture holders of a company; Lloyd’s Register = classified list showing details of all the ships in the world and
estimates of their condition.
registrar
A person who keeps official records; Registrar of Companies = government official whose duty is to ensure that companies are
properly registered and that, when registered, they file accounts and other information correctly.
regression analysis
A mathematical technique for estimating the parameters of an equation from sets of data of the independent and dependent
variables. An example of this would be that, in the demand equation q =aY+bP+c, in which q =quantity bought of a good,
Y=income and P=price, the parameters a, b and c can be estimated, provided there is a sufficient number of actual observations of
the variables q, Y and P to enable a sensible conclusion to be reached. Regression analysis finds the values of a, b and c, which
when substituted in the expression aY+bP+c yields the least error in estimating q. Regression analysis is widely used in
econometrics.
regressive taxation
A system of taxation in which tax accounts for proportionally less of an individual’s income as their income rises. It the UK it is
agreed by most economists that Value-Added Tax is regressive as it takes away a larger proportion of a poorer persons income
than it does someone with a higher disposable income.
regulation
Government laws or rules designed to change the behaviour of firms. The major kinds are economic regulation, which affects
prices, entry or service of a single industry, and social regulation, which attempts to correct externalities such as pollution.
reinsure
To spread the risk of an insurance, by asking another insurance company to cover part of it and receive part of the premium.
relative-income hypothesis
A theory of consumption and saving that suggests individuals are more concerned with their consumption relative to other
people’s than they are with their absolute living standards. If this is true, the poor will spend a higher proportion of their income
than the rich - this is observed to be the case. However, as society as a whole gets richer, people will feel unable to consume less,
because everybody will also be getting richer. This too is observed. The hypothesis, developed by James Duesenberry, is an
alternative to the permanent-income hypothesis and the life-cycle hypothesis.
relief
tax relief = allowing someone to pay less tax on certain parts of his income; mortgage interest relief = allowing someone to pay no
tax on the interest payments on a mortgage up to a certain level.
relocate
To move to a different place.
remunerate
To pay someone for doing something.
rent
Economic rent: this term was applied by David Ricardo in the nineteenth century to income obtained from ownership of land.
The total supply of land available in a nation is fixed, and the return paid to the landowner is rent. The term is often extended to
the return paid to any factor in fixed supply i.e. to any input having a perfectly inelastic or vertical supply curve.
repayment
Paying back; money which is paid back; repayment mortgage = mortgage where the borrower pays back both the interest and
capital over the period of the mortgage (as opposed to an endowment mortgage).
replacement
An item which replaces something; replacement cost = the cost of an item to replace an existing asset; replacement value = value
of something for insurance purposes if it were to be replaced.
report
A statement describing something; feasibility report = document which says if something can be done; financial report =
document giving the financial position of a company.
repossess
To take back an item which someone is buying under a hire-purchase agreement, or a property which someone is buying under a
mortgage, because the purchaser cannot continue the repayments.
repressed inflation
The state in which a set of markets or an economy records a persistent excess of demand for goods and services. If prices are
below their market clearing levels, demand will outweigh the available supply; this should result in prices moving upwards, so
causing inflation. However if prices are prevented from rising, by say the use of price controls, the inflation can be prevented but
consumers will not be able to obtain as much of things as they want. Markets suffering repressed inflation will often suffer from
queues, or state rationing, even constant shortages or black markets. Specifically, repressed inflation is one of the four forms of
quantity rationing in the macro economy. This type of inflation occurs where both the labour and goods markets are rationed:
households cannot get the goods they want and firms the labour they want. Its cure appears to be the freeing prices and wages
and letting them rise, so that they meet equilibrium prices, or by cutting aggregate demand so that the equilibrium price in each
market moves down to the level of the actual price.
resale price maintenance
The penalties or restrictions imposed by manufacturers on the prices at which, or conditions on which, their goods should be sold.
Most of these agreements are now subject to the Restrictive Trade Practices Act 1956 and the Resale Prices Act 1964. The latter
Act attempted to abolish resale price maintenance: suppliers cannot now state the prices at which goods are to be sold. The
cannot state minimum prices, nor withhold supplies from persons selling below a particular price. They can withhold the goods
however if the customer is using them as loss leaders, but loss leaders are not clearance sales.
rescheduling debts
This is normally an occurrence in the market for international finance but it can occur, on a smaller scale, within a trading
corporation. In the latter case it would almost certainly be part of an attempt to stop the corporation from suffering a dramatic
loss of market confidence. It normally arises when a country or business has a serious liquidity problem which require it to
convince creditors is only a temporary phenomenon. If this is accepted then the creditors will agree to convert outstanding loans
into others which are not repayable until some more distant date. In return they may obtain better interest rates or repayment in
the form of stated instalments at staggered dates. Such agreements are usually backed by a guarantee from a third party. In
practice such rescheduling may often be acceptable to creditors, as it provides a more reasonable change of eventual repayment,
the alternative being to force the debtor into bankruptcy, thus possibly losing the money altogether. On the international scene
such rescheduling arrangements are often set up and supervised by the International Monetary Fund. They normally apply to a
nation which is experiencing difficulties in meeting its debts.
research
Trying to find out facts or information; consumer research = research into why consumers buy goods and what goods they may
want to buy; market research = examining the possible sales of a product and the possible customers for it before it is put on the
market; research and development (R&D) = scientific investigation which leads to making new products or improving existing
products; research costs = the costs involved in R&D; research institute = a place which exists solely to carry out research.
.
reserve
(a)
Money from profits not paid as a dividend, but kept back by a company in case it is needed for a special purpose; bank reserves =
cash and securities held by a bank to cover deposits; capital reserves = money from profits, which forms part of the capital of a
company and can be used for distribution to shareholders only when a company is wound up.
(b)
reserve currency = a strong currency held by other countries to support their own weaker currencies; currency reserves = foreign
money held by a government to support its own currency and pay its debts.
(c)
reserve price = a term used with reference to auctions. A lot which is subject to a reserve price is one which the owner does not
wish sold below this price. If the auctioneer sells at below this figure, the sale is void provided that the catalogue does indeed
state that there is a reserve price. If there is no indication in the catalogue, then where the auctioneer has signed the
memorandum, the title will pass to the purchaser. The owners remedies are to stop the sale before the memorandum is signed or
to sue for breach of warranty of authority.
reserves, bank
That portion of deposits that a bank sets aside in the form of vault cash or non-interest-earning deposits with Federal Reserve
Banks. In the US, banks are required to hold 12 per cent of checking deposits in the form of reserves.
reserves, international
Every nation holds at least some reserves, in such forms as gold, currencies of other nations and special drawing rights.
International reserves serve as international money, to be used when a country encounters foreign liquidity or balance-ofpayments difficulties. If a nation were prepared to allow its exchange rate to float freely, it would need no reserves.
resource allocation
The accepted fact by most that the scarcity of resources leads to the need for allocation. As this allocation of scarce inputs
determines the composition and size of an economy’s output, each possible bundle of goods and services produced by an
economy constitutes an allocation of resources. Each allocation can therefore be defined in two ways: either by the use made of
inputs or by the mix of total output. Economics is often describes as a subject that concentrates on trying to establish the
decisions that influence the allocation of scarce resources. It certainly is concerned with the optimum allocation of those
resources to the production of goods and services required by society and determined through the price system.
Restrictive Trade Practices Acts
The UK Act of 1956, based on the recommendations of the Monopolies Commission’s 1955 report on Collective Discrimination A Report on Exclusive Dealing, Aggregated Rebates and Other Discriminatory Trade Practices. The Act required the registration
of all agreements between two or more firms, whether buyers or sellers, which contain restrictions on prices, quantities or quality
of goods traded or on channels of distribution. It set up a Restrictive Practices Court, serviced by five judges and up to ten
laymen and a Registrar. The court was required by the Act to assume that each agreement is against the public interest unless it
could be shown to have advantages on reference to seven factors: (a) that the restriction is necessary for public safety; (b) that it
confers specific and substantial benefits or advantages on consumers; (c) that it neutralises monopolistic or restrictive activities of
others; (d) that it is necessary in order to be able to negotiate fair terms with strong buyers or sellers; (e) that removal of the
agreement would lead to significant regional unemployment; (f) that removal would reduce export earnings; (g) that it is
necessary to support other restrictive practices which are in the public interest. The functions of the Register of Restrictive
Trading Agreements were taken over by the Director-General of Fair Trading under the Fair Trading Act 1973, which extended
the scope of legislation to include commercial services.
retail
The sale of small quantities of gods to the general public; retail trade = all people or businesses selling goods retail.
retail price
Price at which the retailer sells to the final consumer.
retail price index (RPI)
The index which shows how prices of consumer goods have increased or decreased over time. In the UK, the RPI is calculated on
a group of essential goods and services, and includes both VAT and mortgage interest. It is expressed as either the headline rate
(which excludes housing costs ) or the underlying rate which included housing costs.
Retail Price Index minus X
A pricing formula that is used by the regulators of the newly privatised industries. Such industries are only allowed to increase
their prices by the RPI + or - an agreed figure. So, the RPI=6% and X = 8%, then the industry would actually have to reduce
prices by 25.
retail trade
The final link in the chain of distribution from the manufacturer to the final consumer. The economic functions of the retailer are
to hold stocks at a location convenient to the consumer so as to provide him with choice, guidance and after-sales service and,
where appropriate, credit facilities. In providing these services, the retailer adds value to the goods he purchases from the
wholesaler or direct from the manufacturer.
retained earnings
The part of a corporation’s profit (net income) not paid out as dividends to shareholders but instead retained by the corporation,
normally to expand its productions. The same as undistributed profit.
return
Profit or income from money invested; return on capital employed (ROCE) = profit shown as a percentage of the capital in a
business; return on investment (ROI) = relationship between profit and money invested in a project or company, usually
expressed as a percentage; rate of return = amount of interest or dividend produced by an investment, shown as a percentage;
VAT return = a form showing VAT receipts and expenditure; law of diminishing returns = general rule that as more factors of
production (land, labour and capital) are added to the existing factors, so the amount they produce is proportionately smaller.
returns to scale
The rate at which output increases as all inputs are increased together. For example, if all the inputs double and outputs are
exactly doubled, then this is known as constant returns to scale. However if output grows by less than 100 per cent when all
inputs are doubled, the process shows decreasing returns to scale. If output more than doubles, the process demonstrates
increasing returns to scale.
revaluation
1.
The assets of a company are often re-valued either because they become worth more than when they were acquired, or else
because it is necessary to take account of inflationary changes.
2.
An increase in the official foreign exchange rate of a currency the opposite of a devaluation.
revealed preference
An approach to demand theory that is based on the traditional laws of demand using only information on the choices the
consumer makes in different price and income situations. This is coupled with the assumption that such choices are made
rationally. It is an approach to consumer behaviour and this approach holds that only two types of information are theoretically
needed to predict the behaviour of consumers and derive the laws of demand. The first is the observed spending of a consumer in
different price-income situations - this reveals which bundles of commodities are preferred to others. The second is the
assumption that the consumer’s behaviour accords to certain axioms of rationality -to predict how someone will spend their
money, we must know that they will not behave erratically. It can be shown that, if such information were available in full, an
indifference map could be constructed for the consumer. Implicitly, therefore, the approach does construct at least a partial
indifference map of the form used in indifference-curve theory and should best be seen as an alternative expression of this theory
rather than a replacement for it.
revenue
Money received; revenue accounts = the accounts of a business which record money received as sales, commission, etc.; Inland
Revenue = the UK government department which deals with tax; Internal Revenue Service = the US government department
which deals with tax.
revolving credit
A system where someone can borrow money at any time up to an agreed amount, and continue to borrow while still paying off
the original loan.
rights issue
An invitation to existing shareholders to acquire additional shares in the company. The price is usually lower than it would be in
the open market and the shareholder can normally sell the right to buy to a third party, thus making a profit for himself. From the
point of view of the company it is an easy way of raising new capital.
risk
Possible harm or change of danger; financial risk = the possibility of losing money; risk capital = capital for investment usually in
high-risk projects, but which can also provide high returns (also called ‘venture capital); risk-free = with no risk involved.
roll over
to roll over credit or a debt = to make credit available over a continuing period or to allow a debt to stand after the repayment
date.
royalty
Money paid to an inventor or writer or the owner of land for the right to sue his property (usually a certain percentage of sales or a
certain amount per sale).
runaway inflation
Very rapid inflation which is almost impossible to reduce.
running costs
Money spent on the day-to-day cost of keeping a business going.
Ss
salary
Payment for work, made to an employee with a contract of employment, usually in the form of a monthly cheque; basic salary =
normal salary without extra payments; gross salary = salary before tax is deducted; net salary = salary which is left after deducting
tax and national insurance contributions; starting salary = amount of payment for an employee when starting work; salary review
= examination of salaries in a company to see if workers should earn more.
sales
Money received for selling something, or the number of items sold; sales figures = total sales, or sales broken down by category;
sales tax = tax to be paid on each item sold; sales volume = number of units sold in a particular period.
sample
A study of a limited number of members of a population for the purpose of identifying certain characturistics that might be
applicable to the population as a whole. Sampling is normally cheaper than a study covering the entire population. Indeed, testing
the whole population may be impractical; for example, when the test procedures are destructive (e.g. food-tasting). Provided that
the sampling procedures are properly designed, the margin of error in the estimates may be calculated and the degree of error may
be reduced by increasing the sample size.
sanction
economic sanctions = restrictions on trade with a country in order to influence its political situation or in order to make its
government change its policy.
satisficing
Behaviour which attempts to achieve some minimum level of a particular variable, but which does not strive to achieve its
maximum possible value. The most common application of the concept in economics is in the behavioural theory of the firm,
which, unlike traditional accounts, proposes that producers do not treat profit as a goal to be maximised, but as a constraint.
Under these theories, although at least a critical level of profit must be achieved by firms, the firms priority is attached to the
attainment of other goals.
saturation
Filling completely; market saturation = situation where the market has taken as much of the product as it can buy.
save-as-you-earn (SAYE)
A scheme in Britain where workers can same money regularly by having it deducted automatically from their wags and invested
in National Savings.
savings
The amount of income that is not spent. At the end of any period, saving is equal to income in that period minus consumption,
and could be negative if expenditure exceeds income. In economics, saving is passive and does not imply any decision about the
form the saving may take, such as putting it into a building society. Saving can occur in the public sector when tax revenues
exceed final consumption by government plus transfer payments and subsidies and in the company sector where profits are not
distributed, as well as in the household. For the economy as a whole, if total saving equals total investment, then expenditure by
firms and individuals will be in equilibrium; if saving exceeds investment then expenditure from wages, salaries and dividends
will not return to firms in the form of payments for goods and services and output would have to fall, thus reducing incomes and
bringing savings and investment into balance. What determines the level of saving is therefore important in macroeconomics. An
important hypothesis in economics suggests that the level of saving is a function of the level of income, whilst the permanentincome hypothesis suggests that changes in savings may be used to maintain a steady rate of consumption.
savings bank
A bank which accepts interest-bearing deposits of small amounts. The earliest savings banks were established in the private
sector but later were set up or supported by governments, to encourage individual savings. in the UK, the two main forms of
savings bank are the National Savings Bank and the Trustee Savings Bank, although the building societies share the basic
objectives of the savings banks. In the US, savings banks are also called thrift institutions or savings and loan (S & L)
associations.
savings function
The schedule showing the amount of saving that households or a nation will undertake at each level of income.
savings ratio
The proportion of income which is saved, usually expressed for personal savings as a percentage of personal disposable income.
Since wealthy people save more than the poor, the increase in the savings ratio over recent decades has been partly the result of
increased real incomes, but also apparently from a desire to maintain the real value of savings under inflation.
Say’sLaw of Markets
The theory that supply creates its own demand. J.B.Say argued in 1803 that, because total purchasing power is exactly equal to
total incomes and outputs, excess demand or supply is impossible. Keynes attacked Say’s Law, pointing out that an extra dollar
of income need not be entirely spent (i.e. the marginal propensity to consume is not necessarily unity).
scarcity
The principle that most things that people want are available only in limited supply. Thus goods are generally scarce and must
somehow be rationed, whether by price or some other means.
scorched earth policy
A way of combating a take over bid, where the target company sells valuable assets or purchases unattractive assets.
seasonal adjustment
The elimination of seasonal variations from a time series.
seasonal variations
In compiling statistical tables results are often distorted by variations which are directly attributable to seasonal influences. Retail
sales figures will tend to show substantial increases in month prior to Christmas; employment figures will also tend to rise at that
time, and in some industries ,eg. agriculture they might increase at other times of the year. These seasonal peaks or troughs are
not representative of real trends, and in providing fair and comparative figures statistical techniques are used to eliminate the
effect of these seasonal variations.
secondary banking
Secondary banking is not, as other banking sectors are, primarily concerned with offering a banking service to the public. It is
more concerned with the type of business that clearing banks prefer not to engage in, such as the granting of second mortgages
and other high-risk operations. This area of banking has become somewhat distrusted in the UK and the Bank of England is
charged with keeping a watchful eye upon it.
secondary market
A market in where assets are resold and purchased, whilst in a primary market assets are sold for the first time. The Stock
Exchange is a secondary market in which financial securities are traded, although it is also a primary market where these
securities are issued for the first time. Secondary markets are typically larger than primary markets and perform an important
function, since purchasers of new issues of securities would be reluctant to purchase and would offer a lower price for them
unless they were confident that they could, if necessary, dispose of them in the secondary market.
sector
A part of the economy or the business organisation of a country; public sector = nationalised industries and public services;
private sector = all companies which are owned by private shareholders, not by the state.
securities
The investments in stocks and shares; gilt-edged securities = investments in British government stock; Securities and Investments
Board (SIB) = the official body which regulates the securities markets in the UK; Securities and Exchange Commission = an
official body in the USA set up to oversee the behaviour of the American Stock Exchange and the financial scene generally. It
has considerable powers, even if they are rarely used, to regulate public offers of shares and securities and to keep a watch on
such matters as insider dealings. Although there is no equivalent body in the UK, the increase in company sizes may bring one
into existence.
self-assessment
A method of calculating income tax liability owed to the Inland Revenue by letting individuals calculate and declare their income
at the year end, and then to pay whatever has not been deducted from their wages during the year. It is used in the USA, in
contrast to the UK Pay-as-you-earn system. From 1996 it will be part of the UK tax assessment system.
.
self-liquidating
A term used to describe a low-risk financial transaction or loan which incorporates a procedure for simultaneous termination and
clearing indebtedness. A hire purchase transaction is self-liquidating in that regular payments culminate in a final instalment
which clears the debt. More generally, the term is applied to any form of finance to fill a temporary shortfall of funds, or a
bridging loan by a bank to a customer in the process of selling one house and buying another.
self-regulation
The regulation of an industry by itself, through a committee which issues a rulebook and makes sure that members of the industry
follow the rules (as in the case of the regulation of the Stock Exchange by the Stock Exchange Council and the SIB).
self-sufficient
Producing enough food or raw materials for its own needs.
selling costs
Opportunity costs incurred in marketing and distributing a product, including the costs of advertising, sales promotion, packaging
and sales staff.
sensitive
Elastic; price-sensitive product = a product for which demand will change significantly if its price is changed.
separation of ownership and control
A characteristic of most large corporations today. They are owned by their shareholders but operated and controlled by their
professional managers. In such situations, the actual control exercised by shareholders is limited.
service industry
An organisation offering services to extractive, construction or manufacturing industries or to the public. These organisations do
not actually make anything; they provide a service, for example by putting producers in touch with consumers.
Set-a-side
A procedure adopted by the European Union as part of its agricultural policies. Each farmer has to allocate part of his land,
currently a different 15% each year, to be left fallow, ie. without any crops/animals being put tom it. For accepting this reduction
in his land productivity, the farmer is paid a guaranteed sum.
setting up costs or set up costs
The costs of getting a machine or a factory ready to make up a new product after finishing work on the previous one.
settlement
Payment of an account; rolling settlement = system of paying for shares bought on the stock exchange, where the buyer pays at
the end of a certain number of days after the purchase is made.
shadow price
The opportunity cost to society of those who are involved in some economic activity. It is applied to situations where actual
prices cannot be charged, or where actual prices charged do not reflect the real sacrifice made when some activity is pursued. In a
perfectly functioning economy, market prices will be equal to marginal cost, which itself represents the true cost to society of
producing one extra unit of a commodity. Suppose, though, in an imperfect market with unemployment, the cost to society of
using that unemployed labour is virtually zero, hence the shadow price of labour is zero, even though the workers, if employed,
would have to be paid a wage.
share
One of many equal parts into which a company’s capital is divided; ‘A’ shares = ordinary shares with limited voting rights; ÔBÕ
shares = ordinary shares with special voting rights, often owned by the founder of a firm and his family); deferred shares = shares
which receive a dividend only after all other dividends have been paid; ordinary shares = normal shares in a company, which have
no special benefits or restrictions; preference shares = shares, often with no voting rights, which receive their dividend before all
other shares and are repaid first (at face value) if the company goes into liquidation; share allotment = sharing a relatively small
number of shares amongst a large number of people who have applied to buy them; share capital = value of the assets of a
company held as shares; share issue = selling new shares in a company to the public; share option = right to buy or sell shares at a
certain price at a time in the future; share premium = a sum over and above the nominal value may be charged on an issue of
shares if their profitability indicates that their real value is in excess of their nominal value. Share premiums are put to a special
account, which is a capital reserve and cannot be distributed to members. It can, however, be capitalised and form the basis of a
scrip issue; share index = an index number based on the prices of a particular parcel of shares, supposed to be representative of
overall market fluctuations. It may refer to share prices generally or to the particular group of shares. Among the better known
indices are the Financial Times FT-SE 100 and the Dow Jones Index.
shop steward
An elected trade union representative who reports workers’ complaints to the management.
short
For a small period of time; short credit = terms which allow the customer only a little time to pay; to sell short = to agree to sell
something (such as shares) which you do not yet possess, but which you expect to be able to buy for less; shorts or short-dated
securities = government stocks which mature in less than five years time.
short run
The period in which not all factors can be adjusted. In microeconomics, the capital stock and other fixed inputs cannot be
adjusted and entry is not free in the short run. In macroeconomics, prices, wage contracts, tax rates and expectations may not be
altered in the short run.
short run cost curves
A graphical representation of the relationship between the output of a firm and the cost of producing that output with the firm’s
given level of fixed assets. The short-run cost curve shows how much it would cost to make any output with the existing fixed
assets, taking into account the extra labour and raw materials that would be required. By contrast, the long-run cost curve depicts
the cost of every output if the plant size were allowed to alter. Any short-run cost curve can be broken down into two elements:
short-run fixed costs, being the payments incurred independently of output, and short-run variable costs, such as raw materials
and labour costs which vary with output.
shutdown point
In the theory of the firm, the shutdown point comes at that point where the market price is just sufficient to cover average variable
cost and no more. Hence, the firm’s losses per period just equal its fixed costs. It might as well shut down.
sight
sight bill = bill of exchange which is payable at sight;
silent partner
A partner who has a share of the business but does not work in it.
simple interest
Interest calculated on the capital only, and not on any interest accrued.
simulation
The construction of a model which describes mathematically the structure and processes of a real-world situation to be studied
and the inputting of values of variables in the model in order to generate appropriate out-turns. The model enables the results of a
process to be simulated without the need to test the process in an actual situation.
Single European Act
The Act passed into law in each member state of the European Community in 1987. Each state agreed to the setting-up of a
single market throughout the European Union. It also widened the areas in which decisions could be made by majority, as
opposed to unanimous, vote.
Single Market
The name given to the central policy issue of the EU’s initiative to foster free trade in goods, services and capital within the
borders of the European Union.. The idea of the ambition is to limit the degree to which technical, fiscal and physical barriers
limit the flow of commodities across national borders. The initiative created a Single Market which started on 1 January 1993.
The single market programme does not aim to remove all factors inhibiting trade: such natural barriers as differences in national
tastes, will remain. The term ‘single market’ may also be used to describe any other trading zone in which goods are traded in
roughly uniform conditions of supply and demand.
sinking fund
An accounting term for cash set aside for a particular purpose and invested so that the correct amount of money will be available
when it is needed.
skill
The ability to do something because you have been taught or trained; skilled workers = workers who have special skills or who
have had long training.
slump
Any rapid fall, or specifically a period of economic collapse with high unemployment and loss of trade.
small business
A firm, managed by its owners, which has only a small share of its market and is not sufficiently large to have access to the Stock
Exchange for the purpose of raising capital. Most small firms have little recourse to institutional sources of finance other than
commercial banks, and rely heavily on the personal savings of the proprietors, their families and friends .Some economists
believe that the long-term growth in taxation on income and wealth has inhibited the growth of the small-firm sector. Most small
businesses are sole proprietorships and partnerships, but the vast majority of Britain’s active private companies are small firms.
Smithsonian Agreement’
An agreement signed in 1971 by the ‘Group of Ten’ of the International Monetary Fund at the Smithsonian Institute, Washington.
Under the agreement, the major currencies were restored to fixed parities but with a wider margin, ± 2.25 per cent of permitted
fluctuation around their par values.
social accounting
The presentation of national income and expenditure accounts in a form showing the transactions during a given period between
the different sectors of the economy. The tabulations are set out in the form of a matrix showing the source of inputs of each
sector or part of sector and the distribution of their outputs.
social benefits
The total increase in the welfare of society from an action that is considered to be ‘economi’. In effect it is the sum of two
benefits. The first is the private benefit accruing to the agent performing the action, for example, the producer surplus or profit
made. The second is the external benefit accruing to society, for example an increase in taxation revenues.
social capital
The total stock of a society’s productive assets, including those that allow the manufacture of the marketable outputs that create
private-sector profits, and those that create non-marketed outputs, such as defence and education.
Social Charter
A Social Charter and Social Action Programme was drafted by the Social Affairs Commissioner of the European Community in
1989 for discussion by the member states, with a view to having the necessary agreements and legislation in place by 1992. The
programme includes such areas as health and safety at work, freedom of movement of workers throughout the Community,
equality of opportunity and social security. The United Kingdom signed this Charter in 1997.
social cost
The total cost to society of an economic activity. It is the sum of the opportunity costs of the resources used by the agent carrying
out the activity, plus any additional costs imposed on society from the activity. For example, when people drive their cars, they
incur the private cost of petrol and wear and tear on the vehicle, but the social cost of driving also includes wear and tear on the
roads, and the congestion and pollution they cause and the potential costs to the health service of road accident victims none of
which they pay for directly. By taxation, external costs can be incorporated into private costs so that market prices properly
represent the true costs to the community.
social overhead capital
The essential investments on which economic development depends, particularly for transportation, power and communications.
Because of the high capital cost and indivisibilities involved, social overhead capital generally depends on government planning
and economic support, especially in less developed countries.
social security
A system of government-financed income transfers designed to effect a desirable distribution of income. The main component is
the range of welfare benefits, given to those in considered to be living in poverty. This can be done by identifying groups likely
to be poor, such as that they have less disposable income than is thought necessary to maintain a certain standard of living.
social welfare
The total well-being of a community. It is not measurable because it is not possible to sum the benefits or utilities enjoyed by the
individuals composing the community. It is possible, however, for the community to judge whether it prefers one situation to
another.
socialism
A political theory that holds that all the means of production, other than labour, should be owned by the community. This allows
the return on capital to be shared more equally than under capitalism. In recent years it has undergone a considerable amount of
re-thinking and re-writing. This has been the result of the increased market orientated economic policies used by many
governments and an apparent change in some values previously held by countries and their citizens.
soft currency
The opposite of a hard currency. Soft currencies are those which are falling in value, usually due to continual balance of
payments problems in the country they represent. They are by nature not welcome within any nation’s gold and foreign exchange
reserves.
soft loan
A loan bearing either no rate of interest, or an interest rate which is below the true cost of the capital lent. It is the policy of the
World Bank to give ‘soft’ loans to developing countries for long-term capital projects.
sole proprietorship, sole trader
An unincorporated business owned by one person, which may or may not have employees. The majority of small firms are sole
traders or partnerships.
solvency
Being able to pay all debts.
sources and uses of funds
An accounting statement describing the capital flows of a business. Sources of funds are profits from trading operations,
depreciation provisions, sales of assets and borrowing, including capital issues. Uses of funds are purchase of fixed or financial
assets, and distribution of income.
sourcing
Obtaining supplies from a certain place or supplier.
special deposits
These are deposits made with the Bank of England by joint stock banks, at the direction of the government. This is a means of
restricting credit in a period of inflation. The joint stock banks lend in proportion to the money deposited with them. The special
deposits are a means of reducing cash held, and therefore reducing the amount of credit available for lending on. Special deposits
are not the same as the current balances which the banks have with the Bank of England.
special drawing rights (SDRs)
Units of account used by the International Monetary Fund, allocated to each member country for use in loans and other
international operations; their value is calculated daily on the weighted values of a group of currencies shown in dollars.
specialisation
The study of one particular thing, or dealing with one particular type of product or part of an overall production process.
speculative motive
The reason which causes people or firms to hold a stock of money in the belief that a capital gain or the avoidance of a loss can be
achieved by so doing. It forms one of three motives for holding money outlined by Keynes. He put forward that when the price of
bonds falls, the attraction of holding them increases; this is because people will expect their price to rise again, and anyone
owning them when this takes place will make a capital gain. People will tend to buy bonds when their price is low, and will thus
hold little money. When the price of bonds is high, on the other hand, they will believe their price could fall, and hold more
money. The amount of money held under this motive thus varies with the price of bonds; as the rate of interest varies inversely
with the bond price, the speculative motive for money varies inversely with interest rates.
speculator
Someone engaged in speculation, i.e. who buys or sells commodities or financial assets with the aim of profiting from later selling
or re-buying the asset at a higher price at a later date.
spending
paying money; consumer spending = spending by consumers; spending power = the amount of goods which can be bought for a
certain sum of money.
Spin-off
A useful product developed as a secondary product from a main item.
sponsor
A person who pays money to help research or to pay for a business venture; company which pays to help a sport, in return for
advertising rights.
spot
Buying something for immediate delivery; spot cash = cash paid for something bought immediately; spot market = the market for
buying a product for immediate delivery; spot price = the price for something which is to be delivered immediately.
squeeze
Government control carried out by reducing amounts available; credit squeeze = period when lending by the banks is restricted by
the government; profit squeeze = control of the amount of profits which companies can pay out as dividend.
stability
The situation of being steady and not moving up or down.
stabilisation
Making stable or preventing sudden changes in prices, etc.; stabilisation of the economy = keeping the economy stable by
preventing inflation from rising, cutting high interest rates and excess money supply.
stag
A share dealer who buys new issues of shares and sells them immediately to make a profit.
stagflation
A term, coined in the early 1970s, to describe the coexistence of high unemployment, or stagnation, with persistent inflation. Its
explanation lies primarily in the inertial nature of the inflationary process.
stagnant
Not active or not increasing.
stake
Money invested; stake in a business = money invested in a business
stamp duty
A form of indirect taxation which involves the fixing of pre-paid stamps to legal and commercial documents. The tax may be ad
valorem, as on the conveyancing of property, or specific, as on share transactions, the capital of limited companies, insurance
policies and leases. Although an ancient form of taxation, stamp duty is now of diminishing importance.
standard
A set of conditions against which other things are judged against; standard of living = quality of personal home life (such as
amount of food bought); standard rate = the basic rate of income tax which is paid by most taxpayers; standard costing = a
costing technique which used predetermined standards. A product is costed on the basis of a budgeted output. Where the output
has been fixed, the amount of material and labour inputs is known. The amount of overheads is taken to be fixed. Actual cost
will not correspond to budgeted cost, but the differences are handled through accounts known as variance accounts and the
amount charged to any particular job or product is not altered until the standards are altered.
standardise
To make sure that everything fits a standard or is produced in the same way.
standardisation of trade
The growing trend for goods to be similar in design and appeal. Such goods are therefore appealing to a very large proportion of
the world’s population. These goods tend to be those that feature in the classifications of clothes, white goods (kitchen based) and
brown goods(living accommodation based) Another category in which this description can be found is motor vehicles where a
number of world player corporations are now producing cars that appeal to world styles of life. eg the family saloon/Another
example are goods that feature in kitchens such as food mixers .A wide variety of appliances are available but each is really only
an electric motor. It is the white plastic shell that determines the function of the appliance . Countries who wish to participate in
these markets have to accept that competition is fierce but rewards can by high. The Sony Walkman is another example of a
product that is accepted by a very large number of the world’s population
standby
standby ticket = cheap air ticket which allows the passenger to wait until the last minute to see if there is an empty seat on the
plane; standby arrangements = plans for what should be done if an emergency happens, especially money held in reserve by the
International Monetary Fund for use by a country in financial difficulties.
standing order
An order written by a customer asking a bank to pay money regularly to an account.
standstill
The situation where work or production has stopped.
staple
staple commodity = basic food or raw material; staple industry = the main industry in a country; staple product = main product.
start
Beginning; house or housing starts = number of new private houses or flats of which construction has been started during a year;
starting salary = salary for an employee when he starts to work with a company.
start-up
The beginning of a new company or new product; start-up financing = the first stage in financing a new product, which is
followed by several rounds of investment capital as the project gets under way.
state
(a)
Independent country; semi-independent section of a federal country such as the USA;
(b)
government of a country; state enterprise = company run by the state; state ownership = situation where an industry is
nationalised.
state planning
The regulation of any sector or sphere of an economy by public administrators rather than the price system. If state planning is
comprehensive, a planned economy is said to exist.
statement
Saying something clearly; financial statement = document showing the financial situation of a company; statement of account =
list of invoices and credits and debits sent by a supplier to a customer at the end of each month.
static market
A market which does not increase or decrease significantly over a period of time.
status
Importance or position in society; status symbol = a luxury good which reflects a person’s high position in society.
statutory
Fixed by law; statutory regulations = regulations covering financial dealings which are based on Acts of Parliament, such as the
Financial Services Act.
sterling
The standard currency used in the UK; pound sterling = official term for the British currency; sterling area = formerly an area of
the world where the pound sterling was the main trading currency; sterling balances = a country’s trade balances expressed in
pounds sterling.
stimulate
To encourage or make something more active, such as the economy.
stock
(a)
Quantity of raw materials, goods for sale, etc.; opening stock = details of stock at the beginning of an accounting period; closing
stock = details of stock at the end of an accounting period; stock control = making sure that enough stock is kept and that
quantities and movements of stock are noted; stock depreciation = reduction in value of stock which is held in a warehouse for
some time; stock valuation = estimating the value of stock at the end of an accounting period.
(b)
Investments in a company, represented by shares or fixed interest securities; stocks and shares = shares in ordinary companies;
debenture stock = capital borrowed by a company, using its fixed assets as security; loan stock = money lent to a company at a
fixed rate of interest; convertible loan stock = money lent to a company which can be converted into shares at a later date.
/ NOTE: In the UK, the term stocks is generally applied to government stocks and debentures, and shares to shares of commercial
companies. In the USA, shares in corporations are usually called stocks, while government bonds are called bonds. In practice,
shares and stocks are interchangeable terms, and this can lead to some confusion.
stock appreciation
An increase in the value of stock resulting from an increase in market prices.
stock exchange
A market in which securities are bought and sold. Their economic importance is in facilitating saving and investment, first by
making it possible for investors to dispose of securities quickly if they wish to do so, and secondly in channelling savings into
productive investment.
stockbroker
Person who buys or sells stocks and shares for clients; stockbroker’s commission = payment made to a broker for a deal carried
out on behalf of a client.
stockholder
A person who holds shares in a company.
stock market
An organised marketplace in which common stocks are traded. In the USA, the largest stock market is the New York Stock
Exchange, on which are traded the largest American companies.
stockpile
Supplies kept by a country or a company in case of need.
stocktaking
Counting of goods in stock at the end of an accounting period.
stop-go
A phrase used to describe the attempted management of aggregate demand in the UK during the post-war period and particularly
in the 1960s during the period of fixed exchange rates .Subsequently the exchange rate came under pressure during periods of
rising economic activity, but as fiscal policy and monetary policy were applied to reduce aggregate demand and improve the
balance of payments it soon became necessary to stimulate the economy again to counteract recession. The stop-go cycle tended
to amplify movements in the trade cycle
straight line depreciation
Depreciation calculated by dividing the cost of an asset, less its residual value, by the number of years it is likely to be used.
strategy
Plan of future action.
stratified sampling
A method of sampling which is used when the population to be sampled is not homogeneous and the nature of the populationÕs
heterogeneity is pertinent to the characteristic of e population about which information is sought. In a heterogeneous population,
a stratified sample will give more accurate results than a simple random sample of the same size.
strike
Stopping of work by the workers (because of lack of agreement with management or because of orders from a union); all-out
strike = complete strike by all workers; general strike = strike of all the workers in a country; sympathy strike = Strike to show
that workers agree with another group of workers who are already on strike; strike pay =wages paid to striking workers by their
trade union; strike ballot = vote by workers to decide if a strike should be held.
strong
With a lot of force or strength; strong currency = currency which is high against other currencies (the opposite is a weak
currency).
structural unemployment
Unemployment resulting from the decline in the regional or occupational pattern of job vacancies. This normally results in such
vacancies not being sufficient to absorb all those seeking worlds most common reason is that major industries/employers in a
region record a permanent downturn in their demand eg shipbuilding in most parts of the United Kingdom. There may be jobs
available, but unemployed workers may not have the required skills, or the jobs may be in different regions from where the
unemployed workers live.
structure
The way in which something is organised; capital structure = the way in which a company’s capital is set up.
subcontract
A contract between the main contractor for a whole project and another firm who will do part of the work.
subliminal advertising
Advertising which attempts to leave certain impressions on the mind of the person who sees or hears it, without the person
realising that this is being dome.
subscribe
to subscribe to a magazine = to pay for a series of issues of a magazine; to subscribe for shares = to apply for shares in a new
company.
subsidiarity
The notion that political authority should rest with the most local jurisdiction available. Under subsidiarity, problems affecting
only a town should be decided by the town. The twin precepts of subsidiarity are that everyone who is affected by an issue should
be in the jurisdiction with responsibility for it; and that as few people as possible not affected by an issue should be in the
jurisdiction responsible for it.
subsidiary
Something which is less important; subsidiary company = a company which is more than 50% owned by a holding company, and
where the holding company controls the board of directors.
subsidise
To help by giving money.
subsidy
A payment by a government to a firm or household that provides or consumes a commodity. For example, governments often
subsidise food by paying for part of the food expenditures of low-income households.
subsistence
The minimum amount of food, money, housing, etc., which a person needs; subsistence agriculture = the type of farming found in
many developing world nations where farmers produce only enough food to feed themselves and their families, as opposed to
commercial farming, where the produce is sold; subsistence allowance = money paid by a company to cover the cost of hotels,
meals, etc., for a member of staff who is travelling on business; to live at subsistence level = to have only just enough money to
live on.
substitutes
Products which at least partly satisfy the same needs of consumers. Products are defined as substitutes in terms of the cross-price
effects between them. If, when the price of cassettes goes up, sales of compact discs rise, compact discs are said to be substitutes
for cassettes, as consumers can to some extent satisfy the need served by cassettes with compact discs.
substitution effect
The tendency of consumers is to consume more of a good when its relative price falls, and to consume less of the good when its
relative price increases. This substitution effect leads to a downward-sloping demand curve.
sunk costs
The opportunity costs incurred in the past which are irretrievable and therefore not relevant to current decisions. For example, a
factory might buy an a certain asset as a fixed cost and this is a valuable piece of equipment, without which an operator could not
commence production. At a later date it could sell it should it want to. It might also pay out a large amount in advertising its
services. Sunk costs represent a barrier to entry and exit in an industry because they scare potential entrants from entering should they fail, they would have wasted all the sunk costs.
sunrise industries
Companies in the growing fields of electronics and other high-tech areas.
sunset industries
Old-style industries which are being replaced by new technology.
superannuation
A pension paid to someone who is too old or ill to work any more.
supermarket
A term which today is strictly misused, for it is often used for self-service multiple stores. Its true definition is an organisation
where many traders do business on their own account under the same roof. The owners of the premises take their profit from the
charges made to the traders, rather than from the turnover.
supplement
Something which is added; supplementary benefit = payments from the government to people with very low incomes.
supply and demand, law of
This law stipulates that under perfect competition, market price will move to the level at which the quantity purchasers wish to
buy just equals the quantity that sellers wish to sell. See elsewhere for relevant diagrams.
supply curve
A schedule showing the quantity of a good that suppliers in a given market would be prepared to sell at each price, holding other
things equal.
supply shock
In macroeconomics, a sudden change in production costs or productivity that has a large and unexpected impact on aggregate
supply. As a result of a supply shock, real GNP and the price level change unexpectedly. For example, when oil prices rose
sharply in the 1970s, inflation increased sharply and real output fell.
supply-side economics
A view emphasising policy measures to affect aggregate supply or potential output. This approach holds that high marginal tax
rates on labour and capital incomes reduce work effort and saving. Supporters of such theories suggest that a cut in marginal tax
rates will increase factor supplies and total output. An extreme view, put forth by Arthur Laffer, was that a cut in taxes may
actually raise total tax revenues. Within this broad heading are now include policies that relate to privatisation, reductions in the
influence of Trade Unions and other measures designed to ‘free up’ the markets for both labour and products.
surcharge
Any additional charge.
surplus
Extra stock or something which is more than is needed.
surplus value
A term used in Marxian economics to refer to the excess of a price over the value of the total direct and indirect labour that went
into the manufacture of the good.
surtax
An additional levy on higher incomes and for many years part of the UK taxation system. It was essentially a penal tax and was
abolished in 1973.
SWOT analysis
A method of developing a marketing strategy based on an assessment of the strengths and weaknesses of the company and the
opportunities and threats in the markets.
syndicate
A group of companies or people working together to make money; arbitrage syndicate = group of people who together raise the
capital to invest in arbitrage deals; underwriting syndicate = group of underwriters who insure a large risk.
synergy
Producing greater effects by joining forces than by acting separately.
Tt
take-home pay
The amount of money received in wages after tax, national insurance, pension contributions, etc., have been deducted.
takeover
The purchase of a controlling interest in a business by acquiring more than 50% of its shares; takeover bid = an offer to buy all or
most of the shares in a company so as to control from it.
takings
Money received in a shop or a business.
tangible assets
Assets such as machinery, buildings, furniture, etc., which are visible.
tap issue
The issue of securities by the Treasury directly to government departments or other chosen recipients as opposed to being placed
on the market or put up for tender.
tap stock
Readily available securities, particularly gilt-edged government stock, which can always be obtained on demand. Tap stocks
should be distinguished from tap issues.
target
Something to aim for; monetary targets = figures such as the money supply, PSBR, etc., which are given as targets by the
government when setting out its budget for the forthcoming year.
tariff
A Taxe imposed on commodity imports. They are normally levied on an ad valorem or specific basis. The purpose may be for
raising revenue, in which case the home-produced product equivalents would probably also receive an equivalent tax increase.
However, import duties are generally applied for the purpose of carrying out a particular policy, and may serve many functions:
(a)
To reduce the overall level of imports by making them more expensive relative to their home-made substitutes, with the aim of
eliminating a balance of payments deficit.
(b)
To counter the practice of dumping by raising the import price of the dumped commodity to its economic level.
(c)
To retaliate against restrictive measures imposed by other countries.
(d)
To protect a new industry until it is sufficiently well established to compete with the more developed industries of other countries.
(e)
To protect ‘key’ industries, such as agriculture, without which the economy would be vulnerable in times of war.
it was an accepted principle under the most-favoured nation clause of the General Agreement on Tariffs and Trade that tariffs
should be non-discriminating and any concessions agreed between two countries should be extended to all. It has, however, been
accepted that this principle may be waived in the interests of developing countries; tariff barriers = customs duties intended to
make imports more difficult; General Agreement on Tariffs and Trade (GATT) = international organisation set up with the aim of
reducing restrictions in trade between countries. Though now known as The World Trade Organisation the same principles apply.
tatonnement process
This process was suggested by Walras to illustrate the equilibrium in perfect markets can be attained at a particular set of prices
no matter what the original disequilibrium position of the markets and the route by which prices move before reaching
equilibrium. Buyers and sellers make known their prices in the first round. In the second round, buyers and sellers increase their
published prices, where there is excess demand, reduce them where there is a shortfall in demand and keep them the same where
demand and supply are in balance. The process continues until there is a balance of demand and supply in all markets. At this
stage, actual transactions take place; no trade is done until equilibrium is reached.
tax
A sum of money taken by the government or an official body to pay for government services; capital gains tax = tax on capital
gains; corporation tax = tax on profits made by companies; income tax = tax on salaries and wages; value added tax (VAT) = tax
on goods and services, added as a percentage to the invoiced sales price; ad valorem tax = tax calculated according to the value of
the goods taxed; back tax = tax which is owed; direct tax = tax paid directly to the government (such as income tax); indirect tax
= tax paid to someone who then pays it to the government (such as VAT); tax allowances = that part of income which a person is
allowed to earn and not pay tax on; tax credit = part of a dividend on which the company has already paid advance corporation tax
which is deducted from the shareholder’s income tax charge; tax haven = country where taxes are low, encouraging companies to
set up their main offices there; tax year = twelve-month period on which taxes are calculated (in the UK, 6th April to 5th April of
the following year); progressive or graduated taxation = taxation system where tax levels increase as income rises; regressive
taxation = system of taxation in which tax gets progressively less as income rises.
tax and price index
An index number which measures the percentage change in gross income required by taxpaying individuals to maintain their real
disposable income. The index takes into account the movement in the retail price index and changes in direct taxation and
employee National Insurance contributions.
tax avoidance
Arranging ones financial affairs within the law so as to minimise taxation liabilities, as opposed to tax evasion, which is failing to
meet actual tax liabilities through, for example, not declaring income or profit.
tax base
The quality or coverage of what is taxed. The tax base for income tax is the assessed incomes of the whole population. The tax
base for value-added tax does not include sales of most foods, books and financial services.
tax burden
The amount of money which an individual, institution or group must pay in tax. It should include all costs to the taxpayer which
he incurs in paying the tax, such as the net-of-tax cost of employing an accountant to complete a tax form, as well as the tax itself.
tax expenditures
The costs of tax allowances and relief. It has been argued that tax allowances are similar to subsidies and may be seen as a form
of public expenditure. However, tax expenditures can never be more than estimates since it cannot be assumed that the tax base
would remain unaltered if the allowances were abolished.
tax yield
The amount of money which results when the tax is applied to the money value of the tax base, minus the costs of collecting the
tax.
taxation
The compulsory transfer of money from private individuals, institutions or groups to the government. It may be levied on wealth
or income, or as a surcharge on prices. On income it would be called a direct tax; in the latter, an indirect tax. Taxation is one of
the principle means by which a government finances its expenditure; incidence of taxation = the ultimate distribution of the
burden of a tax. The initial tax impact, or formal incidence of an excise duty on tobacco, for example, may be on the importer or
wholesaler who has to pay over the tax to the authorities, but he is likely to pass on some or all of the tax in the form of higher
prices to the retailer and consumer. Whether or not a tax is wholly shifted forward will depend upon the price elasticity of
demand and supply for tobacco. If the consumer does not reduce his purchases following the increase in price, he will bear the
whole of the tax. If he does reduce his purchases, the wholesaler and the retailer will also be worse off and will be bearing part of
the tax.
technological change
The introduction of a new production method, yielding product improvements or cost reduction and thereby raising productivity.
It results in an outward shift in the production possibility frontier.
technology
The sum of knowledge of the means and methods of production of goods and services. Technology is not merely applied science,
as things are often done without precise knowledge of how or why they are done except that they are effective. Early technology
- craft skill - was almost entirely of this sort. Modern technology is increasingly science based, however, and, rather than relying
on acquired skill, is easily communicable by demonstration and printed material to those qualified to receive it. It also covers
methods of organisation as well as physical technique. Technological change and the diffusion of technology are important in
economics because new methods, including those embodied in investment, play an important part in theories of economic growth.
There is, however, some controversy about the extent to which technological development is an autonomous factor in economic
growth. Because it is so difficult to measure, there is also room for doubt about whether or not technological change is, or has
recently been, accelerating.
telecommunications
Systems of passing messages over long distances by cable, radio, etc.
tender
An offer to do something for a certain price; legal tender = notes or coins which can be legally used to pay a debt (small
denominations cannot be used to pay large debts).
term loan
A bank advance for a specific period repaid, with interest, usually by regular periodical payments. Term loans are common
practice in the US commercial banking system for business finance, and for larger borrowings the loan may be syndicated, i.e. the
provision of funds and interest earned are shared between several banks. Similar facilities are available in Britain, mainly from
the commercial banks or other institutions such as Investors In Industry, but overdrafts are still the most common form of bank
loan. Unlike an overdraft, the interest of a term loan is fixed and the loan cannot be recalled in advance of its maturity date.
terms of trade
A phrase usually employed with respect to international trade, referring to the real terms at which a nation sells its export products
and buys its import products. It refers to the ratio of an index of export prices to an index of import prices.
tertiary industry
Service industry, or industry which does not produce or manufacture anything but offers a service, such as banking, retailing or
accountancy; tertiary sector = the section of the economy containing the service industries.
Third World
Countries of Africa, Asia and South America which do not all have highly developed industries.
threshold
A limit, or point at which something changes; tax threshold = the point at which another percentage of tax becomes payable.
throughput
The amount of work done or goods produced in a certain period of time.
tie-in sales
Sales of a product that have a condition that some other item will be purchased at the same time. An example would be the
condition that in order to subscribe to the services of a telephone utility, you have to also rent or buy one of their telephones. It is
an example of a vertical restraint.
tied loan
A loan made on condition that certain purchases are made from the lender. In the brewing industry, tied loans are made to pubs
and clubs for fitting out bars and restaurants on the understanding that beer is supplied by the brewer making the loan. In foreign
aid, loans are made on favourable terms on condition that capital equipment or services are purchased from the lending country.
tight-money policy
A central bank policy of restraining or reducing the money supply and of raising interest rates. This policy has the effect of
slowing the growth of real GNP, reducing the rate of inflation or raising the nation’s foreign exchange rate.
time deposit
Funds held in a bank, that have a minimal time of withdrawal. Included in broad money but not in narrow money, because they
are not accepted as a means of payment.
time preference
The amount by which consumers value immediate consumption in preference to deferred consumption. An example of this
would be that an individual has £1: he can either spend it now, or put it aside and spend it next year. The rate of time preference
of that consumer is the amount of money necessary so as just to persuade him to save the pound. If he thinks he will be doing
very well next year and has no need to save, he will require a large amount of compensation not to spend the pound. On the other
hand, if he believes he will be worse off next year, he may be rather more inclined to save.
time rate
A rate for work which is calculated as money per hour or per week, and not money per unit of work completed. Compare with
piece rate.
Tokyo round of trade negotiations
Agreement was reached in Tokyo in 1973 to initiate a seventh round of trade negotiations under the General Agreement on
Tariffs and Trade. These negotiations began in 1974, after the passing in the USA of the Trade Act, which gave the President
powers to negotiate. The negotiations were concluded at the end of 1979. Agreement was reached on the following matters:
(a)
The major developed countries agreed to reduce their tariffs by, on average, one-third over a period ending in 1987.
(b)
A new code of conduct was drawn up covering customs-valuation procedures, barriers caused by technical specifications, import
licences and government procurement policies. For instance, the American Selling Price system was abolished. Under this
system the USA re-valued imports of chemicals to the higher level of that charged by US domestic producers and then calculated
the import duty on this higher facility.
(c)
A new code was also agreed concerning the application of countervailing duties. These duties may only be applied when it can be
demonstrated that material injury is being caused to the domestic producers of a commodity because of the importation of that
commodity from a subsidised overseas source.
total product
The total amount of a commodity produced measured in physical units.
trade
The business of buying and selling; export or import trade = the business of selling to other countries or buying from other
countries; foreign or overseas or external trade = trade with other countries; trade barrier = any of a number of protectionist
devices by which governments discourage imports. Tariffs and quotas are the most visible barriers, but in recent years, non-tariff
barriers, such as burdensome regulatory proceedings, have replaced more traditional measures; trade bill = bill of exchange; trade
credit = the credit extended by businesses to other firms; trade cycle or business cycle = period during which trade expands, then
slows down, then expands again; trade deficit or trade gap = difference in value between a country’s low exports and higher
imports; trade investment = shares held by one company in another, normally minority holdings in customers or suppliers; trade
surplus = difference in value between a country’s high exports and lower imports; free trade = system where goods can go from
one country to another without any restrictions; trade-weighted index = index of the value of a currency calculated against a
basket of currencies; trade creditor = an accounting term for a person to whom money is owed in the course of trade.
trading
The business of buying and selling; trading partner = company or country which trades with another; Office of Fair Trading =
government department which protects consumers against unfair or illegal business’ plans.
training
Being taught how to do something; industrial training = training new workers to work in an industry; management training =
training staff to be managers, by making them study problems and work out solutions to them; on-the-job training = training given
to workers at their place of work; off-the-job training = training given to workers away from their place of work (such as at a
college or school).
tranche
When large sums of money are to be raised through fixed-interest securities issued by governments or major corporations, it is
often to the benefit of both the issuer, who does not require the full amount authorised immediately, and the market which needs
time to absorb new issues, that the process is staggered over perhaps quite an extended period. Each proportion of the total is, at
the time it is introduced, referred to as a tranche.
transaction
A piece of business or buying or selling; a transaction on the Stock Exchange = purchase or sale of shares on the Stock Exchange;
transaction costs = the costs associated with the process of buying and selling ÐÊthese are small frictions in the economic sphere
that often explain why the price system does not operate perfectly.
transactions demand for money
The holding of cash by people or firms to finance foreseeable expenditures. When people are paid, the probably put their salary
into a bank account, from which they can spend it very easily, using cheques or cash taken from a machine. If they wanted to,
however, they could invest it, say, in government bonds which would pay interest. People, however, keep much of their money in
easy-access, low-return account. This is the transactions demand for money.
transactions motive
The factor which causes people or firms to hold a stock of money to finance their foreseeable expenditures. It is one of the three
motives for holding money outlined by Keynes.
transfer costs
The total opportunity costs of moving goods or materials from one place to another including loading/unloading costs and
administrative costs as well as transport costs.
transfer earnings
The minimum payment necessary to keep a factor of production in its existing use and deter movement to other employment.
Earnings in excess of transfer earnings are economic rent.
transfer payments
Any payment made from one party to another, which does not represent a return to a factor of production. Examples include
social security payments and unemployment benefit. These are usually intended to change the distribution of income by aiding
particular groups.
transfer pricing
Internal prices used in large organisations for transactions between semi-autonomous divisions. A multinational corporation, for
example, will have to set transfer prices for the supply of components from one subsidiary to another. Transfer prices between
subsidiaries acting as profit centres may approximate to market prices or they may be set above or below them so as to minimise
the payment of tariffs or to shift profit from a high-taxation country to a low-taxation country.
transformation curve
The graphical representation of the maximum amount of one good or service that an economy can produce by reducing
production of a second good or service and transferring the resources saved to the production of the first good. An example of this
would be that an economy might be capable of producing fifty tanks if it produces no food, or no tanks if it produces a million
tons of food. Either of these combinations would be a point on the transformation curve, which can be plotted on a graph with the
number of tanks produced on one axis and the amount of food on the other. It traces the number of tons of food that can be made
using the resources required for any given level of production. A transformation curve is normally assumed to be concave to (i.e.
bulge away from) the origin. This is because the rate of technical substitution declines the more of a commodity that is produced.
transmission mechanism
The process by which changes in the money supply affect the level of aggregate demand. The mechanism can work in several
ways. First, with extra cash people may choose to buy new goods. Second, and more indirectly, with extra cash, people may buy
more bonds, as a means of storing their new wealth. This increase in the demand for bonds will push their prices up and interest
rates down and this will stimulate new investment. Monetarism concentrates on the more direct process, while Keynesian
economics has tended to play down the power of money, believing that its effects work only through the second, indirect
mechanism.
trans-national corporation
Large company which operates in various countries.
treasury
the Treasury = the government department which deals with the country’s finance (the term is used in both the UK and the USA;
in most other countries this department is called the Ministry of Finance); treasury bill = shot-term financial instrument which
does not give any interest and is sold by the government at a discount through the central bank (in the UK their term varies from
three to six months; in the USA they are for 91 or 182 days, or for 52 weeks. In American English they are also called
‘Treasuries’ or ‘T-bills’; treasury notes = medium term bonds issued by the US government.
treasury bills
Short-term bonds or securities issued by the federal government.
trust
Management of money or property for someone; investment trust = company whose shares can be bought on the Stock Exchange
and whose business is to make money by buying and selling stocks and shares; unit trust = organisation which takes money from
investors and invests it in stocks and shares for them under a trust deed.
turnover
Amount of sales of goods or services by a company.
turnover tax
A tax levied as a proportion of the price of a commodity on each sale in the production and distribution chain; also called a
cascade tax. Such a tax encourages vertical integration. Turnover taxes were widespread in Europe, for example in Germany,
before the introduction of the value-added tax now standard throughout the European Union.
Uu
ultimate
Last or final; ultimate consumer = the person who actually uses a product.
umbrella organisation
A large organisation which includes several smaller ones.
unbundling
the process of dismantling costs and prices for what were once flar rate charges. An example of this is the way in which BT has
charged for directory enquiry calls whilst cutting the cost of ordinary call charges.
uncertainty
A state in which the number of possible outcomes exceeds the number of actual outcomes and when no probabilities can be
assigned to each possible outcome. It differs from risk, for this is defined as having measurable probabilities. Where
probabilities are measurable, insurance can be taken out to cover the worst possible outcomes. In the case of uncertainty,
however, no insurance company could properly assess what premium to charge to cover bad outcomes: it is simply a possibility
that has to be faced. It is the role of the entrepreneur in facing each uncertainty when setting up a new company that justifies
profit as a reward.
uncrossed cheque
A cheque which does not have two lines across it and can be cashed anywhere (these are no longer used in the UK, but are still
found in other countries).
undated
With no date written; undated bond = bond with no maturity date.
undercapitalised
Without enough capital.
underdeveloped
Which has not been developed; underdeveloped countries = countries which are not fully industrialised.
underemployment
A situation where workers in a company do not have enough work to do, or where there is not enough work for all the workers in
a country.
underground economy
Unreported economic activity. The underground economy includes otherwise legal activities not reported to the taxation
authorities, and illegal activities such as the drug trade.
undersubscribed
(share issue) where applications are not made for all the shares on offer, and part of the issue remains with the underwriters.
undervalued currency
A currency whose exchange rate is below either its free market level or the equilibrium level which it is expected to reach in the
long run. Conversely, an overvalued currency may develop as a consequence of balance-of-payments deficit.
underwrite
To accept responsibility for, to insure or agree to pay for costs; to underwrite a share issue = to guarantee that a share issue will be
sold by agreeing to buy all shares which are not subscribed; underwriter = a person who underwrites a share issue or an insurance.
undistributed profit
Profit which has not been distributed as dividends to shareholders.
uneconomic
Not making a commercial profit; an uneconomic proposition = a proposition which will not be commercially viable.
unemployment
In economic terms, involuntary unemployment occurs if there are qualified workers who would be willing to work at prevailing
wages but cannot find jobs. A worker is unemployed if he or she is not working and either is waiting for recall from layoff or has
actively looked for work in the last four weeks. Historically, unemployment was very high in the 1930s; it then fell to its lowest
level in the 1950s and re-emerged as a major economic and social problem in Western economies after the oil crisis of 1973, for
the first time simultaneously appearing with high inflation, this was known as\ ‘Stagflation’. Four distinct causes of
unemployment can be distinguished:
(a)
Frictional unemployment is caused by people taking time out of work between jobs or looking for a job.
(b)
Classical unemployment is caused by excessively high wages, above their equilibrium level.
(c)
Structural unemployment refers to a mismatch of job vacancies with the supply of labour available, caused by shifts in the
structure of the economy.
(d)
Keynesian unemployment results from the deficiency of aggregate demand, which is simply insufficient to support full
employment. A fall in wages - which should cause an increase in the demand for labour - merely reduces aggregate demand
further because it reduces the spending power of the employed, and thus fails to clear the excess supply of workers. Much
economic debate has centred on whether, in the long term, cuts in wages cannot in fact increase demand, and thus whether
Keynesian unemployment is not just a special case of classical unemployment in which workers are simply pricing themselves
out of jobs.
Monetarist and neo-classical economists have tended to argue that all unemployment is either classical or voluntary. Either the
market fails to clear because wages are artificially held too high; or, if the market does clear, the unemployed have chosen not to
take a job at the going rate. In particular circumstances it has been shown to be possible for the economy to stick at a less than
true employment equilibrium, the only way out of which is to boost aggregate demand. The labour market is widely recognised
as being slower to adjust than any other.
unemployment, natural rate of
The level of unemployment that exists when all markets in the economy are in equilibrium. The natural rate is equivalent to the
voluntary unemployment rate, because if there is neither excess demand nor excess supply on the labour market, anybody not
working must have chosen not to take a job at the prevailing wage. This is also roughly equivalent to the frictional
unemployment rate because it is those who are between jobs who are making a rational choice as to whether it pays them to work
or not. The level of natural unemployment reflects the structural characteristics of an economy: this includes such factors as the
level of benefits for the out-of-work, the ease with which workers can change jobs and the stigma attached to being out of work.
Friedman argued that it is beyond the influence of policies designed to affect aggregate demand. It is only possible to cause a
temporary deviation from the natural rate by increasing demand in the economy; this is because it leads to both higher wages and
higher prices, but as long as price increases outstrip workersÕ expectations of them, they will think real wages are higher than
they are and be fooled into taking jobs they actually believe not to be worth the money. This would only be as long as
expectations lagged behind actual inflation. Three policies can thus be pursued towards the natural rate: first, accelerating rates of
inflation to hold price increases ahead of expectations and keep people working who would otherwise choose to stay at home;
secondly, supply-side policies can be pursued, such as cutting benefits for the out-of-work, making jobs relatively more attractive;
or thirdly, the natural rate itself must be endured. Because unemployment cannot be held below the natural rate without
accelerating inflation, it is often called the non-accelerating inflation rate of unemployment (NAIRU).
unemployment trap
The existence of social security benefits for the out-of-work that erode any incentive for the unemployed to take a job. The
incentive for the unemployed to find a job can depend on the generosity of state benefits, the level of pay offered and the tax
levied on that pay.
unfair competition
trying to do better than another company by using techniques such as importing foreign goods at very low prices or by wrongly
criticising a competitor’s products.
unfair dismissal
Removing someone from a job for reasons which are not fair.
unfavourable
Not favourable; unfavourable balance of trade = situation where a country imports more than it exports; unfavourable terms of
trade = situation where the index of a country’s import prices is greater than the index of its export prices.
uniform business rate
A tax levied on business property which is the same percentage for the whole country.
unilateral
On one side only, or done by one party only; unilateral aid = .
union
trade union = organisation which represents workers who are its members in discussions with management about wages and
general conditions of work; union dues or union subscription = payment made by workers to belong to a union; customs union =
agreement between several countries that goods can go between them without paying duty, while goods from outside countries
have special duties (a common external tariff) levied on them.
unissued capital
Capital which a company is authorised to issue but has not issued as shares.
unit
(a)
Single product for sale; unit cost = the cost of one item; unit price = the price of one item
(b)
production unit = separate small group of workers which produces a certain product; research unit = small group of research
workers
(c)
monetary unit or unit of currency = the main item of currency of a country (a dollar, pound, yen, etc.); unit of account = a
standard unit used in financial transactions among members of a group, such as SDRs in the IMF and the ECU in the EU (used for
example, when calculating the EU budget and farm prices)
United Nations Conference on Trade and Development (UNCTAD)
A conference first convened in 1964 in response to a growing anxiety among developing countries over the difficulties they were
facing in their attempts to bridge the standard-of-living gap between them and the advanced nations. Since then full conferences
have been held every three or four years. UNCTAD VIII was held in 1991. The first Director General of UNCTAD summarised
the problem in his report. The growth rate of 5 per cent per annum which was required for the developing countries to make
progress in terms of real income per head implied a required import growth of imports at 6 per cent. However, the trend rate of
growth of exports had been only about 4 per cent in value, and this had been reduced to the low figure of 2 per cent because of the
deterioration in their terms of trade. If this relationship continued, they would suffer chronic balance of payments deficits which
would lead to a worsening in their economic welfare. The problem could be tackled on two fronts: through measures to offset the
deterioration in the terms of trade and to promote their exports. The terms-of-trade approach could be through international
commodity agreements, which would be designed to prevent primary prices from falling, and through compensatory finance
arrangements. A new chapter to the GATT was added in 1965 on trade and development which called for the reduction of tariffs
and quotas on developing countries’ exports. It became possible for preferential duties to be given to imports from developing
countries without having to extend these preferences to all the contracting parties of the GATT. The advent of The World Trading
Organisation did not effect the principles outlined above.
unit-elastic demand
The situation between elastic demand and inelastic demand, in which price elasticity is equal to one in absolute value. This
means that, when price changes by one per cent, quantity demanded changes by one per cent in the opposite direction. In
addition, when price changes, total revenue is unchanged.
unit tax
An indirect tax levied as a cash amount per unit of the product produced or sold. Synonym for specific tax.
unit trust
An organisation which takes money from small investors and invests it in stocks and shares for them under a trust deed, the
investment being in the form of shares in the trust.
unlimited liability
Situation where a sole trader or each partner is responsible for all the firm’s debts with no limit to the amount each may have to
pay.
unlisted
unlisted securities = shares which are not listed on the Stock Exchange; unlisted securities market (USM) = market for buying and
selling shares which are not listed on the Stock Exchange.
unquoted shares
Shares which have no Stock Exchange quotation.
unsecured
unsecured creditor = creditor who is owed money, but has no security from the debtor for it; unsecured debt = debt which is not
guaranteed by assets; unsecured loan = loan made with no security.
unwritten agreement
An informal agreement which has been reached in speaking (such as in a telephone conversation) but which has not been written
down.
upturn
Movement towards higher sales or profits.
Uruguay round of trade negotiations
The eighth round of trade negotiations of the General Agreement on Tariffs and Trade opened in Uruguay in 1986. The aim was
to reduce trade restrictions and to encourage free trade on a multilateral basis. The negotiations sought to obtain agreements in
the following main subject areas: (a) the reduction in trade distorting agricultural subsidies, (b) the reduction of restrictions on
imports of tropical product, (c) the reduction of tariffs on industrial goods by 30 per cent, (d) the reduction of restrictions on
foreign investment, (e) the review of the rules governing the origin of imports, (f) a review of the rules governing the application
of anti-dumping measures, (g) the reduction of restraints on trade in services, (h) the international protection of intellectual
property rights such as patents and copyright, (i) the review of the multi-fibre arrangement. The USA proposed that agricultural
export subsidies should be reduced by 90 per cent and import levies and internal subsidies should be reduced by 75 per cent over
a period of ten years from 1991. The European Community could not accept this and offered a cut of 30 per cent in subsidies
over ten years from 1989, but with no cuts in export subsidies and retention of the right to impose import quotas on specific
commodities. Negotiations failed to reach a conclusion in time for the December 1990 deadline and were not concluded until late
in 1993.Their conclusion was in time for the World Trade Organisation to commence its work on the agreed date of 1st
January,1994.
USM
see
unlisted securities market
usury
The charging of an interest rate above a legal maximum on borrowed money.
utilitarianism
The philosophy by which the purpose of government was the maximisation of the sum of utility, defined in terms of pleasure and
pain, in the community as a whole. It was not hedonistic in so far as pleasure could include, for instance, the satisfaction of
helping others. The purpose of government was to ensure the ‘greatest happiness of the greatest number’. It implied that utility
could be measured and interpersonal comparisons made. Its chief advocate was Jeremy Bentham.
utility-possibility frontier
see
production possibility frontier.
utility, total
The total satisfaction derived from the consumption of commodities. To be contrasted with marginal utility, which is the
additional utility arising from the consumption of an additional unit of the commodity.
Vv
valuation
An estimate of how much something is worth; stock valuation = estimating the value of stock at the end of an accounting period.
value
The price which an item would fetch in an open market. Distinction should be made between value in present use and value in
alternative use. For instance, a factory building may be worth £500 to a person wishing to use it as a factory, but £50,000 to a
person wishing to redevelop the land. Value is also determined by various other factors, ranging from sentiment to long-term
speculation, so it is in fact a rather imprecise term.
value added
The difference between the value of goods produced and the cost of materials and supplies used in producing them. Value added
consists of the wages, interest and profit components added to the output by a firm or industry.
value added tax (VAT)
This tax, was already being applied in European countries, when it was introduced to the UK In 1973.Its effect was not dissimilar
to the purchase tax which it replaced. The underlying principle of VAT is that the tax is levied at each stage of the production of
goods or services and on the value added at each stage; e.g. tax is paid by manufacturers on the cost of making an item, by
wholesalers on the price they charge the retailer and by retailers on the price they charge the consumer. Each party in this process
must account to the Customs and Excise for the tax on their output but may deduct from this figure the amount of tax already paid
by the party supplying them.
value judgement
A proposition which cannot be reduced to an arguable statement of fact but which effectively asserts that something is good or
that something ought to happen.
value, theories of
Explanation of what determines the value of different commodities. The different approaches have tended to distinguish two
notions of value: that determined by the utility it gives a consumer and reflected in the demand for it, or the cost of producing the
commodity reflected by the supply of it. The classical economists held that in the long term, price and hence the exchange value
of an item is determined by its costs of production, but that it is the fact that a demand exists for it that determines whether an
item has any value at all. Ricardo developed a labour theory of value, asserting that value derives from the effort of production,
again, based on supply. The novelty of his approach was in showing that all costs of production reduce to labour costs, either
paid directly or stored in the form of capital. However, there is a need to reward those who store labour, and thus defer
consumption, and this undermined his theory. Later economists like Marshall subverted theories of value to theories of price,
determined by demand and supply; with each determined by marginal utility or marginal cost. Since then, theories of price and
value have not been separated except by followers of Marx.
variable
A magnitude of interest that can be defined and measured. Important variables in economics include prices, quantities, interest
rates, exchange rates, etc.
variable costs
An accounting term for costs that vary proportionately to the level of output.
variance
A measure of the dispersion of a series of numbers around their mean.
velocity of money
Money, in serving its function as a medium of exchange, moves from buyer to seller to new buyer and so on. Its velocity refers to
the speed of this movement. The income velocity of money is defined as nominal GNP divided by the average total money
supply for the period in question.
venture
A business or commercial deal which involves a risk; joint venture = very large business project where two or more companies
join together, sometimes forming a joint company to manage the project; venture capital = capital for investment which may
easily be lost in risky projects, but can also provide high returns.
vertical integration
Joining together two businesses which deal with different stages in the production or sale of the same product.
vertical restraints
Restrictions or conditions imposed on the seller or buyer of an item. Common restraints are resale price maintenance and tie-in
sales. They are usually either structured to extend a natural monopoly in one market to a more competitive market, or they are
designed to affect the retail conditions in which a product is sold. Competition authorities have been concerned to limit the
application of these restrictions, although more recently it has been argued that in most cases vertical restraints are as much
against the producer’s interest as the public interest.
viable
Able to work in practice; not commercially viable = not likely to make a profit
visible
Which can be seen; visible imports or exports = tangible goods (not services) which are imported or exported; visible balance =
the balance of payments in visible trade (imports and exports of merchandise rather than services).
voluntary
Done without being forced; voluntary liquidation = situation where a company itself decides it must close and sell its assets;
voluntary redundancy = situation where a worker asks to be made redundant.
voluntary export restraints
An agreement to restrict the number of exports in a particular sector that one country makes to another. VERs are beyond the
terms of the General Agreement on Tariffs and Trade and grew in the 1980s as tariffs generally fell.
voting shares
Equity shares entitling holders to vote in the election of directors of a company. Normally all ordinary shares are voting shares,
but sometimes a company may create a class of non-voting ordinary shares if the holders of the equity wish to raise more equity
capital but exclude the possibility of losing control of the business. Preference shares are rarely, and debenture shares never,
voting shares.
voucher
A piece of paper which is given instead of money, and which may be exchanged for some good or service.
Ww
wage
Money paid (usually in cash each week) to a worker for work done; basic wage = normal pay without any extra payments;
minimum wage = lowest hourly wage which a company can legally pay its workers; wage differentials = differences in salary
between workers in similar types of jobs; wage freeze = period when wages are not allowed to increase; wage-price spiral =
situation where price rises encourage higher wage demands which in turn make prices rise.
wage drift
The difference between wage rates set by national agreements and the total earnings received by workers, which includes
overtime pay, special bonuses and commissions. If wage negotiations take place between union leaders and management bodies
at a national level, whatever the outcome of those negotiations in certain areas of the country, the wage agreed may not be high
enough to attract all the workers demanded. In this case, local employers will attempt to entice workers with side payments that
do not directly infringe national agreements. Such payments are difficult to monitor and control, and thus undermine attempts to
run a prices and incomes policy. If wage drift could lead to cuts in pay as well as increases, it would be a more economically
efficient means of introducing pay flexibility. As it happens, though, wage drift has the consequence of making a nationally
agreed pay rate the bare minimum anyone receives, with ‘top ups’ the norm.
wage-fund theory
The idea that Adam Smith took over from the Physiocrats, that wages are advanced to workers in anticipation of the sale of their
output. Wages could not be increased unless the capital destined to pay them was increased. Capital, in turn, was determined by
savings. The classical school developed its ideas around these ideas. In the short run, there was a given number of workers and a
given amount of savings to pay their wages. The two together determined the average wage. In the long run, the supply of labour
was related to the minimum of subsistence needed to sustain the labour force. If the wage rate rose above this, the population
increased; if it fell below, it contracted. In the long run, the level of demand for labour was determined by the size of the wage
fund and this, in turn, by the level of savings. Hence the demand for commodities is not the demand for labour. If you increased
consumption you reduced savings and therefore the wage fund. Productivity did not influence real wages; what mattered was the
level of profits, for savings depended on profits. The argument assumed that savings flowed into fixed capital and variable
(wage) capital in equal proportions so that what Marx called the organic composition of capital remained constant. Ricardo
worried about this point in his analysis of the effect of machinery on employment.
wages council
An independent body appointed by the Secretary of State for Employment consisting of representatives from employees and
employers in a particular industry. The purpose of the council was to negotiate and fix wages and conditions of employment in
the industry that it represents. Wages councils were only found within industries which did not have their own collective
bargaining arrangements through trade unions. They became progressively less common, and were abolished in the UK in 1993.
waiver
Where one person waives his rights in a contract, this is known as a waiver. Though an alteration of an existing contract, it is in
effect a new agreement and requires consideration.
Wall Street
A street in New York where the Stock Exchange is situated; the American financial centre.
warehouse
Large building where goods are stored.
warrants
Securities giving the holder a right to subscribe to a share or a bond at a given price and from a certain date. Warrants, which are
commonly issued ‘free’ alongside the shares of new investment trusts when launched, and carry no income or other rights to
equity, immediately trade separately on the stock exchange, but at a price lower than the associated share or bond. This provides
the investor in warrants with an element of gearing since, if the associated share or bond price ultimately rises above the
subscription price it will have a value corresponding to the difference between the subscription price at which the warrant rights
may be exercised and the market price of the share or bond. Similar to an option.
Washington Agreement
An agreement concluded with the USA in December 1945, under which $25,000 million of Lend-Lease aid to the Commonwealth
was written of and the UK was granted a long-term loan of $3,750 million. The sterling value of this drawing in 1945 was £931
million. By the end of 1975, with two sterling de-valuations in the meantime and the floating of the exchange rate, the amount
outstanding had risen to £1,264 million.
wasting assets
Assets with strictly limited, though not necessarily determinate, lives, such as a mine, timber lands or a property on lease.
Wasting assets have many of the characteristics of current assets, but are normally included under fixed assets.
watering, stock
The issue of the nominal capital of a company in return for less than its money value, thus overstating the capital of the company
and reducing its apparent return on capital.
Ways and Means Advances
Advances to the consolidated fund made by the Bank of England.
wealth
The net value of tangible and financial items owned by a nation or person. It equals all assets less all liabilities.
wear and tear
Acceptable damage caused by normal use.
weighted average
An average which is calculated taking several factors into account, giving some more value than others; weighted index = index
where some important items are given more value than less important ones.
welfare economics
The normative analysis of economic systems, i.e. the study of what is wrong or right about the economyÕs functioning.
what, how and for whom
The three fundamental problems of economic organisation. What is the problem of how much of each possible good and service
will be produced with the society’s limited stock of resources or inputs. How is the choice of the particular technique by which
each good is produced. For whom refers to the distribution of goods between members of the society.
white goods
Machines such as refrigerators and washing machines which are used in the kitchen.
wholesale
Buying goods from manufacturers and selling in in large quantities to traders who then sell in smaller quantities to the general
public; wholesale price index = index showing the rises and falls of prices of manufactured goods as they leave the factory.
wholesale banking
The making of loans or acceptance of deposits on a large scale between banks and other financial institutions, especially in the
inter-bank market. As distinct from retail banking, a term for the business of the commercial banks carried out with customers of
their branches.
wholly-owned subsidiary
A company which is completely owned by another company.
windfall
A sudden winning of money or sudden profit which is not expected; windfall profit = sudden profit which is not expected;
windfall tax = tax on sudden or excessive profits.
window dressing
The rearrangement of a company’s financial affairs at year end to make the balance sheet look different from usual; specifically, a
practice of the British clearing banks prior to 1946, in which, in their half-yearly balance sheets, their cash ratio was shown to be
substantially higher than it was at other times of the year.
wind up
To liquidate and close a company and sell its assets; compulsory winding up = a liquidation which is ordered by a court.
withdraw
To take out money from an account.
withholding tax
A tax which removes money from interest or dividends before they are paid to the investor (usually applied to non-resident
investors), or any amount deducted from a person’s income which is an advance payment of tax owed (such as PAYE)
with profits
(insurance policy) which guarantees the policyholder a share in the profits of the fund in which the premiums are invested.
worker
A person who is employed; blue-collar worker = manual worker in a factory; casual worker = worker who can be hired for a short
period; manual worker = worker who works with his hands; white-collar worker = office worker.
work in progress
A term usually found attached to stocks in a balance sheet, i.e. ‘stocks and work in progress’ It represents the value of work
commenced but not completed. In a manufacturing business this will be partly finished goods, whilst in a contracting business it
will be in the form of uncompleted contracts. Difficulties arise in valuation, one problem being whether to include part of the
anticipated profit and how to deal with cash paid in advance. The traditional method is to take profit into account in the same
proportion as the amount paid is to the work certified. This applies to contractors’ accounts and profit is normally reduced by any
anticipated losses. The valuation is important: often a large proportion of total assets is represented by stocks and work in
progress.
working capital
An accounting term usually defined as the difference between current assets and current liabilities. It is also sometimes referred
to as circulating capital as such assets and liabilities are continually circulated or turned over in the normal course of business. It
is distinguished from fixed capital, which comprises fixed assets.
work-sharing
A system where two part-timers hare one job.
World Bank
The central bank, controlled by the United Nations, whose funds come from the member states of the UN and which lends money
to member states. Its official title is the International Bank for Reconstruction and Development.
World Trade Organisation (WTO)
The organisation which replaced the General Agreement on Tariffs and Trade (GATT) in 1994. The GATT came into operation
in January 1948 as a result of an agreement made at an international conference the previous year, which also included plans for
an international trade organisation. Nothing came of the latter, but GATT proved a useful body for international tariff bargaining.
Its Articles of Agreement pledge its member countries to the expansion of multilateral trade with the minimum of barriers to
trade, reduction in import tariffs and quotas and the abolition of preferential trade agreements. There have been successive
negotiations between the nations. In 1955, the provisions regarding the treatment of subsidies designed to reduce imports or
increase exports were strengthened. Members are required to give details of any subsidies, and if they are liable to prejudice the
interests of any other member, they are required to discuss the possibility of reduction or elimination. On export subsidies, in
particular, member governments should ‘seek to avoid the use of subsidies on the export of primary products. For other products,
subsidies should cease as soon as practicable if they result in export prices lower than the home prices of the product. In 1965 a
revision came into force of the section of the agreement dealing with trade and development, laying emphasis on the special
problems of the developing nations. This enables the most-favoured nation principle to be waived in relation to agreements
entered into with developing countries. There has been a growing tendency for countries to become more protectionist through
the imposition of non-tariff barriers and for economic blocs to make preferential trade agreements with other countries. Examples
include the European Union. A ministerial meeting of GATT was held in 1982 to reaffirm its free-trade principles. Studies were
initiated to examine farm export subsidies, financial support for domestic industries, a formula by which a country may impose
import restrictions to protect its domestic industry, textiles, tropical products and trade in services. Agreement was eventually
reached at a meeting in Uruguay in 1986 on an agenda for a new round of negotiations. This considered aspects such as
agricultural export subsidies, restrictions on trade in services and restrictions on direct foreign investment.
write off
To cancel a debt or to remove an asset from a companys accounts as having no value.
written down value
An accounting term for the cost or valuation of an asset, less the written-off depreciation. It is no indication of the present selling
price of that asset.
Xx Yy Zz
x-efficiency
The effectiveness of a firm’s management in minimising the cost of producing a given output or maximising the output produced
by a given set of inputs. There is often a discrepancy between the efficient behaviour of firms as implied by economic theory and
their observed behaviour in practice. This is frequently a result of a lack of competitive pressures.
Yardstick competition
The process of comparing the performance of one local monopoly with other similar monopolies. It is one of the policy options
open to the regulators monitoring the behaviour of once publically owned industries (post privatisation).
year
Any period of twelve months; calendar year = the year from January 1st to December 31st; financial year = the twelve month
period for a firm’s accounts (it does not need to be the same as a calendar year); fiscal year = twelve month period on which taxes
are calculated (in the UK it is from April 6th to April 5th of the following year); year end = the end of the financial year, when a
company’s accounts are prepared.
yen
Currency used in Japan.
yield
same as
interest rate or rate of return on an asset.
yield curve
A graphical representation of the relationship between the annual return on an asset and the number of years the asset has before
expiring. Longer-term assets usually offer some premium over short-term ones and yield curves thus slope upwards. This effect
is more pronounced if short-term interest rates are expected to rise.
yield gap
The difference between the yield on ordinary shares and the yield on gilt-edged securities. If the latter exceeds the former, it is
called the reverse yield gap.
zero
Nought, the number 0; zero-rated = an item which has a VAT rate of 0%.
zero-sum game
A game in which one players gain is equal to other players’ losses, whatever strategy is chosen. The players can only compete for
slices of a fixed cake; there are no opportunities of overall gain through collusion. The sum of gains will always equal the sum of
losses, the whole summing to zero.