Biographies

Welcome to Definitions

Find definitions of various economic & finance terms from A to Z.

A

Ability-to-pay principle: The Ability-to-pay principle is a tax theory suggesting that taxes should be imposed based on an individual’s financial capacity, meaning those with higher income should pay more taxes.
Expanded Definition
The “Ability-to-pay Principle” refers to a progressive tax policy concept, highlighting that taxes should be imposed based on an individual’s financial capacity. It posits that individuals with higher income or wealth should bear a larger proportion of the tax burden, as they have a greater ability to pay. This principle is rooted in the concept of tax fairness and is often employed to foster economic equity across diverse income levels.
Absolute advantage: Absolute advantage is the capacity of a producer to generate a higher output than another producer from identical resources.
Expanded Definition
‘Absolute advantage’ is an economic concept that refers to a producer’s capability to manufacture a greater quantity of a product or service compared to another producer, given the same quantity of inputs. In essence, it illuminates the efficiency and productivity of different producers. If one can generate more output with the same level of resources, they are said to have an ‘absolute advantage’. This comparison can apply to individuals, businesses, or nations, and it encourages them to specialize in producing goods or services where they have an absolute advantage to maximize efficiency.
Absolute good: “Absolute good” is an uncompromisable value or principle often seen in realms of ethics and morality; it transcends individual preferences and cannot be exchanged for other benefits.
Expanded Definition
‘Absolute Good’ is defined as a conceptual value that holds unwavering importance, unequivocally superseding all other high-value interests or considerations. This non-negotiable stature, often attributed to various moral or ethical principles, is firmly maintained by proponents who perceive these principles as innately virtuous, therefore insusceptible to compromise or exchange.
Active management: Active management is an investment strategy that involves constant portfolio adjustments and selective asset choices, aiming to exceed market returns.
Expanded Definition
Active management is a strategic approach in the field of investment management. It involves the deliberate selection and regular trading of a specific set of assets, with the primary aim of surpassing the performance of other investors or benchmark indexes. In contrast to passive management, where investments typically mirror a market index and are less frequently traded, active management is an intentional and ongoing process. This approach necessitates proficiency and ample market knowledge from the fund manager, given the continuous analysis, judgment, and adjustment required to potentially achieve better returns than the broader market.
Activist investing: Activist investing refers to the process where investors acquire significant equity in a company to influence its strategy or management, aiming to enhance profitability and stock value.
Expanded Definition
‘Activist investing’ can be defined as a strategic process undertaken by fund managers, where they acquire significant equity or shares in a business. This acquisition isn’t merely for passive profits, but serves as a tool enabling them to actively influence the company’s operations. The goal of this investment approach is to push for significant changes within the company — these could be alterations in management, shifts in business strategy, an overhaul of corporate policies, or various types of financial restructuring. Fund managers who employ this methodology believe that these changes can potentially lead to enhanced corporate profitability, and thereby, an appreciation in the company’s stock price. In summary, activist investing is a strategic, hands-on approach to investment that focuses on effecting change within a company to increase its market value and generate higher returns.
Actual output (real GDP): Actual output (real GDP) refers to the total monetary value of all goods and services produced by an economy, adjusted for inflation. It is a concrete quantification of an economy’s productivity.
Expanded Definition
‘Actual Output’, also known as ‘Real Gross Domestic Product (GDP)’, is a macroeconomic term that refers to the total economic output of a nation, adjusted for inflation, at a specific period of time. It represents the total value of all finalized goods and services produced within a country’s borders during a given year. Unlike nominal GDP, real GDP considers price changes and inflation to give an accurate reflection of an economy’s true production capabilities. Consequently, it serves as a more precise tool for tracking economic growth, productivity, and living standards over time.
Adjustable-rate mortgage (ARM): An Adjustable-rate Mortgage (ARM) is a type of mortgage where the interest rate can fluctuate over time, based on a referenced index.
Expanded Definition
An Adjustable-Rate Mortgage (ARM) is a type of home loan agreement wherein the interest rate applied can be modified at predetermined intervals. This alteration in the interest rate is directly influenced by fluctuations in a relevant financial index, often representative of current economic conditions. Essentially, this means that the cost of borrowing can either increase or decrease over the life of the loan, depending on broader market interest rates. This variation differs from Fixed-Rate Mortgages, which maintain a consistent interest rate for the entirety of the loan’s duration. ARM’s offer flexibility and may be advantageous for borrowers anticipating a future drop in interest rates or those intending to sell or refinance their home before the rate adjustment period begins.
Adjusted gross income: Adjusted Gross Income (AGI) is the total income earned less allowable deductions, such as contributions to retirement plans and alimony payments. It serves as the base for calculating an individual’s tax liability.
Expanded Definition
“Adjusted Gross Income,” often abbreviated as AGI, refers to an individual’s total gross income, which includes all forms of earned revenue such as wages, salaries, dividends, and interests, minus certain specific deductions or adjustments. These adjustments may include contributions to retirement plans, student loan interest, certain educational expenses, alimony paid and others as defined by tax law. The AGI is crucial as it forms the basis for the calculation of an individual’s tax liability and is used to determine eligibility for numerous tax credits and deductions. Therefore, it is a pivotal benchmark in the U.S. tax system.
Administered rate: An administered rate is a directly set interest rate, not influenced by market dynamics of supply and demand.
Expanded Definition
An ‘Administered rate’ is a term in finance that refers to an interest rate determined and established directly by a governing body, such as a central bank, instead of being dictated by the dynamic marketplace where the forces of supply and demand usually hold sway. This type of rate is an intervention tool that institutions use to regulate economic metrics, and it can impact aspects like borrowing costs, loan interest rates, and market liquidity. It is not subject to fluctuating market conditions. Rather, it is strategically established, often with the aim of achieving specific economic goals.
Adverse selection: Adverse selection refers to the bias where individuals more prone to risk, and thus more likely to claim insurance, are often the ones who seek insurance coverage.
Expanded Definition
‘Adverse selection’ is a term primarily used in the insurance industry, referring to a socioeconomic phenomenon where individuals who are more likely to incur specific risks are also more inclined to purchase insurance coverage for those risks. In essence, it represents a disproportionate tendency where those most likely to create claims are the ones actively seeking and being covered by insurance policies. This situation leads to an imbalance in the risk pool, potentially creating financial strain on insurance companies due to higher than normal claims. Adverse selection is a classic example of ‘information asymmetry,’ where one party has more or better information than the other, often resulting in market inefficiencies.
Advertising: Advertising is a method of delivering persuasive messages by businesses to entice consumers to purchase their products or services.
Expanded Definition
Advertising is the strategic deployment of targeted communication by businesses to influence and motivate consumers to make purchasing decisions. This form of communication can take various forms, including digital and print advertisements, broadcast commercials, billboard ads, or direct mailers. It involves studying consumer behavior and trends to curate messages that resonate with specific consumer groups. While the primary goal is to build a customer base and drive sales of products or services, advertising also serves to enhance brand identity and increase market presence.
Agency costs: Agency costs refer to the fees incurred when delegating tasks to an external entity, such as managing investments or running a business, highlighting the principal-agent relationship issues.
Expanded Definition
‘Agency costs’ refer to the financial expenses incurred when delegating responsibilities or tasks to an external or third-party entity. Such costs typically arise from utilizing the services of professionals, e.g., investment fund managers entrusted with managing an individual’s financial portfolio or the professional executives appointed to oversee a corporation’s operations on behalf of the shareholders. This concept is often associated with the principal-agent problem, a situation where there might be a conflict of interest between the party delegating the task (the principal) and the party performing the task (the agent), due to differing objectives, information asymmetry, or other factors.
Agency debt: Agency debt refers to the borrowing obligations issued by government-backed institutions such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Expanded Definition
‘Agency debt’ refers to the direct financial obligations that are issued by government-sponsored entities, namely Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These loan institutions are endorsed by the U.S. government and their purpose is to enhance the accessibility and affordability of home loans for the American citizens. The debt issued by these entities is typically in the form of bonds or securities, and the funds raised are used to provide financing for residential mortgages. The term ‘agency debt’ underscores the government affiliation of these entities, though it does not explicitly imply a government guarantee.
Aggregate demand: Aggregate demand is the total expenditure on goods and services in an economy, which can decrease without changes in income or wealth due to increased savings.
Expanded Definition
‘Aggregate Demand’ is a macroeconomic term that represents the total demand or expenditure throughout an economy on all goods and services within a specific time frame. This economic metric substantiates the total spending by individuals, businesses, government, and foreign entities. While changes to individuals’ income and wealth influence aggregate demand, other factors can also cause fluctuation. For example, if the propensity to save becomes dominant rather than the propensity to spend, even without a change in income or wealth, the aggregate demand may drop. This comprehensive measure, thereby, helps in analyzing the overall economic activity and guiding policies related to economic growth and stability.
Aggregate demand curve: The aggregate demand curve is a graph showing the total quantity of a nation’s goods and services demanded at various price levels, reflecting the GDP.
Expanded Definition
The ‘Aggregate Demand Curve’ is a visual representation that illustrates the total quantity of all goods and services desired for purchase by consumers, businesses, and the government at various price levels within an economy. Positioned on a graph, it demonstrates the relationship between the overall price level and the total output, or Gross Domestic Product (GDP), that potential buyers would willingly spend money on. Essentially, it helps measure the entire demand for an economy’s output. The curve helps economists and policy makers understand preferences of buyers in different pricing scenarios, making it a key analytical tool in economics.
Aggregate supply curve: The aggregate supply curve is a visual representation of the total goods and services produced by a business at various price levels. It depicts a direct relationship between the nation’s overall price level and its GDP.
Expanded Definition
The ‘Aggregate Supply Curve’ is a graphical illustration utilized in economics to represent the total quantity of goods and services, otherwise known as real output (gross domestic product [GDP]), that firms within an economy are willing and able to produce at varying price levels. This curve portrays the relationship between the overall price level and the quantity of output firms are motivated to supply, highlighting the concept that as prices increase, suppliers tend to produce more, assuming all other factors remain unchanged.
Agriculture: Agriculture is the practice of growing crops and rearing animals primarily for food production.
Expanded Definition
‘Agriculture’ is defined as a critical practice and sector focusing on the cultivation of plants and the rearing of animals, with the primary goal being to provide a consistent food supply. This includes activities such as seeding, planting, watering, fertilizing, harvesting crops, as well as the breeding, feeding, and caring of animals. Throughout history, this economic activity, which spans thousands of years, has served as the foundational cornerstone of human sustenance and growth. Present-day agriculture has evolved to incorporate advanced technologies to address global food demand and improve productivity, while also considering environmental sustainability.
Algorithm: An algorithm is a prescribed set of detailed instructions or rules designed to perform calculations or solve problems, primarily used in computing.
Expanded Definition
An ‘Algorithm’ is a systematic and structured sequence of instructions or procedures designed to solve a specific problem or execute a particular task. Often utilized in the realm of computer science and information technology, these documented steps serve as a guide for a computer to perform operations effectively. Algorithms are coded into programming languages and work behind the scenes enabling software and applications to function correctly, delivering accurate results and optimized solutions. Understanding them requires logical and analytical thinking, but their purpose is to simplify complex problems and streamline computational processes.
Allocation: ‘Allocation’ refers to the strategy or method of distributing goods, services, or resources in various sectors.
Expanded Definition
“Allocation” refers to the systematic process of effectively and strategically distributing resources, goods, or services. It involves strategically planning and distributing these elements to ensure optimal usage and economic efficiency. This concept is prevalent in fields like economics, business, and finance, helping determine how to appropriately provide scarce resources to various sectors, individuals, or functions based on certain criteria like need or productivity.
Alpha: Alpha is the value that a fund manager adds to a fund’s return, reflecting the manager’s expertise and strategy. It’s a critical, yet challenging metric to quantify.
Expanded Definition
‘Alpha’ refers to the measurable, excess return on an investment attributable to the active management strategies employed by a fund manager. Essentially, it is used to gauge the manager’s efficiency shown beyond the expected returns based on the risk-level and market performance accounted for by the ‘Beta’. Evaluating ‘Alpha’ can be quite challenging due to market uncertainties and the need to isolate the manager’s contribution from varying economic conditions. However, a positive ‘Alpha’ suggests the manager has added value to the fund through strategic investment decisions, while a negative ‘Alpha’ would indicate underperformance.
Alt-A (Alternative A) mortgage: An Alt-A mortgage is a type of loan offered to borrowers with good credit ratings, but featuring non-traditional elements such as minimal documentation requirements, lower down payments, or extended to non-residential owners.
Expanded Definition
An Alt-A (Alternative A) mortgage refers to a particular type of home loan extended to borrowers who usually possess a commendable credit history, but the loan diverges from conventional norms in certain respects. Unlike the standard mortgage, an Alt-A mortgage often includes non-traditional elements such as reduced documentation requirements during the application process. This means that less proof of income or assets is required for approval. Additionally, it may consist of low down payment options which represent a smaller initial upfront payment by borrowers. In other cases, it could be used by non-owner occupiers, individuals who secure the loan but do not intend to live in the property, such as investors. Despite their strong credit profiles, these borrowers opt for Alt-A mortgages due to their flexible terms and less stringent criteria compared to traditional loans.
Alternatives: Alternatives refer to the various options available for selection in a specific context. It means having more than one potential choice or path to consider.
Expanded Definition
“Alternatives” refer to the array of distinct choices or options that are available in a specific scenario. These can involve strategies, routes, solutions, methods, or approaches among other possibilities, typically set as part of a decision-making process. Alternatives essentially facilitate the comparison, evaluation, and selection of a preferred course of action from among various possibilities, each offering potential outcomes depending on the context and factors involved.
Ample reserves: ‘Ample reserves’ refer to a large volume of extra funds that banks hold, sufficient to ensure that minor fluctuations don’t influence the federal funds rate.
Expanded Definition
‘Ample reserves’ is a term referring to a substantial volume of reserves held in the banking system. This is enough to absorb minor fluctuations in the level of reserves without altering the federal funds rate, a key interest rate that is determined by the conditions of the open market. Essentially, in a state of ample reserves, the banking system possesses significant enough reserves that modest changes, whether increases or decreases, in the level do not directly impact this specific market-determined rate. This implies a level of stability and flexibility in the banking system’s management of its reserve assets.
Ample reserves regime: The ‘Ample reserves regime’ is a strategy employed by the Federal Reserve where adequate bank reserves are maintained, so minor tweaks don’t influence the market-based federal funds rate.
Expanded Definition
The ‘Ample Reserves Regime’ is a term that pertains to the method used by the Federal Reserve (Fed), the United States’ central banking system, to enact monetary policy. Within this regime, there is a significantly large volume of reserves within the banking structure. The goal of this policy is to maintain ample reserve balances so that smaller alterations to the available reserve levels do not considerably impact the Federal Funds Rate, which is the interest rate determined by the market at which banks lend funds maintained at the Federal Reserve to one another on an overnight basis. Thus, under this regime, the banking system retains a high level of liquidity and banking operations become more independent of daily central bank management.
Anchoring effect: ‘Anchoring effect’ refers to the cognitive bias where initial information strongly influences decision-making processes.
Expanded Definition
The “Anchoring Effect” is a cognitive bias that refers to the propensity of an individual to overly depend on the initial information they are presented with, also known as the “anchor”, during the decision-making process. This initial piece of information is used as a reference point for all following evaluations and judgments. This effect may influence a person’s ability to make subsequent, objective decisions as their perception has already been shaped by the anchor. In various contexts, such as in negotiations, financial estimations, and forecasting, the anchoring effect can significantly impact outcomes by potentially biasing decisions towards the initial information received.
Animal spirits: ‘Animal spirits’ is a Keynesian concept reflecting the psychological and emotional factors driving consumer and business behavior, potentially influencing economic performance. It underlines the idea that economic fluctuations can stem from changing confidence or pessimism levels in the economy.
Expanded Definition
‘Animal spirits’ is an economic term coined by renowned British economist, John Maynard Keynes, who employed it as a metaphor to express the psychological factors driving the economic decisions of consumers and businessmen. Essentially, these ‘animal spirits’ denote the collective emotional mood or sentiment of economic agents, which can significantly impact the overall economic climate. For example, a negative sentiment, characterized by low confidence or pessimism, can exacerbate or prolong periods of recession, as individuals may curtail their spending or investment, thereby stifling economic recovery and growth. To understand this concept thoroughly, one can delve into Keynesian economics, which emphasizes the role of psychological factors, among various macroeconomic elements, in shaping economic dynamics. Reading additional specific literature on the topic would provide a comprehensive understanding of its intricacies and importance.
Annual percentage rate (APR): APR is the annualized rate reflecting the total cost of a loan, comprising both interest and upfront fees. It offers a standardized measure to compare borrowing costs across different lenders.
Expanded Definition
‘Annual Percentage Rate (APR)’ pertains to a comprehensive measure of the cost of borrowing, expressed as a percentage. It encapsulates not only the interest rate that the borrower will pay annually, but also any additional costs and fees associated with the loan or credit, such as origination fees or transaction charges. Thus, APR represents the total borrowing cost on yearly basis, allowing consumers to effectively compare different loan products and lenders. It is, essentially, the real rate of interest that one pays, providing a holistic perspective of the financial obligation involved in a loan or credit.
Annuity: An annuity is a periodic, fixed-sum payment over a specified timeframe, often used in financial planning for retirement.
Expanded Definition
An annuity is a financial product used primarily for income generation and investment, offered by insurance companies, banks, or financial institutions. It’s a long-term contract where the buyer contributes funds which will later be divided into periodic payouts. The key characteristic of an annuity is a series of steady payments made to the recipient. These payments are predetermined and typically consistent in amount. Payment intervals may be on a weekly, monthly, or annual basis, over a definitive time frame. This scheduled arrangement provides a reliable cash flow for individuals, such as retirees, seeking a steady source of income. Common types of annuities include immediate or deferred annuities, fixed or variable annuities, each having unique specifications fitting different financial needs.
Annuity equation: The annuity equation, FV = (A/i)[(1+i)n – 1], calculates the future value of a series of equal payments (A) after a number of periods (n), at a given interest rate (i).
Expanded Definition
The ‘Annuity Equation’ is a financial formula utilized to calculate the future value of a series of identical payments, better known as an annuity. Stated mathematically, it is expressed as ‘FV = (A/i)[(1+i)^n – 1]’. In this formula: 1. ‘FV’ stands for the Future Value. This is the total amount that will be accumulated in the future after a certain number of payments have been made. If the future value is unknown, it can be calculated using this equation. 2. ‘A’ represents the Annuity. An annuity is a sequence of equal payments made at regular intervals. This could range from monthly savings contributions, to yearly insurance premiums or loan repayments. 3. ‘i’ is the Interest Rate. This is the rate at which your money grows each period. In this formula, it’s crucial that the interest rate be expressed as a decimal. For example, if the interest rate is 3%, it should be written as 0.03. 4. ‘n’ signifies the Number of Periods. This is the count of total identical payments that will be made over the lifecycle of the annuity. In the case of a monthly payment over five years, ‘n’ would be 60 (12 months x 5 years). Overall, this equation allows you to determine how much an investment or savings will grow over time on the basis of repeated, consistent payments and a specified rate of interest.
Antitrust: Antitrust refers to laws enacted to prevent businesses from monopolizing markets, thereby safeguarding consumer interests and promoting competition.
Expanded Definition
‘Antitrust’ refers to a specific category of legislation and regulations that have been put into place to maintain and encourage fair competition within a market or industry. The primary purpose of these laws is to prohibit businesses from harnessing a monopoly position unfairly, which can potentially stifle competition, hinder innovation, and adversely affect consumers as well as competitors. This is achieved by preventing unscrupulous market practices such as price-fixing, collusion, predatory pricing, and other anti-competitive business tactics. By bolstering healthy competition, antitrust regulations safeguard consumer interests, ensuring they receive quality products and services at reasonable prices, while also promoting diversity, innovation, and fair opportunity within relevant industries.
Antitrust law: Antitrust law refers to regulations that prevent business activities limiting fair competition, including monopolistic practices and price rigging.
Expanded Definition
Antitrust law refers to a body of legal statutes established to regulate and prevent business practices that obstruct or limit competition in the market. This includes activities such as price-fixing, in which businesses collude to set prices at a certain level rather than allowing them to be determined naturally by market forces. Additionally, these laws are designed to discourage the formation of monopolies, where a single entity possesses an overwhelming dominance in a specific industry. This dominance increases the potential for a lack of competition, which can lead to inflated pricing and limited consumer choices. Antitrust laws are critical to maintaining fair competition, fostering innovation, and protecting consumer rights, all of which contribute to a healthy economy.
Appreciation: Appreciation refers to the growth in value of an asset or currency as compared to others. In terms of currency, appreciation represents a rise in one currency’s value against another.
Expanded Definition
‘Appreciation’ is a financial and economic term that denotes the rise in the worth or value of an asset or investment over time. This enhanced value can be the result of a variety of factors such as demand intensification, commodity scarcity, or advantageous changes in the economic or financial market environment. In the context of currency, ‘appreciation’ refers to a situation where the value of one form of currency surges in comparison to another currency. This could manifest due to fluctuations in market conditions, changes in interest rates, or shifts in general economic performance. In essence, a currency appreciates when it becomes more valuable concerning another currency, thereby granting larger purchasing power within the international market sphere.
Appropriation act: An Appropriation Act is a legislative mandate allowing federal sectors to borrow and expend funds from the Treasury, essentially dictating government operations funding for the forthcoming fiscal year.
Expanded Definition
An ‘Appropriation Act’ is a legal authorization that permits federally-operated programs or agencies to undertake financial activities, such as borrowing funds and executing payments, drawing from the US Treasury. This act is primarily deliberated by Congress on an annual basis. Its main purpose is to establish the allocated budgets for federal government operations and activities for the upcoming fiscal year, ensuring financial resources are distributed according to legislative priorities.
Appropriations: Appropriations are the official authorizations granted by Congress, allowing federal agencies to expend monies from the U.S. Treasury.
Expanded Definition
‘Appropriations’ refers to the legal authorization granted by the United States Congress to federal agencies, permitting them to utilize funds available in the U.S. Treasury. This process is a crucial part of fiscal governance, providing agencies with the necessary financial resources to run their operations. The concessions are usually allocated yearly and are used to cover various expenditures, such as agency activities, programs, and overall functioning.
Arbitrage: Arbitrage is the practice of capitalizing on price discrepancies for the same asset in different markets by performing simultaneous buying and selling actions for profit.
Expanded Definition
Arbitrage is the tactical financial strategy where an individual or institution capitalizes on price disparities across different markets or exchanges. This strategy involves the simultaneous purchase and sale of an asset, such as securities, currencies, or commodities, to generate profit from the difference in prices. The arbitrageur, the entity conducting arbitrage, purchases the asset at a lower price in one market and sells it almost instantly in another market where the price is higher. The profitability of this method relies on the efficiency of the markets and the speed of the transactions, as the price difference can close rapidly. Despite its inherent risk, arbitrage is considered an important strategy in financial markets as it contributes to market efficiency by mitigating price discrepancies across different markets.
Asset: An asset is a valuable resource owned by an individual, corporation, or nation, expected to offer future economic benefits.
Expanded Definition
An ‘Asset’ can be defined as a resource, tangible or intangible, that holds economic value. It is owned, controlled, or possessed by an entity – whether that’s an individual, a corporation, or a country – with a primary expectation. That expectation is that the given asset will generate economic benefit, often by contributing to income or potential future profits, possibly appreciating in value, or providing some form of invaluable utility or service. Assets factor critically into an entity’s overall value, financial health, and operational capacity.
Asset stripping: Asset stripping is the process of purchasing a company and promptly selling its individual parts for profit, often causing business upheaval and job losses.
Expanded Definition
‘Asset stripping’ is a financial strategy often utilized in corporate acquisitions. It involves purchasing a company, systematically disassembling its tangible and intangible assets, such as real estate, intellectual property, equipment, brands, etc., and then selling these assets separately, typically at a profit. This process often unfolds rapidly, leading to significant business disruption. As cost cuts are generally made during the disassembly, this strategy frequently results in significant job losses. However, it’s worth noting that asset stripping is not inherently negative, as it can also be used to revive unprofitable companies by focusing on their profitable components. Regardless, the implementation of an asset stripping strategy necessitates thorough, strategic planning and careful execution due to its potential repercussions on employees, stakeholders, and the overall industry.
Asset value: Asset value, also called book value, is a measure that defines a company’s worth by subtracting its debts from its total assets. It is a critical determinant for investors to assess the net worth of a company.
Expanded Definition
‘Asset Value’ refers to a crucial metric used by investors to determine the financial worth or value of a company. Essentially, it reflects the total value of a company’s assets. This typically includes tangible assets like property, plant, and equipment, as well as intangible assets like intellectual property or goodwill. In order to obtain a more accurate representation referred to as ‘Net Asset Value’, a company’s total liabilities or debts are subtracted from its total assets. This result provides a clearer picture of a company’s overall financial health and intrinsic value. Often synonymous with ‘Book Value’, this valuation method allows investors to assess whether a company is overvalued or undervalued, aiding in informed decision-making. Despite its utility, it’s worth noting that the Asset Value predominantly reflects the historical cost of assets and might not represent the current market value or the replacement costs of the assets.
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF): The AMLF was a Federal Reserve initiative that facilitated U.S. depository institutions and bank holding companies to buy high-quality asset-backed commercial paper from money market mutual funds. It operated until February 1, 2010.
Expanded Definition
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) was a financial-support mechanism formed by the Federal Reserve. Its role was to infuse liquidity into the U.S. financial system during times of stress. It worked by extending loans to U.S. based financial entities such as depository institutions and bank holding companies with specific conditions. These entities could use these loans to buy superior-rated asset-backed commercial paper (ABCP), a short-term investment, from money market mutual funds, thus providing funds to these money markets in a strained economic environment. However, the facility was rendered inactive, having closed its operation on February 1, 2010.
Asset-backed commercial paper (ABCP): Asset-backed commercial paper (ABCP) is short-term, fixed-maturity debt, usually 1 to 270 days, issued to fund the purchase of various assets like trade and debt receivables, leases, and collateralized debt obligations.
Expanded Definition
Asset-Backed Commercial Paper (ABCP) refers to a form of short-term debt that is most often scheduled to mature anywhere between 1 and 270 days. This type of debt instrument relies on its funding from the issuance proceeds, predominantly utilized to acquire a range of assets. These assets can include trade receivables, which are outstanding invoices a company has yet to receive payment for; consumer debt receivables, which pertains to debts owed by individual consumers; auto and equipment loan leases, which refers to credits availed for the purchase or rental of cars and machinery; and collateralized debt obligations, which encompass a pool of loans with varying risk levels repackaged into separate tranches for sale to investors. Like its broader class, the commercial paper, ABCP provides a way for borrowers to gain immediate cash to finance their short-term liabilities.
Asset-backed security (ABS): An asset-backed security (ABS) is a transferable financial instrument that is paid from the cash flow generated by specific financial assets. Such assets typically include mortgages or credit card debt.
Expanded Definition
An Asset-Backed Security (ABS) is a type of financial instrument typically traded in capital or money markets. It is designed to be transferable between parties involved in market transactions. The ABS is underpinned by an array of fixed income assets, like mortgages, auto loans, or credit card debts, that generate the cash flows used to fulfill the financial commitments of the security. The exact assets backing such securities and the cash flows they generate may vary depending on the specific type of ABS. Notable types of ABS include Commercial Mortgage-Backed Securities (CMBS) and Residential Mortgage-Backed Securities (RMBS), both of which derive their cash flows from the mortgage payments on commercial and residential properties, respectively.
Asymmetric information: ‘Asymmetric information’ refers to a context where one participant in a financial exchange has more data or insights than the other, creating an imbalance in the transaction.
Expanded Definition
‘Asymmetric information’ refers to a scenario within an economic exchange where the parties involved do not possess an equal understanding or knowledge about the transaction or object of the transaction. This imbalance can provide a significant advantage to the party having more comprehensive information, as they can make more informed decisions. Meanwhile, the party with less information may make less optimal choices due to their constraints in understanding. This principle can apply broadly to various market situations, including stock trading, insurance, and real estate, among others, and can potentially influence market outcomes and consumer behaviors.
Auction: An auction is a transaction method where goods are sold to the buyer willing to pay the top price.
Expanded Definition
An auction refers to a method of selling property, goods, or services, where items are presented for public bidding. It commences at a specified price, and potential buyers place incremental bids. The process carries on until no higher bids are put forth. The item is then sold to the highest bidder, marking the successful conclusion of the auction. This method of sale is often overseen by an auctioneer and can take place in various formats, including live in-person events, online platforms or even through phone bidding.
Austerity: Austerity refers to policies implemented to decrease public spending in a bid to reduce a government’s debt, often by cutting social expenditures, which can reduce demand in a weak economy. These measures are a point of contention between Keynesian economists, who critique their detrimental effect on demand, and free-market proponents who argue for a limited government role in the economy.
Expanded Definition
‘Austerity’ refers to fiscal policies implemented by governments to decrease their spending and reduce deficits. These policies are typically enacted to shrink the proportion of public spending relative to the overall size of the economy, as quantified by the Gross Domestic Product (GDP). This approach gained particular prominence in the 2010s in response to economic crises. There exists a significant debate within economics regarding the effectiveness and appropriateness of austerity measures, particularly amidst economic downturns. Keynesian economists, who advocate for government intervention to moderate economy’s boom and bust cycles, tend to critique austerity policies during such times. They argue that these measures reduce demand by lowering public spending, which may impede economic recovery. On the contrary, free-market economists, who largely favor minimal government intervention in the economy, tend to support austerity measures. They assert that without such measures, the role of the government in the economy could continuously expand, which might deter private sector growth and innovation. Thus, the term ‘Austerity’ encapsulates this contentious intersection of fiscal policy, economic theory, and practical outcomes.
Austrian school: The Austrian School is a libertarian economic framework led by figures such as Hayek and Mises, prioritizing individualism, minimal state intervention, and low taxation, standing in contrast to socialist ideologies.
Expanded Definition
The ‘Austrian School’ refers to a collection of free-market-oriented economists, with significant figures such as Friedrich Hayek and Ludwig von Mises. They place heavy emphasis and focus on individual autonomy, asserting that markets function most effectively when there’s minimal state intervention. Developed primarily as a counter-argument to economic theories underpinning communism and social democracy, advocates of this school of thought firmly believe in the necessity of maintaining low tax rates and consciously scaling back the role of the state in various aspects of economic life, arguing that a minimal state is crucial for preserving individual freedoms and economic dynamics. Their perspectives are rooted in the premise that market forces, rather than state planning, are the optimal drivers of economic prosperity.
Autarky: Autarky is an economic policy of self-sufficiency, often adopted by authoritarian regimes to minimize reliance on foreign countries. While enabling independence, it is generally considered inefficient by economists as it hinders a country’s ability to maximize its comparative advantage through trade specialization.
Expanded Definition
“Autarky” refers to a state of self-sufficiency and independence wherein a nation, territory, or system generates and sustains all of its requirements without any reliance on external resources or influence. This policy is notably adopted by some authoritarian regimes as a strategic move to decrease their dependency on foreign countries, thus establishing unilateral control over their resources and economy. However, most economists view autarky as an inefficient economic strategy. This assumption is grounded in the principle of “comparative advantage,” which posits that countries reap greater economic benefits when they specialize in producing goods and services they can make most efficiently, and engage in international trade for other needs. Autarky, in this view, inhibits a country’s full potential to specialize, optimize resource utilization, and realize the extensive benefits of global trade.
Authoritarian capitalism: Authoritarian capitalism refers to a political-economic system, commonly seen in China and Russia, where businesses operate in a controlled environment under an authoritarian regime, facing penalties for actions deemed as challenges to government authority.
Expanded Definition
‘Authoritarian capitalism’ is a term predominantly used in the context of countries like China and Russia, characterizing a socio-economic structure wherein businesses operate and generate profit within the framework of an authoritarian governmental system. While these businesses are granted freedom to pursue economic gains, their autonomy is notably restricted. Their actions and narratives are closely surveilled, with any attempt to openly challenge the government, or exhibit undue levels of independence, liable to legal prosecution or financial penalties. This economic model is marked by the intersection of free market capitalism and controlled political dynamics – business growth permitted, yet always subject to state influence and control.
Automated teller machine (ATM) card: An ATM card is a type of debit card that allows account access via cash machines through a personal identification number.
Expanded Definition
An Automated Teller Machine (ATM) card is a type of payment card that serves as a financial tool, primarily enabling the cardholder to withdraw cash and/or perform other banking transactions. This card, typically linked to the user’s bank account, provides access to funds anytime through ATMs by utilizing a secure, numeric Personal Identification Number (PIN). In addition to withdrawing cash, ATMs may facilitate a range of other transactions, such as balance inquiries, depositing checks, or transferring funds between accounts. Hence, an ATM card serves as a convenient, 24/7 banking solution for users.
Automatic stabilizers: Automatic stabilizers are pre-set policies that trigger automatically during economic downturns, needing no additional action or intervention.
Expanded Definition
‘Automatic stabilizers’ refer to economic policies or mechanisms that come into effect intrinsically, without the need for enacting new legislation or government intervention, during periods of economic downturn or recession. These stabilizers function as a counter-cyclical regulatory tool, designed to mitigate the negative impacts of economic fluctuations by increasing public spending during a downturn and reducing expenditure during an upswing. Examples include unemployment insurance, welfare programs, and progressive tax systems which help to maintain aggregate demand, stabilize income, and reduce the severity and duration of economic contractions.
Automatic transfer: ‘Automatic transfer’ is a scheduled, recurring digital transaction that deducts funds from a designated account, simplifying the payment process.
Expanded Definition
‘Automatic transfer’ is a term used within the context of online banking and financial services. It refers to a pre-authorized, recurring financial transaction set up to systematically move money from one account to another. This could be between different accounts within the same financial institution, or across separate institutions. The process transpires automatically on a set schedule, such as weekly, monthly, quarterly, etc., and does not require manual intervention each time. This convenience offers consistency in terms of payments, savings or investments and can help manage cash flows and budgeting effectively.
Automation: Automation is the technology-driven method of operating machinery, systems, or processes without direct human intervention, leveraging electronic or mechanical devices to replace manual labor.
Expanded Definition
‘Automation’ refers to the advanced technology-enabled process that allows machines, electronic devices, or software to carry out tasks that would otherwise need human involvement. This highly efficient system governs the operation of equipment, mechanisms, or workflows independently, reducing manual labor. It spans from simple actions, like scheduling emails, to complex operations in industries such as manufacturing, reducing human error and increasing productivity. As such, automation signifies a significant progression towards optimizing and simplifying daily processes or business operations.

B

Backwardation: Backwardation refers to the market condition where the spot price of a commodity surpasses its future delivery price, often indicating a supply shortage. It’s the opposite of contango where future prices are higher.
Expanded Definition
‘Backwardation’ is a financial term specifically applied within the commodities market. It refers to an unusual market condition in which the immediate delivery of a commodity (the “spot price”) is priced higher than its future delivery. This is contrary to the usual market scenario, termed as ‘contango,’ where the future price is more than the current spot price. Backwardation typically signifies a supply shortage, as it points towards a heightened demand from traders to acquire the product instantly, instead of waiting for future availability.
Balance of payments: The Balance of Payments is a comprehensive record of a country’s economic transactions with the rest of the world over a specific time period. It includes trade of goods, services, and investments between the country and all other nations.
Expanded Definition
The ‘Balance of Payments’ is a comprehensive financial statement that systematically records a country’s monetary transactions with other nations over a defined time period. These transactions encompass both public and private sectors and include trade of goods and services, international investments, and any financial transfers. Essentially, it provides a clear picture of a country’s economic interactions with the world, acting as a vital tool for economic policy formulation and analysis.
Balance of trade: The Balance of Trade, or “net exports”, is the monetary discrepancy between a nation’s exported and imported goods.
Expanded Definition
The ‘Balance of Trade’ is an economic term that represents the monetary differential between the total goods and services a nation exports and the total it imports. This figure is a crucial indicator of the country’s relative economic health and competitiveness in the global market. If a country exports more than it imports, it has a ‘trade surplus,’ which can be a sign of a strong, production-based economy. Conversely, if a country imports more than it exports, it has a ‘trade deficit,’ which could indicate an economy that heavily relies on foreign goods and services. This concept is also referred to as ‘net exports,’ as it net out the value of a nation’s imports from its exports. Therefore, the balance of trade provides insights into the market dynamics and trade policies of a nation.
Balance sheet: A balance sheet is a financial document that summarizes a company’s or individual’s total assets and liabilities at a specific point in time.
Expanded Definition
A ‘balance sheet’, in the domain of accounting and finance, refers to a comprehensive report that delineates a company or individual’s financial position at a specific point in time. This report provides a snapshot of what the entity owns, termed as ‘assets’, what it owes to others, classified as ‘liabilities’, and the difference between the two, known as ‘equity’ or ‘net assets’. The fundamental principle of a balance sheet is that assets are always equal to the sum of liabilities and equity. The balance sheet is one of the key components of a financial statement, offering valuable insights into an entity’s stability, liquidity, and long-term solvability.
Balance sheet policy: A balance sheet policy is a strategy in which a central bank manipulates financial market conditions through the buying or selling of securities, primarily to affect long-term interest rates or stabilize vital financial markets.
Expanded Definition
Balance sheet policy pertains to strategic maneuvers executed by a central bank, involving sizable purchases and/or sales of financial securities, with the principal aim of influencing the dynamics of the financial market. Through what are known as open market operations, the central bank can impact critical elements such as long-term interest rates and the stability of key financial markets. This policy is designed to direct monetary conditions and ensure the financial system’s efficient functioning. The balance sheet policy lies within the broader scope of a central bank’s toolkit to manage economic variables and achieve its macroeconomic objectives.
Balanced budget: A balanced budget is when the government’s spending matches its tax income.
Expanded Definition
A ‘Balanced Budget’ typically refers to a financial situation where the input and output of finances are in equilibrium. In governmental terms, it is particularly related to the scenario where the federal government’s total spending on various public programs and initiatives is exactly balanced by the total tax revenue it collects within the same timeframe, typically a fiscal year. This condition signifies a balanced fiscal policy and reflects governmental efficacy in managing finances, preventing deficits or surplus. It’s a key indicator of fiscal responsibility and economic stability, while also influencing public debt levels. However, balancing the budget doesn’t necessarily mean zero debt, as some debts may be carried over year-to-year.
Bank account register: A bank account register is a ledger for tracking all transactions, including debits and credits, from a specific bank account, ensuring precise record-keeping of the account balance and activity.
Expanded Definition
A ‘Bank Account Register’ is a financial management tool utilized by account holders. Initially, it records the starting balance of an account. Following that, it systematically tracks all outflows (debits) and inflows (credits) linked with the account. This consistent recording allows the user to maintain a precise, up-to-date record of all account transactions, thereby enabling them to ascertain the account’s exact current balance at any given time. It serves as a critical instrument for effective money management, error identification, and prevention of overdraft fees or fraudulent activities. Its simplicity and accessibility make it suitable for both personal and business finances.
Bank failure: Bank failure is when a bank collapses due to a lack of sufficient funds to fulfill withdrawal requests from depositors.
Expanded Definition
‘Bank failure’ is a financial term that denotes a situation in which a banking institution lacks the adequate liquid funds or assets to fulfill the withdrawal requests from its depositors. This critical condition can arise from various issues such as poor management, inadequate capital, weak regulatory oversight, or significant economic downturns. Essentially, bank failure signifies the inability of a banking establishment to function as a secure repository and intermediary for monetary transactions—one of the primary roles expected of banks in modern economies.
Bank holding company: A bank holding company is a corporation with a majority stake in one or more banks, supervised by the Federal Reserve regardless of the bank’s primary federal supervision.
Expanded Definition
A ‘Bank Holding Company’ is a corporate entity that maintains majority ownership or controlling stake in one or more banking institutions. This control over banks can be exerted through being the primary shareholder or by holding majority voting rights. Control may also refer to the ability to elect a majority of the board members. The U.S Federal Reserve exercises regulatory authority and supervision over these bank holding companies, notwithstanding the fact that the banks owned by these holdings may be primarily overseen by other federal agencies. This regulation includes assessing the company’s management, financial condition, systems for controlling or managing risk, and compliance with applicable laws and regulations.
Bank panic: A bank panic denotes a systemic failure where fear-driven withdrawals spread from one bank to all others, undermining public trust in banking institutions.
Expanded Definition
A ‘Bank Panic’ is a financial phenomenon described as a situation where fear-driven withdrawals start from a single banking institution and subsequently extend to multiple banks. This widespread financial anxiety can lead to a severe crisis of confidence among depositors, thereby potentially undermining the core stability of the banking sector. It can result in a massive, uncontrolled withdrawal of deposits, leading to potential insolvency of the affected institutions in severe cases. This is often precipitated by economic downturns, rumors or perceptions of an unstable financial infrastructure, creating a ripple effect of potential economic disruptions.
Bank rate: The ‘Bank rate’ is the Bank of England’s key interest rate that influences borrowing costs for businesses and consumers by dictating the interest it pays to commercial banks. Changes in this rate are a tool for controlling monetary policy.
Expanded Definition
The ‘Bank Rate’, often referred to in the United Kingdom, is the key interest rate established by the Bank of England. It is the rate at which the central bank lends money to domestic commercial banks. The Bank Rate is a significant monetary policy tool used by the Bank of England to influence overall interest rates in the economy. As such, changes to the Bank Rate affect the interest rates charged by commercial banks to businesses and individual consumers for loans. A lower Bank Rate might stimulate borrowing and spending to boost the economy, while a higher rate could help to control inflation by encouraging saving and reducing excessive borrowing. As such, this rate plays a crucial role in managing the economic activity and stability in the country.
Bank reserves: Bank reserves are the portion of deposits that banks retain rather than lending to customers.
Expanded Definition
‘Bank reserves’ are defined as the minimum quantity of cash that financial institutions, like commercial banks, are required by law to keep on hand to cover potential withdrawals by clients. These reserves serve as a form of protection against unexpected liquidity problems and can be held either as cash in the bank or as deposits with the central bank. Bank reserves aren’t typically loaned out because they act as a safety net for financial stability. Furthermore, their levels can influence the economy through control of the money supply and lending capacity of banks.
Bank run: A bank run is a sudden surge of withdrawals triggered by collective panic amongst depositors, leading to potential insolvency for the bank.
Expanded Definition
A ‘Bank Run’ is a financial term that refers to a situation in which a substantial number of depositors of a particular bank, driven by concerns about the bank’s solvency, simultaneously attempt to withdrawal more funds than the institution actually has available. This usually occurs when there is a perception that the bank might become insolvent, leading to panic among the depositors. If a bank run is not managed adequately, it could lead to the collapse of the bank in question, and can potentially cause widespread economic impacts. The prevention of bank runs is a primary reason for the creation of institutions like the Federal Deposit Insurance Corporation (FDIC) in the United States, which provide deposit insurance, thereby promoting depositor confidence.
Bank statement: A bank statement is a periodic report issued by banks to account holders, detailing all their transactions within a specific cycle, either mailed or digitally available.
Expanded Definition
A ‘Bank Statement’ is a succinct, periodically generated document provided by banking institutions, such as banks and credit unions, to their respective account holders. It presents a comprehensive record of all financial activities, including deposits, withdrawals, purchases, and any interests or charges, conducted during a specific time period known as the statement period. Not only is this indispensable document dispatched via postal mail on a regular, often monthly, basis, but it is also made readily available in a digital format through online banking platforms to ensure convenient access and ease of use for customers.
Bank suspensions: Bank suspensions refer to the temporary halt of banking services due to financial instability or crises within the institution.
Expanded Definition
‘Bank suspensions’ refer to the situation where banking institutions temporarily halt their operations and cease offering services to the public due to the presence of financial constraints or challenges. These financial troubles may arise from inadequate liquidity, insolvency, or financial mismanagement, creating potential risks for current account holders. The suspension serves as a measure to prevent further financial loss, allowing the bank to restructure its financial position and operations. This term is significant in the broadcasting of economic health and financial stability within the banking sector.
Bankruptcy: Bankruptcy is a legal declaration of insolvency, typically involving court-regulated asset liquidation to repay creditors.
Expanded Definition
‘Bankruptcy’ refers to a legally regulated procedure where an individual or an entity publicly admits an inability to fulfill financial obligations to respective creditors. Implemented under court supervision, this process involves an assessment and potential liquidation of the insolvent party’s assets. The proceeds from such liquidation are then utilized to partially offset the outstanding debt. This process aims to balance the debtor’s financial recovery with the fair treatment of debts owed to creditors, providing a structured mechanism for managing serious financial distress.
Bankruptcy trustee: A bankruptcy trustee is an appointed independent entity who oversees a bankruptcy case, amassing assets and disbursing payments to creditors.
Expanded Definition
A bankruptcy trustee refers to an impartial individual, often chosen by a federal agency, who is responsible for managing the process of a bankruptcy case. Their primary task involves identifying all assets owned by the debtor, liquidating qualifying assets, and distributing the proceeds equitably among the creditors. They serve as an intermediary between the debtor and the creditors, ensuring regulatory compliance, and facilitating transparent and fair resolution of debts during bankruptcy proceedings. Their role is critical in preserving the integrity of the bankruptcy system.
Banks: Banks are financial institutions that safeguard deposits and facilitate loans.
Expanded Definition
Banks can be accurately defined as regulated financial institutions that perform a multitude of crucial services for both individuals and businesses. Primarily, banks offer secure platforms for depositing funds, with offerings ranging from simple checking or savings accounts to more complex investment and retirement accounts. Simultaneously, banks also provide a broad variety of loans for diverse needs – including mortgage loans for purchasing real estate, personal loans for various individual needs, and business loans for enterprises, among others. In addition to these primary roles, banks often engage in other financial services like wealth management, financial advisory, and transactional services. Thus, banks function as keystone entities in the economy, driving monetary flow and contributing to financial stability and growth.
Barriers to entry: Barriers to entry are hindrances, such as high start-up costs or control of unique resources, that prevent or make it challenging for new firms to penetrate a market.
Expanded Definition
Barriers to Entry refers to the challenges or hindrances that a new company or business entity faces when attempting to compete in an existing market. These barriers may be categorized as economic, legal, or strategic obstacles that restrict the seamless entry of newcomers into a specific market sector. Economic barriers may involve significant start-up costs or investment, which may discourage potential entrants. These costs can be associated with developing a new product, purchasing necessary equipment, marketing the product, or hiring skilled personnel. Legal barriers can include regulatory requirements such as licensing and permits, patents and copyrights, or other legal restrictions that protect existing companies from new competitors. Strategic barriers may involve control of essential resources or distribution channels, established brand recognition of existing entities, or other competitive strategies that make it tough for new entrants to gain market share. In essence, Barriers to Entry entail any impediment that hinders the smooth transition of a new player into a market, thereby maintaining a competitive advantage for established businesses.
Barter: Barter is a direct exchange of goods or services without monetary transactions.
Expanded Definition
‘Barter’ is defined as the direct exchange of goods or services between two parties without any monetary transaction involved. It is a primitive form of trading where individuals swap items they possess but don’t require for those they need but don’t own. The key characteristic of a barter system is its simplicity – it does not involve financial systems or complex calculations, instead functioning based on the mutual agreement of value between the exchanging parties. It’s noteworthy that this system operates most effectively in small and insulated economies rather than large-scale, modern marketplaces.
Basis point: A basis point is a unit of measure used in finance, equal to 0.01% or one-hundredth of a percent, often applied to changes in interest rates. For instance, a rate increase of 0.25% equates to a 25 basis point change.
Expanded Definition
A “basis point” is a financial metric used primarily for quantifying alterations in interest rates and other financial percentages. It represents 1/100th of one percent, or 0.01%. This unit of measure is frequently implemented in finance, as it accurately documents minor changes in values that are usually discussed in terms of percentages. For instance, when there’s an interest rate increase or decrease by 0.25%, it is often expressed as a change by 25 basis points. This terminology provides clearer, more exact communication within the financial world.
Baumol’s cost disease: Baumol’s cost disease is an economic theory that asserts wages in less productive sectors rise in response to wage increases in more productive sectors, due to competition for labor, regardless of the actual productivity within each sector. Essentially, it explains why sectors like the arts see wage increases despite no significant increase in their productivity over time.
Expanded Definition
‘Baumol’s cost disease’ is a defined economic principle that highlights an intriguing anomaly in the correlation between worker productivity and wage rates within various sectors of the economy. This concept, developed by economist William Baumol, emphasizes the fact that increased productivity does not always dictate higher wage growth. The principle turns to the world of music to illustrate this point; despite musicians’ productivity remaining static over centuries (as it takes the same time to play a string quartet now as it did in Mozart’s era), their pay has increased over time. The theory explains that this wage growth is not a result of increased productivity but rather competition for labor in the job market. Workers in less productive sectors, like music, can potentially find employment in more productive sectors. Hence, to maintain a competent workforce, the wages in less productive sectors must keep pace with growing wages in more productive ones, like manufacturing. In essence, Baumol’s cost disease is the observation that wage increases in high-productivity sectors inadvertently cause wage increases in lower-productivity sectors.
Bear: A bear is an investor who anticipates a decline in asset prices.
Expanded Definition
A ‘bear’ is a term used in finance that refers to an investor who, based on their analysis and market predictions, anticipates a decline in the price or value of an investment asset or the market as a whole. Their investing strategies are influenced by this expectation, often involving moves to sell or short-sell assets in an attempt to profit from anticipated downturns. The term is derived from the behavior of a bear, swiping downwards with its claws, symbolically representing falling prices.
Behavioral economics: Behavioural economics is a field in economics that argues that people’s financial choices are significantly influenced by irrational biases rather than solely by rational assessment of potential returns. This perspective is exemplified by the endowment effect, where individuals place higher value on items they own compared to their market price.
Expanded Definition
Behavioural economics is a specialized subfield within the discipline of economics that studies how psychological, emotional, cognitive, and social factors influence the decision-making processes of individuals and institutions involved in economic transactions. Rather than adhering strictly to the traditional economic theory that assumes individuals always act rationally to maximize utility, behavioural economics acknowledges that humans may be swayed by biases and irrational behaviour. For instance, the ‘endowment effect’ is a concept from behavioural economics where individuals place a higher value on items they own in comparison to what they would be willing to pay for the same item in a non-ownership situation. This diverges from the concept of market equilibrium, illustrating that our subjective value for goods can be affected by our psychological attachments. Further understanding of this complex interplay between economics and psychology can be explored in detail in various research articles on the subject.
Benefits: ‘Benefits’ refer to the valuable outcomes or advantages gained from a specific action or decision. They are the positive impacts that justify and reward certain activities.
Expanded Definition
‘Benefits’ can be proficiently defined as advantageous outcomes or profitable returns that a decision maker accrives from a selected course of action or involvement in a specific activity. They are construed as positive influences that enhance value for the individual or entity making the decision, contributing to its objectives in a meaningful, tangible or intangible way. These benefits may encompass a wide range of forms, such as economic gains, improvements in productivity, advances in personal growth or wellbeing, among others. Leveraging benefits is an integral facet of strategic decision-making, potentially fostering more favorable results.
Beta: Beta is a financial measure that indicates the volatility of a stock or asset in comparison to the overall market, with high beta depicting greater volatility and low beta showing less.
Expanded Definition
‘Beta’ is a statistical measure in finance that represents the sensitivity or correlation of a particular asset, such as a stock, to the fluctuations of the broader market. This concept is employed in the capital asset pricing model (CAPM), which is used to calculate the expected return of an asset. A high beta value, exceeding 1, illustrates that the asset’s price has historically moved with greater volatility compared to the market. Thus, when the market climbs, a high beta stock tends to increase beyond the market’s gains, and conversely, it may drop more dramatically when the market is declining. Conversely, a low beta value, less than 1, indicates that the asset’s price movements are less volatile than those of the market. These assets show steadier gains and fewer losses relative to market movements. Therefore, beta offers insights into the risk profile of an asset, aiding investors in managing their portfolio’s risk-return balance.
Big Mac index: The Big Mac Index is an informal measure of currency valuation based on purchasing-power parity theory, introduced by The Economist in 1986. It uses the price of a McDonald’s Big Mac sandwich in different countries to indicate whether a currency is over- or undervalued.
Expanded Definition
The “Big Mac Index” is an informal economic tool, brought to light by The Economist in 1986, used to gauge the parity or discrepancy in purchasing power across various currencies. Conceptually grounded in the theory of purchasing-power parity (PPP), the index suggests that over time, exchange rates should adjust to render the cost of goods uniform across different currencies. The metric is named after McDonald’s Big Mac, a product that is globally standardized and hence can serve as a consistent benchmark for comparative pricing analysis. Updated interpretations of this “burgernomics” indicator are regularly provided to accommodate shifts in the global economic landscape. Further specifics pertaining to this index can be found in the related resources.
Bill of exchange: A bill of exchange is a written agreement, used as a financing tool in international trade, where the buyer commits to pay the seller a specified sum on a certain date. In contemporary finance, it’s used broadly to reference short-term debts like Treasury and commercial bills.
Expanded Definition
A ‘Bill of Exchange’ is a financial instrument, historically instrumental in international trade financing. It facilitated transactions as the buyer would provide the seller a signed bill, equivalent to the purchased goods’ value. The seller could then convert this bill into cash through a banking institution. In today’s financial landscape, the term ‘bill of exchange’ is generally used to categorize any short-term debt instruments, including but not limited to Treasury and commercial bills. The essence of these instruments revolves around providing immediate liquidity to the holder while ensuring feasible short-term debt management for the issuer.
Binary map: A binary map is a graphical representation that categorizes areas into two distinct groups or classes.
Expanded Definition
A ‘Binary Map’ is a type of data visualization that categorizes geographical areas or regions into two distinct classes or categories. This map utilizes contrasting binary data, often visualized through two distinct colors or shading, to represent and differentiate between two types of information or classifications. The method is frequently used in various fields such as geography, geology, demographics, or statistics to clearly display comparative data on a geographical scale. The intention is to provide viewers with an immediate and clear understanding of the spatial distribution of the two categories under analysis.
Blockchain: Blockchain is a decentralized database used to securely record and verify the ownership of digital assets, notably cryptocurrencies.
Expanded Definition
Blockchain is a dynamic, distributed ledger system, designed to chronologically and transparently record digital transactions, with its most common application found in the field of cryptocurrencies. Uniquely resistant to data modification, it operates through a decentralized network where each participant, or node, holds a copy of the entire blockchain. This ensures a heightened level of transparency and security. Each transaction or ‘block’ added to the ‘chain’ undergoes rigorous and complex mathematical validation, making blockchain technology a breakthrough in accountability and trust in the digital sphere.
Board of Governors: The Board of Governors is a central agency of the Federal Reserve System directing its policy actions.
Expanded Definition
The ‘Board of Governors’ can be defined as an authoritative agency within the federal government structure of the United States, which holds a vital role in the Federal Reserve System – the central banking system of the country. This panel of governors provides strategic direction, formulates and implements policies, and oversees the operational activities of the Federal Reserve System to ensure that it functions in line with its objectives. Their guidance is critical in steering the monetary policies and the overall financial stability of the nation.
Bond: A bond is a debt security issued by entities like governments or corporations, serving as an IOU, where the issuer owes the holders a debt and is obligated to pay them interest and/or return the principal at a later date.
Expanded Definition
A ‘bond’ is a form of investment instrument that signifies a legal commitment. It is commonly issued by governmental entities or corporations as a method of raising capital. The issuer, i.e., the government or corporation, extends a certificate to the investor, symbolically acknowledging the debt incurred. This certificate, or bond, stipulates the terms of repayment, including the principal amount loaned, the duration of the commitment (commonly known as the ‘maturity’ period), and the predetermined interest rate. Throughout this period, the issuer is obligated to make periodic interest payments to the investor. Upon reaching the maturity date, the issuer must also repay the initial principal loaned. These elements combine to enable the investor to achieve a regular and reliable return on their investment.
Bond yield: Bond yield is the average income gained from a bond factoring in its purchase price, periodic coupon payments, and time to maturity. It reflects the effective interest rate earned by the bondholder.
Expanded Definition
‘Bond yield’ refers to the effective return that an investor anticipates from holding a bond until maturity. It is a nuanced measure of return that depends on several factors, including the initial purchase price of the bond, its scheduled interest (or coupon) payments, any changes in its market value over time, and the time remaining until the bond’s maturity date. Bond yield is critical because it provides the investor with a comprehensive view of the potential income and overall profitability associated with the bond investment. It might vary over the duration of the bond’s lifespan due to changes in market conditions, thus it’s an important metric for investors to track.
Book value: Book value is the total value of a company’s assets that shareholders would theoretically receive if a company were liquidated, after deducting liabilities. It’s essentially the net asset value of a company as recorded on its financial statements.
Expanded Definition
“Book value” is a financial term that refers to the net asset value of a company, specifically calculated as total assets minus intangible assets (like patents, copyrights, goodwill) and liabilities. Often used in the context of company analysis or asset valuation, the book value gives investors and analysts a quantifiable measure of the inherent or true value of a corporation. It represents the total amount that would be left over if the company decided to liquidate its assets and pay off all its outstanding liabilities. This concept stems from financial accounting, and is crucial for appraisal of a company’s worth.
Boom: A ‘Boom’ is a period of significant economic growth marked by a consistent rise in key factors including production, investment, and employment.
Expanded Definition
A ‘boom’ is an economic term often used to describe a consistently sustained period wherein key economic markers experience significant growth. These parameters commonly include aspects such as output (also known as GDP, which is the total economic production of goods and services), investment (in terms of both public and private sectors increasing their investment activities), and employment (signifying an enhanced rate of job creation and decreased unemployment). Essentially, a ‘boom’ signals a flourishing economy, often marked by increased consumer spending, business expansion, and overall prosperity. It’s an element of the broader economic cycle and contrasts with periods of economic downturn, such as recessions or depressions.
Borrower: A borrower is an entity, either a person or a business, who takes money from a lender intending to repay it later.
Expanded Definition
A ‘borrower’ is defined as either an individual or a corporate entity that secures funds or assets from a credible lender, such as a bank or financial institution, with a legally binding agreement to repay the sum, typically with interest, in a predefined timeframe. The process often involves clear terms, the stipulation of interest rates, and the provision of collateral for assurance, driving economic growth and personal or corporate development.
Borrowing: Borrowing refers to obtaining funds under an agreement of future repayment.
Expanded Definition
‘Borrowing’ refers to the financial act in which an individual or entity obtains or secures capital, usually in the form of monetary funds, from another individual, entity, or financial institution with a legally binding agreement or promise to return the full amount within an agreed-upon timeframe. This financial transaction often comes with additional terms, such as the payment of interest on the borrowed funds, which serves as the cost of borrowing. The terms and conditions of repayment are typically encapsulated in a formal legal document known as a loan agreement.
Bounded rationality: Bounded rationality is the concept that individuals’ rational behavior is limited by the information they possess or can process, potentially producing decisions that may appear irrational.
Expanded Definition
“Bounded rationality” is a concept in decision theory, assuming that individuals strive to make rational decisions based on the information available to them. However, these decisions are ‘bounded’ or limited by factors such as finite cognitive processing capacity, time constraints, and lack of complete information. As a result, individuals often employ heuristics or rules of thumb to simplify decision-making. While this approach is generally effective, it may sometimes lead to choices that appear irrational when analyzed under traditional economic theories that assume individuals always make perfectly rational decisions. Therefore, bounded rationality serves as a foundational concept in the field of behavioral economics, which seeks to integrate psychological insights into understanding economic decision-making.
Boycott: A boycott is a tactic of dissent where individuals withhold their patronage from a business, ceasing to purchase its products or services, to express discontent.
Expanded Definition
A ‘Boycott’ is a strategic, non-violent tactic employed by consumers or groups to express discontent or disagreement with a business, entity, or policy. It involves the deliberate abstention from purchasing or using the products or services offered by the targeted business. This is done with the objective to exert economic pressure, raise awareness about a specific issue, and potentially induce a change in behavior, policy, or practice of the implicated organization.
Breakeven inflation rate: The breakeven inflation rate is the differential between the yields of regular and inflation-protected U.S. government bonds, serving as a market-based prediction of future inflation.
Expanded Definition
The ‘Breakeven Inflation Rate’ is defined as a key economic indicator which anticipates the prevailing inflation rate by assessing the difference in yield between two types of U.S government-issued bonds. It broadly reflects the market’s expectation of future inflation. The calculations involve comparing interest rates of a conventional Treasury bond, which does not adjust with inflation, and a Treasury Inflation-Protected Security (TIPS), whose principal is adjusted by inflationary changes. The difference in yield, or interest, between these two bonds is perceived as the market’s overall anticipation of inflation. Hence, it’s referred to as the ‘Breakeven Inflation Rate’.
Bretton Woods: ‘Bretton Woods’ refers to the 1944 conference that established the post-war economic framework, including the creation of the International Monetary Fund and World Bank, and a fixed currency exchange system pegged to the gold-backed U.S. dollar.
Expanded Definition
‘Bretton Woods’ refers to a critical conference held in 1944 at a location in New Hampshire, USA. This meeting aimed to establish a new, stable framework for the global economic system following the devastation of World War II. The conference culminated in two significant outcomes. Firstly, it spearheaded the foundation of the International Monetary Fund (IMF) and the World Bank, both key institutions in managing international financial relations and promoting global economic stability and growth. Secondly, the Bretton Woods conference agreed upon a fixed exchange rate system, in which all currencies were pegged to the U.S. dollar at a stable rate, which itself was convertible to gold at a rate of $35 per ounce. This system was designed to prevent erratic currency fluctuations and to stimulate international trade and economic stability.
Bubble: A ‘Bubble’ refers to the situation when an asset’s price significantly exceeds its intrinsic value, often due to speculative trading. Not all economists agree on their existence, and their identification in real-time can be challenging.
Expanded Definition
A ‘Bubble’ in economic terms refers to a phenomenon where the price of an asset significantly exceeds its intrinsic value. The term derives its inspiration from the physical characteristics of a bubble – which grows rapidly and can pop without warning. The principle of a economic ‘bubble’ is that it represents a steep surge in asset prices that is not supported by the fundamental financial indicators of that asset, such as the future expected cashflows. This discrepancy between price and inherent value can occur for a range of assets, including stocks, real estate, or even entire industries. A historical demonstration of an economic bubble is the South Sea Bubble of the early 18th century where speculation led to inflated share prices that eventually crashed. However, the existence of bubbles is a topic of contention among economists, particularly those who advocate the efficient market hypothesis (EMH). Adherents of EMH argue markets are rational and prices always reflect the underlying asset’s true value. The challenge, though, is that identifying a bubble in real-time is often complex and fraught with uncertainty, since perceptions of intrinsic value vary widely among investors. Bubbles are usually easier to identify retrospectively, once a sharp drop in prices has occurred. For a comprehensive understanding on the difficulty of detecting bubbles, you may refer to this article.
Budget: A budget is a financial plan detailing estimated earnings and expenses for a certain time frame, guiding income management, expenditure, and savings.
Expanded Definition
A ‘Budget’ is a comprehensive, systematically organized financial document, delineating the estimated revenues and projected expenses for a stipulated time frame, typically for a fiscal year. Essentially, it serves as an operative financial guide that strategizes and governs the process of income management, detailing the modus operandi for expenditure conduct, and providing an outline for savings alternatives. This financial tool aids in prudent resource allocation, promotes financial discipline, helps track spending habits, and strives toward effective financial management, aligned with the organization or individual’s fiscal objectives.
Budget (elementary): A budget is a detailed financial roadmap that itemizes anticipated income and expenses, facilitating efficient allocation and tracking of funds.
Expanded Definition
A budget, in its most elementary sense, is a detailed financial blueprint that outlines an individual’s or an organization’s anticipated income and expenses over a specific period of time. It is a strategic tool that aids in managing finances by prioritizing spending and saving, promoting understandable financial habits and ensuring effective allocation of resources to safeguard against potential financial hardships. This organized plan provides a proactive approach to managing money, enabling one to monitor, regulate, and enhance their financial health.
Budget deficit: A budget deficit occurs when a government spends more than it earns, creating a shortfall that must be financed through borrowing.
Expanded Definition
A ‘Budget Deficit’ is an economic term that refers to the situation in which a government’s total expenditure surpasses its total revenue within a specific time period, typically a fiscal year. This situation arises when the government spends more on public services, infrastructure, and welfare programs, among other items, than it collects in forms of taxes, fees, or other sources of income. This deficit may necessitate borrowing and could lead to the growth of public debt. It’s a significant factor in fiscal policy and the process of macroeconomic management.
Budget functions: Budget functions are categories in federal budget allocation which represent various national priorities such as defense or health. Each function is further divided into subfunctions for more detailed allocation.
Expanded Definition
“Budget functions” refer to the systematic classification of spending used in federal budgeting that is aimed at addressing specific national needs such as national defense, health, or education. This framework allows for the streamlined organization and transparent allocation of fiscal resources. Each primary function may be split further into subfunctions to provide an even more comprehensive and detailed breakdown of the budget’s allocation to different sectors or subsectors, enhancing the precision, accountability, and efficiency of the budgeting process.
Budget surplus: A budget surplus occurs when a government’s revenue exceeds its expenditures within a fiscal year.
Expanded Definition
A ‘budget surplus’ refers to a financial situation where a government’s total income, primarily generated from taxes and fees, surpasses its total spending or expenditures within a specified timeframe, typically within a fiscal year. It depicts a positive balance after all obligations and expenses have been met, indicating sound financial management and economic health. This surplus can then be utilized for savings, reducing debt, or be reinvested back into the economy for further growth and development.
Bull: A bull is an investor who anticipates or predicts a rise in market prices.
Expanded Definition
A ‘Bull’ is a term used in business and finance to refer to an investor who anticipates or predicts that the value or price of a financial asset, or the market as a whole, will experience an upward trend. This expectation of an increase can be based on thorough analysis, economic indicators, or market sentiments. Such an investor adopts a strategy known as ‘bullish strategy’, which often involves buying early on in anticipation of future price increase, aimed at making a profit from this rise. This term embodies the aggressive financial optimism and confidence depicted by a charging bull. It is key to the dynamics of market sentiment in the global financial arena.
Bureau of Labor Statistics (BLS): The Bureau of Labor Statistics (BLS) is a U.S. Department of Labor division that collects and analyzes job market and economic data.
Expanded Definition
The Bureau of Labor Statistics (BLS) is a sophisticated research institution within the United States Department of Labor. Its central role is to accumulate, analyze, and disseminate essential economic data, which is primarily related to the labor market conditions in the U.S. The scope of its work encompasses various aspects, including data on employment and unemployment rates, workers’ earnings, job forecasts, productivity measures, and consumer spending, among others. The statistical findings from the BLS operate as invaluable resources for economic stakeholders, policymakers, researchers, businesses, and the public, aiding informed decisions, policy-making, and economic forecasting. The BLS’s commitment to producing impartial and high-quality data is central to enhancing understanding of the economy and promoting economic health and stability.
Business (elementary): A business is an entity engaged in the production and provision of goods or services for consumer purchase in the market.
Expanded Definition
‘Business’ in its basic terms refers to an entity or organization that is engaged in commercial, professional, industrial or financial activities. The primary objective of a business is to create goods or services that have a value in the market. These products or services are then sold to customers, generating revenue for the business. The existence of a business is marked by trading, which is an exchange of goods or services for money or its equivalents between the business and its customers. This definition is rudimentary and does not consider other complexities and aspects involved in the functioning of a business such as strategy, marketing, operations, finance, and management among others. However, it establishes the foundational understanding of the concept of a business.
Business cluster: A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field, fostering an environment of competition and cooperation that benefits businesses, employees, and the region.
Expanded Definition
A ‘Business Cluster’ is a geographical concentration of interconnected businesses, suppliers, and associated institutions in a particular field or industry. Examples include technology firms in Silicon Valley. The emergence of a business cluster provides several benefits. It enhances the ability of companies to attract highly-skilled professionals, offering a diverse range of employment opportunities for the workforce. Furthermore, the proximity of businesses within the same industry fosters rapid exchange of ideas and innovations. It also cultivates an environment conducive for start-ups by offering them easier access to industry-specific resources and financial backing. Altogether, a business cluster promotes economic growth by enhancing productivity, stimulating innovation, and creating new business opportunities.
Business cycle: A business cycle is the pattern of ups and downs in an economy, typically measured from one recession’s onset to the next. It reflects the periodic but irregular rises and declines in economic activity.
Expanded Definition
The business cycle, also known as the economic cycle, refers to the rise and fall in production output of an economy over time. It’s a fundamental concept studied in economics, offering a valuable framework to understand the state of an economy. The business cycle encompasses alternating periods of growth (expansions) and decline (recessions) in economic activity. Each cycle begins with an economic upturn, culminates in a peak followed by a downturn and ends at a trough, before the next cycle begins. The duration of such cycles can vary but is typically measured from the start of one recession until the onset of the next. Understanding these cycles can help stakeholders, such as businesses and policy makers, to make informed decisions and strategies by predicting future conditions.
Bust: A ‘bust’ is a rapid economic decline or downturn, commonly referred to as a recession.
Expanded Definition
The term ‘Bust’ is utilized in the field of economics to describe an unexpected or dramatic reduction in economic activity, oftentimes leading to lowered business revenues, higher unemployment rates, and depreciating asset values. Another popular term for this phenomenon is a ‘recession’. Busts usually occur following periods of economic growth or boom, and they can be triggered by a variety of factors such as fiscal and economic policy changes, financial crises, or shifts in consumer confidence and spending habits. Despite the negative impact on the economy, busts are viewed as a natural part of the business cycle, providing a corrective mechanism to periods of unsustainable growth or excesses.

C

Capacity: Capacity refers to the financial capability of a debtor to meet their debt obligations.
Expanded Definition
‘Capacity’ in a financial context refers to the financial strength or capability of an individual or organization to meet their debt obligations. It evaluates their resources, income, and stability to ensure a timely reimbursement of loans or debts. The assessment of a borrower’s capacity plays a crucial role in the lending decisions, as it indicates the borrower’s creditworthiness and reliability.
Capital: Capital refers to the financial resources invested in a business or project, savings accumulated over time, or the equity held by a bank. It also represents the monetary input from individuals or institutions in the global financial markets.
Expanded Definition
‘Capital’ is an integral term in the field of economics, embodying multiple relevant concepts. Primarily, it refers to the financial resources invested by an entrepreneur into launching or expanding a business endeavor, a fundamental aspect of the capitalism economic model. Moreover, capital encompasses accumulated wealth or savings, available for investment or expenditure. On a broader scope, capital also symbolizes the aggregate of investors and financial institutions that infuse money into global financial markets, shaping economic dynamics. Additionally, in the banking context, ‘equity capital’ constitutes the value of a bank’s assets minus its liabilities, representing the ownership interest of shareholders. Therefore, ‘Capital’ is an encompassing term signifying various facets of monetary resources in the economic realm.
Capital (financial): Capital in financial terms refers to the funds invested in a bank, including equity and certain debts, which act as a safety net to cover loan losses or other issues, thereby ensuring depositor protection. It is classified into Tier 1 capital (long-term funds) which can absorb losses during bank operation, and Tier 2 capital (short-term with possible debt obligations) providing lesser protection.
Expanded Definition
‘Financial Capital’ refers to the all-encompassing funds that are readily invested into a financial institution with the purpose of safeguarding the institution and its depositors from potential financial losses, typically stemming from loan defaults or various other unforeseen liabilities. This capital is predominantly comprised of equity, but may also include certain classifications of debt. Financial regulators have delineated ‘Financial Capital’ into the following two categories for the explicit purpose of supervision and risk management: 1. ‘Tier 1 Capital’, which encompasses the highest quality funding units that are essentially capable of cushioning the bank against financial losses, while simultaneously enabling the bank to maintain its operational activities without any disruptions. This category mainly includes common stock and retained earnings. 2. ‘Tier 2 Capital’, which often takes on the form of debt instruments with a designated finite lifespan, can regularly carry interest obligations or possess other debt-like attributes. This tier is designed to assist the bank’s ongoing financial stability, though its capacity to secure depositors is generally lesser in comparison to Tier 1 Capital.
Capital account: The ‘Capital Account’ is a section of a country’s balance of payments that tracks the net change in national ownership of assets, including inflows and outflows.
Expanded Definition
The ‘Capital Account’ is a term in financial and economic language, which essentially refers to a section within a nation’s Balance of Payments. The Balance of Payments is a comprehensive record of all economic transactions between residents of the nation and the rest of the world. The Capital Account, specifically, traces the flow of funds pertaining to investment or capital assets between the country and other nations. This includes various interactions such as investments made by foreign organizations into domestic assets, investments made by the country into international assets, and transfer of funds related to debt forgiveness. Its primary function is to monitor and document the change in control of different types of capital assets and investments moving in and out of the country.
Capital asset pricing model: The Capital Asset Pricing Model (CAPM) is a financial theory that determines an investment’s expected return based on its systemic risk (beta). It suggests that investors need higher returns for taking on riskier assets as compared to risk-free assets, such as government bonds.
Expanded Definition
The Capital Asset Pricing Model (CAPM) is a sophisticated financial theory that quantifies the relationship between the expected return of a specific investment and its inherent risk. This theory is premised on the concept of a ‘risk-free asset’ typically exemplified by government bonds, considered the most secure form of investment. The model posits that investors undertaking riskier investments such as equities should anticipate a higher return as compensation for the potential increase in loss. The risk level is determined by a metric known as ‘beta,’ which measures the asset’s volatility in comparison to the overall market. Consequently, the CAPM provides a useful tool in evaluating potential investments by balancing their expected profit against their prospective risk.
Capital controls: Capital controls are policies implemented to limit the flow of foreign and domestic capital in and out of a national economy, often used to prevent currency depreciation in fixed exchange rate regimes.
Expanded Definition
‘Capital controls’ refer to the regulatory measures implemented by governments or central banks to restrict the flow of financial assets and capital in and out of a country. These restrictions, which may encompass tools like taxes, tariffs, legislation, or volume restrictions, serve to manage and stabilize economies by averting significant outbound capital movements, usually seen during economic turmoil or instability, that could lead to the devaluation of a nation’s currency. These controls can take on increased importance for countries operating under a fixed exchange rate system where fluctuations in the currency’s value can have immediate and significant implications. The implementation of capital controls was a pivotal part of the Bretton Woods system, an agreement in the mid-20th Century that played an influential role in shaping the global economic landscape, by ensuring financial stability among the participating countries. For a more thorough understanding of this term, our detailed explainer is available for additional information.
Capital flight: Capital flight is the large-scale exodus of financial assets and capital from a nation due to events such as escalated taxes or fears of currency devaluation, typically towards foreign markets. It can prompt governments to enforce capital controls to mitigate the loss.
Expanded Definition
‘Capital flight’ is a term used in economics to describe a large-scale exodus of financial assets and capital from a nation, typically due to adverse political, economic, or fiscal factors. This phenomenon often occurs when investors have concerns over high taxes, the potential devaluation of a nation’s currency, or instability in the country’s political or economic landscape. To safeguard their assets, these investors transfer their capital to foreign markets that present more attractive investment opportunities or greater stability. While governments can attempt to restrict this mass outflow of capital by implementing measures known as capital controls, timing is critical. These controls must be applied before investors anticipate them and expedite capital flight, thereby potentially exacerbating the negative economic impact.
Capital gains: Capital gains refer to the increased value derived from the sale of investment assets, such as stocks or real estate, compared to the purchase price. It’s essentially the financial gain achieved from an investment transaction.
Expanded Definition
‘Capital Gains’ is a term used in the financial sector to describe the positive difference or profit derived from the sale of an investment or a financial asset such as stocks, bonds, or real estate property. It is calculated by subtracting the original purchase cost of the asset from the selling price. This financial concept is crucial as such gains are often subject to taxation under various jurisdictions. However, the rates may vary based on the type and length of the investment held. A clear understanding of capital gains is crucial for effective financial and investment planning.
Capital gains tax: Capital gains tax is a levy imposed on the profit made from selling assets at a higher price than their acquisition cost. It’s a controversial tax, potentially deterring risk-taking yet also preventing income reclassification for tax evasion.
Expanded Definition
‘Capital Gains Tax’ can be more comprehensively defined as a type of tax imposed on the financial gain, or profit, an investor realizes when they sell an asset (like real estate, stocks, or bonds) for a price higher than their original acquisition cost. Some economic theorists suggest this kind of tax may inhibit risk-taking and entrepreneurial ventures since investors may be less motivated to engage in transactions where the profits are significantly reduced due to taxation. Conversely, if there were no tax on capital gains, and regular income continued to be taxed, it could present a potential loophole. Under these circumstances, skilled financial consultants might devise strategies to reposition regular income as capital gains to minimize tax liability. This issue stresses the importance of balancing tax policy to encourage both investment and fairness in taxation.
Capital goods: Capital goods are tangible assets, such as machinery or buildings, used in the production of goods or services, contributing to a company’s productive capacity.
Expanded Definition
Capital goods, also often referred to as capital resources, are tangible assets that an organization utilizes to produce goods or services which are in turn used in the company’s production process to create consumer goods. These are generally durable items like buildings, machinery, and equipment that are integral to manufacturing or service delivery, imbuing businesses with the capacity for long-term operation and profitability. The purchase of capital goods is typically seen as an investment in the business with the aim of contributing to future profits. Such goods are crucial for the growth of an economy as they increase the volume and efficiency of produced output.
Capital investment: Capital investment refers to the acquisition of physical assets, such as machinery or property, utilized in generating products or services.
Expanded Definition
‘Capital investment’ denotes the expenditure on tangible, long-term assets such as buildings, machinery, or technology, which play a key role in increasing production or improving the quality of goods and services. These assets are not intended for immediate resale, but for aiding the company’s operational processes and driving its future profits. Unlike routine operational expenses, a capital investment is often substantial, made with a long-term perspective and plays a cardinal role in setting the direction of a company’s growth and profitability.
Capital markets: Capital markets are financial platforms where governments, corporations, and other entities secure long-term funding through the issuance of equities and bonds, unlike money markets which deal with short-term finance.
Expanded Definition
Capital markets refer to a broad category of markets facilitating the buying and selling of instruments like securities. They are the platforms where governments, corporations, and other entities secure funding for long-term requirements. This funding predominantly materializes in two forms – equities (common or preferred stocks) and bonds (debt securities). These markets play a crucial role in making the accumulated capital of investors available to businesses, government, and other institutions. Capital markets differ from money markets, which primarily deal with short-term funding or financial instruments with high liquidity and short maturities.
Capital ratio (banking system): Capital ratio in banking is the measure of a bank’s financial strength, represented as a percentage, calculated by subtracting total liabilities from total assets and dividing by total assets.
Expanded Definition
The Capital Ratio in banking is a measure of a bank’s financial strength, indicating its ability to absorb potential losses. Contrary to the earlier definition, it is not calculated as total assets minus total liabilities as a percentage of total assets. Typically, the Capital Ratio is computed as the percentage of a bank’s capital to its risk-weighted assets. A higher capital ratio means that the bank is better positioned to withstand financial disturbances. This ratio helps in ensuring that the bank can absorb a reasonable level of losses before becoming insolvent. The capital in this context includes both Tier 1 capital, like equity capital and disclosed reserves, and Tier 2 capital, such as undisclosed reserves, revaluation reserves, and subordinated term debts. The risk-weighted assets are the sum of all assets held by the bank, each weighted by its associated risk level. This ratio is critical for regulators to monitor as part of prudential management to maintain the health and stability of the banking system.
Capital resources: Capital resources are assets, like machinery or buildings, leveraged repeatedly in the creation of goods or services, playing a significant role within the production cycle.
Expanded Definition
‘Capital resources,’ often referred to as ‘capital goods’ or ‘physical capital,’ represent tangible assets that an individual or company leverages repeatedly in the production process. Rather than being sold directly to customers, these items are used for the continual generation and distribution of other goods or services. Their primary function is to aid in increasing productivity, efficiency, and overall output of an operation. Examples include machinery, buildings, factories, or any other durable equipment that contributes to the overall production process. Consider them as the necessary, reusable tools that drive the engine of production.
Capital resources (elementary): Capital resources are assets utilized in the production process, such as tools, machinery, or buildings, which are created by humans and used for generating other goods or services.
Expanded Definition
Capital resources, an elementary concept in economics, refers to the stock of physical and human-made assets utilized in the manufacturing process to create goods and services. These are not consumed or significantly worn during the production process but are essential for its operation. Examples include, but are not limited to, machinery, tools, and buildings. Capital resources’ primary function is to aid in increasing productivity by facilitating the efficient use of labor and other inputs in the process of production.
Capitalism: Capitalism is an economic system where private entities utilize their capital to initiate and drive business operations, with any resulting profits belonging to them. It contrasts communism, which centralizes all economic actions under state control.
Expanded Definition
Capitalism can be more precisely defined as an economic system that is characterized by private or corporate ownership of capital goods and resources. Individuals and corporations invest their financial resources to establish and execute business ventures, which can involve employing labor force, leasing property, and procuring necessary equipment. Success in such activities results in surpluses or profits, which are retained by the business initiators or investors. This fundamental principle of private capital deployment and benefit distinguishes capitalism from economic systems such as communism, where the state predominately manages and controls economic activities and redistributes wealth among its citizenry.
Carbon tax: A carbon tax is a financial charge imposed on greenhouse gas emissions, specifically targeting carbon dioxide, to incentivize carbon reduction strategies and mitigate climate change impacts.
Expanded Definition
A ‘Carbon Tax’ refers to a financial charge or levy imposed on the emission of carbon dioxide and other greenhouse gases that are released into the atmosphere. This tax is primarily implemented with the objective of mitigating the harmful effects of climate change. It acts as an economic instrument that compels businesses and industries, often heavy emitters of carbon, to reduce their carbon output. It incentivizes the shift towards environmentally friendly alternatives and renewable energy sources by making the process of emitting carbon financially disadvantageous. Although the effectiveness and success of this tax can be dependent on a multitude of factors – such as its level, coverage, and how the revenues are used – it tends to face opposition due to concerns about its economic impacts, particularly on energy prices and economic competitiveness.
Card reader: A card reader is a device specifically engineered to interpret the data encoded on plastic cards.
Expanded Definition
A ‘Card reader’ is a technologically advanced device specifically engineered to interpret and process the data stored on plastic cards, such as credit cards, debit cards, or identification cards. This device operates by decoding the information embedded on the magnetic stripe or chips within these cards. The information processed can then be used for various applications such as financial transactions, identity verification, and access control. From a professional standpoint, it acts as a critical component in ensuring security, convenience, and efficiency in numerous sectors.
Card-not-present (CNP) transaction: A Card-not-present (CNP) transaction is a digital payment method wherein the cardholder’s information is provided remotely rather than physically presenting the card.
Expanded Definition
A “Card-Not-Present” (CNP) transaction refers to a payment procedure where the actual, physical card is not required or shown to complete the transaction process. Instead, the cardholder divulges necessary details such as the card number, expiration date, cardholder’s name, and security code, typically in a digital or remote merchant environment. This type of transaction is commonly seen in online shopping, mail order, or over-the-phone purchases, where the merchant cannot physically inspect the card, making secure verification measures incredibly important.
Card-present (CP) transaction: A Card-present (CP) transaction is a direct, in-person payment where the customer’s card is manually processed through a card reader terminal.
Expanded Definition
A ‘Card-present (CP) transaction’ is a term utilized in the finance and banking sector to describe a type of transaction where the cardholder and the card itself are physically present at the point of sale. During this transaction, the payment card is manually swiped, inserted, or tapped on a card reader terminal. This type of transaction commonly occurs in retail establishments, where the cardholder has direct, face-to-face interaction with the merchant. The terminal reads the card’s data and verifies its authenticity, adding an extra layer of security to the transaction. This is in contrast to card-not-present transactions, where payments are made remotely via the internet or over the phone.
Cartel: A cartel is a coalition of producers that coordinate to control the price or limit the supply of a good or service, often subject to antitrust regulations due to competition restrictions.
Expanded Definition
A ‘Cartel’ is typically characterized as a consortium of independent organizations or entities, specifically producers, who consciously come together to coordinate their actions in order to control the price, supply, and market of a specific good or service. This form of strategic alliance is often formed to gain a monopolistic advantage, yielding them substantial control over market dynamics such as supply-and-demand mechanisms and pricing strategies. The Organisation of the Petroleum Exporting Countries (OPEC) is a globally recognized example of such a coalition. However, it’s crucial to mention that in most jurisdictions, such forms of collaboration or cartelization are regarded as illegal due to their adverse effects on healthy competition, hence becoming a subject of regulatory scrutiny under antitrust or competition laws. These laws are designed to prevent such alliances that may potentially inflict adverse impacts on the consumers and the overall competitiveness of the market.
Cash advance: A cash advance is a swift, short-term monetary loan typically associated with high fees, obtained from a bank or non-traditional lender.
Expanded Definition
A ‘Cash Advance’ is a financial instrument provided by a banking institution or an alternative lender, where an individual can borrow funds on a short-term basis. This service achieves fast approval times and swift fund disbursement, catering to those in immediate need of cash. However, this convenience often comes at a cost – the associated fees for such an advance are typically higher than conventional lending options due to the increased risk and operational overheads.
Cash flow: Cash flow refers to the net amount of money coming in and going out, representing the operational profitability of an entity after deducting expenses from income.
Expanded Definition
‘Cash Flow’ is a financial term that refers to the net movement of funds into and out of a business, individual or investment over a specific period of time. It is the difference between the inflows, generally derived from revenues, operations, or investments, and the outflows, which are typically related to expenditures for operations, debt servicing, and acquisitions. A positive cash flow indicates that the entity’s liquid assets are increasing, thereby providing it with more opportunities for development, paying off debt, dividends, etc., whereas a negative cash flow denotes that the entity’s liquid assets are decreasing. The assessment and management of cash flow are integral to maintaining fiscal stability and solvency.
Central bank: A ‘Central Bank’ is a financial authority responsible for controlling a country’s monetary policy and banking regulations.
Expanded Definition
A central bank, often considered a pillar of a country’s financial system, is a sophisticated institution that performs a multitude of essential duties pertaining to the management of a nation’s economy and its banking industry. Primarily, a central bank possesses the authority to control and influence the quantity of money flowing in the economy, a critical component in managing inflation and economic stability. It executes this function through mechanisms like setting interest rates or guiding monetary policy. Furthermore, this institution is entrusted with the regulatory responsibility for the banking system, ensuring its stability, effectiveness, and integrity. Its regulatory oversight includes establishing and enforcing rules for other banks’ operation, promoting healthy competition, and protecting consumer interests. Therefore, a central bank plays a pivotal role in shaping a nation’s financial stability and economic growth.
Certificate of deposit (CD): A Certificate of Deposit (CD) is a financial instrument where funds are deposited for a specific period to earn a predetermined interest rate.
Expanded Definition
A Certificate of Deposit (CD) is a financial product offered by banks and credit unions. It operates similarly to a traditional savings account with the additional stipulation that the depositor agrees to leave a certain amount of money untouched in the account for a predetermined period of time, referred to as ‘maturity’. This term could range from a few months to several years. In return, the institution provides the depositor with a guaranteed interest rate that is typically higher than a regular savings account. The funds are inaccessible before the maturity date without incurring a penalty. CDs are considered a low-risk investment strategy, insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), making them highly suitable for individuals looking to securely grow their savings over a specific time frame.
Chained 2012 dollars: ‘Chained 2012 dollars’ is a measurement method that adjusts financial values for inflation since 2012, enabling comparative analysis of monetary amounts from various years.
Expanded Definition
“Chained 2012 dollars” is a term utilized in economic analysis representing a method of adjusting monetary figures to account for inflation and price changes since the year 2012. This adjustment enables accurate comparisons of values between different years by compensating for the changing purchasing power of the currency. Essentially, it converts expenditure figures from different years into equivalent values, as if the money were spent in 2012. This standardization to ‘2012 dollars’ provides valuable insight into real economic trends and growth, devoid of the distortion caused by inflation over time.
Chapter 11 bankruptcy protection: Chapter 11 bankruptcy protection is a provision in the bankruptcy code enabling businesses or individuals to restructure their debts while continuing to operate, effectively proposing a repayment plan to their creditors. It is typically leveraged by corporations and partnerships to keep their business afloat while mitigating their financial obligations.
Expanded Definition
‘Chapter 11 bankruptcy protection’ pertains to a provision within the U.S. Bankruptcy Code designed principally for businesses, including corporations and partnerships. It primarily enables an entity – grappling with significant financial distress – to reorganize its business structure and debt obligations. The objective of this provision is not to put an end to the entity’s operations but instead to facilitate a restructuring that would allow the business to continue operations while gradually repaying its creditors. In the context of Chapter 11, the distressed entity, referred to as a ‘debtor’, typically formulates a ‘plan of reorganization’. This plan outlines a strategic approach to maintain the business’s functionality, whilst concurrently repaying owed debt amounts over a specified duration. The debtor then presents this plan for approval to its creditors and the bankruptcy court. Notably, Chapter 11 bankruptcy protection is not exclusive to businesses; individuals, although not common, can also opt for Chapter 11 if they meet certain conditions regarding their debt levels and income structure.
Chapter 7: Chapter 7 is a form of bankruptcy involving the selling of a debtor’s assets to repay creditors, often referred to as “liquidation” or “straight” bankruptcy.
Expanded Definition
“Chapter 7” refers to a specific provision in U.S. bankruptcy law aimed toward those facing significant financial difficulty. Under this provision, an individual who has demonstrated the inability to meet their financial obligations may undergo a legal process designed to provide financial relief. This typically involves the liquidation of the person’s non-exempt assets, the proceeds of which are distributed among their creditors to settle the debts. Otherwise known as “straight” or “liquidation” bankruptcy, Chapter 7 bankruptcy serves as a mechanism to help individuals reset their financial landscape while resolving the unpaid debts with their creditors.
Character: Character refers to a borrower’s historical track record in fulfilling financial obligations, primarily revolving around bill and debt repayment.
Expanded Definition
The term ‘Character’ within a financial context denotes the evaluation of a borrower’s creditworthiness. It primarily refers to the borrower’s established track record of repaying debts and bills, based on their historical financial behavior. This perception of trustworthiness is shaped by aspects such as reliability, integrity, and financial discipline shown in past transactions, thus serving as an important criterion for lenders in the loan approval process.
Characteristics of money: ‘Characteristics of money’ refers to the essential properties that define something as money, primarily its portability, durability, divisibility, general acceptability, scarcity, and uniformity.
Expanded Definition
The ‘characteristics of money’ pertains to the essential criteria that any medium of exchange needs to fulfill to function as effective money in the economy. The first characteristic is portability, which means the medium must be easy to carry, making transactions convenient. Secondly, it needs to be durable so that it doesn’t wear out easily and maintains its usability over time. Thirdly, money should be divisible into smaller units to represent different values and facilitate varied transactions. Fourthly, it has to be generally acceptable, which means it is recognized and accepted by the majority within an economic system for the purchase of goods and services. The fifth criterion is relative scarcity; the medium of exchange shouldn’t be so abundant that it loses its store of value, nor so scarce that it becomes inaccessible. Finally, the uniformity characteristic stands for the consistent physical appearance and equal worth of each unit, thus providing the scope for standardized measurements of value in the economy.
Check: A check is a document that instructs a bank to transfer a specified amount of money from one account to another.
Expanded Definition
A ‘check’ is a type of financial instrument, typically a printed document, that serves as an authoritative instruction from an account holder, commanding a bank to transfer a specific sum of money from their account to another. This transaction could be to an account held by a different individual, organization, or even the account holder themselves. The check indicates relevant information such as the payee’s name, account number, the date, the money amount, and the account holder’s signature.
Check-cashing services: Check-cashing services refer to businesses that convert various types of checks into cash and often offer additional financial services, such as payday loans, money orders, and wire transfers.
Expanded Definition
“Check-cashing services” refers to the functionality offered by certain specialized businesses that facilitate the immediate conversion of various types of checks into cash. These services accept a wide range of checks, including but not limited to, those drawn from payroll, insurance disbursements, tax refunds, legal settlements, as well as government and Social Security payments. Alongside this primary service, many of these businesses widen their financial offerings to include additional services such as the provision of payday loans, issuance of money orders, or conducting money wire transactions – all designed to assist with an individual’s immediate cash flow needs.
Checkable deposits: Checkable deposits are funds held in an account that can be accessed or drawn upon using checks.
Expanded Definition
‘Checkable deposits’ are funds placed in a bank or financial institution, in an account type that permits the holder to write checks against the balance. These accounts often include traditional checking accounts, and sometimes savings or money market accounts, depending on the financial institution’s policies. Checkable deposits are considered highly liquid assets because they can be readily accessed and used for transactions, contributing to the immediate purchasing power of the holder.
Checking account: A checking account is a bank deposit account that allows depositors to freely deposit/withdraw funds and perform transactions via checks, ATM card, and debit card usage.
Expanded Definition
A ‘Checking Account’ is identified as a type of bank account established at a banking or financial institution where individuals place monetary deposits for secure storage. The unique feature of checking accounts is the ease of access it offers to account owners. It enables them to frequently withdraw funds using different mediums such as paper checks, automated teller machine (ATM) cards, or debit cards. These mediums can be used for various financial transactions like purchasing items, paying bills, or transferring money, making it an essential tool for managing day-to-day finances.
Chicago school: The ‘Chicago School’ is a dominant economic ideology from the University of Chicago, emphasizing free markets, monetarism, and rational self-interest, led by notable economists like Becker, Coase, and Friedman, and became prominent politically in the 1970s.
Expanded Definition
The term ‘Chicago School’ refers to an influential group of economists and intellectual philosophies that originated from the University of Chicago during the mid-20th century. This school of economic thought champions free-market capitalism, monetarism, and the fundamental conviction that individuals behave rationally and act predominantly out of self-interest. The theories and methodologies developed by its key proponents, including Gary Becker, Ronald Coase, and Nobel laureate Milton Friedman, advanced a paradigm shift in economic thinking. Among their primary tenets were a staunch belief in minimal government intervention in the economy and the assertion that macroeconomic phenomena could be more accurately understood by examining microeconomic human behaviors. The influence of the Chicago School increased notably in the 1970s when the Keynesian consensus, which had dominated post-World War II economic policy, began to fray. Conservative politicians found the school’s free-market advocacy appealing and adopted many of its principles into their economic policies. The Chicago School continues to significantly shape parts of the economic discourse, its influences touching on fields such as monetary policy and public choice theory.
Choice: “Choice” is the act of selecting one option from multiple available alternatives.
Expanded Definition
‘Choice’ refers to the act of purposeful decision-making from among a set of two or more than two options, alternatives or possibilities. It involves the assessment and comparison of the presented options based on criteria significant to the chooser, culminating in a final selection. A choice requires conscious thought and is not random but often influenced by the chooser’s preferences, beliefs, and needs.
Choropleth map: A choropleth map is a graphical representation that uses various colors or patterns to indicate statistical data associated with different geographical regions.
Expanded Definition
A “Choropleth map” is a type of thematic map that employs varying shades, hues, or patterns to represent the statistical differences of one or more characteristics or measurements across distinct geographical regions or areas. The map uses a color key or gradient to clearly delineate and categorize the data values being represented, thereby offering a visual, comparative overview. The represented characteristics, such as population density, income, or temperature, are typically normalized by the area of each region to ensure accurate comparisons. Effective choropleth maps rely upon judicious color choices and carefully scaled data to convey clear, accessible, and accurate information to map users.
Circular flow of economy (elementary): The Circular Flow of Economy is the continuous process of trading resources, goods, services, and currency enacted by businesses and consumers, creating a loop of production, consumption, and financial flow.
Expanded Definition
The ‘circular flow of an economy’ refers to the continuous process through which resources, goods, and services, as well as money, move within an economy. This model showcases the reciprocal relationships among key economic actors — such as households, businesses, and the government — as they engage in various economic activities. In basic terms, households provide resources, such as labor, to businesses in exchange for income, which they then spend on goods and services produced by these businesses, creating a circular economic loop. This ongoing exchange helps maintain economic balance and drive economic growth.
Citation (of data): A citation of data is a brief reference that provides key details about a data set, such as its author, title, distributor, unique identifier, and publication date.
Expanded Definition
A ‘Citation (of data)’ can be more precisely defined as ‘A comprehensive reference generating a pathway to access a specific set of data. This entails the integration of crucial details such as the main researcher or author who contributed significantly in the acquisition or creation of the data, the title assigned to the data set that succinctly summarizes its content, the platform, organization, or individual through which the data can be accessed or obtained (i.e., the distributor), a persistent identifier – a standardized, unique code that enables reliable and efficient location and retrieval of the data over time, and the date when the data was originally published or made available.’ This specific format of citation enables transparent, replicable research methodologies and facilitates proper acknowledgment of the origin of data.
Classical economics: Classical economics, developed by pioneers like Adam Smith and David Ricardo, is an economic theory advocating for minimal government intervention and supporting free trade, believing that economies organically self-correct over time.
Expanded Definition
‘Classical economics’ refers to a predominant philosophical and economic perspective which was prominent during the late 18th and 19th centuries. It was notably advanced by intellectual figures like Adam Smith and David Ricardo. A central pillar of classical economics is its trust in the innate, self-regulatory properties of economic systems. Adherents of this school of thought consistently advocated for minimal governmental intervention, underpinning the principle of ‘laissez faire’. This translates to ‘let it be’ in French, encapsulating the belief in the ability of the marketplace to correct itself without outside interference. Further, this economic model posed a strong belief in free trade. This was largely propelled by Ricardo’s concept of ‘comparative advantage’, a theory suggesting that nations should specialize in producing goods and services they are most proficient at and freely trade for others. This idea underlined the argument for fewer restrictions on global trade, a cornerstone of classical economic thinking.
Clearing banks: Clearing banks are financial entities that facilitate the settlement of transactions involving government and agency securities, along with other money market instruments, on behalf of non-bank dealers.
Expanded Definition
‘Clearing banks’ refer to specialized financial establishments that facilitate the completion of transactions involving government securities, agency securities, and other money-market instruments on behalf of non-bank dealers. They function as intermediaries to ensure that the change of ownership in these transactions is conducted smoothly, legally, and efficiently. This function includes validating the availability of sufficient funds, verifying both parties’ details, and effectively moving the funds or securities from the seller’s account to the buyer’s. These institutions play an essential role in maintaining the stability, speed, and security of transactions within the financial markets.
Clearinghouse: A clearinghouse is a financial establishment that mediates transactions between parties, such as banks, often facilitating the calculation and reconciliation of mutual balances and obligations.
Expanded Definition
A ‘Clearinghouse’ is a specialized financial institution that offers a systematic approach to conduct and administer the process of financial transactions. It mainly acts as an intermediary to facilitate efficient settlement, clearing and regulation of transactions between different parties such as banks or other financial entities. A clearinghouse ensures that all financial transactions are conducted securely, smoothly and in a timely manner, reducing transaction risks and maintaining market integrity. This process helps to streamline operations, validate transactions and ensure fiscal responsibility, elevating confidence in the financial system.
Closed economy: A closed economy is one that operates independently, devoid of any international trade or external economic relations.
Expanded Definition
A ‘Closed Economy’ is a type of economic model which is distinguished by its lack of engagement in any form of international trade. In this scenario, all goods and services are produced and consumed domestically, implying there are no imports or exports. It operates under the assumption that it is entirely self-sufficient for meeting its population’s needs, excluding any direct interaction with foreign economies in terms of economic transactions, such as exchange of goods, services, or capital. However, it’s crucial to note that such models are largely hypothetical, as entirely closed economies don’t practically exist in today’s globalized world economy.
Co-payment (co-pay): A co-payment (co-pay) is a fixed amount a policyholder pays for a covered healthcare service, with the insurer covering the remaining balance.
Expanded Definition
A co-payment, often abbreviated as co-pay, refers to a predetermined fixed amount that a customer, or insurance policyholder, is required to pay at the time of each service, such as a doctor’s visit or prescription drug purchase. This specific amount is stipulated in the insurance policy agreement. Following the policyholder’s payment, the remaining cost of the service is then covered by the insurance company. This split-payment system is a common feature of many health insurance policies and is employed to share the cost of healthcare between the insurance provider and the policyholder to reduce the overall risk to the insurer.
Coase theorem: The Coase theorem asserts that if transaction costs are minimal, parties can negotiate to resolve externalities regardless of initial property rights allocation.
Expanded Definition
The Coase Theorem is a fundamental concept in the study of economics, developed by Nobel Prize laureate Ronald Coase. The theorem suggests that when transaction costs – costs associated with making an economic exchange, such as bargaining costs –are minimal or non-existent, disputes regarding externalities, or indirect consequences of economic activities, can be efficiently settled through negotiation between affected parties. Moreover, the Coase theorem posits the ‘invariance proposition’ which underlines that the resolution of externalities is independent of the initial allocation of property rights. This means that regardless of who holds the initial entitlement, the negotiations will lead to an outcome that maximizes the overall benefit to all parties involved. The theorem is significant because it offers a theoretical solution for managing social costs in a free market context and unveils the crucial role of law in reducing transaction costs.
Coase’s theory of the firm (theory of the firm): Coase’s theory of the firm suggests that firms exist because they decrease the transaction costs of markets, particularly for non-standard goods, by allowing entrepreneurs to manage and reallocate their labor force more efficiently without needing to negotiate contracts for each transaction.
Expanded Definition
Coase’s Theory of the Firm, a seminal economic theory proposed by British economist Ronald Coase in his 1937 paper titled “The Nature of the Firm”, aims to elucidate why businesses exist. Coase postulated that the formation of companies is a strategic response to the “transaction costs” that are inherent in markets, particularly for non-standard goods or services. Rather than navigating individual contracts for each transaction, entrepreneurs establish firms to streamline activities. In this environment of organized business, workers are hired to conduct a variety of tasks, with management retaining the flexibility to reassign these workers between different activities as required. This centralized, internal coordination facilitates effective resource allocation, providing an advantage over the repetitively renegotiated contracts of market transactions, particularly when the products or services involved are unique or complex. In addition to his contributions to understanding the internal dynamics of enterprises, Coase’s extensive work on externalities and property rights significantly contributed to economic theory, earning him the Nobel Prize for Economics in 1991. His theories continue to be integral to modern organizational and economic studies.
Cognitive bias: ‘Cognitive bias’ is an inherent thinking error that sways our perceptions and decision-making processes. It’s a mental deviation that influences our rational judgments.
Expanded Definition
“Cognitive bias” is a psychological principle referring to the inherent errors in human thought processes, which impact our judgment and decision-making abilities. It is a consistent pattern of deviation from rationality, where individuals unconsciously form perceptions and make interpretations based on their personal experiences, beliefs, emotions, and social influences. These biases often hinder objective evaluation and fact-driven responses, and may lead to illogical conclusions and poor decision-making. Understanding the presence and impact of cognitive biases can aid in promoting better decision-making and greater psychological self-awareness.
Coin: A coin is a piece of hard material, typically metal, used as a form of money that is often minted.
Expanded Definition
A ‘coin’ is typically defined as a piece of hard material, generally metal, minted in a round form and authorized by a governmental body for use as a medium of exchange in economic transactions. Coins typically bear an inscription or design often identifying the country of origin, the denominate value, and the year of minting. The metal composition may vary, with common materials including gold, silver, nickel or less precious alloys for everyday circulation coins. This monetary object played a significant role in ancient history to the modern world and remains a critical part of our global economy.
Coincidence of wants: ‘Coincidence of wants’ refers to the scenario where two parties each hold an item the other wants, and are willing to exchange these items – a fundamental condition for barter transactions.
Expanded Definition
‘Coincidence of wants’ is an economic term which refers to a circumstance or situation where two parties involved in a transaction each hold an item or service that the other desires, and they are willing to exchange these items or services with each other. In simplistic terms, it means that both participants in a trade are ready to mutually swap their possessions or services for the other’s offerings. This concept is a fundamental premise of barter systems, where direct exchanges take place without a standard medium of exchange like money.
Collateral: Collateral is an asset used as security for the repayment of a loan that can be confiscated by the lender if the borrower defaults on their payments.
Expanded Definition
‘Collateral’ is comprehensively defined as a pledged asset that a lender, typically a financial institution, requires from a borrower to ensure the security of a loan. This pledged asset can serve as a ‘guarantee’ or ‘insurance’ for the loan repayment. If the borrower defaults on the loan or is unable to meet the loan obligations, the lender has the legal right to seize the collateral to recoup its losses. The collateral can take various forms such as the borrower’s savings, investments, property, or the asset purchased using the loan. This arrangement reduces the lender’s credit risk and facilitates the lending process.
Collateral (elementary): Collateral refers to an asset pledged by a borrower to secure a loan, which the lender can seize upon loan default.
Expanded Definition
‘Collateral’ in a fundamental context refers to a valuable asset that a borrower pledges as security to a lending institution, typically a bank. This collateral serves as an assurance to the lender that they can seize and liquidate this asset to recover their funds, should the borrower default on repayment of the loan. It is a risk-mitigation method employed by lenders to protect themselves from financial loss. The nature of collateral can vary and can be any tangible or certificated asset of substantial value such as real estate property, vehicles, securities, or business equipment.
Collateralized debt obligations (CDO): A Collateralized Debt Obligation (CDO) is a financial product backed by a pool of loans, where the cash flows from these debts are used to pay off investors.
Expanded Definition
Collateralized Debt Obligations (CDO) are complex financial instruments that bundle together a collection of debt into a single product. They are a type of asset-backed security, whose value and cash flows are derived from a portfolio of fixed-income underlying assets. These assets can include bonds, loans, mortgages or other debt obligations. In general, CDOs group individual loans with similar characteristics into a pooled collection or ‘tranche’ based on the level of credit risk associated with the loans. This structure allows different levels of risk and return within the same investment product, making it possible for investors with varying risk tolerances to invest in the same product. Investors in CDOs receive income from the underlying debt obligations as these loans or bonds are paid off by the original borrowers. However, if defaults occur within the underlying debt assets, it can lead to significant losses for the CDO investors. In a nutshell, a CDO is a financial product that turns individual debts into a packaged set of investable securities, each offering different levels of risk and return.
Collateralized loan obligations (CLO): A Collateralized Loan Obligation (CLO) is a type of structured finance instrument backed by a pool of loans, where investors can claim the cash flow generated from these loans.
Expanded Definition
A Collateralized Loan Obligation (CLO) is a complex structured-finance product, which is a type of asset-backed security. It is essentially an investment vehicle that pools together a collection of bank loans with varying degrees of risk, packages them as a unified product, and then sells tranches (portions) to investors. This bundling process allows the risk of default to be spread among the different loans, potentially offering higher returns to investors. The cash flow generated from these bank loans – in terms of principal and interest payments – is then distributed to the different tranche holders. These tranches are generally prioritized based on risk, with senior tranches paid first and bearing the least risk, while equity tranches bear the most risk but offer higher potential returns. This mechanism can help to create investment products that align with different levels of risk tolerance among investors.
Collateralized mortgage obligations (CMO): A CMO is a type of mortgage-backed security that represents some stake in the cash flows produced by a collection of mortgages, essentially acting as a vehicle for bundling and selling mortgage loans.
Expanded Definition
A Collateralized Mortgage Obligation (CMO) is a type of financial instrument, specifically a type of mortgage-backed security. It divides the rights to the cash flows from a pool of home mortgages into various classes, or ‘tranches,’ each with different levels of risk and return. Investors in CMOs receive periodic payments derived from the interest and principal payments made by borrowers on the underlying mortgage loans. This provides a way for lending institutions to remove mortgages from their balance sheets and generate further capital for lending, and enables investors with varying risk preferences to invest in the residential property market.
Collections (government): Collections refer to the revenues a government accrives from taxes levied on entities and individuals, as well as fees charged for government services and activities.
Expanded Definition
‘Collections (Government)’ refers to the monetary resources garnered by a government, primarily sourced from taxes levied on individuals and enterprises. This includes varied types of taxes, such as income tax, sales tax, and property tax, among others. Collections also comprise the fees that the government charges for providing specific services and undertaking certain activities. These services could range broadly, from issuing licenses, permits, to providing utilities like water and electricity. In essence, ‘collections’ form a crucial part of a government’s revenue, facilitating its functioning and the implementation of its policies and programs.
Collision insurance: Collision insurance is a type of car insurance that covers the cost of repair or replacement when a vehicle is damaged in an accident with another vehicle or object.
Expanded Definition
‘Collision insurance’ is a specific type of vehicle insurance policy that offers financial protection for your vehicle in the event of an accident. This coverage comes into effect when your vehicle sustains damage as a result of colliding with another vehicle or striking an inanimate object, such as a tree or guardrail. Whether you are at fault or not, collision insurance typically covers the cost of repairing or replacing your vehicle, up to its current market value, less your deductible. It’s important to note, however, that it does not cover damage to other people’s property or any medical bills from injuries sustained in the accident – these would fall under different forms of insurance coverage.
Collusion: Collusion is an unlawful pact between businesses to control market share, dictate pricing, or restrain production.
Expanded Definition
‘Collusion’ can be comprehensively defined as a secretive, illegal agreement or partnership created between multiple entities, often businesses or corporations, designed to deceive or defraud others, typically to achieve competitive advantage. These entities consensually agree to participate in activities such as dividing market territories, setting fixed prices, or limiting production volume. This unfair coordination is intended to reduce competition, maintain high prices artificially, and maximize profits for all parties involved, to the detriment of other market participants and consumers. The practice of collusion violates antitrust laws and is considered harmful to healthy economic environments.
Command economy: A command economy is a system where the government exclusively owns resources and regulates the production, distribution, and pricing of goods and services.
Expanded Definition
A ‘Command Economy’ refers to an economic paradigm wherein the government exerts comprehensive control over the nation’s resources, production allocation, and distribution mechanisms. Under this system, the government acts as the primary decision-maker, specifying which goods and services will be produced, the methods of production, and the recipients of these goods and services. Moreover, the government regulates the pricing structure of goods, services, and resources, thereby controlling the financial dynamics of the economy. This structure is designed to centrally orchestrate all economic activities, minimizing market competition or private sector influence.
Command economy (elementary): A command economy is an economic system where the government controls all resources and regulates production and pricing of goods and services.
Expanded Definition
A Command Economy, at the expert level, is referred to as a type of economic system in which a central authority, typically the government, exercises all-encompassing control over the allocation and distribution of resources including raw materials, labor, and capital. This includes determining what types of goods and services are to be produced, the quantity, and the price points at which they will be offered for sale. This structure often leads to a highly regulated economic environment where free market mechanisms are supressed, with the intent of achieving specific socio-economic objectives.
Commercial Bank: A commercial bank is a financial institution that collects deposits from the public and extends credit to individuals and businesses.
Expanded Definition
A ‘Commercial Bank’ is a financial institution that provides services to both individuals and businesses. These services primarily include the acceptance of deposits— functioning as a secure place for storing the public’s money while also offering a return in the form of interest. Additionally, commercial banks extend credits by issuing loans, such as car loans, home mortgages, and business loans, thereby facilitating the liquidity flow in the economy. They operate under regulatory oversight and employ strategies to balance risks and returns effectively. Thus, commercial banks play a crucial role in financial stability and economic growth.
Commercial Paper Funding Facility (CPFF): The Commercial Paper Funding Facility (CPFF) was a Federal Reserve program, operational until February 2010, offering liquidity support to U.S. commercial paper issuers to enhance credit availability for businesses and households.
Expanded Definition
The Commercial Paper Funding Facility (CPFF) refers to a financial program instituted by the Federal Reserve, the central bank of the United States. This program was set up with the intent of enhancing liquidity, meaning the ease with which assets can be converted to cash, in short-term funding markets. By supplying a liquidity backstop or safety net, the CPFF was aimed at supporting U.S. issuers of commercial paper. Commercial papers are short-term, unsecured, promissory notes issued by corporations to raise capital to meet immediate financial needs. When the market for these notes becomes strained, it impedes the capacity of businesses and households to access credit. The CPFF was thus developed to stimulate credit availability, facilitating the smooth functioning of financial markets. However, the use of this program was discontinued by the Federal Reserve on February 1, 2010.
Commercial mortgage-backed security (CMBS): A Commercial Mortgage-Backed Security (CMBS) is a type of investment product backed by cash flows from a collection of commercial mortgages. It’s a way of pooling and selling commercial mortgage debt to investors.
Expanded Definition
A Commercial Mortgage-Backed Security (CMBS) is a type of investment product, defined as a security that largely depends on the income streams or cash flows generated from a bundle or pool of commercial mortgages. Here, commercial mortgages refer to loans issued to businesses, rather than individuals, and are secured by commercial real estate such as office buildings, shopping centers, hotels, or apartment buildings. These mortgages are packaged together to create a new product that investors can purchase portions of, much like shares in a company. Prospective returns are based on the repayments of the pooled mortgage loans, which include both the interest and the principal. It is a type of asset-backed security, similarly structured but different from a Residential Mortgage-Backed Security (RMBS), which relies on cash flows from residential mortgages.
Commercial paper: Commercial paper is an unsecured, short-term debt instrument issued primarily by corporations, with repayment typically due in 90 to 180 days.
Expanded Definition
‘Commercial paper’ refers to a type of unsecured, short-term debt instrument, typically issued by corporations, financial institutions, or at times, foreign governments. This represents a promise made by the issuer to pay the bearer a specific amount after a predetermined period. The maturity period usually ranges from 90 to 180 days. As it is unsecured, the issuer does not provide collateral, meaning the investors’ decision to purchase hinges largely on the issuer’s creditworthiness. Commercial paper is often used to meet immediate liquidity needs such as paying off debts or financing day-to-day operations. Its short-term nature makes it an attractive option for temporary cash investment by individuals and institutions.
Commission: A commission is a form of payment for selling a specific product or service, typically proportional to the transaction’s value.
Expanded Definition
‘Commission’ is a monetary incentive provided to sales professionals for facilitating or finalizing the sale of a specific product or service. It is a motivational tool used by businesses to encourage better sales performance. The value of this remuneration typically correlates with the revenue generated by the sale, serving as a percentage of the total sale amount. This proportion-based system ensures that the larger the transaction, the higher the commission earned, fostering a competitive environment amongst sales personnel.
Commodity: A commodity is a raw material, like oil or copper, traded in large quantities, with its price fluctuations significantly impacting economic conditions and consumer demand.
Expanded Definition
‘Commodity’ refers to a basic good or raw material in commerce that is interchangeable with goods of the same type, like crude oil, copper, wheat, or coffee. These commodities, often utilized as building blocks for more complex goods and services, are traded in bulk on global commodity markets. Commodity prices bear substantial economic implications due to their direct influence on production costs and consumer prices. For instance, when energy prices surge, consumer demand could be negatively impacted because greater spending on energy would reduce discretionary income for other goods and services. In a broader sense, fluctuations in commodity prices can even influence monetary policies and inflation rates. Continued exploration on this subject can be found in this comprehensive Explainer.
Commodity cycle: The commodity cycle is a fluctuation pattern in commodity prices and production driven by changes in consumer demand and producer output, which leads to alternating periods of glut and scarcity.
Expanded Definition
A ‘commodity cycle’ is a theoretical framework that helps to explain the cyclical movements of commodity prices and production levels over a specified period. The cycle is largely rooted in the basic principles of supply and demand. When commodity prices increase, consumers are typically influenced to reduce their consumption due to the higher costs. Concurrently, this surge in prices encourages producers to increase their output to take advantage of the profitable market conditions. As a result, an oversupply or ‘glut’ of the commodity is created, leading to a downward pressure on prices. Subsequently, production levels decrease to align with this lower demand. However, as commodity prices fall to a sufficiently low level, they become attractive to consumers again, causing demand and usage to rise. This concludes the cycle, setting a stage for another cycle to potentially commence. By studying the nuances of a commodity cycle, stakeholders can equip themselves with an analytically driven strategy for anticipating market trends and guiding their commodity-related decisions.
Common stock: Common stock is a unit of corporate ownership that grants voting rights on company decisions. It’s an equity investment in public companies.
Expanded Definition
‘Common stock’ refers to a type of equity investment that signifies ownership in a publicly traded corporation, providing the stockholder with a claim on part of the corporation’s assets and earnings. Common stockholders are typically entitled to voting rights within the corporation, allowing them to influence managerial decisions and corporate policies. They may also receive dividends, a portion of a company’s profits distributed to shareholders, although this is not guaranteed. Essentially, owning common stock in a company aligns the shareholder’s interests with the company’s financial success or failure.
Communism: Communism, proposed by Karl Marx, is a system where the state governs all economic activities, private property is banned, and income disparity is limited, though its real-world implementation often results in authoritarian rule.
Expanded Definition
Communism, as originally conceptualized by Karl Marx, encompasses an economic and political system where all resources and means of production are collectively owned and managed by the state. In this configuration, private property is abolished, experience is shared communally, and wealth distribution aims to reduce income disparity, thereby striving for a classless society where each contributes according to their abilities and receives based on their needs. The essential philosophy of communism embodies egalitarian ideals. However, it is important to recognize that its implementation historically, as seen in various communist regimes, has often deviated from its theoretical underpinnings and has tended towards highly autocratic governance and limited individual rights, potentially undermining its primary objectives of equity and shared prosperity.
Community Development Financial Institutions (CDFIs): CDFIs are financial bodies that offer financial services in underserved areas and to individuals lacking financing access, encompassing both regulated entities like community development banks and credit unions, as well as unregulated ones like loan and venture capital funds.
Expanded Definition
Community Development Financial Institutions (CDFIs) are specialized financial bodies whose primary mandate is to foster economic growth and stability in underserved communities. They accomplish this through the provision of financial products and services, such as loans and savings accounts, chiefly to low-income individuals or neighborhoods who typically struggle to access traditional financing avenues. CDFIs come in a variety of forms: they can be federally regulated institutions like community development banks or credit unions, or they can be non-regulated entities such as loan funds or venture capital funds. Regardless of the form they take, their main goal remains to stimulate economic development and promote financial inclusivity in marginalized communities.
Comparative advantage: “Comparative advantage” refers to a producer’s capability to make a product or service more efficiently, using fewer resources, compared to other producers. It reflects the potential for trade-offs and maximizing efficiency in production.
Expanded Definition
‘Comparative advantage’ is an economic term that describes a situation where an entity (such as a business, individual, or country) has the capacity to manufacture goods or provide services at a lower opportunity cost compared to other producers. Simply put, it indicates that the entity can produce a specific product with higher efficiency or lower resource consumption. This term does not imply that the entity is superior in every aspect of production; rather, it showcases their strength in producing a particular good or service more efficiently. This concept forms the basis for international trade, as entities trade what they produce most efficiently, in exchange for goods or services that are expensive or inefficient for them to produce. Opportunity cost, embedded in this definition, is a principle in economics which represents the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Thus, having a lower opportunity cost to produce something implies that the entity gives up less of other goods or services in order to produce it. In essence, ‘Comparative Advantage’ is about maximizing efficiency and productivity in a competitive marketplace and can significantly contribute to economic growth and consumer welfare through specialization and trade.
Competition: Competition refers to the economic interaction where multiple sellers or buyers strive to attain a larger share of a market, primarily based on parameters like price, product quality, service, design, variety, and advertising. It can drive price changes and enhancements in product offerings.
Expanded Definition
‘Competition’ in a business context often occurs in various markets where sellers vie against each other to capture the consumer’s purchasing power. They do so by rivalling through several avenues such as pricing strategies, enhancing the quality of their products and services, delivering superior customer service, innovating in product design and variety, and implementing effective advertising approaches. Meanwhile, buyers also engage in competition amongst themselves to acquire goods and services. This demand-side competition can potentially trigger an elevation in prices. Ultimately, competition’s nature revolves around the strategic efforts of parties to dominate a shared space, whether it be sellers in a market or consumers vying for resources.
Competition (elementary): ‘Competition’ in an elementary context refers to the marketplace dynamic where numerous buyers and sellers vie for the sale or purchase of goods and services.
Expanded Definition
Competition, in an elementary business context, can be characterized as the dynamic interaction between multiple buyers and sellers within a specific market. From the sellers’ perspective, they vie with each other to supply their products or services to consumers. This rivalry often instigates innovation, improvement of product quality, and cost reduction to gain an advantage over competitors. Conversely, from the buyers’ perspective, they compete with one another to procure goods or services that may be in limited supply, thus affecting market demand. This process of competition essentially drives market efficiency, optimal allocation of resources, and promotes consumer welfare.
Competitive markets: Competitive markets are economic environments with numerous buyers and sellers where individual actions hardly sway market prices.
Expanded Definition
A ‘Competitive Market’ is an economic term that describes a marketplace characterized by a large number of buyers and sellers interacting freely. In this market type, no single buyer or seller has a significant influence or control over the price levels. This is due to the presence of multiple market players, each controlling a relatively small portion of the total market share. Prices in these markets are generally dictated by the forces of supply and demand, ensuring a fair and open trading environment where businesses must compete to secure customers. The concept underscores an essential premise of free market economics where competition ideally leads to efficiency and innovation.
Complement (resources): Complement resources are the necessary elements used in conjunction with other elements during production. They work together, enabling the production process to function smoothly without any hiccups.
Expanded Definition
Complement resources refer to various assets, materials, or input factors that are used collectively in the production process to generate an output. These resources work synergistically, meaning their combined use enhances the overall productivity and/or efficiency of the production operation. Unlike substitute resources, which can replace each other, complementary resources are interdependent and can fill specific roles that others cannot. They may include a combination of physical resources, such as machinery and raw materials; human resources, such as labor and expertise; and intangible resources, such as technology and information. The optimized utilization of these complements can lead to an increase in value creation, cost savings, and competitive advantage for a business.
Complements (elementary): Complements, in an elementary context, refer to items that typically function in unison, like markers and paper.
Expanded Definition
‘Complements (elementary)’ in an economic context, refers to products or services that inherently pair together due to their mutual utilization in a specific task or pursuit. These often enhance the functionality, convenience, or effectiveness when used in conjunction with one another. For instance, in the realms of writing or artistry, paper and markers are an example of complementary goods, given that the function of markers is primarily dependent on a surface such as paper to be used effectively. The existence of complementary products often has implications in consumer behavior, market dynamics, pricing strategies, and demand trends.
Compound interest: Compound interest is the practice of calculating interest on both the initial investment (principal) and the interest already earned or accrued.
Expanded Definition
Compound interest is a financial term that refers to the method of calculating interest in which the interest gained over a given period is added to the original amount of the investment or loan – known as principal – then, the interest for the following period is calculated based on this new, larger amount. This cycle of calculating interest on the aggregate sum of initial principal and accrued interest leads to an exponential growth of the principal amount, thereby increasing the total amount of interest earned or owed over time. Its application is common in investments, loans, and savings accounts, underlining its significance in personal finance, banking, and investment planning.
Comprehensive insurance: Comprehensive insurance is a type of auto insurance that covers non-collision related damage or theft of your vehicle.
Expanded Definition
Comprehensive insurance, in the context of vehicular coverage, is a type of insurance policy that safeguards the policyholder against a broad range of potential damages to their vehicle that are not caused by a collision. This includes, but is not limited to, events such as theft, vandalism, fire, natural disasters like floods, storms, or hail, and incidents involving animals. Essentially, comprehensive insurance serves to financially protect the policyholder from unexpected circumstances and non-collision related events that could result in substantial damage to their vehicle.
Conglomerate: A conglomerate is a substantial corporation that operates in multiple industries and countries, typically via acquisitions.
Expanded Definition
A conglomerate is a substantial corporation that is established and operating in numerous countries and sectors. This multi-industry entity typically achieves its wide-ranging scope through the strategic acquisition of smaller firms, allowing it to diversify its business operations. These acquisitions aid the conglomerate in mitigating risks, as it isn’t reliant on a single industry or market for its revenue, promoting both financial stability and potential for growth.
Congress: Congress is the U.S. government’s law-making entity, made up of two houses: the Senate and the House of Representatives.
Expanded Definition
Congress is recognized as the principal law-making entity of the United States government, encompassing both the Senate and the House of Representatives. It is an integral part of the federal government’s legislative branch. The bicameral structure entails that it is divided into two separate chambers, each with distinct roles and responsibilities. The Senate is the upper house, consisting of two senators from each state irrespective of its size or population, while the House of Representatives forms the lower house where representation is proportionate to the population of each state. These two entities work jointly to formulate, review, amend, and pass laws on a national level while also overseeing governmental actions and deliberating on matters of national and international importance.
Consequences: ‘Consequences’ refer to the outcomes, either planned or unplanned, that follow a particular action.
Expanded Definition
‘Consequences’ refers to the outcomes, effects, or repercussions that arise as a direct result of a particular action or decision. These can be either anticipated (intended) or unanticipated (unintended). Intended consequences are the outcomes that are foreseen and planned for, while unintended consequences may be unpredicted or unplanned. The term ‘consequences’ is commonly used across various disciplines, including psychology, economics, and social sciences, highlighting its impacts on behavior, decision-making, and broader societal contexts. Consequences can be positive, facilitating growth and improvement, or negative, leading to detrimental effects or losses.
Conservatorship: A conservatorship is a legal procedure where control of a financially unstable company is transferred to a court-appointed individual (conservator) with the objective of restoring its financial health. This process supersedes the authority of the company’s directors, officers, and shareholders.
Expanded Definition
Conservatorship is a legal framework where an appointed party, often known as the conservator, is granted authority to manage and overhaul the operations of a business that is financially distressed and is not eligible to file for bankruptcy. Within this process, the conservator essentially steps into the shoes of the company’s executives, its board of directors, and shareholders, receiving their control and oversight rights. The core aim of conservatorship is to rehabilitate the company by stabilizing its financial condition, and eventually returning it to a state of solvency and viability.
Consumer confidence: Consumer confidence is a gauge of consumers’ sentiment about the economic climate and their consequent behavior in terms of expenditure and savings.
Expanded Definition
‘Consumer confidence’ is a key metric that gauges the degree of optimism or pessimism consumers feel about the overall state of the economy, which, in turn, influences their economic decisions, such as spending, saving, and investment activities. This measure serves as a vital economic indicator because it can directly affect the economy’s health and stability. High consumer confidence encourages increased spending and stimulates economic growth, whereas low confidence may lead to decreased spending, highlighting potential economic slowdown. Consumer confidence can also reflect consumers’ perceptions of job availability, personal financial situations, and future expectations, offering insights to businesses, investors, and policymakers.
Consumer goods: Consumer goods are products bought by individuals for personal use or consumption.
Expanded Definition
Consumer goods refer to products that are purchased by individuals or households for immediate use or consumption. These are the end products in the production process that directly satisfy human wants or needs. Consumer goods can either be durable (products that can be used for a long period such as furniture or cars) or non-durable (items used for immediate consumption like food or toiletries). Services catering to immediate consumer needs, such as healthcare, entertainment, or restaurant dining, also fall under the category of consumer goods. In essence, any product or service bought by the average consumer that contributes to their comfort, satisfaction, or day-to-day practical needs can be considered a consumer good.
Consumer price index (CPI): The CPI is a statistical metric charting the average price alterations in a set of standard goods and services purchased by urban consumers, reflecting cost of living changes.
Expanded Definition
The Consumer Price Index (CPI) is a statistical tool used to evaluate the average variation in the pricing of a specific set of consumer goods and services over a certain period. The set, often referred to as “market basket,” typically includes a diverse range of products and services, such as food, housing, clothing, education, transportation, medical care, among others. It is predominantly sourced from urban areas, representing a large proportion of the total population, in order to provide a comprehensive reflection of general pricing trends. The CPI is integral for understanding the rate of inflation, assessing cost of living, and making economic policy decisions.
Consumer sovereignty: Consumer sovereignty refers to the power of consumers to dictate what goods and services are produced in an economy, based on their purchasing habits.
Expanded Definition
‘Consumer sovereignty’ is a foundational concept in economics which asserts that the preferences and spending habits of consumers dictate the types of goods and services produced within an economy. Essentially, consumer choices, guided by individual needs and wants, ultimately steer the direction of production. This means that businesses need to accurately perceive and adapt to these consumer preferences in order to maintain a successful operation. This principle underscores the importance of market research and strategic analysis for businesses to thrive in competitive markets.
Consumers: Consumers are individuals who purchase and use products or services to fulfill their needs or desires.
Expanded Definition
‘Consumers’ refers to individuals or households that procure and utilize goods and services generated within the economy to fulfill their personal needs, desires, or demands. These purchases can encompass a wide array of products such as food, clothing, housing, and healthcare, to services that include transportation, education, and entertainment. The term ‘Consumer’ is particularly pivotal in economic frameworks, as consumer expenditure significantly contributes to economic growth and monetary cycles.
Consumption: Consumption is the utilization of goods and services by consumers.
Expanded Definition
‘Consumption’ is a key economic term that refers to the process by which individuals, groups or organizations utilize goods and services to meet their needs and wants. In this context, these goods or services could be tangible products like food items or clothes, or intangible offerings like healthcare or educational services. Consumption does not just imply the physical use of a product, but can include other aspects as well such as usage of digital platforms or subscribing to a service. As a central element of the economic framework, understanding consumption patterns and behavior can illuminate sector-specific trends and overall economic health.
Contango: Contango refers to the condition in the futures market where future contracts trade at a premium to the actual spot price of the underlying asset. It’s the opposite of backwardation.
Expanded Definition
Contango is a term used in commodity futures trading to describe a condition where the future delivery price of a commodity is higher than its current “spot” or market price. This typically occurs when market participants are willing to pay more in the future due to factors like storage costs, or where they anticipate that the commodity’s price will rise over time. Essentially, contango represents a market scenario where investors express a higher demand for owning a commodity in the future rather than in the present. This concept is in contrast to backwardation, which describes a situation where future delivery prices are lower than the spot price, suggesting a preference for immediate ownership or usage.
Contract: A contract is a legally enforceable arrangement between two parties, such as a buyer agreeing to repay a loan for a car purchase at a specific interest rate for a set time.
Expanded Definition
A contract is a legally binding agreement entered into between two or more parties, wherein each party pledges to undertake specified tasks or fulfill certain obligations. For instance, a party may agree to provide goods or services in exchange for a certain amount of money. The essential elements of a contract include mutual consent, consideration, capacity, and legality. Taking a car purchase as an example, the contract comprises the buyer agreeing to pay the decided sum financed at a predetermined interest rate within a defined time frame. The breach of such a contract may result in legal consequences that enforce the obligated party to either comply with the agreement or compensate for the losses incurred by the other party.
Contraction: A contraction is a phase in the economic cycle where the Gross Domestic Product (GDP) falls, signaling a decrease in economic activity.
Expanded Definition
‘Contraction’ is a term primarily utilized in the field of economics to define a phase marked by a decrease in a country’s real Gross Domestic Product (GDP). To elaborate further, a contractionary period is an economic downturn in which the total market value of all goods and services produced by an economy diminishes, revealing a decline in economic growth. This occurrence is an integral part of the business cycle, which also includes growth or expansion, peak, contraction, trough, and recovery stages. Prolonged periods of contraction can lead to a recession. As they can have significant impacts on various sectors, understanding these fluctuations is crucial for both policymaking and business strategy.
Contractionary monetary policy: Contractionary monetary policy is a strategy by the Federal Reserve to curb spending and investment by raising interest rates. It’s used to prevent excessive inflation.
Expanded Definition
Contractionary monetary policy is a strategy employed by a country’s central banking system, such as the Federal Reserve in the United States, to control and slow down an economy that is growing too fast. This is done primarily by increasing the short-term interest rates, which makes borrowing more expensive. Consequently, consumers and businesses are less likely to take on new debt and more likely to reduce spending. This policy serves to alleviate potential inflationary pressures on the economy, ensuring its stability and sustainability.
Core Consumer Price Index: The Core Consumer Price Index (CPI) is a measure of inflation that excludes the often volatile costs of food and energy, providing a clearer view of underlying price trends.
Expanded Definition
The ‘Core Consumer Price Index’ (Core CPI) is a specific measure of inflation within an economy that analyzes the average change in price over time for a basket of goods and services, excluding volatile items such as food and energy. The intention behind excluding these items is to provide a more stable, and thus more realistic, figure by discarding categories that might distort the overall trend due to their tendency to experience dramatic price fluctuations. By focusing on long-term price trends of a broad range of other commonly purchased goods and services, such as clothing, transportation, education, and health care, among others, the Core CPI offers a useful tool for economists and policymakers to evaluate the overall health of an economy and make informed decisions.
Core inflation: Core inflation refers to the change in costs of goods and services excluding food and energy prices, providing a more stable and less volatile measurement of inflation.
Expanded Definition
Core inflation is an economic term that refers to the changes in the costs of goods and services, but does not include the price volatility of certain categories that are subject to frequent and potentially highly variable price changes, most notably food and energy items. This measurement is derived from the Core Consumer Price Index (CPI), which tracks changes in price levels of a broad range of consumer goods and services, excluding the aforementioned volatile categories. By not considering food and energy prices in its calculation, core inflation provides a smoother, more stable, and thus more accurate, indicator of long-term inflation trends. The term is frequently used by policymakers, particularly central banks, to guide monetary policy decisions aimed at maintaining stability in the economy.
Corporation: A corporation is a business entity legally distinct from its owners, whose equity is divided into transferable shares.
Expanded Definition
A corporation is a complex and legal business entity that is separate and distinct from its owners, who are known as shareholders. Shareholders have the benefit of limited liability protection, meaning they are only financially responsible up to the amount of their investments within the corporation. Its distinct entity status allows a corporation to possess rights similar to individuals, such as entering contracts, owning assets, suing or being sued. Corporations can have an indefinite lifespan and can be useful for raising capital as they have the ability to issue various classes of shares. They are generally regulated under specific laws and governed by a board of directors, who are elected by the shareholders to oversee the strategic direction of the business.
Cost of living: ‘Cost of living’ refers to the sum of money required to maintain a certain lifestyle, encompassing expenses on essentials like housing, food, taxes, and healthcare.
Expanded Definition
The ‘cost of living’ is a term that refers to the overall expenditure that an individual or a household needs to incur in order to sustain a particular standard of lifestyle. It involves the total costs of goods and services including housing, groceries, utilities, taxes, and healthcare within a specific period. The cost of living is often used as an index to compare how expensive it is to live in different geographical areas. A higher cost of living typically means that you would need a higher income to maintain the same standard of living that you could achieve with a lower income in a less expensive area.
Cost-benefit analysis: Cost-benefit analysis is a systematic approach to estimate the strengths and weaknesses of alternatives in order to determine options which provide the best approach to achieve benefits while preserving savings. It involves comparing a project’s potential costs with its anticipated benefits, accounting for monetary and non-monetary factors, amidst inherent uncertainties.
Expanded Definition
Cost-benefit analysis refers to a systematic approach employed to evaluate and compare the advantages and disadvantages of business decisions or public sector projects. Its primary objective is to ascertain the overall feasibility and profitability of an investment or initiative. This analytical process involves juxtaposing all possible costs, such as operational, capital, and indirect costs, against the prospective benefits or revenues. The result aids in making informed financial and strategic decisions. However, it’s important to note that the precision of a cost-benefit analysis hinges on the accuracy of the estimations made. For instance, construction projects often exceed their predicted timelines and budgets, affecting the initial cost-benefit analysis. Another complexity lies in quantifying non-monetary factors, such as the environmental impact or potential effects on human life and health. Assigning a monetary value to these elements can prove challenging and often provokes debate due to the inherent subjectivity involved. Hence, it’s crucial to approach this method with a solid understanding of its limitations and potential controversies.
Cost-push inflation: Cost-push inflation is a type of inflation driven by surges in the price of inputs such as labor and raw materials, leading to increased costs for consumers.
Expanded Definition
‘Cost-push inflation’ refers to a specific type of economic inflation that is driven by a substantial increase in the cost of goods or services production, inclusive of components such as labor wages and raw materials. In this scenario, producers or service providers are compelled to escalate their selling prices to maintain profitability. This subsequently drives the general price level higher, leading to inflationary situations. This is typically induced by supply-side factors, and its effects permeate through the economy, subsequently impacting the purchasing power of consumers due to higher costs of goods and services.
Costs: Costs refer to any liabilities, financial or otherwise, that negatively impact a decisionmaker’s choices.
Expanded Definition
‘Costs’ are defined as the monetary expenditure, resource use, or any other sacrifices incurred as a result of a decision or action made by an individual, business, or organization. These costs can include financial payments, time, manpower, or any other resources utilized. They are considered a crucial part of decision-making processes as they impact the budget, profitability, and overall success of a project or operation. The term ‘costs’ is often contrasted with ‘benefits’, and a cost-benefit analysis is commonly used to evaluate the feasibility and profitability of a decision or investment.
Costs of production: ‘Costs of production’ are the total expenditures incurred in the process of creating a product, including expenses for resources such as labor, materials, and utilities.
Expanded Definition
‘Costs of production’ refers to the total monetary expenses incurred by producers or businesses in the process of creating goods or services. These expenses encompass various components such as the cost of raw materials, labor, rent or mortgage for buildings or factory spaces, machinery and technology, energy consumption, and other operational and overhead costs. Additionally, these costs can be classified into variable costs that fluctuate with output levels and fixed costs that remain constant regardless of production volume. Understanding the costs of production is pivotal in determining pricing strategies, analyzing profitability, and making informed business decisions.
Coupon payment: A coupon payment is the periodic interest received by the bondholder from the issuance till the maturity of the bond.
Expanded Definition
A ‘coupon payment’ refers to the periodic interest received by the bondholder from the issuer, typically on a semi-annual or annual basis, from the date the bond is issued until its maturity. This term originates from physical bonds which had coupons attached that bondholders would tear off and redeem for interest payments. In present day, no physical coupons are involved, but the name has stuck. The amount of coupon payment is set at a fixed percentage of the bond’s par value, providing a steady stream of income until the bond reaches its expiration date, at which point the bond’s principal amount is also repaid.
Coverage: Coverage refers to the extent of protection provided under an insurance policy against certain risks or damages.
Expanded Definition
‘Coverage’ refers to the extent to which an insurance policy will grant financial protection against certain types of risks or liabilities. It determines the specific types of incidents, events, or damages for which an insurance company will provide compensation or reimbursement, as well as the maximum limit of such payments. The details of coverage can vary widely across different policies and insurers, and it is a crucial consideration when evaluating and selecting insurance products.
Crawling peg: Crawling peg is a currency exchange system where one currency is tethered to another, but has room for limited fluctuation within a predefined boundary based on specific circumstances.
Expanded Definition
A ‘Crawling Peg’ is a term used in foreign exchange markets to describe a specific type of exchange rate regime. In this system, a country’s currency is attached or ‘pegged’ to another currency, but unlike a fixed exchange rate, it is allowed to fluctuate within a certain predetermined range or ‘band’. The ‘peg’ may be adjusted periodically based on specific economic indicators or market conditions, this is the ‘crawling’ aspect of the system. This approach offers a balance between maintaining stability in the exchange rate (like in a fixed exchange rate system) and allowing some flexibility for changes in the economy (like in a floating exchange rate system). Related concepts include ‘currency peg’, which ties a currency’s value to another, and ‘fixed exchange rate’, where the rate is set and does not change.
Creative destruction: ‘Creative destruction’ is an economic theory by Schumpeter that highlights the necessity of obsolete businesses’ dissolution to free up resources for innovative ventures.
Expanded Definition
‘Creative destruction’ is a sophisticated economic theory, initially cultivated by the reputable economist Joseph Schumpeter. The theory elucidates the cycle of innovation within the economic arena. It asserts that obsolescent or inefficient companies should cease operations, thereby liberating capital and labor. These resources can then be redirected and employed in novel, often more efficient ways, fueling economic growth and innovation. This theory underscores the constant process of transformation that innovates economies, emphasizing that it’s outdated business constraints that often impede new opportunities.
Credit: Credit is the provision of funds or resources by one party to another, under an agreement of future reimbursement, often with interest.
Expanded Definition
‘Credit’ can be comprehensively defined as a financial mechanism wherein a lender, typically a bank, corporation, or individual, extends a certain amount of financial resources or goods of value to a borrower. The exchange is marked by an agreement where the borrower pledges to reimburse the lender at a specified future date, often with an additional cost known as interest. This arrangement is commonly used to facilitate purchases, investments or business operations, that the borrower may not otherwise immediately afford, while enabling the lender to yield financial returns.
Credit card: A credit card is a financial tool issued by a lender, such as a bank or retail store, that allows the cardholder to borrow funds to purchase goods or services or access cash on credit.
Expanded Definition
A ‘Credit Card’ is a type of payment card, issued by financial institutions, that provides the cardholder with a pre-approved line of credit. The agreement between the card issuer and the cardholder allows for the cardholder to borrow funds, which can be used for purchasing goods and services or obtaining cash advances. Credit cards offer the flexibility of repeated use, as long as the cardholder does not exceed the specified credit limit. Payments made with credit cards are, in effect, loans that the cardholder is obligated to pay back, either in full by a certain date or over time with interest payments. Not only banks and savings and loan associations, but also certain retail stores and businesses may issue credit cards. Distinguished by their convenience and global acceptance, credit cards are a key financial tool in today’s economy.
Credit card balance: ‘Credit card balance’ is the total amount you owe on your credit card, accumulated through purchases, fees, and interest charges.
Expanded Definition
A ‘Credit Card Balance’ refers to the total sum of money that the cardholder owes to the credit card issuer. This includes all the purchases made, cash advances taken, any accumulated interest, fees, charges, and penalties. The balance fluctuates based on the user’s activity – including spending, payments, and any credits received – and it is expected to be paid by the due date each billing cycle to avoid potential penalties or interest accrual. The outstanding balance is one of the key factors that contribute to the computation of credit score.
Credit card minimum payment: A credit card minimum payment is the smallest mandatory amount a cardholder must pay monthly on their credit card balance, dictated by the balance size and interest rate, to prevent delinquency.
Expanded Definition
The ‘credit card minimum payment’ is the smallest amount that a cardholder is required to remit to their credit card issuer within the monthly billing cycle to maintain their account in good standing. It acts as a compromise between the borrower and lender that allows the borrower to manage their debt over a period of time. The specific amount is determined by the credit card issuer and is typically a function of the cardholder’s overall balance and the applicable annual percentage rate (APR). Notably, only paying the minimum amount can result in significant interest charges over time due to the compounding effect of credit card interest.
Credit counseling service: A credit counseling service is a consultancy aiding individuals with credit issues, by providing strategies to effectively manage and resolve debt obligations.
Expanded Definition
A credit counseling service is a professional agency that provides guidance and support to individuals experiencing difficulties with managing their credit. This service caters particularly to consumers who are facing problems such as high-level debts or facing potential bankruptcy. Through credit counseling services, consumers receive expert advice on creating viable strategies for debt repayment, understanding credit-related topics, and learning ways to improve their financial health. The ultimate objective of such services is to empower consumers to take control of their financial circumstances, meet their debt obligations effectively, and avoid future credit issues.
Credit crunch: A credit crunch is a swift decline in the availability of loans or credit from banks, often leading to negative economic effects.
Expanded Definition
A ‘Credit Crunch’ is a complex economic circumstance characterized by a sudden and drastic curtailment in the general availability of loans or credit from banking and other financial institutions. This reduction in lending activity is typically driven by a sudden increase in the perceived risk associated with lending due to circumstances such as economic downturns, drastic changes in market circumstances, or failures in the regulatory environment. It often results in significant economic impacts, including stifled economic growth and increased difficulty for businesses and individuals to secure financing. This can trigger a slowdown in general economic activity, as borrowing becomes more expensive and less accessible, thus inhibiting investment and consumption expenditure.
Credit default swap (CDS): A Credit Default Swap (CDS) is a derivative contract that provides insurance against default risk, wherein the buyer pays a periodic premium to the seller in exchange for coverage against specified credit events, such as a default.
Expanded Definition
A Credit Default Swap (CDS) is a form of financial instrument known as a derivative, which gets its value from the performance of an underlying entity, often a fixed-income asset such as a bond or loan. The CDS functions as a form of protection or ‘insurance’ against the risk of default by the issuer of the underlying asset. In a CDS, the buyer makes regular, stipulated payments to the seller, somewhat akin to insurance premiums. In return, the seller agrees to compensate the buyer under certain conditions – typically if the issuer of the underlying asset experiences a ‘credit event’, a term of art in the financial world that often refers to a default or failure to make payment on the asset. Thus, the CDS offers a means for investors to manage or ‘hedge’ their exposure to credit risk. This can be valuable for institutions like banks, hedge funds, and insurers who have substantial investments in debt obligations and may wish to protect themselves from losses due to default of those obligations.
Credit expansion: Credit expansion refers to an increase in the lending activities of financial institutions, typically witnessed during economic growth periods. However, too rapid an expansion might signify risky levels of speculation, particularly in real estate.
Expanded Definition
‘Credit expansion’ refers to a growth in the readiness of banks and other financial institutions to offer loans, typically observed during a period of economic prosperity or boom. This broader access to credit enables more investment and consumer spending, further stimulating the economy. However, rapid and unsubstantiated credit expansion may reflect over-speculation, particularly in high-risk sectors such as real estate, and could potentially lead to financial instability. Particular caution is needed to avoid credit bubbles and subsequent market crashes.
Credit history: A credit history is a record of an individual’s past behavior in fulfilling debt obligations, indicating their level of financial responsibility.
Expanded Definition
A ‘Credit History’ pertains to a comprehensive record that reflects an individual’s borrowing and repayment activities over a specific duration. This includes any previous debts, promptness in payment, default in debts, or bankruptcy. This history plays a crucial role in forming a credit score, which financial institutions use to assess the individual’s creditworthiness. The credit history helps lenders make informed decisions on whether to approve or deny credit application based on the individual’s past financial behaviour. Prospective employers, landlords, and insurance companies may also reference this record to evaluate financial reliability.
Credit rating agencies: Credit rating agencies are companies that evaluate and assign ratings to financial securities, thus determining their creditworthiness. They play a significant role in the financial market, with the Securities and Exchange Commission overseeing their standard of operations.
Expanded Definition
‘Credit rating agencies’ can be more comprehensively defined as professional firms that evaluate the financial strength and creditworthiness of entities such as businesses, governments, and investment products. They focus on analyzing the capability and willingness of an entity to meet its financial obligations. This assessment is translated into a credit rating, which is a simplified metric to convey the complex risk assessment to all market participants like investors, regulators, or financial intermediaries. These ratings significantly influence the investment decisions as they provide an indication about the likelihood of default – a scenario where the debt issuer is unable to repay the debt. Key global credit rating agencies include Moody’s Investor Service, Standard & Poor’s (S&P), and Fitch Ratings. Moreover, these agencies operate under a strict regulatory framework. In the United States, for instance, they must adhere to the regulations and standards enforced by the Securities and Exchange Commission (SEC) to ensure transparency, accuracy, and fairness in their credit rating process. These agencies enhance the efficiency of the financial markets by reducing information asymmetry and providing valuable and credible risk insights.
Credit report: A credit report is a detailed record maintained by a credit bureau, charting an individual’s loan and bill payment history, utilized by creditors to assess the potential risk of default on future debts.
Expanded Definition
A credit report is a comprehensive financial document compiled and maintained by credit bureaus. This report provides an extensive record of an individual’s or business’s debt repayment history, including loans and bill payments. Financial institutions, lenders, and other potential creditors scrutinize this document to assess the borrower’s creditworthiness, i.e., the level of risk involved in lending money to them. This risk is evaluated based on the individual’s or business’s past behavior in settling debts, thereby predicting their likelihood of repaying future debts on time and in full.
Credit reporting bureau: A credit reporting bureau is an entity that gathers and provides credit information on individuals and businesses to interested parties for a charge.
Expanded Definition
A ‘Credit Reporting Bureau’ is a specialized agency that collects and organizes detailed credit history data on individuals and commercial entities. This information includes payment habits, debt levels, financial status, and personal identifying factors. The credit bureau then aggregates these data into comprehensive credit reports which are made accessible to various businesses, typically lenders and creditors, for a nominal charge. These reports assist businesses in making informed decisions about lending money or extending credit lines, based on the borrower’s creditworthiness depicted through these reports.
Credit responsibilities: Credit responsibilities are the duties and conduct expected of individuals when utilizing credit, ensuring optimal credit use and management.
Expanded Definition
‘Credit Responsibilities’ can be more comprehensively defined as ‘The set of duties and obligations expected of individuals when they avail the use of credit. This typically includes prompt repayment of borrowed funds, appropriate management of credit utilization, maintaining a good credit score, and adhering to the terms and conditions outlined in the credit agreement. These responsibilities serve to encourage fiscal discipline, prevent accumulation of excessive debt, and protect one’s financial reputation.’
Credit rights: Credit rights refer to the legal safeguards that aid individuals in securing and preserving credit.
Expanded Definition
‘Credit rights’ can be defined as the legally established safeguards designed to aid individuals in acquiring and preserving credit. These protections ensure fair treatment in the process of applying for credit, rectify erroneous credit reporting, and prevent discrimination based on factors unrelated to creditworthiness, such as sex, race, religion, or age. The aim of these rights is to promote equitable accessibility to credit and enable consumers to influence their credit reputation.
Credit score: A credit score is a numerical representation of an individual’s creditworthiness, derived from their credit history.
Expanded Definition
A credit score is a quantifiable measure, typically represented by a three-digit number, derived from the analysis of an individual’s credit report. This score is an assessment tool used by financial institutions and creditors to gauge the creditworthiness or risk associated with lending money or extending credit to a certain individual. The score is influenced by various factors such as the individual’s payment history, debt level, credit length, and unique factors within the credit report. A higher score generally indicates lower credit risk and a greater likelihood of repayment, facilitating favorable borrowing terms. In contrast, a lower score may signify a higher lending risk.
Credit union: A credit union is a member-owned, nonprofit entity offering banking services, where profits are returned to members as lower fees or higher interest rates.
Expanded Definition
A credit union is a member-owned, not-for-profit organization that offers a range of financial services. These services can include savings and checking accounts, loans, and credit cards among others. The core principle of a credit union is the democratic control where each member, regardless of the size of their deposits, has one vote, fostering a community-centric approach to financial management. The non-profit nature of credit unions typically allows them to offer more competitive rates and lower fees, making them an attractive alternative to traditional for-profit banking institutions. As they are typically community-based, they also often invest their profits back into services that directly benefit their member owners, such as customer service and financial education programs.
Creditor: A creditor is an individual or entity that provides funds or resources to another party, usually in the form of a loan.
Expanded Definition
A ‘Creditor’ is categorically defined as an individual, a financial establishment such as a bank, or a commercial entity who grants credit by lending financial resources or capital. This credit is typically provided under a defined repayment structure which includes terms of interest rates and repayment schedule. The creditor retains the right to demand repayment in specific circumstances as defined by a legally binding credit agreement.
Credits: ‘Credits’ refer to the sums of money added or deposited into an account, thereby increasing the account balance.
Expanded Definition
‘Credits’ can be defined as increments or deposits made to an account, signifying an increase in its balance. This term often applies to financial and banking sectors, expressing the process when currency is added into a bank account. A credit could potentially occur from various transactions such as deposits, refunds, or returned purchases. In the context of a bank account register, credits signify positive adjustments that enhance the overall account balance, enhancing an individual’s or an entity’s financial resources.
Criteria: ‘Criteria’ refers to the essential benchmarks or yardsticks used to evaluate and make decisions between different options.
Expanded Definition
‘Criteria’ is a term used to denote a defined set of principles or guidelines. These principles provide a structured means for evaluating, assessing, and making decisions among different alternatives or options. These parameters act as a benchmark or reference point, facilitating a systematic and objective comparison in order to identify the most favorable or effective choice. Criteria can be customized depending on the unique needs or objectives of a situation, making them a crucial element in the decision-making process.
Criteria (elementary): Criteria are crucial factors or standards considered in decision-making processes.
Expanded Definition
‘Criteria (elementary)’ can be professionally defined as ‘Fundamental considerations or standards that play a vital role in the process of decision-making. These are foundational elements of an evaluative process, used to systematically measure, judge or select, based on defined parameters or qualities.’
Crony capitalism: Crony capitalism is an economic system where businesses prosper through ties with political figures rather than through market competition. It’s closely related to rent-seeking and was quantified using a crony-capitalism index by The Economist in 2014.
Expanded Definition
“Crony capitalism” refers to an economic system where success in business is heavily influenced by personal relationships with political leaders rather than business competencies, market dynamics, or the quality and innovation of products or services. In such a system, preferential treatment (in the form of tax breaks, government grants, or other forms of state intervention) may be given to businesses because of their connections with influential political authorities rather than their economic viability or competitiveness. This use of power for personal gain can also lead to a practice known as rent-seeking, where companies exploit their political connections in order to increase their own profits without generating any significant value or wealth for the economy overall. In 2014, The Economist devised a crony-capitalism index, assessing and ranking the prevalence of such practices in several major economies.
Crowding out: “Crowding out” refers to the scenario where government borrowing drives up interest rates, making it too costly for the private sector to secure loans.
Expanded Definition
‘Crowding out’ is an economic theory that refers to a situation where increased public sector borrowing drives up interest rates in the loanable funds market. In this scenario, the government’s demand for borrowed funds surpasses the available supply, leading to higher borrowing costs, or interest rates. As a result, private entities, like businesses and individuals, may find borrowing costs unaffordable or prohibitively expensive. Consequently, they might reduce their investment in expansion projects or consumption, respectively. This phenomenon indicates a negative correlation between public and private sector investment due to limited financial resources.
Cryptocurrency: Cryptocurrency is a digital or virtual form of currency, leveraging blockchain technology for decentralization, transparency, and immutability. Despite its volatility, it’s seen by enthusiasts as a method to elude traditional financial systems governed by banks and governments.
Expanded Definition
‘Cryptocurrency’ refers to a form of digital or virtual currency that uses cryptography for security. It is typically decentralized and operates on a technology called blockchain, which is a distributed ledger enforced by a network of computers, known as nodes. While some central banks have explored producing their own versions, most cryptocurrencies are produced privately. Some of the most well-known include Bitcoin and Ethereum. Cryptocurrency advocates often tout its potential as an alternative to traditional ‘fiat’ currency, such as the USD or EUR. Fiat currency is government-issued money that isn’t backed by a physical commodity like gold or silver. Rather, it’s value comes from the trust and acceptance of the people who use it. By disintermediating fiat currency, cryptocurrency enthusiasts argue that it can eliminate governmental and banking control or intervention. However, the fluctuating nature of cryptocurrencies’ value has impeded their ability to function as a viable store of value (an asset that can be saved, retrieved and exchanged at a later time) or medium of exchange (used for transactions instead of bartering). The substantial price volatility makes it challenging to predict their worth at any given moment, thus reducing their utility as a dependable unit of account.
Currency: Currency is a form of money that is accepted as a medium of exchange in a particular country or region, often issued and regulated by its government.
Expanded Definition
‘Currency’ is conventionally defined as a system of money in general use in a particular country. Although coins and banknotes (traditionally made from a specific type of paper or polymer) are the physical manifestations of currency, in its broader sense, it also includes non-physical forms like electronic or digital currency. It functions as a medium of exchange, a unit of account, and a store of value, universally recognized for trade of goods and services.
Currency peg: A currency peg is a monetary policy where a country’s currency value is fixed relative to another currency, often the US dollar, to stabilize its value and control inflation. However, it can sometimes lead to high interest rates and recession.
Expanded Definition
A “Currency Peg” is a monetary policy implemented by governments or central banks, where the value of a nation’s currency is directly linked or ‘pegged’ to a foreign currency. This foreign reference is often a currency of a stable, robust economy, frequently the US dollar. This policy is most common among developing countries grappling with historical inflation and recurrent depreciation of their currency. By setting a fixed exchange rate, these countries aim to foster economic stability and instill domestic and foreign investor confidence. In practice, however, maintaining a currency peg can often demand stringent economic measures, such as increased interest rates, which may result in economic slowdown or recession. Thus, the feasibility of maintaining the peg is occasionally questioned, and the policy is sometimes deserted due to these restrictive economic conditions. Despite potential drawbacks, a currency peg serves as a strategic policy tool, particularly for economies striving to improve their financial credibility and market stability.
Current account: A current account is a nation’s record of its transactions with the rest of the world, including exports, imports, net investment income, and transfers. It serves as an indicator of a nation’s economic health.
Expanded Definition
A ‘Current Account’ is a vital component of a nation’s balance of payments, a comprehensive economic report that tracks the financial interactions of a country with the rest of the world. This account specifically chronicles the country’s international trade in goods and services, its net earnings from overseas investments, and its net transfer of funds. By tracking imports and exports, it helps to showcase trade balance, while net investment income reflects the country’s investment activity and the effectiveness of these investments. Lastly, net transfers include things like foreign aid and remittances, which further impact the nation’s financial position on the global stage. Essentially, the current account offers a detailed overview of a nation’s financial relationship with other countries.
Current population survey: The Current Population Survey is a regular data collection by the U.S. Bureau of Labor Statistics to gauge labor force characteristics.
Expanded Definition
The ‘Current Population Survey’ is a methodical research procedure executed by the U.S. Bureau of Labor Statistics. This comprehensive survey aims to gather critical data about the demographic, social, and economic elements linked to the labor force of the U.S. It serves as a primary source of information on subjects ranging from employment, unemployment, earnings, hours of work, and other variables. Conducted monthly, it uses scientifically selected samples of the U.S population to achieve statistically valid results, and its findings are invaluable for policymakers, researchers, and economists in making informed decisions.
Cyclical unemployment: Cyclical unemployment is joblessness arising from economic downturns or recessions, often due to decreased demand in the economy.
Expanded Definition
‘Cyclical unemployment’ can be more comprehensively and professionally defined as “a type of unemployment that is directly attributable to fluctuations, or stages, in the business cycle. It typically happens when an economy faces a downturn, often during a recession. During these periods, job vacancies are scarce as businesses tend to cut back on their workforce to manage costs, resulting in job losses and increased unemployment rates. Once the economy recovers, cyclical unemployment generally decreases as businesses start to expand operations and re-hire personnel.”

D

Data mining: Data mining is the process of extracting valuable insights from massive datasets by identifying recurrent patterns.
Expanded Definition
Data mining is comprehensively defined as the systematic and structured process of analyzing substantial volumes of intricate data with the purpose of identifying, extracting, and summarizing latent, useful information. This specialized analytic procedure involves techniques such as statistical analysis, machine learning, and database systems, with the key objective of discovering novel and meaningful patterns, relationships, or trends. These insights can be utilized to enhance decision-making, predict behavior, and inform strategy in various fields such as marketing, healthcare, finance, and much more. It thereby transforms potentially overwhelming data into actionable, beneficial intelligence.
Data mirroring: Data mirroring is the process of creating an exact copy of data from a separate source, essentially ensuring real-time redundancy for data recovery.
Expanded Definition
“Data mirroring” refers to the process where data from one location is duplicated or cloned in real-time to another storage system or location. This is a critical part of data management strategies that heighten data availability, ensure data accuracy, facilitate rapid recovery in the event of data loss, and provide a reliable backup. This process is typically used in applications that demand high availability and data consistency, such as disaster recovery, business continuity, and load balancing strategies, among others.
Data robots: Data robots are software automation tools that perform data-focused tasks such as downloading or update checks autonomously.
Expanded Definition
‘Data robots’, also known as ‘bots’, can be more accurately and succinctly defined as: ‘Automated software-driven mechanisms designed to perform specific data-oriented tasks. These tasks range from fetching and downloading data, to constantly monitoring for and implementing necessary system updates. They help in reducing manual effort, increasing efficiency and ensuring accuracy by eliminating human error.’
Debit card: A debit card is a payment tool that deducts funds directly from a user’s bank account for transactions, serving as a cashless alternative.
Expanded Definition
A debit card is a payment card crafted from plastic or metal, which is visually akin to a credit card. However, unlike a credit card, its functionality is tied directly to the cardholder’s bank account. Whenever a transaction is made using a debit card, funds are immediately deducted from the associated bank account. This card permits the cardholder to withdraw cash from ATMs and facilitates direct financial transactions, eliminating the need for cash or checks. Please note, the amount the cardholder can spend or withdraw is subject to the availability of funds in their bank account, which differentiates a debit card from a credit card where the customer borrows money from the bank up to a defined limit.
Debits: Debits refer to the amounts deducted from an account, reducing its balance.
Expanded Definition
‘Debits’ is a term used in financial accounting that denotes any transactions resulting in withdrawal, expenditure, or charges from a financial account. Such transactions cause a decrease in the overall balance of the account. Whenever a debit is made, it’s recorded and subtracted from the current account balance, thereby playing a critical role in maintaining an accurate and organized record of an account’s overall financial activity. It’s paramount to note that debits are one part of the fundamental accounting equation wherein every debit must have a corresponding credit.
Debt: Debt is the obligation to repay borrowed funds or credit used for purchases.
Expanded Definition
‘Debt’ refers to the financial obligation that one entity owes to another entity. It is often acquired when one party borrows money, goods, or services from another party under an agreement or contract. The borrowing party, also known as the debtor, is obligated to return the equivalent value to the lending party, referred to as the creditor. The debt usually incorporates repayment terms, including the timeline for repayment and any interest charges. It plays a significant role in economic and financial systems, allowing entities to invest, grow, and meet immediate needs with resources they don’t currently possess but commit to repay in the future.
Debt (elementary): Debt is the obligation to repay borrowed funds, encompassing the principal and often interest accrued.
Expanded Definition
‘Debt’, in its most basic sense, is characterized as the amount of money or financial obligation that an individual, company, or any entity owes to another party due to an initial borrowing. It emerges from a contractual agreement in which one party lends money to another with the expectation that it will be paid back in full, often with agreed interest, within a specified timeframe. The party that owes money is referred to as the ‘debtor’, and the party that lent the money is known as the ‘creditor’. This concept is foundational to many financial systems and activities such as loans, credit systems, and investments.
Debtor: A debtor is an individual or entity that is financially obligated to another party due to a contractual agreement.
Expanded Definition
A ‘Debtor’ is a term used in financial accounting to define an individual, business, or any other entity that is legally obligated to provide a repayment or service to another entity because of a past transaction. This obligation generally manifests itself as a monetary debt that the debtor owes following a transaction, such as a loan, the provision of goods or services, or other forms of credit extensions. The entity to which the money is owed is typically referred to as a ‘creditor’.
Deductible: A deductible is a predetermined sum paid by the insured party before an insurance provider begins covering costs, as stipulated by the insurance policy terms.
Expanded Definition
A ‘Deductible’ is a monetary figure stipulated in an insurance policy, which represents an initial amount the policyholder is obligated to pay out-of-pocket toward the cost of an insured loss before the insurance coverage commences. The specific value of the deductible is pre-determined and outlined within the provisions of the insurance contract. Once the deductible has been paid, the insurance company then starts covering the remaining expenses related to the insured loss, up to the policy’s maximum coverage limit. This principle is applicable across various types of insurance, including health, auto, and homeowners insurance.
Default: Default is when a borrower fails to make their scheduled payments on a loan or debt in a timely manner.
Expanded Definition
In financial terms, ‘default’ refers to the inability or failure to fulfill a contractual obligation, especially when a debtor neglects or is unable to make a scheduled payment of interest or principal amount due on a loan or debt within the agreed timeline. This could occur with loans, home mortgages, and bonds, among other credit agreements, often leading to penalties and potentially impacting the debtor’s credit score.
Deferral: A deferral is the process of delaying or postponing something to a future time.
Expanded Definition
‘Deferral’ refers to the act of delaying or postponing specific actions, decisions, or proceedings to a future time. This concept is most commonly used in financial contexts, where it indicates the adjournment of certain fiscal responsibilities such as payments or investments, or in the academic environment, where it denotes the delay of studies or examinations. The purpose of a deferral is often to provide individuals or entities with additional time to prepare, gather resources, or take on other necessary measures before the deferred task or obligation is due.
Defined-benefit retirement funds: Defined-benefit retirement funds are pension schemes backed by the government, where retirement benefits are calculated based on factors such as employment tenure and salary, tailored specifically for government employees.
Expanded Definition
‘Defined-benefit retirement funds’ can be described as a type of pension plan predominantly managed by governmental agencies. They are financially engineered to provide a set, pre-determined pension payment upon an employee’s retirement, computed based on their salary history, tenure of service, and age. Unlike defined-contribution plans where the benefits fluctuate on individual contributions and investment returns, defined-benefit pensions guarantee fixed payouts, irrespective of market performance, making the government responsible for funding any shortfall. Though commonly associated with government employees, some private sector companies may also offer this type of retirement fund.
Deflation: Deflation is a persistent decrease in the overall prices of goods and services in an economy.
Expanded Definition
Deflation is an economic phenomenon characterized by a continuous and broad-scale decrease in the prices of goods and services within an economy. This often occurs when the supply of goods exceeds demand, leading to a surplus. Deflation can also be attributed to a reduction in the supply of money or credit availability. While occasional price drops can benefit consumers due to increased purchasing power, sustained deflation can signal economic distress, potentially leading to reduced business investment and a decrease in employment. Thus, understanding deflation is crucial for effective economic planning and policy-making.
Delayed gratification: Delayed gratification is the practice of foregoing an immediate reward in favor of a greater future gain, demonstrating self-control.
Expanded Definition
“Delayed gratification” refers to the deliberate decision and self-discipline to forgo an immediate, typically smaller, benefit or reward in anticipation of a more significant or satisfying reward in the future. This ability is a testament to one’s self-control and self-regulation, spotlighting one’s capability to prioritize future success over immediate satisfaction. This concept is crucial in various areas of life, such as personal finance, education, health, and psychological resilience. It often involves dealing with a certain degree of discomfort or sacrifice in the short term to achieve long-term goals and beneficial outcomes.
Delinquency rate: The delinquency rate is the ratio of loans with overdue payments to the total number of loans, typically expressed as a percentage.
Expanded Definition
The ‘delinquency rate’ is a financial term referring to the proportion of loans within a loan portfolio that have failed to maintain timely payments. It is quantified as a percentage, calculated by dividing the total number of loans with outstanding or overdue payments by the total number of loans offered. Essentially, the delinquency rate serves as a key indicator of the quality of loans, reflecting the financial health and credit risk of a given lending institution, whether it be a bank, credit union, or other financial entity. High delinquency rates may demonstrate increased credit risk and potential financial instability, while low rates suggest a majority of consumers are meeting their repayment obligations.
Delinquent: ‘Delinquent’ refers to the late or missed payments on a loan or credit contract.
Expanded Definition
‘Delinquent’ is a financial term primarily used to describe a state of default characterized by the failure to meet scheduled payments under a loan or other forms of credit arrangements within the stipulated time. It implies a breach of the agreement terms and can potentially lead to punitive actions such as additional fees, increased interest rates, and negative impacts on the debtor’s credit score. The term aids in identifying and categorizing borrowers who are at higher risk of default, enabling creditors to employ effective risk management strategies.
Demand: “Demand” refers to the amount of a product or service consumers are willing and able to purchase at varying prices within a specified timeframe.
Expanded Definition
‘Demand’ is a critical economic concept that refers to the total quantity of a specific product or service that consumers are willing and capable of purchasing at every potential price over a defined time frame. It captures the consumers’ desire to buy, underpinned by their purchasing power and readiness to part with resources to attain a product or service. In essence, demand is a comprehensive measure of the market’s preference and capacity for buying a particular product or service during a specific period.
Demand curve: A demand curve is a graphical depiction that shows the quantity of a product consumers are prepared to purchase at various price points within a specific duration.
Expanded Definition
A ‘Demand Curve’ is an economic model depicted through a graph that visually communicates the relationship between the price of a good or service and the corresponding quantity that consumers are prepared to purchase, given their buying capacity, during a specific time frame. The curve, typically downward sloping, illustrates how demand varies with price, signifying that consumers generally opt to buy more of a product as its price decreases and less as its price increases, everything else being equal.
Demographic data: Demographic data refers to quantitative information relating to population attributes such as age, gender, and income.
Expanded Definition
‘Demographic data’ refers to quantifiable statistical information that encapsulates specific attributes pertaining to a given population group. This data can unveil vital socioeconomic insights about that group, by illustrating comprehensive profiles drawn from key indicators such as age distribution, gender diversity, income levels, ethnic backgrounds, and educational attainment, among others. Analyzing demographic data helps in understanding trends, assisting in policy formation, planning marketing strategies, and predicting future scenarios, among other applications.
Dependency ratio: The dependency ratio is a metric reflecting the number of non-working (under 15 or over 64) individuals in relation to the working-age population, indicating the potential tax burden on the workforce. A higher ratio often implies greater economic stress on active workers, particularly in developed economies with significant aging populations.
Expanded Definition
The ‘Dependency Ratio’ is a demographic and economic indicator that measures the proportion of the total population that is either too young or too senior to participate in the labor force compared to the population that lies within the working age. This gauge typically defines dependent individuals as those aged below 15 or above 64. The dependency ratio is further broken down into ‘youth dependency’ and ‘old-age dependency’, which respectively refer to the proportion of young and old dependents. A rise in the dependency ratio signifies a larger burden on the economically active population, as they are expected to support the non-working population through taxes and other social services. It highlights potential socioeconomic pressures, especially in developed economies where life expectancy is high, leading to an increasing number of individuals who live beyond the conventional retirement age. This is synonymous with the term ‘economically inactive’, used to describe those who are not engaged in the labor market either as an employee or a self-employed person.
Deposit insurance: Deposit insurance is a government-provided safety net that protects bank depositors’ funds, including those in checking, savings, or time deposit accounts, in case the bank fails.
Expanded Definition
Deposit insurance refers to the coverage granted by a government agency, securing depositor’s funds held at financially backed institutions like banks or thrifts. It safeguards a range of account types, including checking and savings accounts that are commonly used for everyday transactions; negotiable order of withdrawal (NOW) accounts, which effectively combine the features of checking and savings accounts; money market deposit accounts, which yield higher interest rates and have higher balance requirements; and time deposits like Certificates of Deposit (CDs) which are interest-earning accounts with a specific maturity time. This protective mechanism ensures consumer confidence by minimizing the risk of potential losses if the financial institution fails.
Depository institution: A depository institution is legal financial entity, such as a bank or credit union, permitted to accept money deposits from customers.
Expanded Definition
A depository institution is a legally authorized entity within the financial sector that has the capacity to accept monetary deposits from individuals and businesses. These institutions primarily include commercial banks, savings banks, savings and loan associations, and credit unions. They play an integral role in the financial system by offering services such as savings accounts, checking accounts, and loan provisions, which facilitate the steady flow of money within an economy. Since they are typically subject to rigorous regulations, depository institutions also contribute to the overall security and stability of a nation’s financial infrastructure.
Depreciation: Depreciation refers to the decline in the worth of an asset or currency over time, often due to wear, age, or market conditions.
Expanded Definition
Depreciation, in the realm of finance and economics, is the process through which an asset’s monetary value diminishes over time due to factors such as wear and tear, obsolescence, or market conditions. When applied to currency depreciation, it represents the reduction in the value of the currency of one country relative to another currency. This is often a result of macroeconomic conditions, inflation rates, or changes in interest rates. This depreciation can impact the purchasing power of the currency, where a larger sum may be needed to purchase the same amount of goods or services compared to the past.
Depression: Depression is an extra-severe, sustained economic slump with marked reductions in GDP, beyond the scope of a recession.
Expanded Definition
Depression, in economic context, refers to a profound, enduring downturn in an economy, characterized by a significant decline in a country’s gross domestic product (GDP). This drop off in economic activity is notably harsher and elongated compared to a standard recession, leading to broad implications across sections of employment, productivity, and consumer spending. It is essentially a period of considerable economic distress, where the national income, output, and consumption fall drastically, impacting the economy’s functionality and growth.
Deregulation: Deregulation refers to the process of reducing or removing governmental regulations in order to encourage economic growth. It is often performed as a response to perceived regulatory overreach but tends to be cyclical due to public demand for restrictions on undesirable activities.
Expanded Definition
Deregulation refers to the process or policy of removing or reducing state regulations, typically within the economic sphere. It is often associated with conservative ideologies that advocate for minimal governmental interference in the economy, postulating that an excessive regulatory environment can impede economic growth. Periodically, governments may implement deregulation strategies to alleviate perceived bureaucratic hindrances, often metaphorically referred to as cutting the red tape. However, it is worth noting that public opinion and societal needs often compel governments to establish new regulations, particularly when it is deemed necessary to limit harmful or undesirable activities. Thus, while deregulation seeks to foster a more liberated economic environment, it is continually balanced with the implementation of new regulations to ensure public safety and welfare.
Derivatives: Derivatives are financial instruments whose value is linked to the price of an underlying asset, like stocks or commodities, often used for risk mitigation or speculative trading.
Expanded Definition
Derivatives are a type of specialized financial instrument that derive their value from another underlying asset or group of assets such as stocks, bonds, commodities, currencies, interest rates, or market indexes. Essentially, a derivative represents a contractual agreement between two parties stipulating the terms of payment or transfer tied to future price movements of the underlying asset. Examples of derivatives include futures, options, and swaps. In one of its use-cases, derivatives provide a hedge against potential negative impacts of unforeseen changes in the market value of an asset. For instance, a derivative might be used to protect against significant increases in commodity prices such as oil, thereby mitigating risks inherent in volatile markets. Alternatively, derivatives can also provide an avenue for speculative trading, presenting an opportunity to profit off accurate predictions of future price movements. Thus, while derivatives can act as safeguards, they can also magnify losses, leading some like veteran investor Warren Buffett, to label them as potentially damaging to the financial system. As such, understanding and managing the risks involved with derivatives is critical in financial markets.
Determinants of demand: ‘Determinants of demand’ are variables that influence the quantity of goods or services consumers are willing to buy, including changes in income, tastes, prices of related items, buyer number, and expectations.
Expanded Definition
“Determinants of demand” refers to a range of influential factors that can alter the level of demand for a given product or service within a market. These factors lead to shifts in the demand curve–a graphical representation of the relationship between product price and quantity demanded. 1. Consumer Income: The amount of income a consumer has can directly affect their purchasing power. If consumer income increases, demand for goods and services often rises as they can afford to buy more. 2. Consumer Tastes and Preferences: These are shaped by a multitude of factors, including trends, advertising, and societal influences. When a product aligns with consumer tastes and preferences, demand generally increases. 3. Prices of Related Goods: This involves the prices of complementary and substitute goods. Complementary goods are products consumed together, like coffee and sugar. If the price of one goes up, the demand for the other may go down. Substitute goods, on the other hand, are alternatives to each other; if the price of one rises, the demand for its substitute can potentially increase. 4. Number of Buyers in the Market: The larger the number of buyers, the higher the potential demand. Demographic changes, market expansion, or successful promotional tactics can increase the number of buyers. 5. Consumer Expectations: If consumers expect prices to rise in the future, they may increase their demand presently. Similarly, if they anticipate that their income will increase, they may demand more goods and services now. These determinants can concurrently affect the level of demand and thus are critical to consider for anyone involved in market and economic analysis.
Determinants of supply: ‘Determinants of supply’ are variables that make the supply curve move, including variables like input costs, tax or subsidy changes, technological advancements, producer outlook, and seller quantity.
Expanded Definition
“Determinants of supply” refers to the various factors that contribute to changes in the quantity of goods or services a producer is willing to supply in the market. These factors can cause the supply curve—a graphical representation of the relationship between product price and quantity of product that a seller is willing to supply—to shift or change its position. 1. Input Prices: This includes the cost of raw materials, labor, and other resources needed for production. An increase in input prices will generally discourage supply (shift the supply curve to the left), while a decrease in input prices can motivate producers to supply more (shift the supply curve to the right). 2. Taxes and Subsidies: Taxes add to the costs of production and reduce supply, shifting the supply curve to the left. Subsidies, on the other hand, lower production costs and encourage more supply, shifting the curve to the right. 3. Technological Innovations: Technological advancements can enhance production efficiency, thereby increasing the amount of goods that can be produced with the same input. This can lead to an increase in supply and a shift of the supply curve to the right. 4. Producer expectations: If producers expect future prices to rise, they may decrease supply now (shifting the supply curve to the left) to sell more in the future, and vice versa. 5. Number of sellers: An increase in the number of producers in the market can increase the total amount of goods supplied (shifting the supply curve to the right), while a decrease in the number of producers will have the opposite effect. This detailed interpretation allows us to better understand the underlying factors that heavily influence supply on the macro- and microeconomic scale.
Devaluation: Devaluation is the deliberate downward adjustment of a country’s currency value, specifically in fixed exchange rate systems. It’s different from depreciation, which is a spontaneous, daily decline in currency.
Expanded Definition
‘Devaluation’ is a deliberate economic policy move whereby a government or central monetary authority formally reduces the worth of its own currency in relation to foreign currencies. This is often undertaken within a fixed exchange rate system, where the value of a currency is pegged to another currency or a basket of currencies. By adjusting this rate downwards, the currency can buy fewer units of the foreign currency, resulting in a devaluation. Historical instances include the devaluations of the British sterling in 1949 and 1967. This should not be confused with ‘depreciation’, which is a natural, market-driven decrease in a currency’s value under a floating exchange rate system. Depreciation happens daily based on market forces, including economic indicators, interest rates, and geopolitical stability, among others.
Developed countries: Developed countries are nations with high income per capita compared to the global average, often associated with early industrialization and predominant in Europe, North America, Australasia, and parts of Asia like Japan and South Korea.
Expanded Definition
‘Developed countries’ is a terminology typically attributed to nations that exhibit a relatively high level of economic prosperity and security, often determined by key metrics such as gross domestic product (GDP) per capita, industrialization, and standard of living. They generally feature advanced commercial infrastructure, robust healthcare systems, a well-educated population, and heightened access to technology as compared to the global average. While this category prominently includes nations in Europe as well as former European settler colonies in North America and Australasia, certain Asian countries such as Japan and South Korea, owing to their significant economic growth and industrialization progress, have also achieved this classification. For a deeper understanding of this term and its implications, refer to this linked article.
Developing countries: Developing countries refer to nations with lower per capita income and a relatively recent industrial foundation, often classified by the World Bank as “lower-middle” and “low-income” countries.
Expanded Definition
‘Developing countries’ is a term commonly used to categorize nations where the gross domestic product (GDP) per capita, a key measure of wealth, is comparatively lower than that of ‘developed’ countries, most of which are typically in Europe and North America. These countries usually embarked on industrialization at a later stage than their developed counterparts. The phrase ‘developing countries’ is often synonymous with ‘lower-middle’ and ‘low-income’ economies, according to classifications used by global financial institutions like the World Bank. However, the categorization of a country as ‘developing’ is not officially ordained, and may vary based upon the specific metrics or indicators used for the determination.
Digital object identifier (DOI): A Digital Object Identifier (DOI) is a unique alphanumeric string used to locate and provide persistent access to a digital resource or content online.
Expanded Definition
A Digital Object Identifier (DOI) is a unique alphanumeric string assigned to a digital product, such as an academic paper, a research report, or a dataset, which primarily serves as a persistent identifier in the digital environment. Rather than just being an internet address, it is part of an internationally standardized system that provides a consistent link to digital content. Regardless of where the digital content moves over time, the DOI remains the same, ensuring that it can always be found, thus increasing the ease of digital content access and discoverability. It is typically used in the realm of academic, professional, and governmental publications.
Diminishing marginal utility: Diminishing marginal utility refers to the decrease in satisfaction gained from consuming additional units of a product. In other words, the more you consume, the less value or satisfaction each subsequent unit brings.
Expanded Definition
‘Diminishing marginal utility’ refers to an economic principle signifying a progressive reduction in the additional satisfaction or additional benefit (marginal utility) a consumer derives from consuming extra units of a specific good or service. As the consumption of a particular product increases, there is a point at which the derived pleasure or usefulness from consuming each additional unit begins to decrease. This principle is core to understanding consumer behavior and demonstrates why diversified consumption can offer more overall satisfaction than the continuous consumption of a single item.
Diminishing returns: ‘Diminishing returns’ refers to the economic concept where each successive input in a production process yields less additional output than the previous one. It’s the decrease in the incremental output or benefit gained from an increase in an input, after a point.
Expanded Definition
‘Diminishing returns’, within the context of economics and business, refers to a principle stating that in a production process, if a single factor of production is incrementally increased, keeping all other factors constant, the output or satisfaction derived will eventually decrease in proportion to the investment. In simpler terms, this means that after a certain point, each subsequent unit of input will yield lesser additional output or satisfaction than the previous unit.
Direct deposit: Direct deposit is a digital transfer where funds are directly credited into a recipient’s bank account from a sender’s bank account.
Expanded Definition
‘Direct deposit’ refers to an automated electronic payment system where funds are transferred directly from the account of the payee or emitter (the individual or entity making the payment), into the receiver’s or payee’s bank account (the individual or entity receiving the payment). It eliminates the need for issuing, handling, or depositing physical cheques and ensures a speedy, secure, and convenient mode of payment or transaction. The system is widely used for salary payments, tax refunds, government benefits, and any form of recurring payments.
Direct taxes: Direct taxes are compulsory charges levied by the government on individuals’ income or companies’ profits, collected directly from the payer without intermediaries.
Expanded Definition
‘Direct taxes’ are specifically structured fiscal instruments imposed by the governmental body, directly levied on individuals, corporations and organizations. These taxes are calculated based on the economic status of the taxpayer, such as their income or wealth. Notable examples include income tax, charged on individual earnings, and corporate profits tax, charged on company earnings. Unlike indirect taxes that are typically factored into the price of goods and services, direct taxes are paid directly to the government without intermediary. The direct taxation system serves as a pivotal revenue source for governments and often plays a critical role in economic and social policy design.
Dischargeable debt: Dischargeable debt refers to obligations that can be eradicated via a bankruptcy process. It’s essentially debt forgiven legally through bankruptcy proceedings.
Expanded Definition
‘Dischargeable debt’ is a term used in the realm of finance and insolvency law, generally referring to certain categories of monetary obligations that an individual or business entity may be released from having to repay, subsequent to the successful completion of a bankruptcy proceeding. This is a key component of bankruptcy law and a primary benefit for debtors, as it provides them the opportunity to secure a fresh financial start. The specific kinds of debt that can be discharged will depend on the bankruptcy code of the particular jurisdiction, but typically might include items such as credit card bills, personal loans, and certain tax obligations. However, it’s important to note that not all debts are dischargeable – for example, student loans, child support, and alimony often cannot be erased in bankruptcy.
Discount rate: The discount rate is the Federal Reserve’s charge to banks for taking out loans. It’s essentially the cost of borrowing from the Fed’s lending facility.
Expanded Definition
The ‘Discount Rate’ is a term widely used in financial sectors, and refers to the interest rate set and utilized by the Federal Reserve, the central banking system in the United States. This rate is employed when the Federal Reserve lends money to commercial banks through a specific lending facility known as the ‘discount window’. This mechanism serves as a source of liquidity for banks, enabling them to meet short-term fund inadequacies or comply with regulatory guidelines, thereby promoting financial stability. The ‘discount rate’ is instrumental as it not only impacts the borrowing costs for banks, but also has a widespread effect on the broader economic environment, influencing other interest rates, investment decisions, and consumer spending.
Discount window: The discount window is a Federal Reserve tool employed to lend funds to depository institutions, aiding banking system liquidity and proper execution of monetary policy.
Expanded Definition
The ‘Discount Window’ is a term referring to the mechanism by which the Federal Reserve, the central bank of the United States, provides loans to depository institutions, like commercial banks. This is done in order to maintain the overall liquidity—meaning the availability of cash in the banking system—and its stability, ensuring that banks can meet their short-term obligations. Essentially, this helps banks manage any cash flow challenges they may face and ensures they have enough reserves to meet unexpected withdrawals or financial crises. Also, the Discount Window acts as a tool for the effective implementation of monetary policy by influencing the interest rates at which these loans are provided, which can ultimately affect how much money is circulating in the economy. This mechanism is utilized primarily to keep the U.S. financial system secure and functioning correctly.
Discouraged worker: A discouraged worker is an unemployed individual who has ceased job-search efforts due to perceived job unavailability.
Expanded Definition
A ‘Discouraged Worker’ is defined as an individual who is currently not engaged in any form of employment and is not actively seeking job opportunities due to the conviction that there are no viable positions available that match their skill set or experience. This perception may be due to various factors such as unfavorable economic scenarios, prolonged periods of unemployment, or repeated rejection in previous job applications. This term is typically used in labor market studies to identify members of the potential workforce who have been disheartened by challenging employment circumstances.
Discouraged workers: ‘Discouraged workers’ are individuals who are not actively seeking employment due to reasons like lack of job prospects or suitable jobs, thus positioned as economically inactive in the labor market.
Expanded Definition
“Discouraged workers” refers to a category of individuals in the workforce who are currently not seeking employment due to their belief that suitable job opportunities are not available or achievable for them. They are regarded as part of the “economically inactive” population, implying that they are neither employed nor actively searching for work. Situational factors like continual lack of successful job applications or a depressed job market may lead to such discouragement. While they can contribute to labor market fluctuations, these workers are not typically included in conventional unemployment statistics, which only account for those who are actively job-hunting.
Discretionary income: Discretionary income is the remaining portion of an individual’s income after paying for taxes and essential necessities, which can be used for optional expenses or savings.
Expanded Definition
‘Discretionary income’ is a financial term that refers to the portion of an individual’s income that remains after accounting for all fixed costs and mandatory charges, such as taxes and basic needs such as food, shelter, and healthcare. This is the income that an individual can spend at their discretion, potentially used for non-essential goods, services, or activities, for savings, or for investments. The level of discretionary income can contribute to an individual’s overall standard of living and can vary widely based on income level, geographical location, family size, and lifestyle choices.
Discretionary spending: Discretionary spending refers to the portion of the budget that the Congress determines annually and is used for a variety of specific programs and initiatives.
Expanded Definition
‘Discretionary spending’ refers to the portion of the government’s budget that is decided by Congress through the annual appropriations process. Unlike mandatory spending, which funds programs like Social Security and Medicare based on qualifying criteria, discretionary spending covers a wide range of categories including defense, education, and infrastructure. The exact allocation of these funds can change from year to year, allowing for flexibility based on the nation’s current priorities and circumstances.
Disinflation: Disinflation is a reduction in the rate of inflation, essentially slowing the pace at which prices for goods and services rise in an economy.
Expanded Definition
Disinflation is an economic term used to describe a situation where the rate of price increases in an economy slows down over a specific period. In other words, it is a reduction in the rate of inflation. It is not to be confused with deflation, which refers to an actual drop in prices. Instead, disinflation signifies that prices continue to rise, but at a decreasing rate. This phenomenon can be the result of various factors, including governmental policy measures, decreased demand for goods and services, or an increase in supply. Understanding disinflation is vital as it plays a crucial role in shaping monetary policies and indicates significant trends in the economy.
Disintermediation: Disintermediation is the process of eliminating intermediaries from a supply chain, or transaction process, facilitating a direct connection between producers and consumers, potentially lowering costs, albeit often creating new forms of middlemen, such as online platforms.
Expanded Definition
‘Disintermediation’ is a strategic approach in a business model that seeks to eliminate intermediaries or ‘middlemen’ from a supply chain or a series of transaction processes. The goal is to directly connect consumers with producers or service providers, creating a streamlined and potentially more cost-effective pathway. The assumption is that by removing ancillary layers, typically, the extra costs associated with these intermediaries can be reduced or eliminated. However, the real-world implications often lead to the evolution of new types of mediators adapted to the digital space. While traditional middlemen such as brick-and-mortar travel agents may be less prevalent, online platforms like Expedia or Booking.com have replaced them, acting as the new digital medium between consumers and service providers. It’s essential to note that while disintermediation removes certain links in the value chain, it often simultaneously enables the creation of new, digitally transformed, intermediary entities.
Disposable income: Disposable income is the portion of an individual’s earnings left after all taxes and mandatory charges, which can be saved or spent as they decide.
Expanded Definition
‘Disposable income’ is a fundamental economic term that denotes the total amount of net earnings an individual, household, or business retains after deducing all mandatory charges such as taxes and social security contributions. It represents the income available for discretionary use, meaning it can be allocated towards saving, investing, or spending on non-essential goods and services, thereby serving as a crucial performance indicator for personal financial health and economy-wide consumer spending patterns.
Dissaving: Dissaving refers to the act of spending beyond one’s income, effectively negating any savings.
Expanded Definition
‘Dissaving’ is a term used in economics to describe the circumstance when a person’s, organization’s, or nation’s total consumption exceeds its available income during a specific time period. It fundamentally involves a decrease in personal or institutional savings and can also include the drawing down of past reserves or incurring debt to finance expenditure. Essentially, it’s the antithesis of saving, implying that the financial resources being spent are beyond one’s current income. This concept encapsulates expenditures on necessary items or services, on discretionary items for lifestyle enhancement, or investments for potential future return. Dissaving, while feasible for temporary periods, can lead to financial instability if maintained in the longer term.
Diversification: Diversification is the strategy of investing in a variety of assets to lower risk exposure. It’s like spreading your wealth across different investments to buffer against potential losses.
Expanded Definition
Diversification, in the sphere of finance and investment, refers to a strategic approach which involves allocation of investment capital to a variety of distinct financial instruments, asset classes, or sectors. The primary aim of diversification is to mitigate risk and potential losses by spreading investments across different types of assets. This strategy is grounded in the logic correlating diverse investments with the concept of risk reduction – if one investment performs poorly, others may perform well, effectively offsetting the loss. In essence, diversification embodies the proverb, “Don’t put all your eggs in one basket,” offering defense against market volatility and unforeseeable risks inherent in financial ventures.
Dividend: A dividend is a portion of a company’s earnings distributed to its shareholders, typically in cash or additional shares.
Expanded Definition
A ‘Dividend’ can be comprehensively defined as a specified portion of a corporation’s net earnings that is distributed to its shareholders. These payments are typically decided by the board of directors and may take the form of cash, additional shares of stock, or other property. Dividends serve as a tangible reward for investors, provided directly from the corporation’s operational profits and manifesting their share in company ownership. These payouts generally symbolize the company’s financial health and profitability.
Dividend discount model: The Dividend Discount Model (DDM) values stocks by discounting expected future dividends to present value, accounting for the time value of money. It’s an investment approach predicting returns from dividend cash flows.
Expanded Definition
The ‘Dividend Discount Model’ or DDM is a financial valuation method used primarily for estimating the intrinsic value of company shares. It operates under the principle that the value of a stock today lies in the anticipation of future dividends the investor is expected to receive. These anticipated dividends are adjusted to their present values by applying a discount rate, which caters to the concept of “time value of money.” The “time value of money” is based on the understanding that a dollar in hand today is worth more than a dollar to be received in the future, due to its potential earning power. The Dividend Discount Model thereby helps investors identify undervalued or overvalued stocks by comparing the discounted valuation with the current market price.
Divisible: “Divisible” refers to the ability of a quantity to be split evenly into smaller portions.
Expanded Definition
“Divisible” refers to the property of a numerical value or entity being able to be distributed or separated evenly into smaller units or parts without leaving any remainders. This could apply to concepts across various fields, such as mathematics, where a number is divisible by another if the division results in an integer; in law, where assets can be divisible or indivisible; or in data systems, where information may be divisible into smaller modules.
Division of labor: Division of labour is an economic principle where work is divided into specific tasks, improving efficiency by allowing individuals to specialize in particular operations rather than performing all tasks themselves. This approach enables greater productivity and economic benefit by allowing people to use their earnings to buy goods and services.
Expanded Definition
The ‘Division of Labour’ refers to an essential economic principle, first outlined by Adam Smith in his seminal work, “The Wealth of Nations”. This principle asserts that tasks can be accomplished more efficiently when they are divided into specific, individual tasks, rather than being handled in a comprehensive manner. This division allows for focused specialization, letting people or businesses become experts in their respective fields, thus increasing productivity and output. Furthermore, the concept emphasises that it is often more efficient for individuals to dedicate their skills to their specific labour, earning wages, and then using these earnings to buy goods and services. This rather than trying to independently cater to all their own needs – such as personal food production or creating their own electronic devices – which can be time-consuming and potentially lack expertise. The ‘Division of Labour’ principle thus underpins economic efficiency and specialization.
Division of labor (elementary): Division of labor describes the process where individual workers are assigned specific roles or tasks in a larger production process, streamlining the workflow.
Expanded Definition
The term ‘Division of Labor’ at an elementary level refers to a production strategy where a complex task is broken down into simpler, distinct tasks assigned to individual workers, specialists or teams, each specializing in executing their particular task. This strategic allocation facilitates efficiency and precision in the production process, thereby enhancing the quality and output of a given good or service. It underscores the concept of specialized labor where each individual contributes to a part of the overall task, rather than each person endeavoring to complete the whole task. This approach leverages the proficiency of workers in their area of expertise and promotes economy of scale.
Division of labor: One of the fundamental principles of economics, described by Adam Smith in “The Wealth of Nations”. Work can be undertaken more efficiently if broken up into discrete tasks. It is also more efficient for individuals to focus on their own jobs and use their wages to purchase goods and services, rather than attempt to grow their own food or make their own electrical devices. See also specialisation.
Expanded Definition
One of the fundamental principles of economics, described by Adam Smith in “The Wealth of Nations”. Work can be undertaken more efficiently if broken up into discrete tasks. It is also more efficient for individuals to focus on their own jobs and use their wages to purchase goods and services, rather than attempt to grow their own food or make their own electrical devices. See also specialisation.
Domestic: ‘Domestic’ refers to elements or operations confined within a specific country’s borders. It indicates activities internal to a given nation.
Expanded Definition
“Domestic” is a term characteristically used to denote any activities, affairs, products, or services that are conducted, originated, or produced within the geographical boundaries of a specific country. This term is primarily used in contrast to ‘international’ or ‘foreign’, implying a connotation of local or national. It applies to a broad range of areas, including but not limited to domestic policy, domestic market, or domestic product.
Double coincidence of wants: ‘Double coincidence of wants’ refers to a trading scenario where each party possesses an item the other desires, facilitating a mutual exchange.
Expanded Definition
“Double coincidence of wants” is an economic term that refers to the mutual desire found in two parties involved in a direct barter transaction. Each party holds a commodity or service that the other party values and is willing to exchange their own commodity or service for it. Essentially, they each possess something the other wants. This is considered crucial for a successful barter exchange because without this reciprocal need, barter would be very difficult and inefficient. For example, if Person A has apples and wants oranges, and Person B has oranges and wants apples, the double coincidence of wants condition is satisfied, making for a feasible barter exchange. Yet, if Person B instead wants grapes, not apples, the double coincidence does not occur, making barter less straightforward. This concept underscores the benefits of currency systems, which remove the necessity for this mutual need by providing a universal medium of exchange — i.e., money.
Dow Jones Industrial Average (DJIA): The DJIA is a barometer of U.S. economic activity, tracking the stock prices of 30 leading American businesses across different sectors.
Expanded Definition
The Dow Jones Industrial Average (DJIA), often referred to simply as “the Dow,” is a widely-tracked market index that consolidates and averages the share prices of 30 select, large, publicly traded U.S. companies across a variety of industries. These component companies, chosen due to their significance, impact, and representation of the broader economy, offer a snapshot of American economic health and activity. The DJIA, though not a comprehensive indicator, is used as a key benchmark to measure shifts and trends in the U.S. stock market, thereby serving as a barometer for investor sentiment and market fluctuations.
Down payment: A down payment is the initial, upfront portion of the total cost paid in transactions, primarily in buying property or vehicles, to lower the leftover loan amount.
Expanded Definition
A ‘down payment’ is a specific portion of the total purchase price which is paid upfront at the time of a large transaction, such as the purchase of a property or a vehicle. This initial payment, given directly to the seller, significantly lowers the remaining balance to be paid. The rest of the cost is then typically covered through a loan or financial agreement. The significance of a down payment is that it reduces the principal amount borrowed, leading to lower finance charges over the course of the loan repayment period. It also helps establish a degree of trust and confidence between the buyer and the lender.
Dual mandate: The ‘dual mandate’ refers to the Federal Reserve’s obligation to manage monetary policy to achieve optimal employment levels and price stability.
Expanded Definition
‘Dual mandate’ refers to a policy objective set for the Federal Reserve (the central bank of the United States) which requires it to aim for two key economic goals through monetary policy: maximum sustainable employment and stable inflation. In other words, the Fed must strive to create ideal conditions where as many people as possible have jobs without causing undue inflation—that is, a rapid rise in overall price levels. This delicate balance forms the core of the Fed’s mission to foster a healthy economy, highlighting the importance of both labor market strength and price stability. This mandate is monitored using various economic indicators and is achieved through the strategic adjustment of key policy levers, such as interest rates and the level of reserves banks are required to hold.
Dumping: Dumping is the practice of selling goods at a price lower than production cost, often utilized by industry players aiming to outcompete others, and sometimes triggering protectionist responses like tariffs in international trade.
Expanded Definition
‘Dumping’ is a complex economic term, primarily referring to the practice of selling a product or good at a price generally below its cost of production. A dominant actor in the industry, such as a leading supplier, might employ this approach, typically with the intention of shutting out competitors, potentially leading to a monopolistic control over the industry. On a broader, international scale, the term ‘dumping’ often takes on geopolitical implications. Countries might assert that foreign producers are ‘dumping’ their products within their markets, selling them at significantly lower prices to secure a dominant share of the market, which could detrimentally impact the domestic industries. These allegations of ‘dumping’ may then be used as a rationale for implementing protective measures, such as tariffs, quotas or other mechanisms, aimed at shielding domestic markets and industries from unfairly priced foreign competition. To summarise, ‘dumping’ is a strategic, often controversial, commercial practice both within domestic and international contexts, with potential ramifications on competition, industry dominance, and international trade relations.
Duopoly: A duopoly refers to a market condition where two companies exclusively dominate. It’s a specific example of the broader concept of oligopoly, but more concentrated than a cartel.
Expanded Definition
A ‘Duopoly’ is an economic condition characterized by the dominance of two producers or suppliers within a specific market sector. Essentially, these two entities possess substantial market share, therefore exerting considerable control over market prices and commodities. This situation often results in limited competition. While bearing similarities to a monopoly (single market-dominant entity) or an oligopoly (multiple market-dominant entities), a duopoly focuses specifically on the dynamic and influence of two primary market leaders. Lastly, unlike ‘cartels’, where participants agree to collude for mutual benefit, duopoly participants often compete, albeit within limited bounds.
Durable: ‘Durable’ refers to an item’s ability to withstand wear, pressure, or damage, hence maintaining its integrity and functionality over a long period of time.
Expanded Definition
‘Durable’ is a term used to characterize an object, material, or phenomenon that displays a high degree of resilience and longevity. It usually refers to the ability to withstand wear, pressure, or damage, maintaining its function, integrity, or qualities over an extended period of time. This inherent robustness and endurance is often a critical factor in the practical utility and value of durable items.
Durable good: A durable good is a long-lasting commodity like a car or fridge, with a lifespan typically exceeding three years.
Expanded Definition
A ‘Durable Good’ is a term used in economics to denote products or goods that do not quickly wear out or more specifically, those that yield utility or value over a considerable period of time, usually three years or more. These are typically tangible goods such as automobiles, home appliances, electronics, furniture, and physical infrastructure, which are designed and produced for prolonged use, rather than for immediate consumption. Due to their long-term usability, such goods are also subject to maintenance and repair to extend their useful life.

E

EMV chip specifications: EMV chip specifications are guidelines by Europay, MasterCard, and Visa outlining global chip card standards.
Expanded Definition
‘EMV chip specifications’ entail a comprehensive set of technical standards and guidelines that were collaboratively developed by Europay, MasterCard, and Visa. These specifications provide a structured framework for global interoperability by directing how chip-enabled payment cards, also known as ‘smart cards’, interact with payment terminals. This framework enhances transaction security, minimizes card fraud, and promotes consistent user experiences across different regions and payment systems.
ESG investing: ESG investing is a strategy wherein investments are made in companies that prioritize environmental, social, and corporate governance factors, as it is believed these companies are less likely to face regulatory, consumer, or scandal-related risks. However, some critics argue that standards for ESG investing can be vague and that companies may superficially comply without real commitment.
Expanded Definition
‘ESG investing’ refers to a form of investing that takes into account three primary factors: environmental, social, and corporate governance (ESG). This approach to investing rose significantly in popularity during the second decade of the 21st century, aligning with the concept of stakeholder capitalism, which champions business accountability to all stakeholders, not just shareholders. From an environmental perspective, ESG investing involves considering how a company’s activities could impact natural ecosystems. This may be through a company’s contribution to climate change, waste production, or other environmental issues. From a social standpoint, ESG investing may consider aspects such as a company’s labor practices, product safety, data security, and its impact on local communities. When it comes to corporate governance, this form of investing takes into account factors like the company’s management structure, executive compensation practices, board diversity and transparency. Some proponents of ESG investing argue that companies which don’t pay attention to these areas will eventually face challenges, such as stricter regulatory oversight, consumer pushback, or public scandal. Meanwhile, critics suggest that the criteria for ESG investing are not well-defined and that, as a result, companies can simply give the appearance of meeting ESG standards without making substantial efforts. For an expanded explanation, please refer to the Special Report provided.
Earned income: Earned income refers to the revenue generated from an individual’s active employment or owned business ventures. It is either salary from a job or profit from personal businesses or farming.
Expanded Definition
‘Earned income’ refers to the financial compensation an individual receives in exchange for services or labor provided. It typically originates from two principal sources: employment or self-employment. In the context of employment, earned income is the monetary remuneration given by an employer to an employee for work done. As for self-employment, earned income is the profit accrued from one’s individual enterprise or personal business, which could be in the form of a trade business or an agricultural venture. This term is critical in the areas of taxation and eligibility for certain financial benefits.
Earned income tax credit: The Earned Income Tax Credit (EITC) is a refundable tax benefit for low-wage earners that incentivizes employment and aids in alleviating poverty.
Expanded Definition
The Earned Income Tax Credit (EITC) refers to a federal monetary benefit in the United States, available to working persons with low to moderate income. It is overseen and regulated by the Internal Revenue Service (IRS). This tax credit is ‘refundable’, meaning if the credit exceeds the total tax owed, the surplus is refunded to the individual or family in the form of a tax refund. It is explicitly designed to alleviate poverty by providing financial benefits to those on lower incomes and to promote active participation in the labor force. The EITC reduces the amount of tax these individuals or families are required to pay, providing them with additional income and thereby improving their overall financial wellbeing. Its dual nature provides both a social safety net and work incentive for millions of Americans each year.
Earnings: ‘Earnings’ is the income generated through labor or services provided.
Expanded Definition
“Earnings” can be defined as the monetary compensation that an individual or business receives in return for providing labor, services, or other forms of economic activity. This compensation can come in various forms such as salaries, wages, bonuses, and dividends. It quantitatively represents the value of work performed or output generated, serving as a critical measure of financial success and fiscal stability.
Econometrics: ‘Econometrics’ is the application of statistical methods to economic data in order to discern patterns and relationships commonly found in economic systems.
Expanded Definition
Econometrics is a field within economics that applies statistical methods and mathematical formulas to the empirical analysis of economic relationships, theories, and models. It strives to test hypotheses and forecast future trends by interpreting and managing economic data. Therefore, econometrics serves as a vital tool in economic decision-making endeavors, aiding policymakers and businesses in crafting data-driven strategies through the quantification of variables within the economy.
Economic efficiency: Economic efficiency is the optimal allocation and usage of resources such as land, labor, and capital to produce desired goods and services at the lowest possible costs.
Expanded Definition
‘Economic efficiency’ is a critical term in economics, denoting the optimal allocation and usage of resources including land, labor, capital, and entrepreneurship. It is primarily determined by two key factors – the ability to produce goods and services that fulfil consumers’ desires, and the capacity to utilize resources to maintain the lowest possible production costs. Essentially, it underscores a system’s effectiveness in producing what society requires, in a manner that extracts maximum value from resources with a minimal wastage. It is a balance between fulfilling demand (allocative efficiency) and minimizing costs (productive efficiency), whereby resources are ideally distributed in the market towards those who value them most while minimizing waste in the production process.
Economic equality: Economic equality, also known as economic equity, refers to the fair distribution of wealth, resources, and access to goods and services among all members of a society.
Expanded Definition
“Economic equality,” also referred to as “economic equity,” is a socio-economic philosophy that advocates for fair distribution of wealth, assets, and access to services among all citizens, irrespective of their socio-economic status. It emphasizes the reduction of disparities in income and wealth, prioritizing a balanced economic playing field that enables equal opportunities for all individuals. The concept espouses that every individual should be provided with an equitable chance to reap the benefits of a nation’s economic progress, thus fostering a more inclusive society. It’s instrumental in eradicating poverty, promoting social mobility, and strengthening democratic processes.
Economic equity: Economic equity refers to the fair distribution of wealth, resources and opportunities among citizens, aiming to achieve an equitable economic environment.
Expanded Definition
“Economic equity,” often interchangeably used with “economic equality”, is a socioeconomic concept that advocates for the fair allocation of goods and services among a population. It emphasizes that every individual should have equal access to economic resources and opportunities, driving toward a more balanced wealth distribution. This idea aims to rectify instances of social inequity by ensuring individuals are not disproportionately affected by economic disparities on the basis of factors like racial or ethnic background, gender, or socioeconomic status. Thus, it contributes to social justice and the overall stability and sustainability of the economy.
Economic freedom: Economic freedom is the ability of individuals to make their own decisions regarding careers, spending, saving, and business operations, including mobility and union affiliations. It encompasses the liberty to choose and control one’s economic activities.
Expanded Definition
‘Economic Freedom’ is a multifaceted concept encompassing an individual’s autonomy in making decisions concerning their financial engagements. Based on this broad viewpoint, economic freedom allows individuals to choose their place of residence, determine their employment pursuits, and regulate their spending and saving habits. It also extends to wider spheres such as granting students the liberty to select their career trajectories, enabling workers to switch jobs, align with unions, and exercise their consumer rights to make informed spending and saving choices. In addition, it facilitates entrepreneurial endeavors by allowing individuals to initiate or discontinue businesses as per their needs and decisions. It further includes the right to travel freely based on personal desires. Hence, economic freedom fundamentally represents a person’s authority to make choices that impact their economic life.
Economic growth: Economic growth is the consistent increase in a country’s output or production of goods and services.
Expanded Definition
“Economic growth” is a term that refers to a consistent, protracted increase in a nation’s capacity to produce an assortment of goods and services. This growth, which is typically evaluated over time, signifies a nation’s ability to improve its standard of living, enhance its technology, and create more employment opportunities. It is quantitatively measured by the rise in the gross domestic product (GDP), which represents the total economic output of the country. Economic growth represents not just the increase in value of the nation’s goods and services, but also an improvement in the well-being and quality of life of its citizens.
Economic indicator: An economic indicator is a piece of statistical information used to assess the state of an economy.
Expanded Definition
An economic indicator is a measurable statistical datum that provides critical insight into the prevailing conditions of a national, regional, or sectoral economy. These indicators function as a tool for economists, policymakers, investors, and businesses to evaluate the economic performance, predict future trends, and devise strategies accordingly. They could represent a variety of economic activities such as employment levels, inflation rates, gross domestic product (GDP), consumer sentiment, and more. By systematically assessing these economic indicators, a thorough understanding of the economy’s health and its potential direction can be achieved.
Economic interdependence: Economic interdependence is when entities focus on producing specific goods according to their resources and skills, then engage in trade to acquire other needed goods, intertwining their economies.
Expanded Definition
‘Economic interdependence’ is a concept which refers to a state of affairs in which different economic entities – from individuals and communities to regions and entire countries – concentrate their productive forces on creating specific goods or services, this specialization being generally dictated by the resources and skills available to them. After specializing, these entities engage in trade with others to acquire diverse goods or services that they need but do not produce themselves. This mutual exchange and reliance forms a web of economic relationships that bind these entities together, creating a complex network of interdependence. As such, the overall health of this interconnected economic system can greatly impact the prosperity and stability of each individual participant within it.
Economic models: Economic models are simplified representations of economic processes or concepts, scientifically designed to analyze complex real-world financial situations or predict economic outcomes.
Expanded Definition
Economic models are analytical tools or simplified frameworks designed to depict the interconnected dynamics of economic activity or theory. They serve to distill complex real-world economic situations into easily understandable terms by assuming certain fixed conditions. Normally illustrating abstract concepts through diagrams, equations, or mathematical computations, these models help economists and other stakeholders predict and understand economic behavior, trends, and potential implications of economic policies.
Economic rent: ‘Economic rent’ refers to the surplus income gained from a resource due to its scarcity or unique value, typically exceeding the minimal return needed to keep it operational. For example, it can be additional earning of a specialized employee over the basic wage, or increased rental income due to external factors enhancing property’s value.
Expanded Definition
‘Economic rent’ is a term used in economics to describe the supplementary income that a resource owner receives due to scarcity or unique advantages associated with the owned asset. It represents the difference between what someone earns and what they could earn in the next best alternative employment, or their reservation wage. For example, a highly skilled employee may command a salary significantly higher than their minimum acceptable wage, primarily because their unique skills or experience might be in high demand and short supply. Similarly, if a property owner begins to receive higher rental income due to the construction of nearby infrastructure, such as a railway station, which increases the attractiveness or utility of the property, this increased income is also considered economic rent. It is essential to note that economic rent is not limited to financial returns but can also apply to non-monetary benefits attributable to a particular job or investment. Economic rent is a crucial factor in resource allocation decisions in free-market economies and is subject to taxation policies.
Economic security: Economic security refers to the condition of having stable income or other resources to support a standard of living now and in the foreseeable future. It involves protection from potential financial risks like unemployment, disability, fraud, or financial failure experienced by individuals, employers or businesses in a society.
Expanded Definition
“Economic security” refers to the condition of having stable income or other resources to support a standard of living now and in the foreseeable future. It encompasses the assurance or guarantee that individuals are protected from adverse economic events that could threaten one’s economic stability. These events may include unemployment, disability, identity theft or fraud, natural disasters causing property destruction, and financial failure for individuals or businesses. Economic security involves formulating strategies to minimize these risks. The responsibility of implementing these protective measures could fall on individuals, employers, or the government, depending on the societal norms and agreements in place. The extent to which individuals should be shielded from these risks is a policy decision that requires balancing personal responsibilities, societal goals, as well as economic and governmental constraints. Ultimately, economic security, with its focus on risk management and safeguarding standards of living, plays a crucial role in maintaining the stability and well-being of a society.
Economic stability: Economic stability refers to the condition when an economy experiences constant growth, full employment, and price equilibrium, mitigating fluctuations that might lead to inflation or deflation, ensuring a reliable economic environment for planning.
Expanded Definition
‘Economic stability’ is a term that refers to the sustained and predictable state of a nation’s overall economy that enables people to confidently make informed, future-focused decisions. It is characterized by consistent economic growth, low and stable inflation, and full employment. Consistent economic growth implies a steady rise in the country’s Gross Domestic Product (GDP), with limited fluctuations, ensuring the economic prosperity and progression of the nation. In the context of economic stability, maintaining low and stable inflation is crucial. Inflation refers to the general increase in the prices of goods and services over time, while a decrease in these prices leads to deflation. Both inflation and deflation, if extreme or unpredictable, can be detrimental to an economy’s stability as they may contribute to uncertainty and disrupt financial planning. Full employment is another hallmark of economic stability. This does not necessarily mean zero unemployment, which is often unattainable, but rather refers to the optimum utilization of all available resources, particularly labor. In an economically stable state, unemployment rates are kept to a minimum, maximizing productivity and providing individuals with income security. Taken together, these elements underscore economic stability, reinforcing a secure environment for individuals and businesses to function, flourish, and make future-oriented financial decisions with relative certainty.
Economic wants: ‘Economic wants’ are the desires that are fulfilled through the consumption of goods or services. They are essentially the demand-driven aspects of the economy.
Expanded Definition
‘Economic wants’ are specific desires that individuals or businesses have, which can be fulfilled through the acquisition and utilization of goods and services. They effectively drive economic activity as demands are placed on the market to supply these respective goods and services. These wants, also simply referred to as ‘wants,’ signify not just basic necessities, such as food and clothing, but also extend to include more complex or abstract desires, such as the demand for entertainment, leisure or technology. They invariably shape consumer behavior patterns, market trends, and overall economic dynamics.
Economically inactive: “Economically inactive” refers to individuals within the working age bracket, typically 15 to 64 years old, who are not pursuing employment or full-time education, due to circumstances such as caregiving duties, illness, early retirement, or job market discouragement.
Expanded Definition
“Economically inactive” refers to individuals typically within the working age bracket of 15 to 64 years old who are not actively participating in the labour market. This includes individuals who are not actively seeking employment, nor are they engaged in full-time education. The “economically inactive” label encompasses several groups of people: 1. Caregivers: This includes individuals who have undertaken the primary responsibility of caring for family members or relatives, thereby preventing them from seeking full-time employment. 2. The chronically ill or disabled: These are individuals whose health status makes them incapable of participating in the labor force. 3. Early retirees: These are people who, for a variety of possible reasons, have taken retirement before reaching the official state pension age. 4. Discouraged workers: This term refers to individuals who, after experiencing persistent difficulty in finding employment, have become disheartened and ceased to seek work. This category can also extend to include people who have chosen voluntary unemployment. It’s important to note, however, that being “economically inactive” does not necessarily indicate an unwillingness to work, but may be due to a range of personal, social, and economic factors. The concept is crucial for understanding various social and economic metrics, like employment rate and labor force participation among others.
Economics: Economics is a social science discipline examining how individuals, organizations, and societies manage scarce resources concerning the production, distribution, and consumption of goods and services.
Expanded Definition
Economics is an influential branch of social science focused on the systematic exploration and examination of how individuals, businesses, governments and societies choose to utilize their limited resources. This multifaceted discipline is concerned with the processes of making decisions, which are oftentimes intricate due to the scarcity of resources, aiming towards the creation, distribution, and appropriate utilization of various goods and services. Its study not only incorporates everyday life decisions and business operations but also delves deeper into broader issues like national economic policies, economic growth, financial markets, income inequality, and international trade. Whether it’s analyzing the cost-effectiveness of healthcare programs or the impacts of fiscal policies on the economy, economics provides critical insights and tools for deciphering the complexities of our interconnected world.
Economies of scale: ‘Economies of scale’ refers to the cost advantage that a business experiences as it increases its production, leading to a reduction in average per unit cost. It’s a phenomenon where increased output leads to lower unit costs.
Expanded Definition
“Economies of scale” refers to the cost advantages that a business can leverage by increasing their level of production. This economic concept implies that as a company increases the quantity of units produced, the average cost per unit tends to decrease. This is largely due to the spreading of fixed costs over more units and operational efficiencies gained with higher production volumes. As a result, companies are often incentivized to produce more, making the products more cost-effective, and potentially being able to price their goods more competitively in the market. This concept is integral to growth strategies and cost management in various industries.
Economy: The economy is a system that organizes the creation and distribution of resources, goods, and services.
Expanded Definition
The term ‘Economy’ refers to the extensive and intricate system that orchestrates how resources are managed, commodities are produced, and services are distributed within a geographical boundary or a defined group. It encompasses not just the production, exchange, and consumption of goods and services, but also policies, structures, and institutions that govern these activities. Economies influence and are influenced by various socio-political factors and policies, and they may vastly differ from region to region in terms of scale, type, and complexity depending on numerous factors such as economic models, development stage, resources, and governance.
Educational attainment: Educational attainment refers to the apex level of formal education one person has achieved, such as high school, undergraduate, or postgraduate levels.
Expanded Definition
Educational attainment refers to the apex or most advanced level of formal instruction or training a person has successfully completed in their academic journey. This could be the conclusion of a certain education level such as high school or the achievement of a degree or certification at a collegiate or graduate level of study. Primarily, it serves as a distinct measure of a person’s intellectual capital, reflecting the breadth and depth of knowledge and skills acquired through education. It is an influential factor in understanding socioeconomic status, career progression, and potential earning capacity.
Efficient market hypothesis (EMH): The Efficient Market Hypothesis (EMH) posits that a stock’s current price fully and accurately factors in all available and pertinent information, predicting its present and prospective earnings.
Expanded Definition
The Efficient Market Hypothesis (EMH) is a financial theory asserting that the existing price of a corporation’s stock is an accurate representation of its intrinsic value. This theory relies on the premise that all relevant information and data affecting a stock, such as financial health, sector trends, and wider economic indicators, are promptly and accurately included in the stock’s price. It postulates that future earnings prospects and any other possible factors affecting the stock’s worth are reflected in its current price. Consequently, it suggests that consistent, superior, risk-adjusted returns cannot be achieved through traditional fundamental or technical analysis, as the market effectively prices in all available information. Therefore, it is theoretically impossible to consistently ‘beat the market’ except by chance or through insider information. The EMH has significant implications for investment strategies, suggesting that index funds or passive investment management are most efficient.
Elastic currency: ‘Elastic currency’ is a flexible supply of money regulated by a central bank to stabilize the economy and fulfill economic objectives.
Expanded Definition
“Elastic currency” refers to a monetary system wherein the supply of currency can be dynamically adjusted, increasing or decreasing, based on the economic needs or demands. Implemented by a central banking authority, this monetary adaptation is designed to maintain financial stability and support the achievement of broader economic objectives. It stands as a responsive measure to prevent critical economic instabilities such as inflation or deflation and aids in facilitating economic growth, adjusting to the shifts in the business cycle. This dynamic and flexible approach to managing currency supply helps ensure the overall health and strength of the economy.
Elastic demand: Elastic demand is when consumers’ demand for a product or service significantly reacts to price changes, indicating high price sensitivity.
Expanded Definition
‘Elastic demand’ refers to the degree of the consumer’s demand responsiveness or sensitivity to changes in the price of a good or service. Specifically, when the percentage change in the quantity demanded by consumers exceeds the percentage change in price, the demand is said to be elastic. In other words, with elastic demand, any significant alteration in price, whether an increase or decrease, results in a more substantial change in the quantity of the product or service demanded. This typically applies to non-essential goods and services or those with readily available substitutes. Consequently, sellers and producers must be cautious with pricing strategies, as price changes can impact consumption levels substantially.
Elasticity: Elasticity is the sensitivity of a variable to alterations in another variable, particularly seen in how the demand for a product shifts in response to its price change. This reactivity can result in either price inelasticity (less than proportional demand change) or price elasticity (greater than proportional demand change).
Expanded Definition
‘Elasticity’ is an economic concept utilized to quantify the sensitivity or responsiveness of one economic variable in relation to changes in another. It often describes the consumer behavior resulting from price fluctuations. For example, should the price of a product increase by 10%, and the demand decreases by less than 10%, we refer to this as price inelasticity; implying that the demand for the product is fairly unaffected by the price change. However, if demand decreases by more than 10%, the situation is characterized as price elasticity, indicating a high sensitivity to price change. Essential commodities, like food and fuel, typically show price inelasticity due to their constant demand irrespective of price shifts. This concept helps firms and policy makers make informed decisions about pricing and policy implementation.
Elasticity of demand: Elasticity of demand is a metric that shows the responsiveness of consumer demand to price changes; it indicates how a price shift affects the quantity of a product customers buy.
Expanded Definition
‘Elasticity of demand’ is an economic concept that quantifies how a shift in the price of a product or service influences the quantity consumers are willing to purchase. It’s defined by the proportionate change in demand given a proportionate change in its price. Essentially, it provides a numerical representation of how price-sensitive buyers are in relation to specific goods or services. If the price of an item rises, the demand might drop; the degree of this reaction is what the elasticity of demand measures, and it aids businesses, governments, and economists in understanding market dynamics and making informed economic decisions.
Electronic benefit transfer (EBT): EBT is a digital system that enables government beneficiaries to receive and spend their financial aid using a designated debit card at retail establishments.
Expanded Definition
‘Electronic Benefit Transfer (EBT)’ represents an advanced digital system, primarily designed to automate the delivery of governmental financial aid to eligible recipients. This system operates by furnishing beneficiaries with a specialized debit card – the EBT card – a secure and effective tool for accessing government-approved funds. The EBT card allows its holder to conveniently purchase goods and services from authorized businesses and retailers, functioning much like a traditional debit or credit card. This card-based system enhances the efficiency of benefit transfers, and simultaneously promotes the dignity and privacy of its users by replacing tangible coupons or checks with a less conspicuous electronic format.
Elements of a contract: The elements of a contract – competent parties, consideration, and mutual agreement – are vital prerequisites for creating a legal, binding agreement. They signify that all parties in the contract are able to comprehend its stipulations, willingly exchange value or services, and concur on the fundamental terms.
Expanded Definition
“The ‘elements of a contract’ are crucial provisions required to create a legally binding agreement. These include ‘competent parties,’ ‘consideration,’ and ‘mutual agreement.’ ‘Competent parties’ are those involved in the contract who possess the legal capacity to comprehend and fulfill the obligations within the contract’s stipulations. The term ‘consideration’ correlates with the principle of reciprocality in a contractual agreement, in which each party pledges to surrender a value, such as goods, services, or promises, in response to what is being offered by the opposing party. ‘Mutual agreement’ underscores the necessity for all parties involved to concur unequivocally on the contract’s fundamental specifics, encompassing the rights, responsibilities, and obligations that each party is expected to uphold.”
Embargo: An embargo is a state-imposed restriction on trade with specific nations, often used as a political tool.
Expanded Definition
An “embargo” is defined as a legal directive or restriction established by a government which prevents the engagement of trade activities with a specific country or a coalition of countries. Essentially, this decree puts a halt on the exchange of commercial goods and services, thereby inhibiting the typical financial transactions and relationships in the global trading ecosystem. This measure may be utilized due to a variety of reasons, such as punishing or pressurizing a particular nation, protecting domestic interests, or promoting political or economic change.
Emerging markets: Emerging markets refer to developing countries with investment potential due to high growth prospects, although they carry increased risk and volatility due to potential capital flight when investors become risk-averse.
Expanded Definition
‘Emerging markets’ is a term frequently used within the investment sector referring to nations that are in the process of rapid growth and development. These nations often present attractive opportunities for investors as they typically exhibit substantial prospects for economic growth, which in turn can potentially deliver higher returns on investment. Investment in emerging markets, however, also comes with a degree of risk due to their potential economic and political instability. This instability can lead to capital flight, a situation where investors withdraw their investments en masse due to fears of heightened risk, thereby exacerbating the market’s volatility. Hence, while emerging markets can offer substantial rewards, they likewise represent a more significant risk profile when compared to more stable, developed markets.
Emissions tax: An emissions tax is a financial charge imposed on companies for each unit of pollution they produce, thus allowing them to determine their own pollution levels provided they pay the tax.
Expanded Definition
An ‘Emissions Tax’ refers to a financial charge imposed on enterprises by regulatory authorities, calculated based on the quantity of pollutants they emit into the environment. This economic instrument aims to motivate companies to reduce their environmental impact, as they are free to determine their emissions level, but must bear a fiscal repercussion proportional to their pollution volume. Thus, it serves as a balancing tool to internalize the societal cost of environmental pollution, encouraging corporate responsibility and sustainable practices.
Employed: ‘Employed’ refers to individuals aged 16 and above who are engaged in any form of job or work.
Expanded Definition
“Employed” refers to individuals who are aged 16 years and above, actively engaged in a profession, occupation, or trade, and currently hold jobs, work positions or roles as a means of earning income. This term is utilized within workforce demographics and labor market statistics to categorize individuals actively contributing to the economy through their respective professions.
Employee: An employee is an individual hired and paid by an employer to perform specific tasks.
Expanded Definition
An ’employee’ is an individual who is contracted to perform specific tasks or services for an organization or entity, typically on a full time or part time basis. In return, this individual receives remuneration in the form of salary or wages. The relationship between an employee and employer is defined and regulated by contractual obligations and labor laws. The foundation of this relationship is the understanding that the employer has a degree of authority and control over the employee’s duties, working conditions, and financial compensation.
Employer: An employer is an entity or individual who hires others, pays them for their services, and is responsible for providing them with a job.
Expanded Definition
An ’employer’ refers to an individual or a commercial entity that offers employment opportunities to others. They are responsible for assigning roles, tasks, or projects, which the employed persons are obligated to fulfill. In exchange for the services rendered by the employees, the employer compensates them with a predetermined monetary return, generally in the form of wages or a salary. The employer also bears legal obligations towards its employees, including providing a safe working environment and adhering to labor laws and regulations.
Employment rate: The employment rate refers to the portion of the working-age population that has jobs, expressed as a percentage.
Expanded Definition
The ’employment rate’ is a statistical term widely used in labor economics, defined as the proportion of the working-age population, who are involved in gainful employment. This metric exhibits the percentage of individuals from the total labor force – encompassing those actively seeking work or currently employed – who are successfully employed in some capacity, full or part time. The employment rate is a vital indicator of the health and vitality of an economy, as high employment rates generally suggest robust, robust job markets, economic stability and growth.
Endogenous growth theory: Endogenous growth theory, proposed by Nobel laureate Paul Romer, posits that economic growth is not only driven by exogenous factors like inventions, but also significantly influenced by government policies including investment in R&D and intellectual property protection.
Expanded Definition
Endogenous Growth Theory, a concept pioneered by economist Paul Romer, is a model of economic development which proposes that economic growth is primarily a result of internal factors, rather than external ones. This theory contests the traditional view that attributes economic growth to external influences like invention and innovation. Instead, the theory emphasizes the role of government policies, like investment in research and development, along with laws safeguarding intellectual property rights. While the model has been somewhat controversial among economic circles, it has played a significant role in influencing economic policy-making, even leading to occasional public misunderstandings, such as the notable instance with Britain’s former Prime Minister Gordon Brown misunderstanding and being ridiculed for his reference to “post-neoclassical endogenous growth theory” in a speech. Despite such controversies, Romer’s groundbreaking work on this theory garnered him a Nobel Prize. Yet, the theory is not entirely understood nor accepted by all economists. They recognize that although it provides valuable insights, it is not comprehensive in its explanation of the complex mechanics behind economic growth. The understanding of how and why economies grow continues to be a topic of intense study and debate within the field of economics.
Endowment effect: The endowment effect is a cognitive bias where individuals ascribe more value to items simply because they own them.
Expanded Definition
The ‘Endowment Effect’ is a psychological phenomenon often observed in economic behavior where individuals assign a higher value or worth to objects or properties currently under their ownership, as compared to identical items not in their possession. It represents an inherent bias where people subjectively believe that items they own are of greater value simply due to their ownership, irrespective of its actual market value. This effect can influence decision-making, leading to potential discrepancies in trade, sale, or purchase scenarios.
Energy: Energy denotes the power drawn from resources, either renewable like solar or wind or nonrenewable such as oil or coal, utilized to drive economic activities.
Expanded Definition
“Energy” refers to the capacity to perform work and is integral to powering all components of the economy. This pivotal resource can be obtained from multiple sources categorized into nonrenewable or renewable resources. Nonrenewable resources, such as natural gas, coal, or oil, are finite and once depleted, cannot be quickly replaced. Conversely, renewable resources, such as solar, wind, or geothermal heat, are perpetually replenished by natural processes and inherently sustainable. This energy, captured from diverse resources, is transformed into different forms suitable for various applications – from lighting up cities, powering industries to running transportation systems.
Entrepreneur: An entrepreneur is a person who organizes and operates a new business undertaking, embracing the risks and demands it entails to stimulate economic growth.
Expanded Definition
An entrepreneur is an innovative individual who takes on the critical role of integrating different components of production – such as labor, capital, and business structure – to initiate, establish, and grow a new enterprise. Characterized often by a willingness to take calculated risks, entrepreneurs are frequently lauded for their key role in stimulating economic expansion. Their business ventures introduce new products or services, create jobs, and contribute to increased productivity, thereby positively impacting the overall economy. They balance risk with reward, and through their strategic and creative thinking, often bring about transformative changes in industries and markets.
Entrepreneurs: Entrepreneurs are risk-takers who identify opportunities to innovate through launching businesses or developing novel products, often preferring self-employment and embracing challenges.
Expanded Definition
Entrepreneurs are defined as individuals who are inherently prepared to undertake risks with a aim to innovate, create and launch new products or services, or establish new businesses. They possess a unique ability to identify and seize opportunities that others may overlook. Their motivation often stems from a combination of autonomy, the enjoyment derived from their endeavor, and the intrinsic satisfaction of tackling and overcoming challenges. Entrepreneurs, thus, play a crucial role in driving forward innovation and contributing to economic development and growth.
Entrepreneurship: Entrepreneurship is the act of creating and managing a business venture while assuming all associated risks to generate a profit.
Expanded Definition
Entrepreneurship is the dynamic process of creating incremental wealth and innovating things of substantial value. This process is accomplished by individuals who take on the substantial risks involved, not only in terms of financial implications, but also in terms of time and effort, in organising essential resources. These resources are used to produce valuable goods and services, often delivering new solutions or innovations to meet market needs. Thus, entrepreneurs act as catalysts for economic change by recognizing and seizing profitable opportunities, challenging the status quo, and driving progress through innovation. Their role is crucial within the global economy, aiding the generation of wealth, job creation, and societal improvements.
Equal interval: ‘Equal interval’ refers to the method of categorizing data by segmenting it into uniform-sized groups or ranges.
Expanded Definition
“Equal interval” refers to a statistical method used in data analysis where the collected data is organized into distinct sections, ranges, or intervals of equal size. This enables a more systematic presentation and interpretation of data on a scale. It is especially useful for understanding and comparing distribution patterns, identifying trends, and drawing insights. The technique ensures each data point is allotted a specific place in the sequence, minimizing discrepancies and facilitating a more accurate analysis.
Equilibrium: Equilibrium in economics is a state where supply equals demand, allowing for a stable market price. It can apply to individual markets or the entire economy, and despite potential instability or suboptimal social outcomes, it remains a focal point of economic study.
Expanded Definition
‘Equilibrium’ is a fundamental concept in the realm of economics, denoting the state of balance achieved when the demand and the supply of a good or service are equal. This is attained at a price point known as the ‘market-clearing price,’ where all goods supplied are sold, leaving no surplus or shortage. Economists extend this concept to evaluate different aspects such as the ‘general equilibrium,’ which refers to a balance in all markets in an entire economy and scenarios where markets do not reach equilibrium, as seen in situations like ‘involuntary unemployment’. However, the concept has certain caveats. Notably, equilibriums may not always be stable, as seen in the volatility of the ‘commodity cycle,’ or they may not necessarily yield socially optimal outcomes. The ‘Nash equilibrium,’ meanwhile, refers to a state in a competitive setup where no player can gain by unilaterally changing their strategy. Despite its wide use, some economists believe the focus on equilibrium may be excessive, as discussed in this linked article.
Equilibrium price: Equilibrium price is the cost at which the amount of a product offered by sellers matches the quantity buyers are willing to purchase, essentially the intersection of supply and demand curves.
Expanded Definition
The ‘Equilibrium Price’ is a fundamental concept in economics, defined as the price level at which the quantity of goods or services that suppliers are willing and able to provide perfectly matches the quantity that consumers are willing and able to purchase. This is the price point where the forces of supply and demand are balanced, resulting in market stability. Graphically, the equilibrium price is represented by the point of intersection of the supply and demand curves in a market. It is at this price that the market clears, thus avoiding surplus or shortage scenarios. The concept of equilibrium price is key in understanding how market forces interact to establish prices and guide the allocation of resources within a market.
Equilibrium wage: Equilibrium wage is the pay rate where the labor market achieves a balance between the availability of jobs and the number of people seeking employment. It’s the wage where job supply meets job demand.
Expanded Definition
‘Equilibrium wage’ is a specialized term used in labor economics to describe the level of compensation per unit of labor, often hourly wage, at which the overall demand for labor by employers precisely matches the total supply of labor from workers. In an ideal market scenario, this wage balance ensures that every individual who is willing and available to work at this wage rate will find employment, and every employer who is willing to pay this wage rate will find workers. The equilibrium wage thus serves as a pivotal indicator of labor market health and is influenced by various factors such as skill levels, industry growth, and economic conditions.
Equity: Equity is essentially the net value of an asset after subtracting any debts related to that asset.
Expanded Definition
‘Equity’ is a financial term that represents the residual interest or value that an asset holder has after deducting all liabilities, including debts or other financial obligations, associated with the asset. In essence, it quantifies the actual ownership interest in the asset, considering all outstanding obligations that need to be settled. Therefore, if the asset’s value increases or the associated liabilities decrease, Equity too will increase, thereby increasing the overall net worth of the asset holder. This universally accepted concept plays a significant role in various financial sectors, including real estate, investment, and business finance.
Euro zone: The Eurozone refers to the European Union countries, currently 20, that use the euro as their official currency, plus six other non-EU nations. Its monetary policy is set by the European Central Bank.
Expanded Definition
The ‘Euro zone’, often referred to as the ‘Eurozone’, describes a monetary union formed by a subset of member countries within the European Union (EU). As of the current reference period, this group is composed of 20 EU countries. These nations have showcased their commitment to a common economic agenda by adopting the euro as their official national currency. This collective also extends beyond the EU borders. Six non-EU countries—Andorra, Kosovo, Monaco, Montenegro, San Marino, and Vatican City—have independently chosen to use the euro as their currency, despite not having a formal membership status within the EU. Direction of the Eurozone’s fiscal measures, specifically its monetary policy, lies with the European Central Bank (ECB). The ECB is the central authority entrusted with managing euro supply and executing monetary policy in the overall interest of the Eurozone economies. This includes setting key interest rates and controlling the Union’s money supply to maintain price stability and foster economic growth. In summary, the ‘Eurozone’ reflects a region of shared fiscal strategy and common currency, aimed at synchronizing economies and facilitating financial cooperation among the member nations.
Eurobond: A Eurobond is a debt security issued by a company or government in a currency other than its home country’s currency. It was first introduced in 1963 by the Italian highway network operator Autostrade.
Expanded Definition
A ‘Eurobond’ is a type of debt instrument issued by a government or a corporation, denominated in a currency that is not native to the issuer’s home country. Unlike domestic bonds, Eurobonds float on the international market. The primary motive of issuing a Eurobond is to take advantage of global financial markets and draw investment from international investors. The first Eurobond ever issued was by Autostrade, an Italian motorway operator, which raised $15 million in 1963. Importantly, the term ‘Eurobond’ is not exclusive to bonds issued in Europe or in Euro currency, but refers to any bond issued in a foreign currency.
European Central Bank: The European Central Bank (ECB), headquartered in Frankfurt, is the primary authority responsible for monetary policy and bank supervision in the euro zone, aiming to maintain price stability. Its governing council includes six executive board members and 19 central bank governors from euro zone nations.
Expanded Definition
The European Central Bank (ECB) is the apex monetary institution that governs the policies for euro zone, an economic and monetary union of 19 European Union nations that have adopted the euro as their official currency. The bank’s headquarters are situated in Frankfurt, Germany. The ECB’s primary responsibility is to preserve price stability within the euro area to ensure a balanced inflation rate across countries. This primarily involves controlling the monetary policy, backed by tools such as interest rates and open-market operations. Furthermore, the ECB plays a pivotal role in the prudential supervision of banks in the euro area to enhance financial stability and prevent banking crises. The governing council of the ECB consists of six members of the executive board in combination with the governors of the central banks from the 19 euro area countries, whose joint decisions shape the financial and monetary policies of the region.
Excess reserves: Excess reserves refer to the surplus funds a financial institution holds beyond the statutory or contractual requirements, held specifically in its account at a Federal Reserve Bank.
Expanded Definition
‘Excess reserves’ refer to the additional cash held by a financial institution, over and above its required reserve balance and its contractual clearing balance, at a Federal Reserve Bank. The required reserve balance is a minimum amount mandated by the Federal Reserve that banks must maintain to ensure their financial stability and ability to meet potential withdrawals. The contractual clearing balance is an agreed amount that a bank commits to maintain in its account for clearing purposes. Hence, any funds in excess of these requirements are termed ‘excess reserves’ and these can be used for lending or investment purposes, thus playing a vital role in the monetary policy of an economy.
Exchange: Exchange is the process of swapping goods or services between parties, either for other commodities or monetary compensation.
Expanded Definition
‘Exchange’ is an economic principle referring to the process through which commodities or services are traded between two or more parties. This transaction can occur in the form of a barter, where goods or services are swapped directly without a medium of exchange. Alternatively, it can also involve a monetary system where one party provides goods or services and receives a predetermined monetary value in return. This concept is fundamental to commerce and trade, acting as one of the key mechanisms behind market economies.
Exchange Stabilization Fund (ESF): The Exchange Stabilization Fund (ESF) is a U.S. Treasury-managed reserve that controls U.S. dollars, foreign currencies, and special drawing rights (SDRs), and is used for foreign exchange transactions and loans to foreign governments, with the Treasury Secretary’s approval.
Expanded Definition
The Exchange Stabilization Fund (ESF) is an established pool of financial resources managed by the U.S. Department of the Treasury. It’s been designed to hold three types of assets predominantly: U.S. dollars, foreign currencies, and special drawing rights (SDRs), a type of international money reserve currency created by the International Monetary Fund. The foremost purpose of the ESF is to provide a means by which the U.S. can interact with foreign exchange markets, in a bid to influence exchange rates and stabilize the economy. The techniques employed can include the buying or selling of foreign currencies, which can have an impact on their value relative to the U.S. dollar. Moreover, the ESF is also used to maintain and manage U.S. reserves of foreign exchange and SDR assets. These reserves prove essential in meeting international commitments and sustaining the credibility of U.S. monetary policy. Lastly, the ESF is equipped to deliver financial support to foreign governments. This is often instrumental in global economies and diplomacy, as it can be employed to tackle international financial crises or fund economic reform projects. However, it should be noted that all operations of the ESF are carried out under the watchful eye and explicit authorization of the Secretary of the Treasury. It’s considered a powerful tool for implementing U.S. international economic policy and ensuring international financial stability.
Exchange rate: An exchange rate is the value at which one nation’s currency can be traded for another’s.
Expanded Definition
The term ‘Exchange Rate’ refers to a financial concept that demonstrates the valuation of one country’s currency as compared to another’s. It is essentially the rate at which a particular currency can be traded or exchanged for another. This value fluctuates and is influenced by a multitude of factors, including economic conditions, interest rates, inflation, and geopolitical events. Exchange rates are pivotal in global trade, as they establish the cost of goods and services between nations, affecting both international commerce and investment.
Exchanges (noun): Exchanges are platforms where traders buy and sell goods, services, resources, or money.
Expanded Definition
‘Exchanges’ (noun) can be better defined as ‘Officially regulated platforms or marketplace where participants engage in the purchase and sale of various forms of commodities, services, securities or currencies. These institutions function as a facilitator for such transactions, typically adhering to standard rules and policies to protect the interests of involved parties.’
Excludability: Excludability is the capacity of a provider to prevent access to a product or service by those not willing or able to pay.
Expanded Definition
‘Excludability’ refers to the inherent characteristic of a product or service that enables the provider or seller to prevent any non-paying consumers from accessing or utilizing it. Essentially, it is the control mechanism that bars consumption of goods or services unless they are purchased. This distinct property ensures the economic principle of trade — the exchange of value, typically in the form of money, for a desired good or service.
Exempt (from withholding): ‘Exempt from withholding’ refers to a status where federal income tax isn’t deducted from an individual’s earnings due to specific income, tax, and dependency conditions. It doesn’t provide exemption from other tax withholdings like the Social Security tax.
Expanded Definition
‘Exempt (from withholding)’ is a term primarily used in relation to U.S. federal income tax. It signifies the status of being free from the obligation of having federal income tax withheld from one’s earnings. This exemption status is not automatic and an individual must first meet certain specifications in areas such as income level, tax liability history, and qualifying dependents. It is important to note that even if a person is exempt from federal income tax withholding, this status does not extend to other forms of tax withholdings like the one for Social Security. Consequently, those other types of taxes may still be deducted from their overall earnings. This exemption is specifically targeted towards withholding of income tax at the federal level.
Exempt property: Exempt property refers to the assets a debtor can retain during bankruptcy proceedings.
Expanded Definition
‘Exempt property’ refers to certain assets or properties that a debtor is legally permitted to retain during the process of bankruptcy filing. These specified properties are deemed exempt under various federal or state laws, acting as a safeguard for the debtor to prevent complete destitution. The categories and value limits of exempt property vary widely depending on jurisdiction, and may encompass necessary household items, vehicles, tools necessary for the debtor’s trade, or a portion of earned but unpaid wages. The objective of these exemptions is to provide a debtor with the basic means to make a fresh financial start after bankruptcy.
Exemption: An exemption is a tax deduction claimed by taxpayers for themselves or eligible dependents, reducing their taxable income. The amount is set annually and can involve personal or dependency circumstances.
Expanded Definition
‘Exemption’ in the context of taxation refers to specific amounts that taxpayers are allowed to deduct from their gross income for themselves, their spouses, and for any eligible dependents such as children. A decrease in gross income results in a decrease in the total amount of income that is subject to taxation. This concept means taxpayers essentially have less taxable income, which overall reduces their tax obligations. There are two main types of exemptions in U.S. tax law: personal and dependency exemptions. Every exemption is valued at a specific amount, which is annually adjusted to keep pace with inflation.
Expansion: Expansion is the phase in the business cycle when the economy experiences growth, typically marked by a rise in the real GDP.
Expanded Definition
‘Expansion’ in the economic context is defined as the phase in the business cycle where the real Gross Domestic Product (GDP) – a comprehensive measure of national economic activity – rises over time. This period, characterized by a broad increase in various economic indicators like employment, income, and production, signifies economic growth and generally corresponds to a favorable economic environment. It affirms that the purchasing power of consumers is increasing, leading to higher demand for goods and services, contributing to the risk-taking and entrepreneurial spirit integral to economic development.
Expansionary monetary policy: Expansionary monetary policy is a strategy used by the Federal Reserve to stimulate economic growth by reducing interest rates, thus promoting consumer and corporate spending.
Expanded Definition
‘Expansionary monetary policy’ can be defined as a strategy implemented by a nation’s central banking system, such as the Federal Reserve in the United States, to stimulate economic growth and reduce unemployment rates. This approach involves reducing short-term interest rates, increasing the money supply, and making credit more accessible, with the intention to foster increased consumer and business expenditure. The ultimate aim is to boost the nation’s economy by encouraging higher levels of economic activity, such as trade and investment. Typically, such a policy is deployed in times of economic slowdown or recession.
Expected rate of return: The expected rate of return is the predicted yield on an investment by evaluating its past and probable performance.
Expanded Definition
The ‘Expected Rate of Return’ refers to the potential financial profit or gain an investor foresees from an investment, expressed as a percentage of the original amount invested. It is an estimate calculated by considering the likelihood of various potential rates of return, often derived from historical data. However, since it is a forecast, it is not guaranteed. The expected rate of return plays a pivotal role in investment decision making, as it provides a means to assess the attractiveness and potential risk of a particular investment option.
Expenditures: Expenditures refer to the funds used for purchases of goods and services.
Expanded Definition
‘Expenditures’ pertains to the act of disbursement of funds, notably for procuring goods or utilizing services. This financial concept emphasizes the flow of money from an entity, such as an individual, a business, or a government, to another party in exchange for a product, service, or even as a form of investment. These monetary outflows contribute to the overall operation and progression of the spending entity, whether it is for personal consumption, business operational expenses, or public sector initiatives.
Expenses: Expenses are costs incurred for goods and services which may be categorized as fixed (regular, unvarying outlays like rent), variable (fluctuating costs like groceries), and periodic (recurrent, several-times-a-year expenditures like insurance payments).
Expanded Definition
“Expenses” refer to the financial obligations an individual, household, or business must fulfill to procure goods and services. Typically, they are grouped into three distinct categories: fixed, variable, and periodic expenses. Fixed expenses are recurring costs that remain consistent each payment cycle, usually occurring monthly. Examples include rent, car payments, and mortgage payments – these are costs that do not fluctuate over time, enabling predictable budgeting. Variable expenses, in contrast, do not have a consistent value, fluctuating based on usage or consumption. Individual or business spending on items like food, clothing, gasoline, and entertainment are good examples. These costs can vary from one time period to the next – for example, daily, weekly, or monthly. Periodic expenses are those that arise occasionally, typically several times a year, and not on a regular monthly basis. These can include costs like car insurance and life insurance payments. In a broader economic perspective, understanding these expense categories helps in pursuing effective financial management and planning, tailoring strategies according to the nature of each expense type.
Expenses (elementary): Expenses refer to the cost incurred for acquiring goods and services. It entails any outflow of money for business activities or personal needs.
Expanded Definition
“Expenses (elementary)” refers to the financial amount that is utilized or disbursed in the acquisition of goods and services. These expenditures might vary and can encompass a broad range of categories, such as operating costs for businesses, living expenses for individuals or even procurement costs for physical goods or digital services. Essentially, they represent the economic trade-off made to procure necessities or to gain benefits, and are often central components used in planning and accounting in both personal and business finances.
Explicit cost: Explicit cost is a tangible, direct expense incurred by a business, such as rent or salaries, involving actual cash outlay.
Expanded Definition
‘Explicit cost’ refers to the clearly defined and tangible monetary expenses that a business must pay during its operation. These costs are directly associated with the business functions and are typically recorded and reported within accounting and financial reports. They are critical components of a business’s budget and include expenditures such as rental payments for property or equipment, employee salaries and wages, and utility bills for services like electricity and water. The ability to identify and manage these costs effectively is essential for maintaining a business’s financial health.
Exports: Exports are domestic products or services sold to foreign markets, typically contributing to a country’s economy.
Expanded Definition
Exports refer to the array of commodities, resources, and services that are produced or developed within one country, but are subsequently sold and shipped to other countries. This includes tangible goods such as manufactured products, agricultural produce, raw materials, and intangible services like tourism, patent rights, or consultancy services. Export essentially pertains to any product or service originated domestically but intended for consumption or use in a foreign market, contributing to the country’s economy by generating revenue from non-domestic sources. The term signifies the economic interconnections between the countries, breaking the geographical barriers.
Extended unemployment benefits: Extended unemployment benefits are extra weeks of aid given to individuals who’ve used up their standard unemployment insurance, typically during times of high unemployment rates.
Expanded Definition
‘Extended Unemployment Benefits’ refers to the supplementary weeks of financial assistance provided to individuals who have depleted their regular unemployment insurance benefits. This provision comes into effect during times of elevated unemployment rates. The aim is to offer a continued financial safety net to displaced workers who are unable to secure new employment due to adverse economic conditions, thereby easing existing economic hardship and stimulating economic recovery.
External costs: External costs are unintended negative effects suffered by a third party as a result of an individual’s activity, despite the action being beneficial to the individual undertaking it.
Expanded Definition
‘External Costs’ are expenses which are not directly accounted for by the individual or entity undertaking an action, yet have an adverse effect on third parties. These costs emerge as negative fallout from an individual’s or entity’s actions that benefit themselves but inadvertently impose a burden on others. The third parties end up bearing these unintentional costs, which may include tangible economic impacts, environmental degradation, health issues, and more, often without their consent or without any compensation.
Externality: An externality is a cost or benefit, experienced by an unrelated third party, as a result of transactions between two other parties.
Expanded Definition
An ‘externality’ refers to an economic term that denotes an indirect or unintended consequence, either beneficial or detrimental, incurred by an uninvolved third party due to a transaction or interaction between two separate parties. This impact is typically beyond the control of the third party as it is not directly part of the transaction. Externalities can significantly influence market efficiency and are often considered in policy decisions to ensure comprehensive accounting of societal costs and benefits.

F

FDIC loss-sharing arrangement: An FDIC loss-sharing arrangement is a mechanism introduced by the Federal Deposit Insurance Corporation in 1991 to manage the assets of failed banks, where the FDIC absorbs the majority of the losses, typically 80%, from specified assets, while the acquiring bank handles the rest, aiming to align interests and encourage asset management by the purchasing bank.
Expanded Definition
An FDIC loss-sharing arrangement refers to a mechanism established in 1991 by the Federal Deposit Insurance Corporation (FDIC), designed to handle the resolution of failed insured depository institutions. This system is typically integrated within select purchase and assumption (P&A) transactions. The two primary objectives of this setup include the sale of maximum assets to the purchasing bank and the acquisition and management of nonperforming assets in a way that synergizes the motivations and incentives of both the purchasing bank and the FDIC. In practice, the arrangement stipulates that the FDIC absorbs the majority of the risk – usually around 80% – associated with a specific pool of assets. The remaining risk is borne by the purchasing bank. Additional protection is afforded through the FDIC in cases where large-scale financial disasters threaten the bank’s stability.
FICO credit score: A FICO credit score, created by the Fair Isaac Corp., is a numerical rating between 500 and 850 that evaluates an individual’s creditworthiness, with a higher score indicating greater likelihood of loan repayment.
Expanded Definition
The FICO credit score refers to a numerical valuation model for assessing creditworthiness, used predominantly within financial institutions. The acronym FICO stems from the Fair Isaac Corporation, which pioneered this proprietary scoring system. It uses algorithms to calculate an individual’s credit risk based on their past financial behavior. The FICO score range spans from 500 to 850, with a higher score indicating a lower credit risk, thus implying that the individual is more likely to repay loans or clear debts in a timely manner. This measure assists credit providers in making informed decisions when extending credit services.
Face value (of bond): Face value of a bond is the nominal amount displayed on the certificate, which the issuer promises to repay upon maturity.
Expanded Definition
The face value of a bond, also known as par value or nominal value, refers to the amount of money stated on the bond’s document that the issuer promises to repay to the bondholder upon maturity. This is the figure printed on the face of a financial instrument like a bond, serving as the basis for interest calculations and determining the redemption price at maturity. However, it does not indicate the bond’s market price, which can fluctify based on market conditions or the issuer’s creditworthiness.
Facility: A facility is a long-term or temporary program designed by the Federal Reserve for loaning or depositing operations with various counterparties like banks. Examples include the ON RRP facility, the Discount Window, and programs created during financial crises.
Expanded Definition
A ‘facility’ in the financial context, refers to a pre-existing, structured program created for a specific group of participants (counterparties) to perform transactions such as depositing or borrowing funds. The Federal Reserve (The Fed), for example, operates various types of these facilities. Permanent facilities, such as the Overnight Reverse Repurchase Agreement (ON RRP) facility and the Discount Window, are longstanding programs where counterparty institutions can securely deposit or borrow funds as per their requirements. On the other hand, temporary facilities are set up for specific periods or conditions, usually in response to financial crises or significant economic events. Examples include the various emergency measures instituted during the 2007-09 Financial Crisis and the COVID-19 pandemic. These temporary arrangements help provide stability during times of unprecedented financial stress.
Factors of production: ‘Factors of production’ refers to the critical resources—natural, human, and capital—utilized in the creation of goods and services, also termed as productive resources.
Expanded Definition
‘Factors of production’ refer to the essential inputs or resources utilized in the process of producing goods and services within an economic system. These elements are fundamental for any production activity and can typically be classified into four main categories: land, labor, capital, and entrepreneurship. ‘Land’ encompasses all the natural resources present in nature without human intervention, including everything from arable land to minerals, water, and more. ‘Labor’ refers to the human resource in terms of the physical and mental efforts contributed by individuals in the production process. ‘Capital’ represents man-made aids to production – these can include machinery, tools, buildings, or any other equipment that assists with productivity. Lastly, ‘Entrepreneurship’ implies the skill of combining these resources efficiently to produce valuable goods and services, managing risks, and innovating for the betterment of an economic system. These are collectively known as factors of production, also sometimes referred to as productive resources or inputs.
Fair trade: Fair trade is a system that encourages consumers to consider the labor conditions and wages of supply workers when purchasing goods, with specific programs certifying products like coffee as fairly produced.
Expanded Definition
‘Fair Trade’ is a concept and business model that prioritizes the ethical aspects of commerce, particularly on products originating from developing countries. It emphasizes the social, economic, and environmental wellbeing of the workers involved in the production process. Instead of solely focusing on profit margins and competitive pricing, Fair Trade advocates for buying practices that take into account the minimum wage, safe and healthy working conditions, and sustainable production methods. Various certification programs also exist to authenticate and label a product, such as coffee, as resulting from Fair Trade practices. This approach is perceived to encourage equitable trade and contribute to poverty alleviation in the supply chain.
Fannie Mae (Federal National Mortgage Association): Fannie Mae is a U.S. government-sponsored entity that buys and repackages mortgage loans into tradable securities, promoting liquidity and stability in the housing and mortgage markets.
Expanded Definition
Fannie Mae, also known as the Federal National Mortgage Association, is a U.S. government-sponsored entity that functions as a crucial financial facilitator between lenders, like banks and credit unions, and investors. Founded as a federal agency in 1938 and re-chartered as a private corporation by Congress in 1968, Fannie Mae operates under a public-private hybrid status. Its primary mandate is to enhance liquidity and ensure stability in the U.S. housing and mortgage markets, essentially operating as a bridge between those who lend money and those who invest in mortgages. It accomplishes this by purchasing mortgage loans from lenders, thereby replenishing their funds and enabling them to issue additional home loans. Fannie Mae then consolidates these loans into larger, packaged securities that are traded in the financial market, creating a flow of new investment capital back into the housing market. In summary, Fannie Mae plays a pivotal role in maintaining the accessibility and affordability of homeownership and rental housing in the United States by ensuring a constant finance stream within the real estate sector.
Fat tails: ‘Fat tails’ refer to a statistical distribution where extreme outcomes occur more frequently than predicted by a normal distribution, signifying a higher risk of severe events. During the 2007 financial crisis, for example, Goldman Sachs experienced unexpected “fat tail” events.
Expanded Definition
‘Fat tails’ is a term used in statistics and finance to denote a phenomenon where extreme outcomes occur more frequently than what is predicted by the normal distribution model. In a typical ‘bell curve’ or normal distribution, most events are close to the average, and the likelihood of extreme events decreases significantly the further they are from the average. However, in a scenario with fat tails, this pattern does not hold true. The chances of extreme events occurring is considerably higher, indicating the presence of higher levels of risk and unpredictability. An example of this was observed during the 2007 financial crisis. David Viniar, the then CFO of Goldman Sachs, reported instances of ’25 standard deviation events’ taking place on consecutive days, something that is virtually improbable under normal distribution. It revealed that their predictive models, which were based on standard statistical techniques and assumptions, were inadequate as they failed to consider the possibility of such fat-tail events, leading to underestimation of risk.
Federal Deposit Insurance Corp. (FDIC): The FDIC is a U.S. government entity that provides insurance cover for bank deposits and oversees state-run banks not part of the Federal Reserve system.
Expanded Definition
The Federal Deposit Insurance Corporation (FDIC) is a U.S. government-created body responsible for maintaining public confidence in the U.S. financial system. It accomplishes this by insuring deposits in banks and savings associations in the event of a bank failure, up to a specified limit currently set at $250,000 per depositor. This means that if an insured banking institution fails, the FDIC will cover the loss of a depositor’s money up to the limit per account type. Apart from this, the FDIC also supervises the operations of state-chartered banks that are not members of the Federal Reserve System to ensure their compliance with established regulations and safeguards, thereby enhancing the overall stability and integrity of the country’s banking system. The FDIC is funded by premiums paid by banks and thrift institutions, not by taxpayers.
Federal Home Loan Banks: Federal Home Loan Banks are a network of 12 regional, privately-owned wholesale banks established by Congress in 1932 to support local community financing and streamline the mortgage system.
Expanded Definition
The Federal Home Loan Banks (FHLBanks) are a network of 12 regional U.S. banking institutions, established by an act of Congress in 1932, with the principal goal of addressing the credit and financial requirements of their respective local communities. The creation of FHLBanks was designed to solidify and improve the mortgage finance system across the nation. Despite their congressional charter, FHLBanks function as privately held entities and operate as wholesale banks that provide various financial services to their member financial institutions. However, unlike many financial establishments, they do not have stock that is publicly traded.
Federal Housing Administration (FHA): The Federal Housing Administration (FHA) is a HUD agency that guarantees private lender-issued mortgages and loans.
Expanded Definition
The Federal Housing Administration (FHA) is a specialized institution that operates within the umbrella of the U.S. Department of Housing and Urban Development (HUD). The primary function of FHA is to promote homeownership by providing insurance protection to private lenders that issue mortgages and other types of loans for housing. This insurance mitigates the risk lenders undertake, encouraging them to offer more accessible and lenient lending conditions, including lower interest rates and more flexible qualification standards. By insuring these loans, the FHA facilitates home acquisitions for individuals who might otherwise find it challenging to qualify for a mortgage, fostering wider access to home ownership across the United States.
Federal Housing Finance Agency: The Federal Housing Finance Agency (FHFA) is a U.S. government agency that oversees the Federal Home Loan Banks, Fannie Mae, and Freddie Mac within the executive branch.
Expanded Definition
The Federal Housing Finance Agency (FHFA) refers to an autonomous regulatory entity within the executive branch of the U.S. government. It holds mandates to supervise and regulate the operations of specific entities within the U.S. housing finance system, namely, the 12 Federal Home Loan Banks, the Federal National Mortgage Association (widely known as ‘Fannie Mae’), and the Federal Home Loan Mortgage Corporation (commonly known as ‘Freddie Mac’). These powerful financial institutions play prominent roles in the U.S housing market, providing access to home financing and facilitating homeownership for Americans. By imposing standards and rules, the FHFA ensures that these entities function effectively, soundly, and transparently, ultimately contributing to the stability and integrity of the national housing finance system.
Federal Insurance Contributions Act (FICA) tax: FICA tax is a payroll levy split between employers and employees to finance Social Security and Medicare programs.
Expanded Definition
The Federal Insurance Contributions Act (FICA) tax refers to a mandatory U.S. federal tax legislated to finance the nation’s Social Security and Medicare programs. Governed by the Internal Revenue Service (IRS), it is deducted directly from the paychecks of employees and matched by their employers. The FICA tax impacts virtually all wage earners and employers, contributing to systems that provide retirement, disability, and healthcare benefits for qualifying individuals, typically the country’s elderly and their dependents. Its structure involves a shared responsibility between employees and employers to ensure the ongoing solvency of these vital social programs.
Federal Open Market Committee (FOMC): The Federal Open Market Committee (FOMC) is the policy-making branch of the Federal Reserve System, composed of the seven Board of Governors and five Reserve Bank presidents, that makes decisions about interest rates and the growth of the U.S. money supply.
Expanded Definition
The Federal Open Market Committee (FOMC) refers to the critical policy-making body established under legal statutes within the Federal Reserve System, the central banking structure of the United States. This committee, comprising seven members of the Board of Governors and the president of the Federal Reserve Bank of New York, has a fixed membership. In addition, it includes four other presidents from the remaining Federal Reserve Banks who serve on a rotating basis to ensure broad regional representation. FOMC discussions and decisions also receive valuable inputs from non-voting Reserve Bank presidents. Primarily, the committee’s function is to oversee and make key decisions regarding the nation’s open market operations, essentially involving the purchase and sale of U.S. government securities, which influence the level of reserves in the banking system, and by extension, economic activity. Given its influence over monetary policy, the FOMC plays a crucial role in maintaining price stability and promoting sustainable economic growth.
Federal Reserve Act: The Federal Reserve Act of 1913 is a U.S. legislation that resulted in the creation of the Federal Reserve System, the central banking authority in the United States.
Expanded Definition
The Federal Reserve Act, enacted by the United States Congress in 1913, refers to the legislation that instituted the Federal Reserve System, the central banking structure of the United States. This act was instrumental in founding a flexible and more stable financial and monetary system within the country to manage monetary policy, sustain economic stability, supervise and regulate banking institutions, offer financial services and safeguard the integrity of the U.S. payment system. The Act provided the basis for the establishment of the Federal Reserve, its structure, responsibilities, and its capacity to issue currency. It has undergone multiple amendments over the years, adjusting to the changing economic conditions and requirements of the country.
Federal Reserve Bank: The Federal Reserve Bank is one of 12 regional banks serving commercial entities and the U.S. government while carrying out economic research on a regional and national scale.
Expanded Definition
The ‘Federal Reserve Bank’ refers to one of twelve distinct entities established across different regions in the United States. These banks have a multi-faceted role. They offer a variety of key financial services to commercial banks within their jurisdictions. Moreover, they serve as authorized financial representatives of the United States government, executing fiscal duties and responsibilities on its behalf. Beyond their operational services, these Federal Reserve Banks are engaged in comprehensive economic research, examining detailed data and trends within their respective regions and throughout the US at large. The insights gained from this research are crucial in informing and shaping national economic policies.
Federal Reserve Districts: Federal Reserve Districts are the 12 U.S. sectors, each overseen by a respective reserve bank, varying by geographic location.
Expanded Definition
‘Federal Reserve Districts’ refers to the twelve geographically delineated sections of the United States, each of which is overseen by a specific Reserve Bank. These districts were established by The Federal Reserve Act to maintain a decentralized structure for the U.S. central banking system, thereby providing broad and representative economic input. Each district’s Reserve Bank serves as a fiscal agent for the U.S. government, supervises commercial banks in its territory, and influences monetary policy. This structure has been devised to provide diverse economic perspective and to ensure balanced economic and financial conditions across the country.
Federal Reserve System: The Federal Reserve System is the U.S.’s monetary authority that implements financial and economic policy, controls money supply, and manages banking institutions.
Expanded Definition
The Federal Reserve System, often simply referred to as the ‘Fed,’ serves as the central banking authority in the United States. Established by Congress in 1913, it was designed to foster economic stability by influencing monetary policy, supervising and regulating banking institutions, facilitating the smooth operation of the national payment system, and protecting the credit rights of consumers. The Federal Reserve System consists of a board of governors in Washington D.C. and twelve regional Federal Reserve Banks across the U.S. It aims to promote a well-performing economy and ensure financial stability by implementing policies to control inflation, regulate the banking sector, and maintain the stability of the financial system. It also manages the nation’s money supply and is responsible for issuing and distributing U.S. currency. The Federal Reserve System is unique in that it operates independently within the government, meaning its decisions do not need to be ratified by the President or Congress. However, it is subject to oversight by Congress to ensure it achieves its mandated objectives of maximum employment, stable prices, and long-term interest rate stability.
Federal Reserve limited liability companies: Federal Reserve Limited Liability Companies, also known as Maiden Lane, are entities created by the New York Federal Reserve to purchase and manage assets from troubled financial institutions like Bear Stearns and AIG to mitigate market disruption.
Expanded Definition
‘Federal Reserve Limited Liability Companies,’ also known as ‘Maiden Lane,’ are specific corporate entities established by the Federal Reserve Bank of New York. These were created under the provisions of Section 13(3) of the Federal Reserve Act. Their primary objective was to acquire and manage certain assets of Bear Stearns, the American International Group (AIG), and AIG’s subsidiaries. This action was taken to avert severe disruptions in financial markets and stabilize the overall economy. These companies, due to their limited liability status, protect the Federal Reserve from bearing a significant amount of financial risk during such initiatives.
Federal Trade Commission: The Federal Trade Commission (FTC) is a U.S. government agency dedicated to promoting fair competition, upholding antitrust laws, and preventing identity theft.
Expanded Definition
The Federal Trade Commission (FTC) refers to an autonomous entity within the U.S. federal government. Its core mandate is to ensure the maintenance of fair and competitive business practices across diverse commerce sectors within the nation. Regulating and enforcing federal antitrust laws forms an integral part of its responsibilities; these laws are designed to prevent undue concentrations of economic power and the formation of monopolies. Furthermore, the FTC is dedicated to consumer protection and actively works to spread awareness about potential threats, such as identity theft. It provides resources and guides to educate the public on how to protect themselves against fraudulent activities and cybercrimes.
Federal funds rate: The Federal funds rate is the interest rate that banks charge each other for overnight loans of reserve balances, facilitating immediate liquidity.
Expanded Definition
The Federal Funds Rate refers to the benchmark interest rate at which banks and financial institutions operating within the United States lend each other reserve balances. These transactions typically take place overnight or on an uncollateralized basis within the Federal Reserve System. Generally, a bank holds these reserves to meet the minimum reserve requirements set by the Federal Reserve. The Federal Funds Rate significantly influences the general structure of interest rates, impacting various economic factors such as inflation, employment and investments. Its adjustments are a primary monetary policy tool for regulating the nation’s economic activity.
Federal income tax: The federal income tax is a levy imposed by the U.S. government on individual earnings to fund national initiatives such as defense, foreign affairs, and debt servicing.
Expanded Definition
The term ‘Federal income tax’ refers to a fiscal levy imposed by the U.S. federal government on the annual earnings of individuals, corporations, trusts, and other legal entities. This revenue becomes a primary source of funding for national-level operations and initiatives such as defense infrastructure, international relations, law enforcement agencies, and the service of the national debt. It is structured upon a progressive system, meaning the tax rate increases according to income brackets, which ensures equitable taxation. The complexity of individual income, deductions, credits, and exemptions leads to a varying taxation amount for each taxpayer. This taxation system facilitates the financial stability and functional continuity of the nation’s major communal services.
Federal student loan: A federal student loan is government-funded financial aid, extended to postsecondary students and parents, to help cover education expenses.
Expanded Definition
A ‘Federal Student Loan’ is a financial aid instrument provided by the U.S. government. It is specifically designed to support both postsecondary students – those pursuing undergraduate, graduate, or professional academic degrees – as well as their parents. The fundamental purpose of this loan is to facilitate the payment for educational endeavours, reducing the immediate financial burden by allowing for a deferred repayment. The terms and repayment schedules of these loans are usually more flexible and bear lower interest rates compared to private loans, making them a viable tool to finance higher education. The recipients, however, are required to repay the loan amount in full, often including interest, after completing their studies or upon leaving school.
Fees: Fees are monetary charges applied by financial institutions for processing credit applications or maintaining credit accounts, including various charges like late fees, maintenance fees, overdraft fees, and non-bank ATM usage fees.
Expanded Definition
“Fees” are specific monetary charges imposed by financial institutions or credit providers for a variety of services related to the management or usage of your account. These fees may be levied for processing applications for credit, maintaining your account, executing particular transactions, or even for services rendered in handling defaults like late payments. Such charges can also be incurred for the use of services beyond a bank’s network, such as withdrawing cash from an ATM of a different bank. These fees serve as a form of compensation to the institutions for the administrative costs associated with offering these services.
Fiat money: Fiat money is a type of currency that’s issued by a government and not backed by a physical commodity like gold, hence its value is derived solely from the trust and confidence of the people who use it.
Expanded Definition
“Fiat money” refers to a form of currency issued by a government that isn’t backed by a physical commodity with its own inherent value, such as gold or silver. Instead, the value of fiat money is derived from the trust and confidence that people have in the stability of the issuing government. It holds value because a government maintains its value, or because two parties engaging in a transaction agree on its value. Examples of fiat money include the dollar, euro, yen, and other modern-day global currencies. In essence, fiat money possesses value because it’s recognized as a medium of exchange for goods and services and not because it has any intrinsic or representational value.
File a return: ‘File a return’ is the process of submitting tax-related information to the IRS, typically detailing a taxpayer’s income and tax owed. This submission can be made via paper, electronic or phone methods.
Expanded Definition
‘File a return’ refers to the process by which taxpayers provide detailed data about their earned income and owed taxes to the Internal Revenue Service (IRS) using a specific, pre-determined format. The data includes income details, tax deductions, credits, and liability calculation, among other information required by tax laws. The return can be submitted to the IRS through various modes, including paper documents sent by mail, electronic submissions via secure online portals, or by providing information over the telephone to an IRS service center. This submission procedure ensures that the IRS has all necessary information for tax assessment, and allows the taxpayer to fulfill their legal obligation in a timely and accurate manner.
Final goods and services: ‘Final goods and services’ refer to products directly consumed or used by the end consumer, not intended for resale or further production.
Expanded Definition
“Final goods and services” encompass all goods and services that are bought for ultimate consumption, meaning they are intended for the direct use or enjoyment of the end-user, rather than for resale or further manufacturing purposes. They signify the final stage in the production process. Examples can range from a personal computer purchased by an individual, a meal bought from a restaurant, to a car procured by a company for company use. Therefore, final goods and services contribute directly to a country’s Gross Domestic Product (GDP) as they represent the total market value of all such goods and services produced within a nation in a given period.
Financial asset: A financial asset is an agreement where one entity guarantees future monetary payment to another under specific terms.
Expanded Definition
A ‘Financial Asset’ is a legally binding agreement that outlines the terms wherein one entity, such as an individual or institution, commits to make a monetary payment to another entity at a specified future date. This asset involves a claim on future cash flows or income, and it can encompass a variety of forms such as stocks, bonds, bank deposits, or property rights. It is a fundamental component of finance, investment, and wealth building strategies, and plays a critical role in the marketplace as it aids in wealth distribution and management.
Financial capital: Financial capital refers to the funds held by a bank used as a cushion for potential losses from loans or other risks, safeguarding the money of its depositors and encompassing equity plus certain kinds of debt.
Expanded Definition
‘Financial capital’ refers to the monetary resources that are invested in or held by a financial institution, such as a bank. These resources act as a safety net, allowing the institution to absorb losses from loans that cannot be repaid or from other risky transactions, thereby safeguarding the interests of the depositors. Financial capital is derived from a variety of sources including, but not limited to, all forms of equity such as stocks and retained earnings, and certain kinds of debt that can be converted into equity. It serves not merely as a buffer but as a key measure of the financial stability and solvency of a banking institution. The amount of financial capital held by a bank often dictates its lending capacity and influences its risk-taking propensity.
Financial crisis: A financial crisis is a sudden, broad-based rush for safe, easy-to-sell assets that disrupts the regular functioning of financial systems and institutions.
Expanded Definition
A ‘Financial Crisis’ is a circumstance where there is an abrupt, extensive surge in necessity for secure, readily convertible assets such as cash or treasury bills. This urgent demand disrupts the standard functioning of the financial infrastructure, including but not limited to banks and diverse financial entities. The situation may lead to issues such as credit crunch or difficulties in obtaining loans, drastic changes in asset values, and severe impact on economic activity. Such a crisis can also precipitate substantial financial distress for businesses and individuals alike and may necessitate government or central bank intervention to restore stability.
Financial institution: A financial institution is a business entity that facilitates monetary transactions such as deposits, withdrawals, loans, investments, and currency exchange.
Expanded Definition
A financial institution is a licensed, regulated business establishment engaged in conducting monetary transactions. Its primary role includes receiving deposits, extending loans, offering investment products, and facilitating currency exchange services. It serves as an intermediary in financial transactions, enabling the efficient flow of funds within the economy. Financial institutions range from banks, credit unions, to insurance companies, each offering a unique suite of financial services tailored to the needs of individuals, businesses, and government entities. Their operations are crucial to maintaining monetary stability and driving economic growth.
Financial intermediary: A financial intermediary is a corporation, like commercial banks or investment funds, that facilitates transactions between lenders and borrowers.
Expanded Definition
A ‘financial intermediary’ is a specialized commercial entity that facilitates transactions between parties in a financial marketplace. These intermediaries serve crucial functions in the financial system by providing a link between investors and borrowers, thereby enhancing the efficiency and fluidity of markets. Examples of financial intermediaries include commercial banks which facilitate funds transfers between depositors and borrowers; investment banks that assist corporations in raising capital; mutual funds that pool resources from numerous investors to engage in securities trading; and pension funds that accumulate and invest capital for future pension payouts. The interplay between these intermediaries helps maintain an integrated, smoothly-operating financial environment.
Financial investment: Financial investment is the act of allocating funds into savings or various financial instruments like stocks, bonds, or mutual funds, aiming to enhance wealth.
Expanded Definition
Financial investment refers to the strategic allocation of financial resources into different avenues, including savings accounts and various other financial instruments such as equities (stocks), debt securities (bonds), or pooled funds (mutual funds). The primary objective of this process is to generate a profitable return on the invested capital over time. This involves a thorough analysis of the potential risks and yields associated with each investment type, and it requires both expertise in understanding market trends and patience to allow the investments to mature.
Financial literacy: Financial literacy refers to the understanding of financial concepts and the ability to use that knowledge for effective management of personal finances.
Expanded Definition
‘Financial Literacy’ can be comprehensively defined as the proficiency or understanding of various financial concepts, instruments, and practices that is necessary for making prudent decisions related to money management. This incorporates the ability to comprehend the nuances of personal finance, budgeting, investments, taxes, insurance, retirement planning, and other financial topics. Additionally, it encompasses the aptitude to apply this gained knowledge practically in one’s life to maintain financial health, involving activities like budgeting income, successfully managing debts, making sound investment decisions, saving for retirement, and maintaining a balance between income and expenses. True ‘Financial Literacy’ empowers one to navigate their financial journey with confidence, mitigate financial risks, and secure their financial future efficiently.
Financial markets: Financial markets are venues where investors trade assets such as equities, bonds, derivatives, and short-term loans. They reflect the overall sentiment towards economic policies and events as indicated by market fluctuations.
Expanded Definition
Financial markets refer to any structured or organized public or private marketplace where the trading of various financial instruments takes place. These instruments typically encompass short-term loans, stocks (also known as equities), bonds, and various financial derivatives. These markets serve as a platform for investors and borrowers to engage in the buying and selling of these financial instruments, usually with the objective of wealth accumulation, income generation, or hedging risks. Financial markets are essential to the functioning of capitalist economies as they facilitate the flow of funds from those who have excess (savers or investors) to those who need it (borrowers). They help in determining the price of securities through the forces of supply and demand. In media representations, financial markets are frequently personified or anthropomorphized to present a simplified view of complex economic events. For example, statements like “The markets reacted negatively to the government’s proposed budget” illustrate the market sentiment or collective investor reactions towards specific economic policies or events.
Financial system: A financial system is an interconnected network of financial institutions like banks, stock exchanges, and insurance companies, facilitating the transfer of funds.
Expanded Definition
A financial system refers to a complex, interrelated network consisting of various institutions, including but not limited to banks, insurance companies, and stock exchanges, that facilitate the movement of money. These bodies, guided by national and international regulations, serve the primary purpose of fostering economic growth by enabling the accumulation of capital, the transfer of funds from those with surplus to those in need, and the moderation of risks via diversification. This systemic structure promotes monetary transactions, investment, and lending, which are vital for both individual and collective economic activity and development.
First mover advantage: First mover advantage is the competitive edge gained by the initial significant occupant of a market segment. It often creates brand recognition and deters other competitors from entering the market.
Expanded Definition
‘First mover advantage’ is a strategic advantage that is possibly, but not necessarily, gained by the initial significant occupant of a market segment. It can result from pioneering a particular product or innovation, and establishing a strong brand associated with that product, effectively discouraging potential competition. In a broader context, these advantages can extend beyond the business sphere, potentially applicable in any competitive scenario, as elucidated by game theory. However, the success of this strategy isn’t guaranteed; it highly depends on market dynamics and the firm’s capability to maintain the advantageous position.
Fiscal agent: A fiscal agent is an individual or entity responsible for managing another party’s financial affairs and transactions.
Expanded Definition
A fiscal agent, in professional terms, refers to an individual or an entity that manages the financial affairs on behalf of another party. Their responsibilities may include tasks such as managing funds, conducting financial transactions, maintaining regulatory compliance, and providing strategic financial advice. Typically appointed under a legal agreement, a fiscal agent works to ensure the financial integrity and efficiency of the principal party, catered to both business and individual needs. The role demands a high level of expertise in financial management, as fiscal agents are often entrusted with significant financial decisions and oversight.
Fiscal drag: Fiscal drag is a taxation phenomenon where revenue increases due to inflation-led wage rises, without corresponding adjustment of tax thresholds, causing individuals to pay higher taxes in real terms.
Expanded Definition
‘Fiscal drag’ is an economic phenomenon whereby the government’s tax revenues increase as a result of inflation. Within many tax structures, there are income thresholds set that indicate when an individual is required to commence paying income tax, or when they are moved to a higher tax band. In scenarios where these thresholds are not periodically adjusted (or ‘uprated’) to match the rate of inflation, individuals end up contributing more in tax over time, even though their ‘real’ income, in terms of purchasing power, may not have increased. This is known as fiscal drag, as the tax system ‘drags’ more money from individuals due to the non-adjustment for inflation. This mechanism allows the government to collect more taxes without officially changing the tax rates.
Fiscal policy: Fiscal policy refers to the government’s use of taxation and expenditure strategies to regulate the economy. It involves adjustments in government spending and tax rates to manage economic activity.
Expanded Definition
‘Fiscal policy’ is a terminology primarily used in economics that refers to the strategic use of government revenue collection (mainly through taxation) and expenditure (spending) to influence a nation’s economy. It is an essential methodology employed by the federal government to manage and adjust the country’s economic outputs, which includes mitigating unemployment rates, controlling inflation, and managing economic growth. These fiscal measures are instrumental in adjusting the spending and investment levels in the country by altering tax rates, redistributing income, and funding public services and projects. Essentially, it serves as a means through which a government can guide its economy toward desired state of balance and stability.
Fixed costs: Fixed costs are consistent, unavoidable expenses in business operations like rent, that exist regardless of production volume.
Expanded Definition
‘Fixed costs’ refers to the expenses incurred by a business that do not fluctuate with the scale of production or sales level. These costs are invariably incurred, irrespective of the business’s output or performance. Examples of fixed costs include rent, insurance, and salaries, which are mandatory expenses and do not change with the rise or fall in the production volume or sales. Fixed costs thus form an integral part of the business’s overhead expenses and need to be paid regardless of the business’s profitability status.
Fixed exchange rate: A fixed exchange rate is a monetary policy where a country’s currency value is tied to another specific currency or to gold, providing certainty for import and export costs. It became less feasible with increased cross-border capital flow in the 1970s and beyond.
Expanded Definition
A ‘Fixed Exchange Rate’, also known as a pegged exchange rate, is a type of exchange rate regime that involves the value of one nation’s currency being directly linked to another country’s currency, a basket of international currencies, or a valued commodity like gold. This system was more prevalent until the 1970s and provided stability, enabling importers to accurately estimate the cost of goods from overseas, while exporters could forecast the earnings they would acquire from their overseas sales. However, maintaining this system became increasingly challenging due to the growing ease and prevalence of capital movement across international borders. In the period leading up to the establishment of the Eurozone, its founding nations adhered to this fixed exchange rate system amongst each other. The Fixed Exchange Rate differs from other systems such as the floating exchange rate, where the value of a currency is determined by the fluctuating forces of the global market, and the gold standard, a former system where currencies were directly linked to gold.
Fixed rate: A fixed rate is a constant interest rate on a financial instrument, like a bond, that doesn’t change over time.
Expanded Definition
A ‘fixed rate’ refers to an interest rate that remains unchanged over the entire duration of a financial contract, such as a loan, bond, or mortgage. It remains constant regardless of market fluctuations or changes in economic circumstances. This provides consistency in repayment amounts, presents less risk for investors or borrowers, and allows for easier future financial planning due to its predictable nature.
Fixed-rate mortgage (FRM): A fixed-rate mortgage (FRM) is a type of loan where the interest rate remains consistent throughout its duration.
Expanded Definition
A fixed-rate mortgage (FRM), also known as a fixed-term mortgage, is a financial product used in the context of home purchases. This specific type of mortgage loan maintains a constant interest rate throughout the entire duration of the loan repayment term. This means that borrowers have the stability and predictability of unchanging monthly repayment amounts, making it easier for them to budget accordingly. It provides protection against possible interest rate increases but conversely, does not offer the benefit of decreased payback should the market interest rates drop. The common term lengths for FRMs range from 10 to 40 years. This can differ depending upon financial institutions and regional preferences.
Flat tax: A flat tax is a method where taxation applies uniformly to all income tiers, ensuring everyone pays the exact same percentage.
Expanded Definition
A ‘Flat tax’ refers to a fiscal strategy in which a standard, uniform tax rate is applied to all levels of income, irrespective of the amount earned. This denotes that a person with a lower income and a person with a higher income are taxed at the identical rate. It’s a straightforward strategy that negates the need for complex tax systems and multiple tax brackets. However, it’s considered somewhat controversial as it doesn’t take into account the different capacities of people to pay their taxes. While it simplifies the calculation, critics argue it fails to encapsulate the progressive elements of taxation, where higher earnings are taxed at a higher rate.
Flexible exchange rate: A flexible exchange rate is a system where exchange rates are shaped by market forces of supply and demand, fluctuating freely without government intervention.
Expanded Definition
A flexible exchange rate, often referred to as a floating exchange rate, is a type of exchange rate regime in which the value of a currency is allowed to be determined dynamically by the foreign exchange market. This value fluctuates based on the interplay between supply and demand forces. In such a system, factors such as interest rates, inflation rates, political stability, economic performance, and speculation can all influence currency exchange rates. When a particular currency is in high demand or its supply is high, its value will appreciate or depreciate respectively. This system provides a natural hedge against currency risks and allows economies to absorb shocks by automatically adjusting the exchange rate. However, it may lead to significant currency volatility, creating potential risks for businesses and investors.
Floating rate note: A Floating Rate Note (FRN) is a debt security whose interest fluctuates over its lifespan based on a reference rate, like LIBOR or federal funds rate.
Expanded Definition
A Floating Rate Note (FRN) is a type of debt instrument issued by corporations or governments, distinguished by its unique feature where the interest rate, also known as coupon rate, adjusts periodically based on a predefined benchmark or index. This index could be something like the federal funds rate, the LIBOR, or any other reference rate. The adjustments in the interest rate are made to account for changes in the market condition, attributing to the note’s ‘floating’ denomination. This form of financial instrument provides a means of investment that can potentially benefit both issuer and investor, contingent on fluctuations in the interest rate environment.
Flotation: Flotation, or Initial Public Offering (IPO), is the process where a private company goes public by selling its shares on the stock market for the first time.
Expanded Definition
Flotation, often referred to as an Initial Public Offering (IPO), is a fundamental financial process where a privately owned company transitions to a publicly traded company by offering its shares for the first time on a stock market. This strategy not only provides the company with a broader access to capital from public investors, but also improves its credibility and visibility in the market. The process involves extensive legal and financial preparation, including diligent evaluation of the company’s overall value, to determine an optimal price for the shares. The emitted stock can then be purchased by institutional and individual investors, allowing them to claim partial ownership in the company. Hence, flotation is a significant event in a company’s lifecycle and strategic growth.
Food stamps: Food stamps, also known as SNAP, is a program that subsidizes healthy food purchases for low-income individuals.
Expanded Definition
‘Food stamps’, now recognized as the Supplemental Nutrition Assistance Program (SNAP), is a federal aid initiative in the United States. This program is designed to provide financial assistance to individuals and families with low income, enabling them to purchase nutritionally adequate food and basic health-care items. It aims to combat hunger and improve nutrition by ensuring access to wholesome food items and essential health-care products among those who might otherwise struggle to afford these necessities.
Forbearance: Forbearance is a short-term agreement that temporarily reduces or halts monthly loan repayments, typically for a year.
Expanded Definition
‘Forbearance’ can be expertly defined as a provisional postponement or decrease in monthly loan repayments that a borrower can request from a lender. This financial arrangement is typically granted for a limited span, often not exceeding a year, enabling the borrower to have a reprieve during a period of financial difficulty without incurring penalties. Forbearance does not eliminate the obligation to repay the debt, but rather provides a brief relief or adjusted repayment plan.
Foreclose: Foreclosure is the legal process where a lender seizes a property due to the borrower’s inability to meet mortgage obligations.
Expanded Definition
‘Foreclosure’ refers to the legal process initiated by a lender in which they assume control of a property from a borrower. This is typically a last resort action taken when the borrower has not fulfilled their mortgage payment obligations, consistently falling behind or ceasing their payments. This process safeguards the lender’s interests, enabling them to recover some or all of their losses by either selling or leasing the property. This term is commonly used in the real estate and finance sectors and is crucial in mortgage lending operations.
Foreclosure: Foreclosure is a legal process where a mortgaged property is sold to pay off a defaulted loan, typically enacted when the borrower fails to make timely payments.
Expanded Definition
Foreclosure is defined as a legal procedure where a lender can recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. This asset is generally a property that has been mortgaged by the borrower. When a lender issues a mortgage, it uses the property as a guarantee of repayment for the loan. If the borrower fails to meet their loan repayment obligations for any reason, be it due to delinquency or default, the lender can initiate a foreclosure process. The sale of the foreclosed property is typically applied to the outstanding mortgage debt. If the proceedings from the sale are insufficient to cover the debt, the borrower may still be liable for the outstanding amount depending on the state laws. This process allows financial institutions to mitigate the financial risk associated with non-performing loans.
Foreign direct investment (FDI): Foreign direct investment (FDI) refers to the act of a foreign entity establishing a new business or acquiring an existing one in another country, providing benefits like technology enhancement and workforce skill improvement, but it may raise concerns over strategic sectors.
Expanded Definition
Foreign Direct Investment (FDI) is a significant economic strategy where an investor from one country initiates a business operation, or acquires an existing business, in another country. Unlike portfolio investments which primarily involve purchasing minor stakes in businesses for profit, FDI often implies a degree of control and direct influence on the management and operations of the enterprise. FDI serves as a critical tool for international economic growth as it allows the transfer of advanced technologies, enhances skills of the domestic workforce, and improves productivity, driving the overall economic development of the receiving country. Intense proliferation of FDI was observed at the culmination of the 20th century, reshaping global economic landscapes. However, FDI is often monitored closely by governments, particularly when burgeoning businesses from critical sectors like technology or defense are involved. There can be concerns over the potential strategic implications and national security threats if foreign entities gain control over important industries; thus, this often necessitates government scrutiny and regulation on such investments.
Foreign exchange market: The foreign exchange market is a global financial marketplace for trading national currencies against one another.
Expanded Definition
The foreign exchange market, often referred to as the ‘forex market’, is a decentralized global marketplace where the currencies of different countries are traded. This market operates as an exchange platform where participants, ranging from financial institutions to individuals, can buy, sell, or exchange currencies from different countries. This exchange process aids international trade and investments by allowing currency conversion. For instance, it permits a company in the United States to import goods from Japan and pay in yen, even though the business’s primary income is in US dollars. Transactions in the forex market cover everything from the conversion of currencies by a traveler at an airport to billion-dollar payments made by corporations, financial institutions, and governments.
Foreign exchange reserves: Foreign exchange reserves are assets, typically in major currencies or gold, held by a central bank for use in financial crises or for influencing the country’s exchange rate. Despite the difficulty in combating vast daily currency trading, these reserves remain critical tools for supporting the domestic currency’s price.
Expanded Definition
‘Foreign exchange reserves’ refer to the strategic stockpile of foreign currencies and precious metals like gold, maintained by a country’s central bank. These reserves act as a vital financial buffer for mitigating economic crises or to assert the nation’s monetary policy objectives, including managing exchange rates. While the Central banks traditionally assembled reserves in globally dominant currencies such as the US dollar or the euro, the modern-day colossal scale of daily currency trading complicates the feasibility of accumulating enough reserves robust enough to counteract market forces. This financial scope was particularly critical under the historic systems of fixed exchange rates and the gold standard, as the central banks could regulate the domestic currency’s value by trading in these vast reserves.
Form 1040: Form 1040 is the standard form issued by the IRS, used by taxpayers to submit their yearly income tax returns.
Expanded Definition
Form 1040 is the official document issued by the U.S. Internal Revenue Service (IRS), utilized by taxpayers to report their annual income and calculate the amount of tax they owe. This comprehensive form considers various income sources, deductions, and credits to calculate one’s tax liability or refund for the year. Individual taxpayers fill out this form, detailing their financial information for the tax year, including wages, interest income, capital gains, and eligible expenses. Completion of Form 1040 is a requirement for U.S. citizens and residents in order to fulfill their yearly tax filing obligations.
Forward exchange rate: A forward exchange rate is a predetermined rate for a currency exchange transaction set to occur at a future date, influenced by the interest rate disparity between the two involved nations.
Expanded Definition
The ‘forward exchange rate’ is a pre-determined or agreed upon rate for exchanging two different currencies at a specific future date. It is a financial contract that two parties, typically involved in forex trading, engage in, agreeing to trade a certain amount of one currency for another at a future point, typically months or a year later. This rate is not just a speculative projection, but a fixed rate of exchange set today for the future transaction. The variance between this forward rate and the ‘spot rate’, which is the rate for immediate currency exchange, is influenced by ‘interest rate differentials’. Interest rate differentials refer to the discrepancy in interest rates between the two respective countries of the currencies involved. This factor reflects the economic conditions and monetary policy decisions of a country, which in turn impact the relative value of its currency, shaping the dynamics of the forex market and thus determining the forward exchange rate. In essence, the forward exchange rate allows parties to hedge against potential losses from future currency fluctuations. It plays a crucial role in the international finance and trade landscape, aiding businesses to predict costs and returns in foreign markets, thereby facilitating global economic activities.
Forward guidance: Forward guidance is a communication strategy employed by central banks to predict future monetary policy, influencing present-day financial and economic decisions by individuals and businesses.
Expanded Definition
‘Forward guidance’ refers to a strategic instrument deployed by central banks to communicate their anticipated future path of monetary policy to the public. Essentially, it is a means of managing expectations by broadcasting intended future policy actions, which could involve adjusting interest rates, executing quantitative easing, or strategies linked to inflation or employment targets, among others. The dissemination of this forward-looking information is imperative as it enables individuals and businesses to make informed decisions about their spending and investment plans. Consequently, the present financial and economic landscape can be shaped by this guidance on probable future policy actions, helping to stabilize the economy by reducing uncertainty and providing clear, predictable signals in an otherwise complex and often volatile economic environment.
Forward rate agreement: A Forward Rate Agreement (FRA) is a financial contract that sets a future interest rate, enabling borrowers to hedge against potential interest rate fluctuations.
Expanded Definition
A ‘Forward Rate Agreement’ (FRA) is a type of financial derivative instrument, constituted under a contractual agreement between two parties. This agreement dictates the interest rate that will be applicable on a certain principal amount at a predetermined future date. Primarily, the purpose of an FRA is to hedge against the risk of fluctuations in interest rates. Borrowers, particularly in adjustable rate situations, often use FRAs to lock-in potential future interest expenses well in advance, thereby providing them with certainty regarding their financial obligations. This instrument serves as a tool for financial risk management, offering borrowers protection against rising interest rates and providing lenders with hedging against falling rates. However, it’s important to note that an FRA is a notional agreement—it doesn’t involve the actual exchange of the principal amount, only the difference in interest is settled at the start of the contract period.
Four-firm concentration ratio: The ‘Four-firm concentration ratio’ refers to the combined market share of the top four companies in an industry, with higher ratios indicating less competition, and the maximum possible value being 100%.
Expanded Definition
The ‘Four-firm Concentration Ratio’ pertains to a quantitative measure used in economic analysis to assess the combined market influence exerted by the top four companies within a specific industry. This ratio is computed by adding together the market shares of these four largest firms. If the resultant concentration ratio is larger, it typically suggests a higher level of market domination by these few entities, consequently implying a lower degree of competition within that industry. On the contrary, a smaller concentration ratio indicates a more competitive market with a broader dispersion of market power among numerous companies. Theoretically, this ratio can range from 0% (if no firm has any market share) to 100% (indicating the top four firms entirely monopolize the industry). Nevertheless, realistically, the values often fall between these two extremes, providing a snapshot of the competitive landscape in different industries. This tool is often used by policymakers and economists to assess market structure and potential competitive issues.
Fractile interval: A fractile interval refers to the segmentation of data into equal or nearly equal groupings, with each segment containing a similar number of data points. It’s a method used for data classification.
Expanded Definition
A ‘Fractile Interval’ can be defined as a statistical method used to categorize a set of data by dividing it into distinct intervals or groups, such that each group contains an equal or approximately equal number of data points. The aim of this procedure is to organize and comprehend the data more effectively, allowing obscured patterns or trends to become more apparent. This approach is particularly useful in statistical analyses and data representation.
Fractional reserve banking system: Fractional reserve banking is a system where banks keep a fraction of deposits as reserves and lend out the remainder, thus expanding the money supply.
Expanded Definition
The Fractional Reserve Banking System refers to a banking structure in which financial institutions such as banks maintain reserves — that is, actual cash — that are less than the total amount of their customers’ deposited funds. This is predicated on the understanding that not all customers will withdraw all their funds at once. This system enables banks to use the rest of the deposits to provide loans, issue credit, and make investments, thereby creating more money and stimulating economic activity. It’s crucial to note that while this model allows banking institutions to generate more income, it also incorporates a measure of risk, as they might not be able to fulfill all immediate withdrawal demands in a worst-case scenario.
Framing: ‘Framing’ in behavioural economics refers to the strategic presentation of options or decisions to influence people’s choices, such as breaking down costs into smaller parts to seem more appealing.
Expanded Definition
‘Framing’ in the discipline of behavioral economics refers to the principle that the way information is presented or ‘framed’ can significantly impact the responses or decisions of individuals. This concept implies that a person’s perspective or behavior could change based on how options are phrased or conveyed. To illustrate, if a business communicates the cost of an annual subscription as being $72 per year, it might seem expensive and deter prospective customers. However, if the same subscription is expressed as costing $6 per month, it may appear more affordable and thus appeal to a larger customer base. Consequently, ‘framing’ underscores the power of perception and its influence on consumer behavior.
Fraud: Fraud is the intentional act of falsifying information consciously, violating regulations and laws.
Expanded Definition
‘Fraud’ is a term that refers to the deliberate and premeditated act of providing false information or misleading representations, with the intent to deceive, done in direct contravention of existing laws and regulations. It’s often executed to obtain undue advantages or benefits, which might otherwise be unattainable had the truth been known. This misconduct could lead to significant legal consequences as it directly undermines fairness and trust, pillars of any functional socio-economic system.
Freddie Mac (Federal Home Loan Mortgage Corporation): Freddie Mac is a congress-backed agency, established in 1970, that purchases mortgage loans from lenders to ensure a stable and affordable U.S. housing market.
Expanded Definition
Freddie Mac, the colloquial name for the Federal Home Loan Mortgage Corporation, is a United States government-sponsored entity (GSE) that was officially chartered by Congress in 1970. As a significant participant in the secondary mortgage market, Freddie Mac’s principal function is to buy residential mortgages from financial institutions (like banks and credit lenders), bundle them into investment products called mortgage-backed securities, and then sell them to investors on the open market. Through these operations, Freddie Mac ensures a steady flow of funds to mortgage lenders, which in turn promotes stability, enhances liquidity, and supports affordability in the U.S. housing market. Therefore, the broader objective of Freddie Mac is to facilitate homeownership and rental housing for middle-income Americans.
Free rider: A ‘Free rider’ refers to an individual who enjoys advantages from resources, goods, or services without contributing to their cost or upkeep.
Expanded Definition
A ‘free rider’ is a term predominantly used in economics and business models. It represents an individual or entity that leverages or enjoys the benefits of an asset, service, or outcome without contributing to the costs or efforts associated with its creation and maintenance. This can lead to situations where the actual burden is shouldered by others, thereby creating an imbalance in the cost-benefit equation. These scenarios often arise in public goods and services, where it’s challenging to exclude any participants from gaining the advantages even if they haven’t directly contributed to it.
Free trade: Free trade is the unrestricted international exchange of goods and services for bolstering efficient economies, aimed at long-term prosperity, albeit often criticised for potential job loss in domestic industries.
Expanded Definition
‘Free trade’ refers to an economic policy that encourages unobstructed global trade of goods and services, reducing barriers such as tariffs and protectionist policies. This concept, instrumental in the establishment of The Economist in 1843, is a fundamental point of discussion and contention among economists and policymakers. Proponents of free trade argue that it drives economic efficiency by leveraging the principle of comparative advantage, where countries focus on producing goods and services they can make more efficiently than others. They assert this, consequently, promotes overall economic growth and prosperity in the long term. However, critics of free trade contend that it can have negative implications for domestic industries. They believe that exposing local enterprises to international competition may result in job losses, prompting some governments to introduce barriers to trade in the form of tariffs or protectionist measures.
Free trade area: A free trade area is a geographical region that eliminates tariff and non-tariff barriers on imports and exports, exemplified by entities like the European Union and USMCA. It fosters easier trade among member nations.
Expanded Definition
A ‘Free Trade Area’ refers to a designated group of countries that have agreed to eliminate tariffs, quotas, and other trade barriers on items traded among them. This agreement facilitates a more seamless and fair exchange of goods and services across borders. When a region becomes a Free Trade Area, it encourages economic integration and cooperation by making the import and export of products more straightforward and less costly. The European Union and the United States-Mexico-Canada Agreement (formerly known as NAFTA) are prominent examples of this economic arrangement. However, it’s noteworthy that unions like the EU take this concept further, pursuing even deeper integration through common policies and regulations beyond free trade.
Free-market economists: Free-market economists are proponents of minimal governmental intervention in the economy, arguing that market mechanisms inherently lead to more efficient resource allocation and robust long-term growth.
Expanded Definition
‘Free-market economists’ refers to individuals who underscore the strengths of a free-market or liberalized economy in determining the efficient distribution of resources over governmental intervention. Their beliefs rest on the premise that high levels of state regulation and public expenditure often lead to hindering long-term economic growth. This principle is closely associated with certain economic theories like those propounded by the Austrian School and the Chicago School, and also aligns with concepts of laissez-faire capitalism and neoliberalism. They advocate less governmental intervention and increased competition, asserting that market mechanisms naturally create efficiency and innovation.
Frequency: ‘Frequency’ refers to the regular intervals at which events or data points occur, such as on a monthly, quarterly, or annual basis.
Expanded Definition
‘Frequency’ commonly refers to the rate at which a specific event or phenomenon occurs over a given interval, typically measured in cycles per unit of time. In the field of macroeconomics, ‘frequency’ is a term employed to express how often data related to economic activities or metrics, such as employment statistics or gross domestic product, is gathered and released. For example, if the frequency is monthly, this means the data is compiled and published once a month. Other common frequencies include quarterly (four times a year), semiannually (twice a year), and annually (once a year). The chosen frequency provides insights into the rate of change and trends in the economic parameters monitored, aiding in economic forecasting and policy decision-making.
Frictional unemployment: Frictional unemployment refers to the temporary joblessness experienced by individuals transitioning between jobs or entering the labor market for the first time.
Expanded Definition
‘Frictional unemployment’ is a type of unemployment that occurs when individuals are in the process of moving from one job to another, or when they are entering the labour market for the first time, such as recent graduates. This type of unemployment is typically due to the time necessary for job searching and the matching of job seekers with new job openings. Despite its name, frictional unemployment is not necessarily indicative of a problem within an economy, but rather reflects the routine ebb and flow of individuals throughout a dynamic job market.
Full employment: Full employment refers to the state where the unemployment rate is at its minimum in a thriving economy, with maximum efficient use of all production factors.
Expanded Definition
‘Full employment’ is a term used in economics to describe an optimal state of the job market where the unemployment rate has hit its lowest feasible level while the economy continues to grow. It implies that all available resources or factors of production—such as labor, capital, land, and entrepreneurship—are utilized in the most efficient and productive manner. Ideally, this means everyone in the workforce has a job, but in practical terms, it acknowledges that there will always be some level of unemployment due to factors such as job-switching or structural changes in the economy. It’s important to note that the precise unemployment percentage constituting ‘full employment’ can vary depending on the viewpoint of economists and policymakers.
Full-time employment: Full-time employment typically involves working 35 hours or more per week, although the specific hours can vary depending on the employer’s discretion.
Expanded Definition
‘Full-time employment’ refers to a work status in which an individual typically dedicates a substantial portion of his or her time to a single job. While the United States Bureau of Labor Statistics characterizes full-time employment as a minimum of 35 hours per week, the precise measure of hours may fluctuate between organizations and industries. Essentially, the definitive threshold for full-time employment is often established by the specific employer based on its policies and operational requirements. Understanding this term is crucial as full-time employees often have access to a different set of benefits and obligations compared to their part-time counterparts.
Functions of money: Functions of money refer to its role as a medium for trade, a quantitative measure for goods and services, and a way to save and accumulate wealth.
Expanded Definition
“The ‘functions of money’ refer to the critical roles that money plays within an economy. These functions include serving as a ‘medium of exchange’, wherein money is universally accepted in transactions of goods and services, thereby facilitating trade. It also acts as a ‘unit of account’, by providing a standardised measure to express the market value of goods and services. Finally, it serves as a ‘store of value’, allowing individuals to preserve and accumulate wealth, under the understanding that it can be exchanged for goods and services in the future. These functions of money form the foundation of monetary operations in a modern economy.”
Future: A future is a financial contract, exchanged on a market, that sets the price for a commodity or financial instrument to be traded at a specified future date, utilized for hedging price fluctuation risks or speculating on future price changes.
Expanded Definition
‘Future’ specifically refers to a standardized legal agreement, typically bought and sold on an established exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specific date in the future. In essence, it’s a form of risk management tool used to protect against fluctuating asset prices. It has two primary purposes. One is for hedging purposes – it provides an opportunity to guard against potential price movements, essentially introducing stability and predicability. For instance, a farmer might lock in a price for his crops ahead of time to shield from potential price drops. The other purpose is for speculation – investors may use futures to predict and capitalize on future price changes, aspiring to make profits from shifts in market prices.
Future value: Future value is the predicted worth of a current asset or cash amount at a given future date, reflecting the impact of anticipated interest or investment returns.
Expanded Definition
‘Future Value’ is a financial concept that estimates the worth of an asset or an amount of money at a predetermined date in the future, taking into account certain variables such as interest rates or rate of return. This term is predicated upon the principle that money available today will hold a different value in the future due to potential earning capacity. It provides a measure to evaluate the potential growth of investments over time, aiding individuals and businesses in planning for long-term financial goals.
Future value equation: The future value equation, denoted as FV=PV(1+i)n, determines the future value of an investment given the present value (PV), the interest rate per period (i), and the number of periods the money is invested or saved (n).
Expanded Definition
The ‘Future Value Equation’ is a mathematical formula used in finance to calculate the anticipated financial worth of an investment in the future, factoring in variables such as the initial income, interest rate, and investment period. The equation is: FV=PV (1+i)n. In this equation, FV stands for the ‘Future Value’ of an investment, which is the unknown monetary figure you aim to attain after a specified period. The emphasis is on the projected profitability or growth of your investment. PV, also known as ‘Present Value’, signifies the current monetary amount or the initial investment. This is the base sum which will accrue interest over the investment period, potentially increasing its value. The variable i denotes ‘Interest Rate’, a major determinant of the future value. This percentage figure impacts the sum of profits generated from the investment. However, in the context of this formula, the interest rate should be represented as a decimal (e.g., 3% should be listed as 0.03). Lastly, n refers to the exact number of periods (commonly displayed in years) for which the original sum is invested and earns interest. This could range from a couple of years to several decades, with ‘n’ representing the specific investment duration in the calculation.

G

GDP: GDP, or Gross Domestic Product, is the total monetary value of all goods and services produced within a country’s borders in a specific time period, serving as a comprehensive measure of a nation’s overall economic activity.
Expanded Definition
Gross Domestic Product, often abbreviated as GDP, is a comprehensive monetary measure which provides an evaluation of the total value of all goods produced and services provided within a specific geographical area, such as a country, during a defined period, typically a year. It serves as a significant economic indicator that reflects the collective economic health of a nation, providing useful insights into the productivity levels, standard of living, economic growth, and development rate of that particular region. GDP is commonly used for relative size comparisons between different economies.
Gainful employment: “Gainful employment” refers to a position of work, typically secured post-graduation, that is aptly aligned with one’s abilities and prospects.
Expanded Definition
“Gainful employment” refers to a form of professional occupation that an individual secures, typically after concluding their educational pursuits. This employment is not only appropriate to the individual’s capabilities and potential, but also allows them to earn a sufficient income. It takes into account the alignment of the employee’s acquired skills, knowledge, and abilities with the requirements of the job. Gainful employment, therefore, serves as a meaningful measurement of the applicability of one’s education and skill level in the workforce, as well as their ability to achieve financial independence through their career choice.
Game theory: Game theory is a mathematical framework for deciphering strategic situations where an individual’s success in making choices depends on the choices of others, with applicability in fields like economics, social sciences, and politics. It incorporates elements of competition, cooperation, and potential conflict, offering insights on long-term advantages and interactive decision-making.
Expanded Definition
Game theory is a comprehensive mathematical method utilized to examine and understand the strategic interactions among rational entities—be it individuals, businesses, or governments. This technique examines the strategic decision-making process where the choices of one party influence and are influenced by the choices of others. A commonly used example of game theory is analyzing business competition, where companies strive to gain a long-term edge over their rivals. In this scenario, each company considers potential reactions of others before making strategic decisions. On a larger scale, game theory has also been deployed in global politics, notably in the strategy of nuclear deterrence. Key concepts within game theory include ‘Nash Equilibrium,’ a state where no participant can gain by unilaterally changing their strategy while others keep theirs unchanged. For a more in-depth understanding, consider exploring detailed scholarly resources or publications.
Gearing: Gearing refers to the process of increasing the potential return from an investment by using borrowed funds, often creating a proportion of debt to equity. It’s essentially a strategy of utilizing leverage.
Expanded Definition
“Gearing,” often synonymously used with the term “leverage,” is a fundamental financial concept used to illustrate the proportion of a company’s operations or activities that are financed through debt compared to those financed by equity. It is a key indicator of the financial health and stability of a business, by articulating the extent to which the company relies on borrowed funds versus its own resources. High gearing implies more risk, as the company has a larger proportion of debt, but it also has the potential for higher returns. Conversely, low gearing implies less risk due to lesser debt obligations, but it may also result in lower returns. Understanding the concept of gearing helps stakeholders make informed decisions about the company’s financial strategies, performance, and potential risks.
General Agreement on Tariffs and Trade: The General Agreement on Tariffs and Trade (GATT) was a 1947 agreement designed to minimize protectionism and reduce trade barriers, ultimately replaced by the World Trade Organisation (WTO) in the 1990s.
Expanded Definition
The General Agreement on Tariffs and Trade, often referred to by its acronym GATT, was an international treaty signed in 1947 with the primary goal of mitigating protectionism – a policy of shielding a country’s domestic industries from foreign competition through the application of tariffs and subsidies. This economic practice became prevalent in the 1930s and was identified as a key factor impeding global economic progress and stability. Post its inception, GATT launched multiple rounds of negotiations known as “trade rounds”, where member countries engaged in discussions to progressively diminish barriers obstructing free trade, such as tariffs or import quotas. These negotiations were designed to cultivate an international trading landscape characterized by equal opportunity and fair competition to foster economic growth. In the 1990s, GATT was superseded by the World Trade Organisation (WTO), an entity that inherited the principles and operations of GATT, but with a broader remit and stronger institutional foundations. Today, the WTO serves as a platform for member nations to negotiate trade agreements, resolve disputes and collaboratively participate in shaping the direction of the global trading ecosystem.
General-purpose reloadable (GPR) prepaid card: A General-purpose reloadable (GPR) prepaid card is a rechargeable card that can be topped up with funds and can facilitate direct deposits, serving as a flexible financial tool.
Expanded Definition
A General-Purpose Reloadable (GPR) Prepaid Card refers to a type of payment card that is pre-charged with a set amount of money. Branded as “general-purpose,” it implies that it can be used in various transactions, similar to how a traditional debit or credit card is used for purchases, bill payments, and other financial activities. A distinct characteristic of a GPR prepaid card is its “reloadable” feature. This means the cardholder has the ability to add, or reload, more funds onto the card as desired. Furthermore, these GPR cards often have the capability to accept direct deposits, allowing users to directly move funds from an income source, such as their paycheck, onto their prepaid card. This versatile financial tool offers accessibility and convenience, particularly to individuals who may not have access to traditional banking services.
Generally acceptable (money): ‘Generally acceptable (money)’ refers to a medium of exchange universally accepted for transactions, like goods, services, or labor payment.
Expanded Definition
“Generally acceptable” in the context of money, is a term used to describe a form of currency that is universally recognized, and thus, widely accepted as a valid medium of exchange. This means that this currency can be used across various times and contexts without loss of its exchange value. People willingly accept it as compensation for their services rendered or goods provided. Such a form of money serves as a standard measure and common denominator of market value, facilitating seamless economic transactions locally, nationally, or even globally. This universal acceptability and reliability give a currency its purchasing power.
Giffen goods: Giffen goods are unique commodities where an increase in price actually boosts demand, as consumers forego pricier alternatives due to their reduced real income. Examples are rare, but can include staple foods like bread and rice.
Expanded Definition
‘Giffen Goods’ is an economic term describing a distinctive type of essential product where the standard association between supply and demand is not applicable. In the case of Giffen goods, an increase in price actually results in a surge in demand. This uncommon scenario occurs due to the impact on real income from the price increase. As prices rise, consumers may have to cut down their expenses on more costly items and instead, opt to consume more of the less expensive, yet essential product, thereby increasing its demand. The occurrence of Giffen goods is relatively rare in the real-world market, but staple items like bread and rice may occasionally exhibit such Giffen characteristics. This idea should not be confused with Veblen goods, which are luxury items that also observe increased demand with increasing prices, but based on different economic principles.
Gig economy: The gig economy refers to a labor market characterized by a prevalence of short-term contracts or freelance work, typically facilitated by platforms like Uber or Deliveroo, rather than permanent jobs, thus often lacking in worker benefits and job security.
Expanded Definition
The ‘Gig Economy’ refers to a modern employment landscape predominantly characterized by the prevalence of short-term contracts or freelance work, instead of permanent jobs. These transient, or ‘gig’ roles often result in less job security for individuals. The concept saw considerable growth with the advent of the internet era, giving rise to platform-based companies like Uber (a ride-hailing service) or Deliveroo (a food delivery service) that majorly employ independent contractors. In this economy, workers typically perform on a task-by-task basis for various employers over time. While this provides flexibility, it also leaves them devoid of traditional worker benefits such as paid holidays or pensions. However, legal adjustments have been advocated and in some cases implemented, compelling companies to treat some gig workers comparably to full-time employees. This term is closely associated with the ‘precariat’ class, comprising people experiencing precarious employment conditions in this fluctuating job market.
Gilts: Gilts are British government-issued bonds, regarded as a high-quality investment due to the guarantee of repayment.
Expanded Definition
“Gilts” is a term used in finance to denote the bonds or debt securities issued by the British government. The name originated from the historical practice of gilding the edges of the bond certificates, but over time, “gilt-edged” evolved to carry an implication indicative of the high creditworthiness of the issuing entity, in this case, the British government. Investors understand these gilts to be a reliable and low-risk investment since they are backed by the British government’s guarantee of repayment. Hence, ‘gilts’ have become synonymous with safe and guaranteed investments in the finance industry.
Gini coefficient: The Gini coefficient is a numerical representation, between 0 and 1, of a population’s income or wealth distribution, where 0 signifies perfect equality and 1 signifies total inequality. It is calculated using the Lorenz curve, a graphical representation of wealth distribution.
Expanded Definition
The Gini coefficient is a statistical tool utilized to illustrate the level of income inequality present within a population. Usually expressed as a number between 0 and 1, the Gini coefficient provides a quantitative measurement of income distribution: a value of 0 denotes perfect income equality where everyone earns the same amount, whereas, a value of 1 implies absolute income inequality which means all wealth is held by a single individual while everyone else earns nothing. In practical use, the Gini coefficient is determined graphically with the help of a Lorenz curve, a plot which visually represents the cumulative incomes of a population in increasing order. For calculating the Gini coefficient, the area between the Lorenz curve and a hypothetical line of perfect income equality (a straight diagonal line on the plot) is measured. The ratio of this area to the total area under the line of perfect income equality generates the Gini coefficient. By offering a quantitative snapshot of income distribution at a point in time, the Gini coefficient contributes significantly to socio-economic analysis and helps policymakers and researchers understand and address wealth disparity within regions and societies.
Gold: Gold is a precious and finite metal traditionally used in the global monetary system and currently held as reserves by central banks, often viewed as a potential safeguard against inflation.
Expanded Definition
Gold is a highly valued precious metal that played a fundamental role in the global monetary system, particularly when the gold standard was in effect. This system linked the value of a currency directly to gold, ensuring economic stability. Today, despite the gold standard no longer being popularly used, central banks worldwide continue to preserve gold as a significant aspect of their financial reserves. People often view gold, which is finite in supply, as an investment tool to protect against inflation. This belief, however, does not have a consistent track record. In other words, the efficiency of gold as an instrument against inflation varies and is not always reliable.
Gold standard: The Gold Standard is a monetary system where a country’s currency or paper money has a value directly linked to gold, allowing for its conversion at a fixed rate.
Expanded Definition
The ‘Gold Standard’ is an economic principle where a country’s currency or paper money has a direct and fixed value linked to gold. Under this system, the government allows its currency to be freely converted into fixed amounts of gold at the specified rate. Essentially, it represents a monetary system where a country’s wealth is backed up by the gold reserves it possesses. This system was historically used to stabilize economies by providing a standard of value, or ‘yardstick’, against which the value of a currency was measured and maintained.
Goods: ‘Goods’ refer to tangible items that fulfill the desires or needs of individuals.
Expanded Definition
‘Goods’ refer to tangible commodities or products that are produced or processed to meet individuals’ needs or demands. These are physical items that individuals, businesses, or organizations purchase or exchange for consumption or use, contributing to the satisfaction of consumers’ desires or requirements. They are integral to economic activity, characterized by their ability to provide utility, satisfaction, or value to the buyer.
Government bonds: Government bonds are debt securities issued by a government, essentially a loan from an investor to the government, known to be reliable in repaying their debts, making them a risk-free asset. These bonds have significant influence on the corporate borrowing cost as their yields set the benchmark for the market.
Expanded Definition
‘Government bonds’ refers to the debt instruments issued by a country’s government as a method of borrowing money. These bonds are often critical to the functioning of a country’s financial markets. They are highly trusted and considered secure investments because governments are usually dependable in meeting their debt obligations, thus, the risk of default is very low. As such, they form an essential component of the investment portfolios of insurance companies and pension funds. In addition, the yield, or the interest rate, on these government bonds also establishes a benchmark for the borrowing costs for corporate entities within the country. Typically, companies have to offer a higher yield on their bonds, compared to government bonds, to compensate for the increased risk of potential default.
Government debt: Government debt refers to the total outstanding loans and past due obligations incurred from running budget deficits. It’s often referred to as national debt.
Expanded Definition
‘Government debt’, often referred to as ‘national debt’, denotes the total economic obligation incurred by the federal government. It is essentially the aggregation of every annual budget deficit, which occurs when governmental expenditures surpass the revenue it generates. This debt, inclusive of interests, is owed to those entities – individuals, companies, or governments – that lent money to the government in the form of purchasing government bonds or other forms of securities. The size and management of this debt can significantly influence a nation’s fiscal policy, economy, and its financial standing on the global stage.
Government expenditures: Government expenditures are the spending or investments made by the government on goods, services, and transfer payments, forming an integral part of the state’s budget.
Expanded Definition
‘Government expenditures’ is a term defined as the total financial resources deployed by a governmental entity – local, state, or federal – for the procurement of goods and services. These expenses can include everything from infrastructure projects, public services, to government salaries. In addition to these operational and capital expenses, government expenditures also encompass transfer payments. Transfer payments are funds redistributed by the government to segments of society, such as pensions, unemployment benefits, and subsidies, among others. These expenditures form a significant portion of a government’s budget, reflecting its fiscal policies and public priorities.
Government securities: Government securities are debt instruments, such as bonds and notes, issued by a government to fund its financial needs.
Expanded Definition
‘Government securities’ is a term that refers to a range of financial investment tools, which include bonds, notes, and various other forms of indebtedness issued by a government. The primary purpose of these securities is to raise capital to cover public spending and fiscal responsibilities. They are considered as lower-risk investment options, as they are backed by the credit and taxing power of a government. These financial instruments are critical for maintaining a country’s economic stability and growth, providing investors a relatively safe option for diversifying their investment portfolios.
Government securities auction: A government securities auction is a process where potential buyers bid for government bonds, influencing their final yield. The competitive bidding determines this yield, effectively setting the price and interest rate.
Expanded Definition
A ‘Government Securities Auction’ is a financial event in which units of government-issued debt, such as bonds or treasury bills, are sold to the highest bidder. The selling process is often competitive, and the buying price that each participant is willing to pay essentially dictates the yield – the return on investment – that these securities will generate. Essentially, the more a buyer is willing to pay upfront, the lower the yield they will receive, and vice versa. This mechanism is a key tool for government entities to raise funds, and for investors to secure relatively risk-free investments. The specifics of the process can vary depending on rules established by the managing treasury department.
Government spending: Government spending refers to the expenditure made by government entities on public services like military, education, and infrastructure. It contributes to the gross domestic product and excludes transfer payments.
Expanded Definition
‘Government spending’ refers to the financial expenditures incurred by local, state, and national, or federal, government entities aimed at purchasing goods, executing services, or conducting other activities that contribute to general public welfare and economic stability. Examples encompass investments in various sectors such as defense/military, education, transportation, healthcare, and infrastructure. Such spending is integral to the computation of a nation’s Gross Domestic Product (GDP), an economic indicator measuring the value of all goods and services produced within a specific time frame. However, it is crucial to note that ‘Government spending’ does not encompass transfer payments. Transfer payments are redistributed funds, wherein the government moves money from one sector or group (generally through taxes) to another, such as social security benefits, unemployment assistance, and welfare programs. These payments, while important forms of governmental financial activity, purely involve the re-allotment of existing funds, as opposed to the creation of new goods or services, causing their exclusion from the ‘Government spending’ classification.
Government-sponsored enterprises (GSEs): Government-sponsored enterprises (GSEs) are chartered by the federal government to serve public needs and include organizations such as Federal Home Loan Banks and the Federal Agricultural Mortgage Corporation, but despite their governance, their securities aren’t federally guaranteed, except for Fannie Mae and Freddie Mac.
Expanded Definition
‘Government-Sponsored Enterprises (GSEs)’ refer to a unique class of organizations that were primarily created and legally recognized by the United States federal government to serve specific public policy objectives. GSEs encompass entities such as the Federal Home Loan Banks, Agricultural Credit Bank alongside Farm Credit Banks, and the Federal Agricultural Mortgage Corporation. While initiated by the federal government, with the exception of Fannie Mae and Freddie Mac that were shifted into governmental conservatorship in September 2008, all GSEs operate as privately-owned companies. It is important to note that although their activities are linked with the government’s policy objectives, the government does not guarantee or bear the risk associated with their financial securities, hence they do not entail full faith and credit backing by the federal government. This means that the investments in GSEs, though they involve public policy, carry risks akin to other private sector investments.
Gravity model of trade: The Gravity Model of Trade posits that trade intensity between countries is influenced by their respective economic sizes and geographical proximity. It accounts for the extensive US trading relationship with close neighbors like Canada and Mexico, and economic giants like China.
Expanded Definition
The Gravity Model of Trade is an influential theoretical principle in international economics that postulates the volume of trade between two countries is fundamentally determined by two factors: their economic magnitude and their geographical proximity. Essentially, this model suggests that larger economies, denoted by factors such as GDP, have greater resources and hence engage in more trade, while geographic proximity reduces transport costs thereby encouraging trade. A contemporary illustration of this principle is visible in the trading patterns of the United States in 2021 where its chief trade partners were Canada and Mexico, substantially due to their adjacency, and China, due to its position as a leading global economy. However, it’s important to note that the Gravity Model provides an initial baseline assessment only, with many exceptions existing due to distinctive elements like trade agreements, history, or language influences.
Great Compression: The ‘Great Compression’ refers to a mid-20th century era of diminished income inequality, driven by the expansion of welfare programs and high marginal tax rates.
Expanded Definition
The ‘Great Compression’ refers to a specific time period in the mid-twentieth century, characterized by a decreasing inequality in wealth and income distribution. This phenomenon occurred mainly due to the expansion of welfare programs and the implementation of high marginal tax rates. During this period, the economic disparity between individuals was noticeably reduced, fostering a more balanced distribution of earnings across all social classes. In simpler terms, the wealth gap between the rich and the poor narrowed significantly during the ‘Great Compression’, largely due to societal and governmental measures to level the economic playing field.
Great Depression: The Great Depression was a global economic downturn in the 1930s that undermined classical economics and led to the adoption of Keynesian economics post World War II.
Expanded Definition
The ‘Great Depression’ refers to a profound global economic downturn that took place primarily during the 1930s. This era was marked by a drastic contraction in the economic output coupled with a severe decrease in international trade volumes. Traditional economic theories, specifically classical economics, faced a significant challenge during the Great Depression due to its inability to restore growth through market self-correction mechanisms, as posited by such theories. This period of economic hardship significantly contributed to the eventual adoption and popularity of Keynesian economics after World War II. Keynesian economics suggests that aggregate demand, influenced by public and private sectors, drives economic growth and that government intervention can be beneficial to stabilize output and prevent recessions.
Great Moderation: The ‘Great Moderation’ denotes the period, (mid-1980s to 2007), of notable economic stability marked by minimal recessions, low inflation, decreasing interest rates, and booming asset markets; it ended with the 2007 financial crisis.
Expanded Definition
The term ‘Great Moderation’ refers to an extended phase of economic stability observed in the developed world from the mid-1980s until 2007. This period was characterized by reduced frequency and severity of economic recessions, low and controlled inflation, decreasing interest rates, and an exceptional growth in asset markets. However, this remarkable period of economic calm and growth abruptly ended with the advent of the 2007 financial crisis, an event that aligns with the theorized ‘Minsky moment’, which suggests that extended periods of economic stability can lead to destabilizing financial crises.
Gresham’s Law: Gresham’s Law is an economic principle suggesting that in a system where two forms of commodity money are in use, which are identical by denomination but divergent in intrinsic value, the money with higher intrinsic value will be hoarded while the other will circulate more freely.
Expanded Definition
‘Gresham’s Law’ is an economic principle which dictates that in a currency system where two forms of commodity money are in circulation and considered to be of equal value by law, the more intrinsically ‘valuable’ money will be hoarded and effectively driven out of circulation by the less valuable, or ‘bad’, money. This concept is also often communicated as “bad money drives out good.” For example, consider circulation that includes both pure gold coins and coins made of a 90% metal alloy, both legislated to hold the same nominal value, such as a dollar or a pound. Although legally they possess the same value, the gold coins inherently possess more material value than the alloy ones. Therefore, rational economic agents will tend to hoard the gold coins for their higher intrinsic worth and predominantly use the alloy coins for transactions and trading. Over time, this behavior would result in primarily the debased, or alloy, coins remaining in active circulation, essentially driving the ‘good’ pure gold coins out of general circulation. This phenomenon underlines Gresham’s Law.
Gross domestic product (GDP): GDP is the annual monetary value of all finished goods and services produced within an economy’s borders.
Expanded Definition
Gross Domestic Product (GDP) is an all-encompassing financial measure that captures the economic output of a country within a specified timeframe, typically within a calendar year. It is the aggregate dollar value of all goods and services produced by all sectors of the economy, including agriculture, manufacturing, energy, construction, the service sector, government, and more. It only counts “final” goods and services – those ready for their end use by consumers and businesses, to avoid double-counting goods that are used to produce other goods. Thus, GDP serves as a comprehensive scorecard of a nation’s economic health and productive capacity. It is a key construct used by economists, policy makers, and investors to examine and compare the economic performance of different regions or countries.
Gross income: Gross income is the initial earnings obtained before any deductions or adjustments are made. It represents the fullest scope of one’s income.
Expanded Definition
“Gross income” refers to the comprehensive, cumulative sum of all revenues or earnings received by an individual, business, or corporation prior to any deductions or adjustments. This income includes all sources of revenue — for individuals, it may consist of salary, wages, bonuses, and income from investments or other ventures, while for businesses it may involve sales income, service fees, or other types of revenue. It’s important to note that ‘Gross income’ stands prior to any financial obligations, tax deductions, operating expenses, or other adjustments, which will be subtracted later to determine the net income or profit. The analysis of gross income is crucial as it provides a basic understanding of economic potential and financial status.
Gross national product (GNP): Gross National Product (GNP) refers to the aggregate economic output attributed to a country’s residents, inclusive of domestic and international productions. It excludes earnings by foreign residents, thus potentially diverging greatly from GDP in nations hosting numerous multinational corporations.
Expanded Definition
The Gross National Product (GNP) is an economic metric that quantifies the total market value of all final goods and services produced by the residents of a nation, both within domestic borders and overseas, within a stipulated time period, typically a year. It covers the economic output produced by a country’s citizens, irrespective of their geographical location, and excludes the production by foreign nationals within the country’s border. Essentially, it reflects the overall economic production of a country’s nationals and businesses, not limited by geographical constraints. However, incomes earned by foreign residents or businesses operating within the nation’s borders are subtracted. This feature differentiates GNP from Gross Domestic Product (GDP), which gauges economic performance based only on the activities within a country’s geographical boundary. The discrepancy between GNP and GDP can sometimes be significant in nations where foreign direct investment plays a dominant role. For instance, a country like Ireland, with a favorable corporate tax structure, lures numerous multinational corporations which contribute significantly to its GDP, but not its GNP, thus creating a noticeable difference between these two measures.
Gross pay: Gross pay refers to the total compensation an individual receives before deductions like taxes and benefits are accounted for.
Expanded Definition
“Gross pay” is professionally defined as the total monetary compensation a person receives during each pay period, prior to the subtraction of any withholding or deductions. This includes, but is not limited to, regular wages, overtime pay, bonuses, and commissions. It serves as the starting point for determining an individual’s taxable income, before factors such as taxes, social security, health insurance premiums, retirement contributions, or other obligatory or voluntary deductions are deducted. The remainder, following these subtractions, is commonly referred to as ‘net pay’. Gross pay is a critical aspect of payroll administration and personal financial management, offering an overview of an individual’s earnings before expenses.
Gross private investment: Gross private investment is the total expenditure by businesses on physical assets like machinery, equipment, buildings and infrastructure.
Expanded Definition
‘Gross private investment’ refers to the total expenditure undertaken by private sector businesses on capital goods and services like machinery, industrial units, technological equipment, and tools utilized in production processes. Additionally, this extends to outlays on commercial construction projects such as erecting new buildings. It encapsulates the business sector’s attempts to expand productive capacity, innovate, and keep abreast of market changes. Gross private investment represents a significant component of a country’s Gross Domestic Product (GDP) and is a critical indicator of economic health, offering insights into business sentiment, future production capabilities, and potential economic growth.

H

Hacking: ‘Hacking’ is unauthorized computer or network data access.
Expanded Definition
‘Hacking’ is defined as the act of exploiting computer systems or networks, wherein an individual, known as a hacker, leverages advanced technical knowledge to manipulate or bypass a system’s standard security measures. This process is conducted without the explicit permission of the system’s owner, leading to unauthorized access to data or information. It should be noted that while hacking is often associated with malicious intent such as data theft, fraud, or system damage, there is a branch known as ‘ethical hacking’ where security specialists perform authorized hacking to identify and fix potential vulnerabilities.
Haircut: A ‘Haircut’ in financial terms is a discounted value applied on the collateral by creditors like banks, to safeguard from potential value drops when a borrower defaults. Higher the risk associated with the collateral, greater is the haircut applied.
Expanded Definition
A ‘haircut,’ within the context of finance and banking, is a preventative measure taken by creditors (like banks) when they lend money to borrowers. These creditors often require the borrower to provide collateral to safeguard against the possibility of a loan default. The collateral is generally composed of financial securities or assets, such as bonds. However, a key risk for creditors is the potential decrease in collateral value, precisely when the borrower is unable to pay back the loan – a scenario that could leave the creditor with an asset worth considerably less than the loan amount. To mitigate this risk, creditors employ a strategy known as a ‘haircut.’ In this practice, the creditor purposefully undervalues, or discounts, the collateral provided by the borrower. For instance, if a borrower offers securities with a market value of $100 m as collateral, the creditor might only count it as collateral worth $90m. This self-imposed discount or ‘haircut’ of 10% creates a buffer against potential drops in the collateral’s value. The riskier the bonds or securities, the larger the ‘haircut’ applied. This practice ensures that, even in the event of a default, the lender is better positioned to recoup the loan amount from the undervalued collateral.
Hard skills: Hard skills are specific, trainable competencies such as numerical, language, or technical abilities.
Expanded Definition
‘Hard skills’ are the quantifiable and specific abilities or competencies that an individual can learn and master through formal education, training, or hands-on experience. These skills include, but are not limited to, expertise in areas such as mathematics, literacy, data analysis, typing proficiency. They are often measurable and easily identified on tests or assessments, making them directly relevant and applicable to certain job tasks or academic requirements.
Health insurance: Health insurance is a type of coverage that caters for the insured’s medical and surgical costs.
Expanded Definition
Health insurance can be defined as a type of insurance cover that absorbs or covers the costs associated with medical and surgical procedures undergone by the policyholder. It is a contractual agreement between an insurer and an individual or group, where the insurer provides financial coverage for healthcare services in exchange for a predetermined amount, often paid as premiums. This insurance plan reduces the financial burden experienced due to unexpected health-related expenses and usually extends to routine health checks, prescription drugs, mental health care, prenatal and childbirth services, emergency services, and long-term healthcare supports. The specifics of what is covered can vary tremendously based on the policy terms and conditions.
Hedge fund: A hedge fund is a private investiture collective run by a professional manager, offering diverse strategies and risk profiles; it is not publicly available nor tied to a specific asset class like stocks or commodities. Some hedge funds heavily utilize leverage, while others do not.
Expanded Definition
A ‘Hedge Fund’ is an investment instrument that is privately managed and not generally accessible to the public. Typically assembled as a pooled entity, a hedge fund is overseen by a professional investment manager. There is no clear-cut legal connotation for the term, making the assets, investment strategies, and risk levels of such funds notably diverse. Contrary to categories such as bonds, stocks, commodities, or real estate, hedge funds do not constitute a homogeneous “asset class.” They incorporate a gamut of investment strategies, some of which may overlap with those utilized by private equity funds. Nevertheless, the sector’s strategies overall are distinctly varied. The extent of leverage involved also varies among hedge funds; while some may operate with high levels of leverage, others employ minimal or no leverage.
Hedging: Hedging is a risk management strategy used by individuals, companies, and institutions to shield against potential losses from fluctuations in market variables like commodity prices, currencies, or interest rates. It functions similarly to insurance, but for financial markets.
Expanded Definition
‘Hedging’ is a strategic financial mechanism employed by individuals, businesses, and large institutions to mitigate potential losses from unpredictable fluctuations in the market. This strategy acts as a form of insurance, providing a protective measure against adverse changes in various aspects, including commodity prices, foreign exchange rates, and interest rates. Hedging involves entering into a derivative transaction – a financial arrangement, like a futures contract or options – whose value is pegged to the potential risk element. For instance, if a company is concerned about potential foreign exchange losses due to its international trade commitments, it might engage in a hedging contract to “lock-in” a specified exchange rate for a future date, therefore offsetting potential losses if the rate were to move unfavorably. It’s important to note that hedging is not designed to generate profit but to reduce the likelihood and impact of potential losses, thereby bringing security and predictability to financial operations. Ultimately, effective hedging requires comprehensive market understanding, careful risk assessment, and prudent decision-making.
Hedonic adjustment: Hedonic adjustment refers to the modification of inflation data to account for quality improvements in goods, such as advancements in personal computers. It allows for a more precise analysis of price changes by including product quality variations.
Expanded Definition
‘Hedonic adjustment’ refers to the modification applied to reported inflation rates in order to account for the improvements in the quality of goods over time. This term is typically utilized in the context of rapidly advancing industries, like that of technology products. For instance, personal computers have seen significant improvements over the years in terms of their performance capabilities, design, features, and functionality. Therefore, even though a computer may cost the same now as it did several years ago, its enhanced quality represents an increase in the value offered to consumers. The hedonic adjustment process quantifies these quality improvements and incorporates them into inflation calculations, thus providing a more accurate measure of true cost changes and overall economic performance.
Home Owners Equity Protection Act (HOEPA): The Home Owners Equity Protection Act (HOEPA) is a 1994 amendment to the Home Mortgage Disclosure Act (HMDA) that safeguards mortgage borrowers from deceptive lending and practices, ensuring accurate ad information and early access to transaction-specific disclosures.
Expanded Definition
The Home Owners Equity Protection Act (HOEPA), established in 1994 as an amendment to the Home Mortgage Disclosure Act (HMDA), is a federal law designed to offer safeguards to individual mortgage borrowers. Its primary function is to shield consumers from underhanded or misleading tactics in the field of mortgage lending and servicing. One important aspect is its mandate for honesty and accuracy in mortgage advertisements, ensuring potential borrowers are not misled by biased or incomplete information. Another crucial element is the requirement for lenders to provide specific, clear disclosures to consumers regarding their potential mortgage transaction. These are to be given far enough ahead of time to allow borrowers to use them for comparison shopping and informed decision making when seeking a mortgage. This act underscores the importance of transparency and ethical behavior in the mortgage industry, in order to protect homeowners’ equity.
Homeowner’s equity: Homeowner’s equity refers to the monetary value an owner has in their property, determined by subtracting the total of any outstanding loans or liens from the property’s current market value.
Expanded Definition
‘Homeowner’s Equity’ is a financial term that represents the portion of a property that the owner truly ‘owns’ outright. It is measured based on the current fair market value of the property — that is, the estimated price that a knowledgeable, willing, and unpressured buyer could be expected to pay to a knowledgeable, willing, and unpressured seller in the market. From this market value, the total amount of any existing debts or liens attached to the property, such as mortgages or loans, is subtracted. Thus, it refers to the appraised or carrying value of a home reduced by any outstanding loans or other encumbrances. In essence, it is the net value of a property that the homeowner would receive if they were to sell the property and settle any attached debts.
Hot money: ‘Hot money’ refers to short-term capital flows seeking swift profits, often influencing market speculation and currency value fluctuations, and potentially leading to a banking crisis upon its withdrawal.
Expanded Definition
“Hot money” is a term in finance and economics that refers to short-term capital shifting rapidly between countries, seeking the highest immediate returns. This capital often moves through the financial system, notably banks, igniting an expansive period of lending that may fuel speculation, particularly in the real estate sector. Additionally, this influx of hot money can artificially inflate the value of a country’s currency. While this might appear positive, it can adversely affect the country’s export competitiveness by making its goods and services more expensive for international buyers. However, hot money is notoriously unstable and can exit a country as quickly as it entered, specifically when market sentiments shift or better opportunities arise elsewhere. The rapid withdrawal of hot money can devalue the country’s currency, trigger the collapse of inflated speculative markets, and often lead to a banking and financial crisis due to the sudden liquidity shortage. Therefore, many nations favor Foreign Direct Investment (FDI) over hot money. FDI typically represents longer-term, more stable investment in industries and sectors that contribute to broader economic growth and development, whereas hot money is largely seen as volatile, speculative, and potentially damaging to a country’s financial stability.
Household: A household refers to the collective of individuals inhabiting the same residence, without regard to their interpersonal affiliations.
Expanded Definition
A ‘household’ can be comprehensively defined as a collective unit composed of individuals who reside in the same dwelling or living space. It includes not only those who are linked by kinship, marriage or adoption, but also unrelated persons or non-family members. These individuals typically share common living areas and engage in joint domestic activities such as meal preparation and consumption, housekeeping tasks, and often contribute towards shared expenses. The composition of a household can be diverse, based on various cultures, societal norms, and individual circumstances.
Housing market: The housing market pertains to the buying and selling of residential properties, serving as a critical economic indicator.
Expanded Definition
The ‘housing market’ refers to the broad economic sector encompassing the buying, selling, renting, and financing of residential properties. Within it, a wide array of transactions occur, involving home-buyers, real estate agents, construction companies, banks, and governments. Often evaluated based on parameters such as pricing trends, supply and demand conditions, and general economic indicators, the housing market serves as a critical economic barometer. Its performance can provide insightful data about consumer spending, the health of the financial sector, job market conditions, and overall economic well-being. Thus, in essence, the dynamics of the housing market can provide significant insight into the broader economic landscape.
Human capital: Human capital refers to the accumulated abilities and expertise gained through education, training, and hands-on experience possessed by individuals.
Expanded Definition
‘Human capital’ can be comprehensively defined as the collective value of the proficiency, knowledge, and skills possessed by individuals, which are usually acquired through various avenues such as formal education, on-the-job experience, and professional training programs. This term essentially encapsulates the intellectual assets of an individual, workforce, or society, and is often considered critical for economic growth, innovation, and organizational performance. It serves as a significant indicator of potential productivity and future success, given its inherent capacity to be deployed for various tasks, problem-solving, and contributions towards achieving strategic objectives.
Human resources: Human resources, also referred to as labor, signifies the workforce input including their skills and abilities, employed to produce goods and services.
Expanded Definition
‘Human resources’, simply known as ‘HR’, is a complex field which refers not only to the aggregate workforce within an organization, but also to the department or individuals that manage and maintain this workforce. This concept involves the strategic management of employees who individually and collectively contribute to the achievement of organizational goals. The quality and quantity of human effort are crucial in this regard, as this directs the production of goods and services, termed as ‘labor’. However, it also extends to areas such as hiring, training, compensation, employee well-being, compliance with employment laws, and facilitating effective communication within the organization. Human Resources is therefore essential for optimizing the effectiveness and contribution of employees, or ‘human capital’, towards organizational objectives.
Human resources (elementary): Human resources refers to individuals who contribute their intellectual or physical labor to create products and services.
Expanded Definition
Human resources, in its elemental context, refers to individuals who contribute labor, whether cognitive or physical, towards the creation of products or provision of services within an organization or economic setting. This concept recognizes the essential role that every worker plays in achieving the business objectives, often involving a variety of tasks ranging from manual labor to intellectual engagement. As such, human resources stands as a key component in any operational framework, underscoring the need for effectively managing and optimizing these critical assets for enhanced productivity and overall organizational success.
Hybrid working: Hybrid working refers to a flexible work model where employees split their time between the office and remote locations, maximizing both collaborative opportunities and personal efficiency.
Expanded Definition
‘Hybrid working’ is a contemporary business model that originated amidst the COVID-19 pandemic, facilitating a dual-operation work style where employees divide their work time between on-site premises and off-site or remote locations, primarily their homes. This innovative model attends to the need of maintaining professional collaboration and socio-organisational interaction by requiring office attendance for important in-person meetings and discussions, while also acknowledging the employee demand for flexibility, convenience and decreased commute times. The hybrid model is increasingly being acknowledged and adopted by various corporations, reconciling employee satisfaction with operational efficiency. For a more in-depth understanding, you may refer to pertinent articles on the subject.
Hyperinflation: Hyperinflation refers to an uncontrollably quick escalation of prices, indicating an exceptionally high inflation rate.
Expanded Definition
Hyperinflation is an economic term that depicts an excessively swift escalation in the overall price level of goods and services in an economy, resulting in an extraordinarily high and typically accelerating inflation rate. Usually, this involves inflation rates exceeding 50% per month. This rapid devaluation of a country’s currency erodes its buying power where money virtually becomes worthless, often leading to social and economic unrest. Regular economic instruments fall short during such periods, requiring extraordinary measures to stabilize the economy. Please note, hyperinflation situations are relatively rare and typically associated with significant economic turmoil such as war, severe political mismanagement, or a collapse in the supply chain.
Hypothecated taxes: Hypothecated taxes refer to funds raised through taxation that are designated for specific purposes like construction or healthcare. This approach often makes tax increases more palatable while also providing potential avenues for government to reallocate funds to different sectors.
Expanded Definition
“Hypothecated taxes” refers to a fiscal practice wherein the funds raised from particular tax revenues are designated for a specific expenditure, like public infrastructure projects or healthcare services. This allows for greater transparency and accountability in public finance, as taxpayers know exactly where their money is being directed. Hypothecating taxes also serves a political function as it can enhance the acceptability of tax increases among the citizenry if effectively communicated and executed. However, there may also exist potential instances where governments might reallocate these earmarked funds to other departments or sectors based on changing priorities or financial necessities.
Hysteresis: Hysteresis, in economics, refers to the lasting effects of past events, such as continued high unemployment after economic recovery, usually due to factors like decreased morale or diminished skills among workers. It’s a phenomenon defined by its persistence and resistance to immediate change.
Expanded Definition
“Hysteresis” is a term derived from the field of physics, where it describes a delay in the response of a system to changes in influencing factors. When applied to economics, hysteresis refers to occurrences where the impacts of economic events persist, even after the original conditions have changed. This is often noticeable in situations like prolonged high unemployment rates. Even when an economy has visibly improved, the unemployment rate may remain elevated due to various factors, such as a decline in workers’ morale or a lapse in their professional skills over time. This concept is crucial in understanding the lasting effects of economic shifts and aiding in the development of effective policies.

I

IRA (individual retirement account): An IRA is a savings tool for retirement, enabling individuals to invest either pre-tax or post-tax income up to certain yearly limits for potential growth.
Expanded Definition
An Individual Retirement Account (IRA) is a specialized financial tool designed to aid individuals in saving for their retirement. It offers tax advantages to enable the investor to accumulate higher retirement savings over time. With an IRA, individuals can either channel their income before it’s taxed (pre-tax income) or after it’s been taxed (after-tax income), up to a certain amount stipulated annually by the IRS. This income is then invested into various portfolios such as stocks, bonds, or mutual funds, presenting the opportunity for potential growth. As such, an IRA plays a crucial role in financial planning for retirement.
Identity theft: Identity theft is the illicit acquisition and use of another person’s personal information to conduct fraudulent activities, such as unauthorized financial transactions or credit opening.
Expanded Definition
Identity theft refers to a fraudulent activity where a perpetrator illicitly obtains and utilizes another individual’s sensitive personal data, typically including elements such as their name, address, driver’s license number, date of birth, birthplace, Social Security number, and credit card details. This data is subsequently exploited to achieve a range of illegal objectives, major ones being unauthorized access to the victim’s financial accounts which facilitates monetary theft, executing transactions using the victim’s credit or debit cards, fraudulently opening new lines of credit, or engaging in diverse forms of criminal behavior that shield the true identity of the perpetrator. The ramifications of identity theft extend beyond immediate financial loss, often resulting in long-term credit issues and significant breaches of privacy for the victim.
Illiquid assets: Illiquid assets are assets that are not easily convertible into cash without potentially losing significant value. They can pose financial risks when they outweigh instant liabilities, such as customer deposits in a bank setting.
Expanded Definition
“Illiquid assets” refer to types of investments or properties that are not easily converted into cash within a short period of time without a significant loss in value. The process of selling such assets usually requires an extended period or may necessitate a considerable reduction in the asset’s price to attract potential buyers quickly. This potential for a lengthy sales period or mandatory price cut is what primarily defines the term “illiquid.” Illiquid assets have prioritized importance in the financial sector, especially in the operations of lending institutions such as banks. For instance, banks hold customers’ deposits, which are short-term liabilities that can potentially be withdrawn on demand. At the same time, these banks typically invest in longer-term assets like loans or property, which can’t be readily converted into cash. This creates a liquidity mismatch that can lead to financial instability if a large number of customers want to withdraw their deposits simultaneously. The perceived risk associated with illiquid assets often results in them yielding higher potential returns, as buyers demand compensation for the difficulty they could face in reselling the asset. This is the risk-return trade-off related to liquidity. Overall, understanding the characteristics and implications of illiquid assets is crucial for effective financial management and investment decisions.
Implicit cost: “Implicit cost” refers to the non-monetary costs or opportunity costs, measured in terms of potential earnings missed from an alternate choice.
Expanded Definition
“Implicit cost” refers to an economic expense that doesn’t involve a direct monetary exchange, but rather reflects the opportunity cost or potential earnings foregone by choosing one action or investment over another. It is associated with the use of resources owned by the company or individual that could be put to alternative uses. These costs are not typically recorded in financial accounts but are critical in economic analyses and calculations for assessing overall profitability or return on investment. For example, if an individual spends their time doing unpaid work for their own business rather than earning a salary elsewhere, the foregone salary would constitute an implicit cost.
Imports: Imports are goods, services, or resources procured from foreign countries for domestic consumption or use. They include anything acquired internationally but utilized locally.
Expanded Definition
‘Imports’ refer to the wide variety of resources, commodities, or services that are produced or originated in foreign countries and then purchased and brought into a specific domestic market for consumption or use. They essentially highlight the economic activity or transactions where a region or country buys and receives goods and services from another region or country. This process plays a vital role in global trade, enabling nations to access and benefit from products or services not readily available or efficiently produced within their own borders.
Incentive (elementary): An incentive is a stimulating factor, either a benefit to encourage a particular action or a punishment to discourage it.
Expanded Definition
An ‘Incentive’ is a strategic tool or approach often employed to motivate or influence certain behaviors or actions. It takes form in rewards or penalties used to either increase positive actions or decrease undesirable ones. A reward-based incentive is a beneficial offering made more appealing to individuals, intended to motivate better performance, increase productivity, or promote certain behaviors. On the other hand, a penalty-based incentive is a punitive measure designed to discourage negative actions or behaviors, essentially making the individuals ‘worse off’ as a consequence of their actions.
Incentives: Incentives are rewards or stimuli that motivate specific actions or decisions.
Expanded Definition
‘Incentives’ refers to strategically implemented rewards or benefits, either tangible or intrinsic, that are designed to motivate and encourage specific actions or behaviors. These motivational tools could range from monetary rewards, such as bonuses or pay raises, to non-monetary elements like recognition or advancement opportunities. The purpose of incentives is to align individual or group efforts and performance with larger organizational or societal goals. These can profoundly influence decision-making processes by changing the perceived value or potential outcome of certain behaviors. This concept is widely used across various fields including economics, psychology, and business management.
Income: Income is the monetary gain derived from the provision of resources or services, such as labor, typically known as wages or salaries, and through other avenues like rent, profit, and interest.
Expanded Definition
‘Income’ is a financial gain that is obtained by individuals as a compensation for offering their resources within the economy. This primarily occurs when individuals participate in the job market by dedicating their time, skills, and labour, thereby playing an essential role as human resources. The remuneration they get can take the form of regular wages or salaries. However, it’s notable that income can also be derived from other sources. Firstly, one may earn income through renting out property, generating a steady flow of money termed ‘rent’. Secondly, individuals or entities can amass ‘profit’ by engaging in commercial activities, merchandising or entrepreneurship where the income is the residual after deducting all costs and expenses. Lastly, ‘interest’ is another form of income and is earned by providing capital, for instance in savings accounts, or through loans and investments. In each case, income is the financial return yielded for the resource provided by the individual or entity within an economic context.
Income (elementary): Income is the monetary gain derived from labor or services provided.
Expanded Definition
‘Income’, in its most basic sense, refers to the economic gain that individuals accrue in exchange for the labor, services, or goods they provide. It serves as the primary financial resource that enables individuals to afford necessities and luxuries. This compensation can be derived from different sources such as employment, self-owned businesses, investments, or other economic activities, each potentially subjected to different tax regulations. Understanding the nature of income is vital since it largely impacts one’s economic stability, lifestyle, and capacity to save, spend, or invest.
Income distribution: Income distribution refers to the proportional allocation of total income across a society’s individuals.
Expanded Definition
“Income distribution” is a term used in economics to refer to the manner in which the total wealth of a given society is spread among its individual members. This distribution can be represented as a percentage of income groups or as a graph showing wealth dispersion, known as the Lorenz curve. The study of this distribution can give profound insights into economic inequality, purchasing power, standard of living, and socio-economic classes within a society, contributing to critical economic and social policies. Factors affecting income distribution include education, occupation, industry, region, and more. The ideal distribution is often a topic of debate, with various theories ranging from equal distribution to others favoring a more free-market approach.
Income tax: Income tax is a levy imposed on both individuals’ and businesses’ earnings, encompassing both active incomes such as salaries and passive incomes such as dividends.
Expanded Definition
Income tax is a financial charge imposed by the government on the income generated by individuals or entities. It is classified into two categories: earned and unearned income. ‘Earned income’ encompasses monetary benefits procured through various forms of employment, such as salaries, wages, tips, and commissions. On the other hand, ‘unearned income’ represents financial gain obtained without active involvement, including interest and dividends amassed from investments. The government can levy income taxes on both individuals, known as personal income taxes, and business entities, referred to as business or corporate income taxes.
Index: An index is a numerical indicator that measures variations in a value, usually a price level, from a specific base date, often set at 100. It showcases the degree of change over time.
Expanded Definition
An ‘Index’ is a numerical indicator that represents the fluctuation in the value of a specific magnitude, often associated with price levels, from a predetermined baseline date to any subsequent date. It is a tool used in fields such as finance, economics, and statistics to track and compare economic performance, prices, or quantities over time. The baseline date is typically assigned a standardized value of 100, serving as a reference point against which all subsequent changes are measured. The changes are typically represented in terms of percentage difference from this base value, facilitating an easier understanding of relative changes over time.
Index fund: An index fund is a mutual fund that aims to replicate the performance of a specific stock or bond index, like the S&P 500, reflecting the market’s overall performance.
Expanded Definition
An ‘Index Fund’ is a type of mutual fund or exchange-traded fund designed with the aim of mirroring the performance of a specific market index. This index may comprise a large pool of various assets, such as stocks or bonds. An example of such an index is the Standard and Poor’s 500 Index, which includes 500 of the largest companies listed on the US stock exchanges. Index funds operate under the investment strategy called passive management, where fund managers replicate the index to achieve similar returns rather than actively selecting and trading individual securities. By doing so, index funds offer broad market exposure, low operating costs, and low portfolio turnover, making them an accessible and cost-effective option for many investors.
Index number: An index number quantifies the relative change in a variable’s value, typically price levels, from a base date, which is often denoted as 100. It allows for the comparison of the variable’s fluctuation over various dates.
Expanded Definition
An ‘Index Number’ is a statistical term defining a figure that measures relative change in a particular variable, often prices, from a specified reference or base date. This number is often expressed as a percentage, with the base date usually having an index number of 100. This means that if the index number rises to 110, it indicates a 10% increase from the reference point. Index numbers serve to simplify complex data sets enabling comparisons over different periods, or among different data sets. Common examples include consumer price index and the retail price index, which track changes in consumer market prices over time.
Indexation: Indexation refers to the practice of adjusting financial variables like benefits, prices, or bond values to match inflation rates, effectively protecting against loss of purchasing power. It’s also a passive fund management strategy aimed at mirroring a specific stock-market index’s performance.
Expanded Definition
Indexation is a crucial financial term often used to refer the adjustment of a variable, such as wages, benefits, or prices, in parallel with the rate of inflation. This allows for the maintenance of purchasing power by compensating for the impact of inflation. Governments frequently use indexation to adjust benefits and state subsidies, and to set inflation-adjusted pricing for services like rail transportation. In addition, the term Indexation is employed in the context of financial securities, namely index-linked bonds. Issued by governments, these bonds have their coupon rate (the interest paid to bondholders) and repayment value modified in alignment with inflation fluctuations, hence the term ‘index-linked’. Indexation is also a critical concept in the world of investment fund management, specifically in passive management strategies. It refers to the practice of curating a fund’s asset portfolio to mirror the composition and performance of a predefined stock-market index, with the intent of matching, not outperforming, the index’s return. This approach is what defines passive, otherwise known as index, investing.
Indirect taxation: Indirect taxation refers to taxes levied on goods and services, such as sales tax or tourism tax, collected by entities like retailers or hotels, which are then passed onto the government, thus allowing governments to increase revenue without altering direct taxes.
Expanded Definition
‘Indirect taxation’ pertains to the type of taxes which are levoted on goods and services, rather than on income or corporate profits. These taxes are generally collected by an intermediary, such as a retailer or service provider, from the person who bears the ultimate economic burden of the tax, namely the consumer. Examples of indirect taxes include sales tax, value-added tax (VAT), goods and services tax (GST), and excise duties on certain products such as alcohol and tobacco. Indirect taxes on certain sectors, like the tourism tax collected by hotels and airlines, also fall within this category. Governments often implement these forms of taxation as they can enhance fiscal revenues without making alterations to the prominent rates of direct taxes, including income tax or corporation tax, thus providing a less noticeable form of taxation for citizens.
Industrial policy: Industrial policy refers to government strategies utilized to promote and protect certain strategic industries often through measures like subsidies and tariffs. This approach has gained traction due to factors such as supply chain disruptions and geopolitical shifts.
Expanded Definition
‘Industrial policy’ is defined as a strategic government initiative aimed at promoting certain industries deemed crucial for a nation’s economic or strategic goals. This strategy often cites the ‘infant industry’ argument, advocating support for emerging industries until they become competitive. Recent events, such as the disruption of supply chains resulting from the COVID-19 pandemic, rising concerns about China’s expanding economic influence, and geopolitical tensions following Russia’s invasion of Ukraine, have revitalized interest in industrial policy, particularly in Western nations. The tools used in industrial policy may include subsidies, tariffs, and other regulatory or financial measures designed to foster the growth of these favored industries. However, this approach can be a double-edged sword. While it can boost the selected sectors, it may lead to a resurgence of protectionism – a strategy of shielding a country’s domestic industries from foreign competition by taxing imports. Such a trend could have a range of economic implications, possibly disturbing free trade and global economic balance.
Inefficiency: Inefficiency refers to the unnecessary waste of resources in the production process, or a situation where reallocating resources could enhance customer satisfaction.
Expanded Definition
“Inefficiency” refers to a circumstance resultant from sub-optimal utilization or allocation of resources during the production of goods or services. This may manifest as waste of resources such as materials, time, or manpower. Alternatively, inefficiency may also portray a situation where reassigning resources, or changing the way they are used, can potentially lead to higher levels of satisfaction for consumers, thereby indicating that the existing resource utilization is less than ideal. Thus, inefficiency encapsulates scenarios which fail to capitalize on maximizing productivity, utility, or consumer satisfaction within the scope of available resources.
Inelastic demand: Inelastic demand is when a change in a product’s price leads to a less significant change in the quantity demanded, indicating that consumers’ purchasing behavior is largely unaffected by its price variation.
Expanded Definition
‘Inelastic demand’ pertains to an economic concept where the demand for a specific good or service is largely unresponsive to price fluctuations. According to this principle, the percentage shift in the quantity of a good or service demanded by consumers is comparatively less than the percentage shift in its price. In simpler terms, despite a change (increase or decrease) in the price, consumers’ buying behavior remains relatively unaffected due largely to the product’s perceived essential nature or lack of adequate substitutes. This demand elasticity scenario underscores that consumers are less price-sensitive when it comes to such goods or services. Therefore, businesses can alter prices with minimal impact on sales volume.
Inequality: Inequality, often gauged by the Gini coefficient or the top percentages of income and wealth, refers to the economic disparity within a population. It represents the variance in wealth distribution, with theories like the Kuznets curve suggesting that it initially increases with industrialization and then decreases, a concept under ongoing debate among economists.
Expanded Definition
‘Inequality,’ a topic constantly under discussion among economists, refers to the disparity in wealth and income distribution among various economic groups in a society. It is typically quantified using indices such as the Gini coefficient, or by examining the proportions of income and wealth controlled by specific population percentages, usually the top 1% or 10%. The Kuznets curve is a widely recognized hypothesis in this field, proposing that industrialization initially exacerbates inequality before eventually mitigating it. This theory seemed plausible during the “Great Compression” period (1940-1980) marked by decreasing inequality. However, since the 1980s, the developed world has seen a rise in inequality, sparking continued debate. Discussions around inequality encompass not only its measurement and trends but also the impacts of economic policies on its trajectory. Additionally, the complex relationship between inequality and economic growth is a focal point of research, influencing our understanding of socio-economic dynamics.
Infant industry: An infant industry is a new and growing sector that is shielded by a government through tariffs, subsidies, and other measures to reduce foreign competition and stimulate economic growth. It is often seen in emerging economies but also utilized in developed ones.
Expanded Definition
“Infant industry” refers to a nascent or newly developing business sector that receives support and protective measures from the government primarily to shield it from international competition. Such protection often comes in the form of subsidies, tariffs, or other import restrictions implemented to limit competitive pressure, enabling the fledgling sector to grow and mature within the domestic market. The use of infant industry strategy is generally associated with developing economies aiming to spark industrial development and expedite economic growth. However, it is noteworthy that developed economies also invoke the infant industry argument to justify protectionist measures. Essentially, these protective measures are designed to provide a window for these young industries to develop the necessary competitive capabilities before they compete on a global scale. The end goal is usually to attain self-sufficiency and enhanced economic performance at a national level.
Inflation: Inflation is the consistent rise in the cost of goods and services in an economy over time.
Expanded Definition
Inflation is an economic term that refers to an extended period during which the overall prices for goods and services consistently rise within an economy. Ideally, it signifies the decrease in the purchasing power of a nation’s currency- implying, as prices surge, each unit of currency buys fewer products and services. It’s a critical economic indicator, as it impacts the economy’s health and corporate strategies, influences interest rates, and affects household budgets. Understanding inflation is vital because it not only impacts the cost of living but also economic growth and investment decisions. It’s primarily measured in percentage terms as an annual rate to reflect the pace at which a particular set of goods and services has become more expensive over time.
Inflation rate: Inflation rate refers to the percentage rise in the overall costs of goods and services over a specific time frame.
Expanded Definition
The ‘inflation rate’ is a crucial economic metric defined as the rate at which the general level of prices for goods and services is ascending, typically measured on an annual basis. Expressed as a percentage, it represents the diminishing purchasing power of money, meaning a unit of currency can buy less than it could during the previous year. It essentially encapsulates the rate of change in consumer price index (CPI), or prices for a basket of commonly used goods and services, including groceries, clothing, and automotive repair. A rise in this index signifies inflation. Hence, if the inflation rate is 2%, prices have increased on average by 2% from the prior year.
Inflation targeting: Inflation targeting is a monetary policy strategy where central banks aim to maintain inflation within a specified rate or range, using tools like interest rate adjustments or quantitative easing, operating independently from political influence.
Expanded Definition
Inflation targeting refers to a contemporary financial policy pursued by numerous central banks worldwide whereby a specific percentage or a certain permissible range is set for the rate of inflation. This policy aims to maintain economic stability and predictability. Importantly, the central banks implementing this strategy typically operate independently, free from direct political intervention, thereby allowing for objective decision-making based on economic factors alone. To achieve the desired inflation rate, central banks utilize various monetary policy instruments. These can include adjusting the benchmark interest rates, which can influence the borrowing costs and therefore affect spending and investment levels in the economy. Another tool can be the implementation of ‘quantitative easing’, a method involving the purchase of large-scale assets to inject money directly into the economy, thereby influencing overall economic activity and, ultimately, the inflation rate. There are ongoing discussions and considerations around the optimal inflation targets set by the central banks and the extent of their institutional independence. These are matters of significant debate within the field of economics, with varied perspectives and implications for both macroeconomic stability and socio-economic welfare.
Informal economy: The ‘informal economy’ refers to unregistered economic activities that generate income, examples include occasional babysitting or street vending, involving roughly 2 billion people globally according to the International Labour Organisation.
Expanded Definition
The ‘Informal Economy’ is a term primarily used in economics to represent all such economic activities that have quantifiable value but are not formally recorded or regulated by the established governmental bodies of a given country. These activities often operate outside of the formal channels and are largely cash-based, making them harder to trace or tax. This broad category can encompass a wide array of workers and activities, ranging from local teenagers providing unpaid babysitting services to street vendors selling souvenirs or operators involved in unregulated ticket-scalping. According to estimates by the International Labour Organisation, about 2 billion individuals globally might have sporadic engagement in these types of informal economic activities. The intrinsic informality of these practices means they are frequently characterized by a lack of social security, absence of employment contracts, and limited access to legal or financial protections typically available in the formal economic sector.
Infrastructure: Infrastructure refers to the fundamental facilities and systems serving a country, city, or area, such as transportation, utilities, and buildings.
Expanded Definition
‘Infrastructure’ denotes the fundamental and essential physical systems and facilities that serve as the backbone of any well-functioning society. This broad term primarily encompasses built environments such as buildings used for various purposes, transportation systems comprising roads, bridges, tunnels, railway tracks, and airports, as well as utilities including water supply, sewage treatment, and waste disposal systems. The effective execution and maintenance of these systems enable daily operations, support key services and stimulate economic development. This foundational layer is not limited to physical structures; it also includes telecommunication systems, energy networks, and financial and educational systems that help in shaping a society’s prosperity, connectivity, and overall quality of life.
Inheritance taxes: Inheritance taxes are charges imposed on the estate of a deceased person, aimed at promoting meritocracy, yet often encompass various exemptions to protect small businesses and farms. Despite their potential significance, they contribute minimally to total government tax revenue.
Expanded Definition
“Inheritance taxes” refer to the government-imposed charges placed on the total value of assets transferred from deceased individuals to their beneficiaries. The premise behind such taxes is to potentially prevent the unduly concentration of wealth, fostering a more merit-based society. However, these taxes often face backlash from many, predominantly in the middle-class category, who aim to bequeath their assets (primarily residential properties) to their descendants. In response, governments often enforce exemptions to inhibit smaller businesses and agricultural properties from disintegration following the owner’s demise. Despite their existence, inheritance taxes account for a minor portion of the total tax revenues that governments collect. As per the data from OECD in 2021, a meager 0.5% of all government tax revenues on average is generated from this source. This tax mechanism is akin to the wealth tax, which targets a person’s overall net worth.
Initial Public Offering (IPO): An Initial Public Offering (IPO) is the process through which a private company offers its shares for purchase by the public for the first time.
Expanded Definition
An Initial Public Offering (IPO) refers to the process by which a privately held company first offers its shares to the general public, thereby transitioning into a publicly traded corporation. This significant financial event is conducted with the assistance of investment banks, which underwrite the IPO, evaluate the company’s value and determine the initial share price. By embarking on an IPO, a company can raise significant capital for growth, expansion, and debt reduction, while also increasing its visibility and credibility in the marketplace. However, it also necessitates greater regulatory oversight, transparency, and responsibility to shareholders. While investing in an IPO can provide significant investment opportunity, it may also entail substantial risk given the lack of previous public trading history.
Innovation: Innovation, central to boosting productivity and driving economic growth, refers to the introduction of novel concepts, products, or processes such as new technologies, organizational methodologies, or improvements in agricultural systems. It can result from entrepreneurial insights or research and development investments, including those by governments.
Expanded Definition
Innovation can be identified as a fundamental component that contributes towards enhancing productivity, thereby driving economic growth significantly. Although most commonly linked with the development of novel gadgets or breakthrough technology in contemporary times, innovation can also reflect advancements in structuring work processes. This can be seen in historical instances such as Henry Ford’s introduction of the assembly line in manufacturing or the transition from a two-field to a three-field rotation system in agriculture, which drastically improved crop yields. The genesis of innovation often lies in the visionary perspective of entrepreneurs or is the result of significant investment in research and development initiatives. While such advancements can be driven by government-funded projects, they can also stem from private entities. Notable examples of state-backed innovation include the creation of the internet and the global positioning system. In essence, innovation embraces not just the introduction of groundbreaking products or technology, but also includes the implementation of more efficient processes to improve overall productivity and economic growth.
Inputs: Inputs are the essential elements or resources leveraged in the production of goods and services.
Expanded Definition
‘Inputs’ can be formally defined as the range of physical and intellectual materials, resources, or tools necessary in the business process of creating goods or offering services. These can vary widely, encompassing raw materials, machinery, and labor in a manufacturing scenario, or intellectual expertise, software, and time in a service-oriented context. In essence, inputs are the vital components or factors employed in any production or operation system to yield the desired output.
Insider trading: Insider trading refers to the illegal act of trading on the stock market based on confidential, material information about a company, offering an unfair advantage over other investors.
Expanded Definition
“Insider trading” is defined as the act of utilizing confidential and undisclosed information to secure an unfair advantage in financial market transactions. This typically involves individuals who are privy to exclusive information due to their position within a company. These ‘insiders’ attempt to capitalize on this non-public information by buying or selling stocks before it becomes publicly known, thus potentially manipulating the market to their own benefit. Many jurisdictions consider this practice as illegal due to its detrimental implications. It inherently undermines fair market principles by adversely disadvantaging investors who lack access to such privileged information, thereby leading to possible inequality. Simultaneously, it threatens the integrity of financial markets, as consistent incidents of insider trading can erode investors’ trust and confidence in the transparency and fairness of these markets.
Installment credit: Installment credit is a type of loan issued for a specific purpose and repaid over time with regular payments, including interest. Examples encompass home, business, or auto loans.
Expanded Definition
‘Installment credit’ refers to a financial lending mechanism where a substantial amount of money is provided upfront for a specific purpose such as making a large purchase or investment. This form of credit is characterized by a set repayment schedule, typically involving regular payments made over a defined time period. Each payment towards this loan not only reduces the initial principal amount borrowed, but also covers a portion of the accrued interest. This credit structure is commonly employed in various sectors, such as real estate (home loans), automobile finance (car loans), and commercial lending (business loans), among others. By providing a consistent repayment schedule, installment credit aids borrowers in managing their financial obligations as they can effectively plan for the predictable payments.
Institutional investors: Institutional investors are entities like insurance companies, pension funds, and sovereign wealth funds that invest significantly in financial markets.
Expanded Definition
Institutional investors refer to large organizations that make substantial investments in the financial markets. These entities, whether public or private, invest capital collected from a variety of sources into diverse financial instruments. There are several types of institutional investors, including insurance companies, which invest to provide for potential policy-related liabilities; pension funds, which manage capital for employees’ retirement; sovereign wealth funds, which are state-owned entities that manage the nation’s investments; and charitable endowments, which invest donated funds to generate income for charitable work. In essence, these institutional investors play a vital role in the financial markets, both due to the magnitude of their investments and their ability to influence market trends.
Institutions: Institutions are enduring entities that govern interactions amongst individuals or groups based on common beliefs and established rules. They perpetuate by their inherent belief system impacting the behavior of their members.
Expanded Definition
“Institutions” can be defined as enduring, self-perpetuating systems or structures, often within societies, that operate based on a collective set of beliefs, norms, or rules. These shared beliefs dictate the manner in which individuals, groups, or entities interact and engage with each other. Institutions provide an organized, structured framework that helps to regulate behavior, maintain societal order, and guide interactions among parties within a specific context. Examples of institutions might include government systems, economies, educational systems, families, or religions.
Insurance: Insurance is a paid service providing coverage against specific risks, where the insurer compensates for defined losses.
Expanded Definition
Insurance is a financial product, often characterized as a contract or policy, that mitigates the risk of unforeseen or potential losses. An individual or entity, known as the policyholder, purchases this protection from an insurance company. The policy stipulates the specific circumstances or potential risks covered, such as illness, damage to property, or loss of life. In return for this safeguard, the policyholder pays a predetermined amount to the insurance company, commonly referred to as a premium. This financial contribution is usually paid on a regular basis, such as monthly or annually. If the specified loss occurs, the insurance company is obligated to compensate the policyholder, often according to the terms and agreed coverages specified in the insurance policy itself.
Intangible asset: An intangible asset is a non-physical asset with potential value, such as patents or brand names, typically classified under the broader category of intellectual property.
Expanded Definition
An ‘Intangible Asset’ refers to a non-physical asset, distinguishable for its lack of tangible presence, yet holds the potential to generate economic value or benefits for its holder. Intangible assets encompass various forms of intellectual property such as patents, which provide exclusive rights to inventions, and brand names, defined by the recognition and reputation associated with a company’s name and logo. Given their non-physical nature, intangible assets often increase the company’s worth beyond its tangible assets and are crucial for the company’s growth, competitiveness and sustainability. Further comprehensive information on intangible assets can be found in the accompanying article.
Intellectual property: Intellectual property refers to unique creations of the mind, such as inventions, literary works, or brands, protected by legal rights like patents, copyright, and trademarks.
Expanded Definition
Intellectual property (IP) refers to the legally recognized exclusive rights to creations of the mind, encompassing a broad range of creations such as inventions, literary and artistic works, symbols, names, and images used in commerce. This body of law is designed solely to protect the products of human intelligence and creativity, and provide the creator a monopolistic right to commercially exploit the work. It can be categorized mainly into copyrights, patents, and trademarks. Copyrights grant the creator of an original work exclusive rights to its use and distribution, typically for a limited time, to encourage creative expression. Patents give an inventor a set duration of exclusive rights to a process, design, or new invention, to stimulate technological progress. Trademarks protect the names, logos, sounds, or other distinguishing features that denote products or services of a particular source from those of others, ensuring a level of quality and trust for consumers. Overall, intellectual property provides a platform where creativity and invention are incentivized and rewarded, while also ensuring economic growth, market competition and consumer protection.
Interbank funding markets: Interbank funding markets are platforms in the U.S where depository institutions lend and borrow federal funds amongst each other on an overnight basis, essentially trading bank reserves.
Expanded Definition
‘Interbank funding markets’ are financial platforms within the U.S. wherein depository institutions such as banks and credit unions exchange or lend reserves amongst each other, typically on an overnight basis. This form of borrowing and lending is crucial for these institutions’ routine operations and regulatory compliance since it allows them to meet their immediate liquidity needs and maintain requisite reserve amounts as stipulated by central banking regulations. The traded reserves, known as ‘federal funds,’ make these markets an essential vehicle for managing short-term liquidity, monetary policy implementation, and systemic risk assessment within the American banking sector.
Interest: Interest is a fee charged by lenders to borrowers for the use of their money, or a return paid to investors for their deposited funds.
Expanded Definition
‘Interest’ is essentially a fee charged by a lender to a borrower for the privilege of using their funds or assets. Banks, being financial intermediaries, use the money deposited by account holders to provide loans to borrowers. As compensation for permitting the bank to allocate their funds to others, account holders earn interest on their deposits. Conversely, borrowers pay interest on their loans to offset the opportunity cost for the lender and compensate for the risk involved in lending. This not only motivates the lending institution by providing earnings but also instigates a cautionary approach to lending, as the charge of interest could heighten in accordance with a potential increase in associated risk. In essence, interest can be seen as a fundamental tool in facilitating the circulation and growth of wealth, acting as the price one pays for the advantage of utilizing another’s financial resources.
Interest (elementary): Interest is the fee charged by banks for lending funds or the compensation paid to customers for maintaining a deposit account.
Expanded Definition
Interest is a financial term referring to both the money rewarded to depositors by banking or financial institutions for leaving their funds in the care of those institutions, and the charges imposed on borrowers for the privilege of using funds lent by such institutions. When individual or corporate entities deposit money in a bank, the bank pays them interest as a form of gratitude for trusting them with their funds. This essentially works as a rental fee paid by the bank for the usage of the client’s funds. On the other side, when clients seek a loan from the bank, they are obliged to pay back the loan’s principal amount as well as an additional fee known as interest. This arrangement compensates the bank for the risks and income opportunity associated with lending the money and can be seen as a cost that borrowers pay for the benefit of immediate cash access.
Interest on reserve balances (IORB): Interest on reserve balances (IORB) refers to the interest that the Federal Reserve pays to banks on their reserved funds, used primarily as a major tool in the Fed’s monetary policy implementation.
Expanded Definition
‘Interest on Reserve Balances (IORB)’ refers to the process by which the Federal Reserve, the central bank of the United States, incentivizes financial institutions to manage their cash holdings more effectively. Specifically, IORB is the interest paid by the Federal Reserve to commercial banks and other depository institutions on the money they hold, above their required minimums, in reserve accounts at Federal Reserve Banks. This mechanism serves as a significant instrument in the Fed’s monetary policy arsenal as it affects the availability and cost of credit, thereby indirectly influencing economic activity such as inflation and employment.
Interest on reserve balances (IORB) rate: The Interest on Reserve Balances (IORB) rate is the interest paid by the Federal Reserve to banks for funds held in their reserve balance accounts, serving as a minimum rate for banks’ overnight investments. It’s a tool used by the Fed to influence the federal funds rate towards the target set by the FOMC.
Expanded Definition
The Interest on Reserve Balances (IORB) rate can be defined as a benchmark interest rate governed by the U.S. Federal Reserve (Fed). It represents the interest that the Fed pays on the cash reserves that commercial banks and other depository institutions maintain in their accounts at Federal Reserve Banks. This rate serves as a determinant for banks when deciding whether or not to lend funds overnight in the market, as they are unlikely to do so if the market rate is below the IORB rate. Therefore, the IORB rate plays a critical operational role for the Fed in maneuvering the federal funds rate – the rate at which banks lend reserve balances to other banks on an overnight basis – within the desired range set by the Federal Open Market Committee (FOMC), the Fed’s primary monetary policymaking body. Through the strategic manipulation of the IORB rate, the Fed thus exerts control over money supply and, in turn, influences broader economic dynamics.
Interest rate: Interest rate refers to the proportion of a loan that the borrower is charged to borrow money, and concurrently, the percentage return earned on savings in a deposit account.
Expanded Definition
An ‘Interest Rate’ refers to a percentage, determined by a lender or financial institution, that is added to the principal amount of money borrowed through a loan or offered on deposits in a savings account. For loans or credit, it signifies the cost of borrowing money, where the borrower pays the interest as a ‘fee’ over a distinct period. Conversely, in a savings account, it is the return or ‘reward’ paid by the bank to the account holder for maintaining a certain amount of money in the account. In both scenarios, the interest rate is typically represented on an annual basis, often referred to as the Annual Percentage Rate (APR).
Interest rate effect: The interest rate effect is the influence on consumer and business spending due to changes in purchasing power, caused by variations in the overall price level. Essentially, it observes how spending activities react to changes in the value of money.
Expanded Definition
The ‘Interest Rate Effect’ is a sophisticated economic concept that describes how fluctuations in the overall price level impact consumer and business spending by affecting the purchasing power of their monetary assets. In essence, when aggregate prices change, the real value or buying power of money held by consumers and firms can also modify. Subsequently, this adjustment influences the levels of consumption and investment, as changes in purchasing power can make borrowing money more or less expensive, hence affecting the interest rates. Therefore, the ‘Interest Rate Effect’ facilitates a nuanced understanding of the intricate relationship between price levels, interest rates, and overall economic activity.
Interest rates: Interest rates are the cost incurred for borrowing money and the return on lending it, determined by factors such as the credit risk of the borrower, time value of money, inflation, and central bank policies.
Expanded Definition
‘Interest rates’ denote the percentage of an amount of money, typically the principal loan amount, that is paid as a charge for the privilege of borrowing or the benefit of lending money. This rate serves as the compensation for the financial risk and opportunity cost associated with loaning funds or extending credit. Interest rates can fluctuate, reflecting the time value of money, which is the concept that money available today holds more value than the same amount of money in the future due to its potential earning capacity. Another critical factor affecting the level of interest rates is the perceived credit risk associated with the borrower. This risk represents the likelihood of the borrower defaulting on the loan repayment and consequently, riskier borrowers can be charged higher interest rates. Interest rates also adjust according to inflation levels which erode the buying power of money over time. Thus, higher inflation rates usually correspond to higher interest rates. In terms of setting these rates, the country’s central bank largely controls short-term interest rates, which often influence the rates available to consumers on loans and savings. These rates can rise or fall in response to central bank policies aimed at managing national economic growth and inflation. Conversely, long-term interest rates, such as those on bonds, generally reflect broader macroeconomic elements like the equilibrium between national savings rates and credit demand. When savings exceed the demand for credit, long-term interest rates can decrease, and vice versa. In sum, interest rates are a complex financial tool representing the cost of borrowing funds and the benefit obtained from lending, thoroughly tethered to diverse economic facets and monetary policy.
Intermediary: An intermediary is a person or entity that acts as a mediator or link between two parties to enable a transaction or communication.
Expanded Definition
An ‘intermediary’ is defined as a professional entity or individual that serves as a connecting figure between two or more parties, with the objective of aiding in negotiations or transactions. The intermediary’s role is primarily to simplify communication, create mutual understanding, and liaise between parties, often in financial or business settings, to ensure effective exchange of goods, services, or information. This mediator plays a crucial part in fostering successful relationships and agreements by facilitating clear interaction between parties who may not directly engage with each other.
Intermediate good: An intermediate good is a manufactured item utilized in the production process of another commodity, ultimately integrating into the final product or service.
Expanded Definition
An ‘Intermediate Good’ refers to a manufactured or processed item utilized in the production process of another final product or service. This good does not reach the consumer directly, but is rather integrated into, or forms a component of, the final product or service. This makes it an integral part of the production chain, transforming its value through various stages until it reaches its end-state in the final consumer goods or services.
Intermediate good (elementary): Intermediate goods are materials or components used in the production process that are incorporated into the final product, like thread in a shirt or flour in cookies.
Expanded Definition
An “Intermediate Good” refers to a commodity utilized in the production process that will ultimately be incorporated into a final product or service. Essentially, it is a product that undergoes further processing or refinement before it reaches the end consumer. Examples include the thread used in the creation of a dress shirt, which becomes an integral component of the final product or the flour used in the baking process, transforming into cookies. Intermediate goods are vital links in the supply chain, connecting raw materials and final consumer goods, and their costs are factored into the overall price of the finished goods.
Internal Revenue Service (IRS): The IRS is the U.S. government entity responsible for enforcing tax laws and administering the collection of federal income taxes.
Expanded Definition
The Internal Revenue Service (IRS) is a U.S. government agency that operates under the authority of the Department of the Treasury. This agency is primarily responsible for administering and enforcing the internal revenue laws, making its chief function is the collection of individual and corporate income taxes in the United States. Beyond this, the IRS also handles estate and gift taxes, excise taxes, and other forms of federal taxation. In addition, the agency is tasked with administering tax credits and reductions, conducting audits to ensure compliance, and providing guidance and information to taxpayers.
Internal rate of return: The internal rate of return (IRR) is a financial metric used for assessing the viability of an investment or project, with a higher IRR indicating greater profitability. It is essentially the discount rate at which a project’s net present value equals zero.
Expanded Definition
The Internal Rate of Return (IRR) is a financial metric commonly employed by businesses for investment analysis. It is a theoretical yield or loss rate derived from an investment’s projected cash flow stream. Essentially, it serves as a tool to estimate the potential profitability of an investment, presenting the percentage rate at which the net present value (NPV) of costs (negative cash flows) of the investment equals the NPV of the benefits (positive cash flows). A higher IRR indicates a more attractive investment proposition. Before an investment or a project is undertaken, a minimum acceptable rate is usually set, often referred to as the hurdle rate or required rate of return. Thus, if the IRR exceeds this pre-set rate, the project is deemed worthwhile. However, one must consider that the IRR doesn’t account for changing risk profiles over the course of the project. The concept is similar to the ‘rate of return,’ which measures the gain or loss made on an investment relative to the amount of money invested. However, the IRR provides a more comprehensive and detailed analysis, taking into consideration the time-value of money and offering a more precise measure of an investment’s potential yield.
Internalizing the externality: ‘Internalizing the externality’ refers to the process where economic agents take into account the indirect costs and benefits of their actions, which were previously borne by third parties, into their own decisions.
Expanded Definition
‘Internalizing the externality’ refers to the strategic modification of economic incentives with the aim of ensuring that both public and private entities, such as individuals and corporations, account for the indirect impact their actions have on others in their decision-making processes. This typically involves the costs or benefits that have been unintentionally imposed on or transferred to third parties, which are not directly involved in a transaction. The purpose of this practice is to align personal or corporate interests with societal interest, encouraging more socially aware and responsible behavior.
International Monetary Fund (IMF): The International Monetary Fund (IMF), established post-Bretton Woods agreement in 1944, serves as a global financial institution that provides consultative and monetary aid to nations facing balance-of-payments issues. Known for policies endorsing deregulation, privatization, and global trade—collectively referred to as the “Washington consensus”—its austerity-focused strategies have sparked controversy, viewed as favoring wealthy creditors.
Expanded Definition
The International Monetary Fund (IMF) is a globally recognized financial institution that was initially established as part of the Bretton Woods agreement in 1944. The origination of the IMF was built around the primary objective of providing financial assistance to nations entangled in balance-of-payments issues, acting as an imperative pillar of global monetary cooperation. Traditionally, the IMF steps in whenever nations encounter formidable economic challenges or financial distress. By offering expert policy advice, financial resources, and technical assistance, the IMF enables these economies to manage and mitigate potential crises. However, the IMF’s involvement has occasionally earned critique, primarily stemming from the viewpoint that its stipulated economic reform measures may mandate rigorous austerity procedures. These measures have occasionally disproportionally impacted the working class, while seemingly favoring prosperous creditors. Key aspects of these reform measures often can include deregulation, privatization, and the promotion of a more liberalized international trade regime. This general direction of policy prescription has earned the characterization of the ‘Washington Consensus’, a term coined in reference to the location of the IMF’s headquarters in Washington D.C. Despite its various criticisms, the IMF remains a critically important establishment within the global economic landscape, helping to maintain monetary stability and economic growth worldwide.
International trade: International trade is the exchange of goods and services across national borders, fostering global economic connectivity and growth.
Expanded Definition
International trade refers to the exchange of goods, services, and capital across international borders or territories. It involves the import and export activities conducted by businesses, corporations, and governments from different countries. This commercial interaction not only promotes global economic growth, but also allows countries to gain access to products and resources not available within their local markets. Various international trade laws, tariffs, and treaties regulate these transactions, assisting in maintaining a balance in global economic relations.
Internet: The Internet is a global network system that interlinks electronic devices, facilitating changes in work, communication, and commerce. Its impact, while significant, is debated among economists when compared to prior technological breakthroughs like electrification and the internal combustion engine.
Expanded Definition
The internet is a transformative system that links various electronic devices like personal computers, thereby revolutionizing global economies. It has significantly remodeled how people engage in professional activities, interact, and make purchases. It should be noted, though, that its advent has been marked by a reduction in productivity growth in developed countries. This prompts a discussion among economists regarding whether this phenomena is attributable to problems in capturing accurate measurements or whether the internet, despite its apparent influence, does not encompass the same level of transformational power as previously seen with other technological advances such as electrification and the internal combustion engine.
Inventory: Inventory refers to the unsold products that a business has produced or stocked.
Expanded Definition
Inventory refers to the detailed catalog of tangible assets held by a business encompassing items that are in the process of production, finished goods, and merchandise procured from suppliers that are yet to be sold. Inventory serves as a critical component of a business’s operational and financial management, acting as a dynamic asset that changes with sales activities, demand fluctuation, and production cycles. It’s crucial for businesses to manage inventory efficiently to maximize profitability, improve cash flow, and minimize waste or loss.
Investment: Investment is the procurement of tangible assets like structures or equipment, utilized in generating products or services.
Expanded Definition
‘Investment’ is a term commonly used in finance and economics, which refers to the acquisition of assets or capital goods, such as buildings, machinery, tools, and other forms of equipment. The primary purpose of this acquisition is to utilize them in the creation of goods and services. These purchased items can be leveraged to generate income, production, or both. Therefore, an investment embodies an avenue for increasing wealth, involving an initial outlay with the expectation of achieving a beneficial return in the future. It’s important to note that while the investment typically carries an element of risk, strategic investment decisions can yield considerable long-term gains.
Investment (financial): An investment is an asset bought with the expectation that it will appreciate in value and deliver financial benefits.
Expanded Definition
Investment, in financial terms, refers to the allocation of financial resources into an asset or venture, with the anticipation that it will increase in worth over time, thus leading to potential financial profit. This involves committing capital to the purchased asset, such as stocks, bonds, real estate, or a business venture, with an expectation of favorable future returns. This return may come in the form of interest, dividends, capital gains, or a rise in the value of the asset. However, it’s important to note that investments also carry varying degrees of risk, which can affect the anticipated outcomes.
Investment banker: An investment banker is a financial professional who guides businesses in capital formation strategies, including determining the right share price and quantity for successful fundraising.
Expanded Definition
An investment banker is a financial professional who collaborates with businesses to strategize and execute financial plans aimed at facilitating the company’s goals. This liaison role requires an extensive understanding of both financial markets and business operations. The investment banker assists businesses in capital raising activities by determining the appropriate amount of funds required and advising on key parameters, such as the pricing and quantity of shares to be issued and sold in the market. This process involves skillful valuation of the business, market trend analysis, and financial structuring to align with the company’s objectives, appropriate risk management, and optimal investor return.
Investment banking company: An investment banking company is a firm that initiates, underwrites, and promotes new securities in the financial market.
Expanded Definition
An investment banking company is a specialized financial institution that primarily offers services related to raising capital for companies, governments, or other entities. They facilitate initial public offerings (IPOs), sell securities to the public, and act on the behalf of their clients in the process, known as underwriting. In addition, they play a critical role in the marketing of these newly issued securities, helping to maximize their value in the credit markets. Moreover, these firms often provide strategic advisory services for mergers, acquisitions, and other types of financial transactions. Their clientele typically consists of corporations, pension funds, other financial institutions, governments, and high-net-worth individuals.
Investment in human capital: Investment in human capital refers to the commitment towards enhancing one’s skills and know-how through education, training, or experience. It represents intentional actions taken to boost personal capabilities.
Expanded Definition
‘Investment in human capital’ is a term that refers to the deliberate application of resources towards enhancing an individual’s knowledge, skills, abilities, and other attributes. This is primarily achieved through directed avenues such as formal education, practical experience, and specialised training. By investing in these areas, individuals become more valuable to both themselves and the broader socio-economic context, thereby propelling economic development, personal career growth, and societal advancement. This investment, hence, is seen as crucial for maintaining a high-quality, competitive workforce adaptable to rapidly changing global environments.
Investment management: Investment management refers to the professional activity of handling financial assets and other investments on behalf of clients, typically for a fee, to meet specified investment goals. It encompasses strategies like active and passive management, and can include managing diverse funds such as hedge, pension, or private equity funds.
Expanded Definition
Investment management is a specialized sector within the finance industry that primarily involves the professional administration and handling of various types of investments. This service is often carried out by investment managers for third-party investors, such as individual clients, corporations, and financial institutions, with the main objective to help grow their capital over time. The clientele pool may encompass pension funds, insurance companies, charities, private equity entities, and even hedge funds. The investment managers meticulously strategize, execute, and oversee a diverse portfolio of stocks, bonds, real estate, and other investment types aligned with the clients’ financial goals and risk tolerance. Their credentials typically include in-depth market knowledge, research skills, and the capability to make critical investment decisions. Investment management services are generally not free, with most providers charging an annual fee based on a certain percentage of the total asset value they manage. Additionally, some investment managers may also levy a performance fee which is contingent on the portfolio’s performance against a specific benchmark. The industry adopts two primary approaches to manage investments – Active Management and Passive Management. Active Management is a hands-on approach where the manager regularly buys and sells investments to achieve returns surpassing the market index. Passive Management, on the other hand, is typically a ‘buy and hold’ strategy mirroring a market index aiming to match, not outperform, the market returns. In sum, Investment management plays a pivotal role in strategizing and optimizing investment portfolios that can cater to varying financial objectives over different time horizons.
Investment-grade securities: Investment-grade securities are bonds rated Baa (or BBB) and above, indicating a lower risk of default. They’re seen as safer options for investors due to their reliable creditworthiness.
Expanded Definition
‘Investment-grade securities’ refer to bonds or other types of fixed-income securities that have been assessed and rated by recognized credit rating agencies as having a relatively low risk of default. In essence, these securities are considered to be a stable and reliable investment choice. Ratings are typically given based upon the issuer’s creditworthiness, with the commonly acceptable investment-grade ratings starting at Baa (Moodys) or BBB (S&P, Fitch) and above. Investors tend to prefer these securities because they offer a balance between return on investment and risk of non-payment. It’s important to note, however, that the term “low risk” denotes a lower probability, not the complete absence, of default.
Investors: Investors are individuals or entities that commit capital to businesses with an expectation of generating a financial return.
Expanded Definition
‘Investors’ refer to individuals or institutional entities that allocate their financial resources or other forms of assets towards businesses or projects with the expectation of achieving a profitable return on investment in the future. These returns could potentially arise through income generation, capital appreciation, or other financial benefits. Investors often undertake a thorough analysis to assess the risk-reward scenario prior to committing their resources.
Invisible hand: The ‘Invisible hand’ is a concept coined by Adam Smith, referring to the unseen market forces that guide individuals to act in their own self-interest, indirectly fostering societal benefit.
Expanded Definition
The ‘Invisible Hand’ is a philosophical concept coined by renowned economist Adam Smith, utilized to illustrate the mechanisms by which individual actions, driven by personal self-interest and balanced by competition, unintentionally contribute to the broader economic health and societal benefit. Smith’s analogy suggests that an ‘invisible hand’ guides individuals to maximize personal wealth, which subsequently leads to a more resource-efficient economic structure, optimal distribution of goods, and an overall societal improvement. This metaphor has been heavily influential in modern thinking, underpinning free-market capitalist theories, wherein it is believed that self-interested behaviors, once tempered by market forces, can inadvertently result in a greater communal good.
Invisible trade: Invisible trade refers to the exchange of non-tangible commodities, specifically services like banking and insurance.
Expanded Definition
‘Invisible trade’ refers to international business transactions that do not include the transfer of tangible goods. These transactions primarily encompass a broad range of services such as financial services, including banking and insurance, as well as other forms of offerings like consulting, tourism, and intellectual property. Despite their intangible nature, these transactions substantially contribute to a nation’s balance of trade – a key indicator of its economic health.
Involuntary unemployment: Involuntary unemployment is a Keynesian economic concept wherein individuals willing to work at current wages are unable to secure employment due to factors like subpar aggregate demand or labor market rigidities.
Expanded Definition
“Involuntary unemployment” refers to the state or condition in which individuals who are actively seeking employment at the current wage rate are unable to secure work. This disappointing scenario may arise due to a variety of factors. One key catalyst can be a deficiency in overall economic demand, known as aggregate demand, which represents the total demand for goods and services within an economy. Low aggregate demand could result in organizations cutting back on production and staff hiring. Another possible trigger for involuntary unemployment is the existence of inflexibility within the labor market, which can create conditions where employees cannot easily shift between jobs, or employers cannot readily adjust wages or employment terms according to market conditions. For example, contractual stipulations or union demands can sometimes impose such rigidities. The concept of involuntary unemployment is a cornerstone idea in Keynesian economics, a theory asserting the government’s crucial role in stabilizing output and preventing recessions through interventionist policies. For a more comprehensive grasp on this concept, refer to systematic and explanatory resources for deeper understanding.
Issuer: An issuer is a financial institution that generates and distributes credit cards.
Expanded Definition
An ‘Issuer’ is a legal entity, predominantly a financial institution such as a bank or credit union, which provides or facilitates the provision of credit cards to individuals or businesses. This entity holds the responsibility for authorizing transactions, billing the cardholder for repayments, and managing revolving credit lines. Issuers are key players in the financial ecosystem, contributing to the credit card industry by enabling access to flexible payments and credit systems.

J

J-curve: The J-curve is an economic theory which proposes that a country’s trade deficit will initially worsen after its currency depreciates, due to costlier imports and cheaper exports, before improving as foreign demand for cheaper exports rises and domestic demand for expensive imports falls.
Expanded Definition
The term ‘J-curve’ represents a common economic phenomenon that transpires after a country experiences a significant devaluation or depreciation in its currency. It provides an illustrative description of how the country’s balance of payments, which is the record of all economic transactions between residents of a country and the rest of the world, typically evolves post such currency adjustments. Initially, after a depreciation of the national currency, imports become costlier, while exports are more competitively priced in foreign markets. As a result, the balance of payments tends to deteriorate, leading to a widening deficit. This situation signifies the downward portion of the ‘J.’ However, over time, the cheaper exports start attracting foreign buyers, resulting in an increase in export demand, while the expensive imports make domestic consumers shift toward locally produced goods. This adjustment gradually leads to an improvement in the balance of payments, forming the upswing in the ‘J.’ Hence, the overall pattern of change in country’s balance of payments following a significant currency depreciation or devaluation takes the shape of a ‘J,’ giving rise to the term ‘J-curve.’
Job vacancies: ‘Job vacancies’ refer to the unfilled positions in the labor market, their number tends to rise during economic expansion, potentially driving wages up, and decrease during economic contraction.
Expanded Definition
‘Job vacancies’ refer to the measurement of available but yet unfilled positions available within the workforce, serving as an indicator of the labour market’s overall health. When the economy is on an upward or expansionary phase, the number of job vacancies often rises, suggesting ample employment opportunities. This, in return, can exert upward pressure on wages as employers compete to attract and retain employees. On the other hand, during a downward or contractionary phase, job vacancies typically decrease, reflecting reduced hiring activities. The ‘quit rate,’ another related metric, provides further insights into the labour market by quantifying the rate at which employees willingly leave their positions, frequently indicating their confidence in finding new jobs.
Joint supply: Joint supply refers to a production process where creating one good simultaneously results in the creation of other goods, as seen in crude oil distillation which generates products like gasoline and asphalt.
Expanded Definition
‘Joint Supply’ pertains to an economic situation wherein the manufacturing of a particular product inherently results in the production of another, related product or by-product. This often happens when the extraction or processing of certain raw materials generates multiple commodities simultaneously. A classic example is the distillation of crude oil, a process that produces not only gasoline but also a variety of other products such as kerosene, asphalt, and more. In such scenarios, the products produced in tandem are considered jointly supplied. They share input costs and the variations in the production volume of one can directly influence the other(s).
Jumbo loan: A ‘Jumbo loan’ is a large mortgage that surpasses the limit set by Fannie Mae and Freddie Mac, thus it’s also known as a ‘nonconforming loan’.
Expanded Definition
A ‘Jumbo Loan’ refers to a particular type of mortgage loan that exceeds the borrowing limits set by government-sponsored enterprises, namely Fannie Mae and Freddie Mac. These entities typically buy most mortgage loans from lenders, adding liquidity to the market. However, they can only purchase mortgages up to a specific limit. Therefore, any loan that surpasses this threshold is known as a ‘Jumbo Loan’. Because they are beyond the purchasing capacity of Fannie Mae and Freddie Mac, Jumbo Loans are often called ‘nonconforming loans’. Despite this label, many lenders still issue these loans, but they may have stricter requirements due to the increased risk associated with lending larger sums of money.
Junk bonds: Junk bonds are high-risk bonds with a higher likelihood of default, compensated by offering high yields. They are characterized by low credit ratings.
Expanded Definition
“Junk bonds” refer to fixed-income instruments that carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Commonly considered to be a high-risk investment, these bonds are issued by entities that have a higher likelihood of defaulting on their interest or principal payments. Default refers to the scenario where the issuer might fail to fulfill their financial obligations to the bondholders. As a form of mitigation, these bonds offer an elevated yield compared to more secure bond instruments. This higher yield serves as a form of compensation to the investor for the increased risk they undertake. Bond ratings provided by established agencies can guide investors regarding the risk level associated with particular bonds.
Just-in-time manufacturing: Just-in-time manufacturing is an operational strategy focused on reducing costs and waste by producing goods only upon customer order and minimizing inventory levels. It poses some risk due to potential supply chain disruptions.
Expanded Definition
‘Just-in-time (JIT) manufacturing’ is a production strategy implemented by businesses to increase efficiency and decrease waste by producing items strictly on demand rather than in surplus. The underlying approach is to curtail unnecessary costs and minimize inventory waste by aligning production schedules to market demand. In this way, inventory levels are kept at a minimum, or ‘just-in-time,’ essentially as needed for fulfillment of customer orders. While this model increases operational efficiency, it may potentially create vulnerability to disruptions within the supply chain. For instance, unexpected hindrances such as natural calamities, global pandemics, or other unforeseen circumstances could potentially delay production, thereby affecting the company’s ability to meet customer demand on time. The JIT manufacturing strategy aligns with the principles of lean manufacturing – a system focused on reducing wastes without sacrificing productivity.

K

Keynesian economics: Keynesian economics is a theory positing that government intervention, through fiscal policy including government spending and deficits, is necessary to mitigate the adverse effects of recessions and depressions and stimulate economic demand. It challenges classical economics, which asserts markets self-correct without intervention.
Expanded Definition
Keynesian economics is a school of thought within the field of economics, founded by British economist John Maynard Keynes during the 1930s. Contrary to the underlying tenets of classical economics in which governments were primarily non-interventionist, considering that economic cycles would self-correct over time, Keynes introduced a significantly different perspective, particularly influenced by the realities of the Great Depression. In his understanding, a recession could negatively impact the optimism and confidence (“animal spirits”) of the business community and inhibit consumer spending, therefore, prolonging economic downturns. In response to this, Keynes postulated that governments could, and should, play an active role in responding to economic fluctuations through fiscal policy. This would involve actions such as government borrowing and investing in infrastructure projects to stimulate demand, even if it means compromising a balanced budget. Post-1945, Keynesian economics gained substantial traction globally, leading many governments to incorporate its principles into their economic management practices, adopting a more hands-on role in navigating their economies through variations in the economic cycle.
Keynesian multiplier effect: The Keynesian multiplier effect is the economic principle asserting that a change in fiscal policy inputs such as consumption, investment, or government spending can generate a more significant change in national income due to subsequent chain reactions. Essentially, it amplifies the initial fiscal impact.
Expanded Definition
The ‘Keynesian Multiplier Effect’ is an economic principle stemming from the work of renowned economist John Maynard Keynes. It highlights how a change – either an increase or decrease – in vital parameters of aggregate demand like consumption, investment, or government expenditure, can trigger a more substantial shift in the national income than the original change. This more pronounced result is brought about through a chain of reactions that generate enhanced or reduced economic activity. As an example, an initial increase in government spending leads to enhanced business activity. This creates income for businesses and their workers, who in turn spend more, leading to further economic activity, thereby increasing national income by multiple times the original government spending. Simply put, the Keynesian Multiplier Effect magnifies the impact on national income of any change in aggregate demand, creating a ripple effect throughout the economy, potentially leading to significant economic growth or contraction, depending on the initial direction of change.
Knightian uncertainty: Knightian uncertainty refers to situations where risk cannot be quantified due to insufficient information to evaluate the probability of different outcomes, a concept established by economist Frank Knight. It signifies environments where the probability distribution is only determinable in highly specific conditions.
Expanded Definition
‘Knightian uncertainty,’ a term coined by the American economist Frank Knight — a notable founder of the Chicago School of Economics — refers to a complex form of ambiguity that economic participants encounter. This occurs when they do not possess enough data to accurately calculate the potential risks involved in their actions, making it difficult to evaluate the likelihood of possible outcomes. This element of uncertainty is distinguishable from ‘measurable risk,’ which implies that the distribution of possible outcomes and probabilities can be assessed predictably, such as betting on a specific number in a game of roulette. Knightian uncertainty is rather observed in situations where events are uncertain to such a degree that no conceivable probability distribution can be created. The lack of comprehensive information leads to a scenario where decisions are made amidst a prevalent ambiguity about outcomes, extending beyond traditional risk parameters. This concept provides significant insights for understanding decision making in environments of profound uncertainty and complexity.

L

LIBOR index: The ‘LIBOR index’ refers to a standard used to calculate the fluctuating interest rates for specific adjustable-rate mortgages (ARMs), derived from the average lending or borrowing rates between global banks in the London interbank market.
Expanded Definition
The ‘LIBOR Index’, or the London Interbank Offered Rate, serves as a critical financial benchmark. It represents the average interest rate determined by major international banks that are willing to lend or borrow funds amongst themselves in the London interbank market. This rate is routinely employed as a reference to calibrate interest rates for various financial capabilities, including certain Adjustable Rate Mortgage (ARM) plans. The LIBOR Index assists in the management of interest rate fluctuations, thus being integral to the efficient operation of global financial markets.
Labor: Labor refers to the human input, in terms of both quantity and quality, required for the production of goods and services, synonymous with the term human resources.
Expanded Definition
‘Labor’ refers to the collective human endeavor, in terms of both scope (quantity) and proficiency (quality), aimed towards the creation of products and services. This vital element of the economy encompasses a variety of forms, like manual work, intellectual contributions, and management efforts, among others. The term is often used interchangeably with ‘human resources’, underlining the fundamental role human talents and skills play in diverse fields and industry sectors. It’s a key driving force of productivity, economic growth, and societal development.
Labor force: The labor force refers to all individuals, both actively working and those seeking employment, in a given economy.
Expanded Definition
The term “labor force” denotes the complete sum of individuals who are either gainfully employed or actively seeking employment in a given economy. This incorporates individuals who are currently occupationally engaged and contributing to the economy (employed) as well as those seeking paid work (unemployed). It signifies the human resources available for production and services and is a critical measure in determining an economy’s health and productive potential. This definition does not include individuals who are neither employed, nor looking for work, such as retirees, students, or homemakers.
Labor force participation rate: The labor force participation rate is the percentage of individuals who are either working or actively seeking employment.
Expanded Definition
The labor force participation rate refers to the proportion of the working-age population, in terms of both the employed and those actively seeking employment, usually represented as a percentage. This metric offers economic insights by illustrating the total count of individuals engaging in or searching for employment, thereby showing the capacity and readiness of the population to contribute to the economy actively. This rate is an indicator of the labor market’s overall health and can be instrumental in policy formulation and economic analysis.
Labor market: The labor market, also known as the job market, is the platform where workers sell their skills and businesses buy these skills for their operations.
Expanded Definition
The “labor market,” commonly referred to as the “job market,” is a complex arena wherein the dynamics of supply and demand intersect. Here, workers provide their services, often referred to as ‘selling labor’, and employers or businesses seek these services, often known as ‘buying labor.’ This market is driven by various factors such as skill levels, experience, education, and geographical location of the workforce. Ultimately, the labor market regulates employment rates, wage levels, and also impacts broader economic and social trends.
Laffer curve: The Laffer Curve, attributed to economist Arthur Laffer, illustrates that while tax revenues rise initially with increasing tax rates, they eventually decline due to the disincentivizing effect of high taxes on work and enterprise, though the exact ‘bend’ in the curve is arguable.
Expanded Definition
The ‘Laffer Curve’ is an economic theory proposed by American economist Arthur Laffer. The graph depicted by this theory aims to illustrate the relationship between tax rates and the amount of tax revenue collected by governments. It presents the concept that, initially, as tax rates escalate from zero, the total revenue generated from taxes also rises. However, when tax rates reach a certain threshold, the curve suggests that further increase in tax rates can actually lead to a decrease in total tax revenues. This phenomenon is explained by the idea that exceedingly high tax rates might discourage individuals and businesses from earning more or making profitable investments, thus reducing the taxable income base. While this theory is widely cited in economic and political debates, particularly among proponents of lower tax rates, it poses some challenges. One prominent difficulty is determining the exact point on the curve where higher tax rates start to diminish tax revenues – this “turning point” remains a contentious issue among economists. Furthermore, this theory suggests there may be differing optimal tax rates for different economies, hence implying it could be significantly higher than the current tax rates in many countries.
Lagged effect: A lagged effect refers to the delay between implementation of an economic policy, like interest rate adjustment, and its full impact on the economy, often due to contract renegotiation timelines. It suggests potential for economic circumstances to shift before policy effects are fully realized.
Expanded Definition
“Lagged effect” refers to the delayed impact of certain economic policy modifications on the overall economy. This temporal delay is often due to the structural and procedural intricacies involved in executing the policy changes and their subsequent penetration into the system. An illustrative example can be changes in interest rates. These revisions might not immediately affect all market participants since they could be effective only when loans are restructured or new contracts are drawn. This might take up to 18 months or even more to fully permeate the economy. A significant risk associated with this lagged effect is potential shifts in the economic condition that may occur during the latency period. Consequently, by the time the policy’s impact becomes perceptible, the economic landscape might have evolved, perhaps necessitating different policy responses.
Lagging indicators: Lagging indicators are economic metrics that reflect past performance or trends, such as GDP or unemployment rates, which are often determined and adjusted post-quarter. They’re useful for analyzing historical economic conditions rather than predicting future trends.
Expanded Definition
‘Lagging indicators’ refer to specific economic indicators that are observable only after a significant economic event or trend has already been established. These indicators serve as statistical data confirming past economic performance rather than predicting future economic activity. For instance, Gross Domestic Product (GDP) figures, which encapsulate the overall economic output of a nation, are typically released well after the relevant quarter has concluded and may be subject to later revisions. Similarly, unemployment rates, another crucial lagging indicator, usually decrease gradually following an economy’s recovery phase. This lag in response reflects their nature of chronicling historical performance, contrasting to leading indicators that anticipate future economic conditions, or real-time indicators that capture the current economic landscape.
Lags: “Lags” refer to the time delay between identifying an economic issue, implementing a remedy, and seeing its effect on the economy.
Expanded Definition
“Lags” in an economic context refers to the period of time that elapses from the identification of an economic issue, through the stages of putting in place a corrective policy and its implementation, and finally to the point at which the impacts of these measures become evident in the economic indicators. This term recognizes that there is often a significant time delay through this process, with impacts not instantly apparent due to the complex dynamics of economic systems. The concept highlights the challenges in timely economic decision-making and the need for predictive capacity in managing economic trends.
Laissez-faire: ‘Laissez-faire’ is a French term signifying minimal governmental intervention in economic affairs, fostering unrestricted trade, deeply rooted in classical economic theory.
Expanded Definition
‘Laissez-faire’ is a term derived from the French language, literally meaning ‘let do’. In economic contexts, it represents a policy or ideology suggesting minimum intervention by governments in the procedures of a country’s economy, instead promoting the freedom of private enterprise. Classical economics, which was prevalent in the late 18th to early 19th century, incorporated this laissez-faire principle, advocating for unrestricted competition in free markets. Essentially, advocates of laissez-faire economics propose that natural business cycles, balanced by supply and demand, are more capable of fostering economic growth and welfare than government regulations. This approach emphasizes noninterference and encourages free trade, believing that such an environment stimulates innovation and productivity.
Land: ‘Land’ refers to all naturally occurring resources on earth, both tangible (like forests and mineral deposits) and intangible (like air), utilized for the generation of goods and services.
Expanded Definition
‘Land’ within the context of economic and resource management signifies naturally occurring resources that exist on and within the Earth, that can be utilized for the production of goods and services. These resources encompass not only the solid surface terrain such as arable fields or undeveloped lands but also include water bodies like oceans, atmospheric elements such as air, mineral resources buried within the earth’s crust, and undisturbed or primary forests. These varied components contribute to the sustainability of life and economic activity and are inherently finite, highlighting the significances of managing their use efficiently and responsibly.
Law of demand: The Law of Demand states that there is an inverse relationship between the price of a good or service and the quantity consumers are willing to purchase; higher prices deter demand and lower prices increase it.
Expanded Definition
The “Law of Demand” is an economic principle that describes a fundamental relationship between a product’s price and its consumer demand. In precise terms, it posits that as the price of a specific good or service increases, consumers tend to purchase fewer of that item. Conversely, if the price decreases, consumers are likely to purchase more of that item. This inverse relationship between price and demand is the essence of the Law of Demand. It is essential to note that this law assumes other factors affecting demand remain constant, such as income levels and tastes, encapsulated in the concept of ‘ceteris paribus’ or ‘all other things being equal’. It forms the foundation of the demand curve, a key aspect of economic theory and practice.
Law of supply: The law of supply states that the quantity of a product provided by producers increases with a rise in its price and decreases when the price drops.
Expanded Definition
The ‘Law of Supply’ is a fundamental principle in economics that establishes a direct relationship between the price of a good or service and the quantity of it that producers are willing to supply. It postulates that if the price of a certain good or service increases, the producers are incentivized to supply more of that product due to the opportunity of higher revenues. Conversely, when the price decreases, the quantity supplied by the providers will decrease as well, since the potential profits are lower. This principle assumes that all other factors remain constant, and it helps us to understand and predict the behavior of producers and market dynamics.
Lawsuit: A lawsuit is a legal dispute between two parties, resolved in a court of law, initiated by a party who believes they’ve been harmed.
Expanded Definition
A lawsuit is a formal legal action taken by an individual, group, or business entity against another party. It is carried out in a court of law, where the plaintiff, the party that initiates the lawsuit, alleges that the defendant, the party being sued, has caused harm or has failed to fulfil a legal duty towards them. The purpose of a lawsuit is to seek a legal remedy, often in the form of monetary compensation or enforcinga specific action. It is governed by rules of civil or criminal procedure, depending on the nature of the suit, and is decided by a judge or jury.
Leading indicators: Leading indicators are predictive economic statistics that provide insights into future trends, such as changes in consumer behavior, inflation rates, or stock market performance. They are not always accurately predictive but provide valuable information for forecasting models.
Expanded Definition
‘Leading indicators’ can be defined as various types of economic information that are meticulously analyzed to predict potential future economic trends. These indicators provide insights into future market activities and can range from surveys assessing consumer confidence, which potentially suggest upcoming changes in retail sales, to inflation in producer prices, which may predict fluctuations in consumer inflation in the future. Some experts consider the stock market as a leading indicator of the economic outlook, given its apparent reflection of anticipated business conditions. However, it should be understood that this tool isn’t foolproof and may not always accurately predict future economic performance. This term is in the same category as ‘lagging indicators’ and ‘real-time indicators,’ which focus on past and present economic activities, respectively.
Lean manufacturing: Lean manufacturing is a production philosophy, pioneered by Toyota, aimed at minimizing waste and continually boosting efficiency in the manufacturing process, often aligning with just-in-time production methods.
Expanded Definition
Lean manufacturing, an innovative methodology adopted initially by Toyota Motor Company, fundamentally emphasizes the systematic elimination of waste and inefficiencies in the manufacturing process, with the overarching goal of boosting productivity and quality. This approach calls for an iterative process of continuous enhancement, known in Japanese as ‘kaizen.’ Rooting in this philosophy, lean manufacturing facilitates the creation of value for customers by streamlining operations and improving the flow of products. This methodology is closely related to the ‘just-in-time manufacturing’ practice, which aims to minimize inventory costs by producing and delivering goods exactly when they’re needed in the production process.
Lease: A lease is a legal agreement outlining the rules stipulated by a landlord pertaining to the rental of property, including payment details, duties of all involved parties, and penalties for non-compliance.
Expanded Definition
A lease is a legal agreement between two parties, typically a property owner (the landlord) and an individual or entity seeking to use the property (the tenant). This contract details the agreed-upon terms and conditions for renting the property, which often includes the cost of rent, the frequency of payment, and the duration of the lease period. It sets out the responsibilities and obligations of each party, from maintaining the property to adhering to specified usage rules. It further outlines consequences for not meeting these obligations, thus providing a form of protection for both parties. This comprehensive agreement aims to ensure a clear and fair rental arrangement, mitigating potential conflicts or misunderstandings.
Legacy benefits: Legacy benefits are long-term advantages or rewards that steadily build up or accumulate in a system or program over time.
Expanded Definition
‘Legacy benefits’ refers to a category of advantages or privileges that accumulates progressively over an extended period. These benefits, often associated with long-standing policies, investments or systems, are not immediate but instead enhance value or yield returns gradually as time passes. The scope of legacy benefits can span across various domains including, but not limited to, pension schemes, insurance policies, long-term investments, or even software systems. The key characteristic of such benefits is their propensity to grow or mature over a predetermined duration, offering substantial returns or value-boost in the future.
Legend: A ‘Legend’ is a key on a map that explains the meanings of its symbols and colors. It decodes the graphical data for easy understanding and interpretation.
Expanded Definition
A ‘Legend’ in the context of cartography, is a distinct section typically positioned within or beside a map. This explanatory component acts as an informative guide or key, providing essential details to help users interpret various icons, symbols, lines, patterns, and colors employed within the map. Essentially, it aids in understanding the visual data depicted on the map, enhancing accuracy and clarity in data interpretation. Thus, the legend essentially serves as an essential communication tool between the map creator and the map reader.
Lemons: ‘Lemons’ refers to a concept in economics, introduced by Nobel laureate George Akerlof, illustrating how information asymmetry in markets such as used cars (where sellers have more information about the product than buyers) can lead to adverse selection, potentially causing market inefficiency or even market failure. In this context, a “lemon” is a defective car which buyers are wary of purchasing, affecting their offered price.
Expanded Definition
‘Lemons’ is a term introduced by George Akerlof, a renowned American economist and recipient of the Nobel Prize, to elucidate the concept of ‘adverse selection’ that can lead to inefficiency in markets primarily due to an information gap. Akerlof used the used-car market as an illustration where an ‘information asymmetry’ exists because the sellers of the car have significantly more information about its condition than potential buyers. Due to this information disparity, buyers may harbor suspicions about inadvertently purchasing a faulty or substandard car, referred to as a ‘lemon’. Consequently, they might lower the price they’re willing to pay. If the sellers don’t find the reduced price agreeable, it may result in an impasse with no deal being made. We delve deeper into this discussion in our ‘Schools Brief’.
Lender: A lender is a person or entity that loans money with the anticipation of repayment, typically with interest.
Expanded Definition
A ‘lender’ is an individual, corporative entity, or financial institution that extends credit or loans to a borrower with the stipulated agreement that the money will be returned, often with interest. This process of lending involves a legal contract that details the terms of the loan including repayment schedule, interest rates, and any potential penalties for late or missed payments. The primary role of a lender in the financial market is to facilitate liquidity by providing the necessary funds for personal, commercial, or industrial pursuits, thereby propelling economic growth and development.
Lender (elementary): A lender is an entity that provides money or items to another, known as the borrower, with the expectation of its repayment or return.
Expanded Definition
A lender refers to an individual, organization, or institution that provides funds or resources to another party, known as the borrower, typically with the expectation of its eventual return. The resources lent could be monetary or otherwise, based upon agreed-upon terms. The borrower is generally obliged to provide the lender with some form of agreed compensation, such as interest on monetary loans, for the privilege of using the lender’s property or resources. The exact terms and conditions of the lending agreement are usually laid out in a contract, specifying loan repayment schedules, interest rates, default penalties, and other related details. A lender can be associated with a variety of financial contexts, including personal loans, mortgages, and commercial loans, among others.
Lender of last resort: A ‘Lender of Last Resort’ is typically a central bank that provides loans to financial institutions in crisis to prevent bank collapse and mitigate economic harm. They only assist banks expected to regain solvency in the medium term.
Expanded Definition
“Lender of Last Resort” refers to a pivotal function performed by central banks in the event of a financial crisis. This role comes into play when depositors and creditors, due to a crisis of confidence, start distrusting the stability of the banking system. This distrust could potentially lead to a collapse of the banking system, creating catastrophic effects on the economy. In such a scenario, the central bank steps in to provide financial support to banks that are fundamentally solvent but are suffering from temporary liquidity issues. The central bank, by acting as the ‘Lender of Last Resort’, provides the necessary funds to these banks, ensuring their survival, which in turn helps to mitigate any major damage to the larger economy. This intervention helps reinstate stakeholder confidence, allowing the overall banking system to continue functioning effectively.
Leverage: Leverage refers to the strategy of using borrowed funds or debt to finance an investment or acquisition, with the expectation that the profits made will exceed the interest payable. It amplifies potential returns but also risks, as evident in leveraged buyouts, margin trading, or mortgage purchases.
Expanded Definition
‘Leverage’ refers to the strategic utilization of borrowed capital to enhance the potential return on an investment or project. Illustrated usually in a business setting, this approach involves a company investing a nominal amount of its own funds while securing the rest through debt, such as bank loans or bonds. The degree of leverage or “gearing” is directly proportional to the ratio of debt used. One popular leverage strategy is a leveraged buyout, where a business is purchased primarily with borrowed money. Similarly, in stock trading, investors often use leverage to purchase shares on margin. For instance, an investor might deposit only 10% of a share’s cost and borrow the rest. If the share’s value increases by 10%, the investor doubles their investment. However, a 10% decrease implies a total loss, demonstrating the amplified risk associated with leverage. Another common example of leverage is seen in real estate purchases where buyers typically pay a small part of the home price upfront, referred to as the down payment, and borrow the rest in the form of a mortgage. It’s pertinent to note, while leverage can increase potential earnings, it’s often a significant contributor to financial crises due to the heightened risk if an investment doesn’t yield the anticipated returns. Thus, proper understanding and management of leverage is crucial in financial planning.
Leveraged buyout: A leveraged buyout (LBO) is a strategy where private equity firms use significant amounts of borrowed funds to acquire a company, intending to reduce debt and increase profits through cost-cutting and asset sales.
Expanded Definition
A Leveraged Buyout (LBO) refers to the acquisition of a company, typically orchestrated by a private equity firm, significantly financed by borrowed funds. Often, these borrowed funds are used to acquire a majority stake in the target company. The acquired company’s assets generally serve as collateral for the borrowed funds. Following the acquisition, operational efficiencies are pursued, and cost-containment measures are put in place. The ultimate goal is to improve the financial health, profitability, and value of the acquired company, thereby facilitating debt repayment. Over time, the private equity firm may choose to sell the improved company at a higher value, providing a substantial return for its investors.
Liability: Liability refers to the financial responsibility one has to repay borrowed funds or other debts.
Expanded Definition
‘Liability,’ in a legal and financial context, refers to the obligation or responsibility an individual, corporation, or other entity has to settle its financial debts. This responsibility may arise from various sources including loans, mortgages, accounts payable, or other binding agreements, and these liabilities significantly impact an entity’s financial health. This term emphasizes the notion of accountability and commitment in fulfilling financial obligations within a stipulated timeframe, often regulated by legal contracts or agreements.
Liability insurance: Liability insurance is a policy protecting an insured individual from financial losses caused by harm or damage inflicted upon others.
Expanded Definition
‘Liability insurance’ can be professionally defined as a type of insurance policy that provides an insured party with protection against claims resulting from injuries or damages inflicted upon others. This insurance is designed to cover civil liabilities, that is, the legal obligation to compensate for any harm or loss incurred by another party due to the actions or negligence of the insured. It ensures financial coverage for legal costs and payouts for which the insured party would be responsible if found legally liable. It is important to note that intentional damage and contractual liabilities are typically not covered under these insurance policies.
Liar loan: A ‘Liar Loan’ is a low-documentation, typically Alt-A or subprime, loan in which the borrower’s income or assets may have been exaggerated or falsified to secure a larger loan amount. These loans are usually “stated income” or “stated asset”, relying on unverified verbal statements from the borrower.
Expanded Definition
A ‘Liar Loan’ is a term used within the financial sector to refer to a category of loans, predominantly classed as Alt-A or subprime, where documentation is either minimal or completely absent for income verification or asset validation. This type of loan generates a measure of concern or suspicion due to the potential for misrepresentation or fraudulent declaration of income or assets by any party involved in the loan process such as the borrower, mortgage broker, or loan officer. This is often done to secure a higher loan volume. The defining characteristic of these loans is usually denominated as ‘stated income’ or ‘stated asset,’ wherein the lender records and approves the loan based solely on the borrower’s verbal confirmation, without performing customary verification checks.
Lien: A lien is a legal claim or right against property to secure repayment of debt. It allows the creditor the ability to seize or sell the property if the debtor fails to meet their repayment obligations.
Expanded Definition
A lien is a legal provision that confers upon a creditor the right to claim possession of, or to sell, a debtor’s property in the event that the debtor fails to meet their repayment obligations. This mechanism is instituted as a form of security to ensure that a debt is fulfilled, and it can apply to a range of property types, from real estate to personal assets. It essentially serves as a financial safeguard, ensuring creditors have a means of reimbursement should a debtor default on a payment. A lien does not equate to ownership; rather, it provides the lienholder with the ability to seek remuneration via the named asset if necessary.
Life-cycle hypothesis: The life-cycle hypothesis, proposed by Franco Modigliani, posits that individuals plan their consumption and savings over their lifetime, borrowing early in their careers, saving during middle-age, and spending in retirement to smooth out fluctuating income levels.
Expanded Definition
The ‘Life-cycle hypothesis’ is an economic theory posited by Franco Modigliani, an eminent Italian-American economist and Nobel laureate. This idea posits that individuals orchestrate their consumption and savings behavior over their lifetime to maintain a stable level of consumption. This hypothesis suggests people’s behavior spans three phases – firstly, borrowing in their younger years to cater to expenditure needs and investments (like purchasing a house), in the presence of a lower income. Secondly, as individuals age and their earnings increase, they save surplus funds in anticipation of retirement. Lastly, during retirement, they draw from their accumulated savings to support their consumption needs, leading to a decrease in wealth. This behavioral pattern assumes that the need for consumption is less variable compared to income across different life stages. It’s closely linked to the permanent income hypothesis, another concept examining consumption smoothing across periods of varying income.
Limited liability: Limited liability is a legal provision safeguarding an investor’s personal assets beyond their initial investment in a company, even in the event of the firm’s financial failure. It mitigates risk, promoting entrepreneurship and investment.
Expanded Definition
‘Limited Liability’ is a critical principle in contemporary capitalistic economies. It refers to a legal structure where the financial accountability of a business owner or investor is limited to the amount of money they have invested in the business. In this context, if the business fails or accumulates debts, the personal assets of the owners or investors—like their homes or personal savings—are safeguarded from being seized to settle the business’s debts. This concept of capping the liabilities provides a safety net for entrepreneurs, encouraging a more robust operational and investment climate by fostering the initiation of new ventures and gaining the confidence of potential investors.
Liquid asset: A liquid asset is one that can be readily turned into cash without significant loss in value.
Expanded Definition
A liquid asset is a financial resource or commodity that can be quickly and conveniently sold or exchanged for cash without significantly affecting its intrinsic value. The efficiency and ease of this conversion process essentially mean that the asset can retain a high majority of its value in a relatively short time. Common examples of liquid assets include stocks, bonds, mutual funds, and cash itself. These are particularly favored by businesses and individuals alike as they support financial stability and flexibility.
Liquidation: Liquidation refers to the process of selling off a debtor’s nonexempt goods, with the generated income being distributed among creditors, typically under Chapter 7 of the U.S. Bankruptcy Code.
Expanded Definition
‘Liquidation’ is a legal and financial term used to describe the process of selling or converting a debtor’s non-exempt assets into cash. These funds are then distributed among the respective creditors as a form of debt repayment. This process primarily comes into play in scenarios of bankruptcy, specifically under Chapter 7 of the U.S. Bankruptcy Code. Under this chapter, a debtor’s assets are comprehensively evaluated and subsequently partitioned among creditors under a court-appointed trustee’s auspices. The stipulations of Chapter 7 bankruptcy aim to fairly distribute a debtor’s assets while simultaneously affording the debtor a chance to start fresh financially.
Liquidity: Liquidity refers to the ease with which an asset can be converted into cash without significantly impacting its value.
Expanded Definition
Liquidity refers to the extent to which an asset, or security, can be promptly bought or sold in the market without significantly affecting the asset’s price. Assets with high liquidity, like major currency pairs or well-known stocks, can be converted into cash readily, often with minimal price impact, due to a large volume of similar transactions in the marketplace. It reflects the ability and ease of an asset to be converted into cash without causing a significant distortion in its market value. The ability to quickly convert assets into cash—also known as marketability—provides financial stability and fulfills immediate transactional needs. It is an essential characteristic for any investable asset, denoting its market’s health and vitality.
Liquidity trap: A liquidity trap is a situation in economics where monetary policy, such as lowering interest rates, becomes ineffective at stimulating economic growth due to a preference for holding cash over investment. It suggests that fiscal policy must be utilized to revive the economy in such circumstances.
Expanded Definition
A ‘liquidity trap’ is an economic term theorized by the eminent economist John Maynard Keynes. It describes a situation where monetary policy, which traditionally regulates the economy by altering interest rates, becomes ineffective due to a prevalent pessimistic outlook. This bleak mindset, also referred to as ‘depressed animal spirits,’ prompts businesses and consumers to hold onto their cash instead of making investments or increasing spending even when interest rates are low. The reason for this behavior is the perceived safety and flexibility – the liquidity – of immediate cash access. In such scenarios, the burden to revive economic growth then falls on fiscal policy, which includes government spending and regulation. One instance of a liquidity trap is when the interest rates are at, or near, zero, known as the ‘zero lower bound’, rendering the typical stimulative effects of interest rate cuts futile.
Loan: A loan is a borrowed sum of money that must be repaid, typically with additional interest.
Expanded Definition
A loan can be defined as a financial arrangement in which a lender, often a financial institution, provides a borrower with a specific amount of money for a predetermined period of time. The borrower is obliged to return this amount within the agreed timeline, typically through regular repayments. In addition to returning the original sum, known as the principal, the borrower is also required to pay a fee for the service, termed as the interest. The interest, calculated as a percentage of the principal, is a way for the lender to compensate for the risk they assume and the opportunity cost of lending their money. This financial instrument is commonly used for various requirements like purchasing a home, automobile, education, or for personal needs.
Loan (elementary): A loan is a sum of money borrowed that should be repaid, typically with additional interest.
Expanded Definition
A loan, in its elementary definition, refers to a specific sum of money that is lent by an entity, typically a financial institution, to an individual, business, or organization. This borrowed sum must be repaid over a stipulated period of time, often alongside an additional amount known as ‘interest’. This interest is essentially a cost of borrowing, serving as a compensation to the lender for the risk and opportunity cost involved. The precise terms of the loan, including the amount, interest rate, and repayment schedule, are typically agreed upon and detailed in a formal contract. Loans are fundamental in supporting economic activities, aiding in everything from daily personal expenditures to substantial business investments.
Loan guarantee: A loan guarantee is a commitment by a third party to repay a loan if the original borrower fails to do so.
Expanded Definition
A “loan guarantee” refers to a legally binding agreement where a third party, often referred to as a guarantor, pledges to fulfill or repay a loan’s outstanding debts if the principal borrower fails to meet their repayment obligations, often known as defaulting. This financial instrument provides an additional security layer to a lender since it minimizes the risk associated with loan default. This arrangement typically arises in scenarios where the borrower may not have a strong credit history or sufficient collateral to secure the loan independently.
Loanable funds: Loanable funds are savings that are available for borrowing, facilitating various financial operations.
Expanded Definition
‘Loanable funds’ can be expertly defined as ‘A pool of funds that financial institutions, including banks and credit unions, generate from savings deposits and investments from individual savers or investors. These funds are then made accessible for borrowers, such as businesses, individuals, or governments, to loan for specific needs or projects. The structure and existence of these loanable funds contribute substantially to economic activities by facilitating financial transactions and enabling investment and growth.’
Loanable funds market: The loanable funds market is a theoretical financial market where borrowers seek funding and savers offer their surplus funds, influencing the determination of interest rates based on supply and demand.
Expanded Definition
The ‘Loanable Funds Market’ is a theoretical construct, referring to a space where a variety of entities come together to trade funds or capital for a designated period of time. This market contains two key participants: borrowers and lenders (savers). Borrowers include any individuals or organizations that require funds or capital. This could be individuals seeking a mortgage for a house, a company needing the capital to expand their operations, or a government department requiring funds for an infrastructural project. On the other side of the market are the lenders, also known as savers. These constitute individuals, organizations, or institutions that, instead of spending their available capital, elect to lend it out. This includes households depositing their savings in a bank, firms investing their excess cash through money markets, or financial institutions offering credit. The ‘Loanable funds market’ is essentially governed by the supply and demand concept. The one party’s eagerness to lend and another’s need to borrow determines the interest rate, which is effectively the ‘price’ of borrowing money. If the supply of loanable funds exceeds demand, interest rates decrease. Conversely, if the demand for loans is higher than what is currently available in the market, interest rates increase. This market has critical influence on the broader economy through its impact on interest rates.
Long-term savings goals: Long-term savings goals refer to financial targets set to fund specific purchases or expenditures that are anticipated to occur a year or more into the future.
Expanded Definition
‘Long-term savings goals’ refers to the financial objectives that an individual aims to accomplish over an extended period, usually exceeding one year. These objectives typically require substantial funds, accrued through consistent savings, in order to secure high-value assets or services, to fund significant life events, or to amass a retirement fund. This strategy encourages financial discipline, sound budgeting, and the sensible allocation of resources for future financial security and prosperity.
Loss aversion: Loss aversion is the psychological bias where individuals prioritize avoiding losses over achieving equivalent gains. It’s the notion that the pain of losing is psychologically about twice as powerful as the pleasure of gaining.
Expanded Definition
‘Loss aversion’ refers to a psychological phenomenon where individuals exhibit a preference for avoiding losses over acquiring equivalent gains. This concept posits that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, suggesting that people are more motivated to prevent a loss than to achieve an equivalent gain. Consequently, individuals may make choices that are not in their best interest due to the fear of perceived losses. This principle holds significant bearings in various fields, including economics, finance, and decision theory.
Lump of labor fallacy: The ‘Lump of Labour Fallacy’ is the misconception that the quantity of available work is finite, leading to the belief that job market influx will disadvantage present workers. It dismisses the economic reality that new employees contribute to economic activity through their earned and spent wages.
Expanded Definition
The ‘Lump of Labour fallacy’ is an economic misconception asserting that there is a predetermined quantity of work available in an economy, suggesting that introducing more workers – such as new graduates, immigrants, or previously marginalized groups – would negatively impact existing workers by reducing their employment opportunities. This notion infers that the job market is a zero-sum game where a job taken by one individual directly results in a job loss for another. Historically, this fallacy was employed to counter the inclusion of women in the workforce and continues to be used against immigration. However, this argument neglects a fundamental economic principle – as new workers join the labor force, earning and spending wages, they generate demand for goods and services. This creates additional job opportunities and therefore, contributes to the growth of the overall economy. It’s important to acknowledge that despite considerable global population growth over the last century, most people have found employment, highlighting the adaptability and expansiveness of the labor market.

M

Macroeconomics: Macroeconomics is the branch of economics that examines the performance, structure, behavior, and decision-making of an entire economy, with a focus on economic growth and sustainability.
Expanded Definition
‘Macroeconomics’ is a branch of economics that examines the behavior and performance of an economy as a whole. Instead of focusing on individual markets, it analyzes aggregate phenomena, including inflation, unemployment, economic growth, gross domestic product, and changes in national income. It explores how these aspects are interrelated and how public policies, such as fiscal and monetary policy, can influence these macroeconomic factors to promote economic growth, stability, and sustainable development.
Macroprudential regulation: Macroprudential regulation represents the framework of policies aimed at mitigating systemic risks in the financial system, including measures like specifying minimum equity capital for banks or increasing down payment requirements for mortgages.
Expanded Definition
‘Macroprudential regulation’ is a policy approach aimed at addressing the stability, integrity, and efficiency of the financial system as a whole, rather than focusing on individual financial institutions. The objective is to prevent system-wide financial crises such as the 2007-2009 financial crash. This is achieved by implementing various regulatory measures, including enforcing minimum capital requirements for banks to increase their financial resilience, and setting stricter upfront deposit requirements for homebuyers to mitigate risks associated with mortgage lending. This approach recognizes that systemic risk – the risk that the failure of a part of the financial system could trigger a widespread economic disruption – can collectively arise even if individual institutions are sound.
Magnetic stripe: A magnetic stripe, or magstripe, is a band on a plastic card that contains magnetic data about the card, which is interpreted when swiped through a reader.
Expanded Definition
A ‘Magnetic Stripe’ refers to the magnetically encoded band that is typically found on the reverse side of plastic cards like credit or debit cards, driving licenses, or membership cards. This band contains crucial information about the cardholder that can be read when the card is swiped through a specially designed reader. Using magnetic properties, the stripe stores data in the form of tiny iron-based magnetic particles. Also known as a ‘Magstripe,’ its primary purpose is to provide security and convenience by enabling a seamless electronic data interchange between the card and the reading device.
Mandatory spending: Mandatory spending refers to expenditures that are legally obligated by existing legislation, a binding spend enforced by law.
Expanded Definition
“Mandatory spending” denotes the portion of the government’s budget that is allocated by existing laws. These appropriations are automatically obligated by laws that dictate the government’s ongoing commitments and do not require annual Congressional approval. Obligations typically include long-term investments and commitments such as social security payments, Medicare, pensions, and income security. This certain type of government spending contrasts with discretionary spending, which requires year-to-year approval by lawmakers, and typically covers defense, education, and infrastructure.
Manufacture: ‘Manufacture’ refers to the large-scale production or processing of goods using industrial machinery.
Expanded Definition
‘Manufacture’ refers to the systematic process of producing goods, typically on a large scale, through the use of industrialised machinery and advanced technologies. This procedure often involves a series of steps, starting from the acquisition of raw materials to the final product. The goods can be anything from consumer products to complex machinery and are often mass-produced for distribution in distinct markets. The manufacturing sector is a critical component of the economy, contributing substantially to a country’s industrial output and job creation.
Margin: ‘Margin’ in finance and economics primarily refers to the distinction between revenues and production costs, often expressed as a percentage, or the concept of buying shares with just a fraction of the full price. In labor economics, it’s the additional output gained by employing one more worker or by adding an extra work hour.
Expanded Definition
‘Margin’ is a term that finds frequent use in the fields of economics and finance. It is crucial in understanding various financial indicators. Within the realm of stock markets, the term ‘profit margin’ represents the disparity between the revenue generated from sales of a product and its corresponding production costs. This is often illustrated as a percentage of the production cost, providing insights into the profitability of a product. Moreover, ‘buying shares on margin’ describes a financial strategy where investors finance a portion of the purchase cost, harnessing the power of borrowing or leverage to acquire more shares than what the available capital would typically allow. In labor economics, ‘marginal product of labor’ is a vital concept portraying the potential increase in output that a firm could achieve by hiring an additional worker or extending the working hours of a current employee. To better understand the concept of margin, related terms such as the ‘marginal cost,’ ‘marginal propensity to consume,’ ‘marginal tax rate,’ and ‘marginal utility’ are also considered essential.
Margin call: A margin call is a demand from a lender for a borrower to deposit more collateral when the value of the initially provided collateral falls below a set threshold.
Expanded Definition
A ‘Margin call’ is a term used in finance that relates to the practice of borrowing funds by leveraging securities or other types of collateral with variable values. In the scenario where the collateral’s market value drops below a predetermined threshold set by the lender, known as the maintenance requirement, the lender typically issues a ‘margin call’. This is essentially a demand for the borrower to deposit additional collateral, thereby securing the loan and offsetting potential losses that may result from further decreases in the collateral’s value.
Marginal benefits: Marginal benefits refer to the extra satisfaction gained from consuming an additional quantity of a product or service. It’s essentially measuring the value of one more unit for a consumer.
Expanded Definition
“Marginal benefits” refers to the incremental gain or satisfaction derived by a consumer from the consumption of an additional unit of a product or service. This is an essential concept in economics and consumer decision-making. It quantifies the value a consumer places on buying more or less of an item, aiding in understanding their purchasing behavior and forming strategies like pricing and product development. It’s crucial to remember that marginal benefits often diminish as more units are consumed, a principle known as the law of diminishing marginal utility.
Marginal costs: Marginal costs refer to the expenses incurred when increasing production by one unit, essentially examining the cost impact of scaled-up production.
Expanded Definition
‘Marginal costs’ refer to the incremental expenses that a business incurs when it increases its production output by one additional unit. This concept is a critical component in economics and managerial accounting, as it helps companies determine the most cost-effective production levels. It is calculated by analyzing the change in total costs when output changes by one unit. It includes costs related to materials, labor, utilities, and any other variable expenses associated with production change. Understanding marginal costs aids businesses in optimizing their operations for profitability and efficiency.
Marginal propensity to consume: The marginal propensity to consume (MPC) is the fraction of additional income that a person spends instead of saving. It’s typically higher for lower income earners, hence fiscal policies often target them for a greater economic impact.
Expanded Definition
‘Marginal Propensity to Consume’ (MPC) is a fundamental economic concept that describes the rate at which individuals alter their spending habits in response to changes in income. Specifically, MPC quantifies the proportion of each additional dollar of income that a person is likely to spend rather than save. This propensity isn’t constant across all income groups – typically, individuals with lower income levels have a higher MPC, as they’re generally more inclined to spend any extra income they receive, rather than saving it. Conversely, wealthier individuals are more likely to save a larger proportion of any additional income, leading to a lower MPC. This principle is important when considering fiscal policy measures aimed at stimulating economic activity. Because lower-income individuals are more likely to spend extra funds, fiscal policies – such as tax cuts or welfare benefit increases – are often best targeted towards this demographic as they have the potential to stimulate more immediate consumption and thereby drive economic activity.
Marginal satisfaction/marginal utility: Marginal utility refers to the incremental satisfaction gained from the consumption of an additional unit of a good or service.
Expanded Definition
‘Marginal satisfaction’ or ‘marginal utility’ is a term primarily used in the field of economics to denote the additional satisfaction or benefit a consumer gains from consuming one extra unit of a particular good or service. This concept is utilised to analyse consumer behavior and decision-making, as it allows us to understand how the perceived value or pleasure a person derives from a commodity decreases as they consume more of it – a phenomenon known as the ‘law of diminishing marginal utility’. This is a fundamental principle in consumer economics and plays a critical role in price determination and demand analysis.
Marginal tax rate: The marginal tax rate refers to the tax percentage applied to each additional dollar of income, with its value potentially influencing work incentives at both low and high income levels.
Expanded Definition
The ‘Marginal Tax Rate’ is officially defined as the percentage of tax applied to your income for each additional dollar that you earn. When a person receives income, it is not taxed at the same flat rate, but instead, different portions of their income are taxed at different rates. This is essentially how progressive tax systems, such as the one in the United States, operate. For example, if you earn an additional $1,000 and it puts you into the 22% tax bracket from the 12% bracket, you will pay an extra $220 (22% of $1,000) in taxes on this income. This would be your marginal tax rate. Individuals who rank in higher earning brackets are usually subjected to high marginal tax rates, which can potentially decrease their motivation to earn more. Moreover, this system isn’t solely applicable to high-income earners. At the lower end of the income scale, individuals might also experience high marginal tax rates as they forego certain welfare benefits when their earnings surpass stipulated thresholds. This is designed to progressively tax individuals based on their earning capacity and to promote fairness within the economy. It can, however, make deciding to return to work or accept a raise more complicated for those individuals if they risk losing benefits.
Marginal utility: Marginal utility is the additional satisfaction or benefit a consumer derives from consuming an extra unit of a good or service. It quantifies the change in overall pleasure from added consumption.
Expanded Definition
‘Marginal utility’ is an economic concept that measures the additional satisfaction or benefit an individual receives from consuming an additional unit of a particular good or service. It represents how the usage or consumption of an extra unit of a product or service affects a consumer’s overall level of satisfaction or utility. The concept helps in understanding the value consumers place on additional units of a product, thus influencing their buying patterns and market demand. It is taken as the change in total utility divided by the change in the quantity consumed.
Marginally attached workers: Marginally attached workers are individuals who are capable and ready to work, have sought employment within the last year but are currently not actively doing so, hence excluded from unemployment statistics.
Expanded Definition
“Marginally attached workers” refers to a specific group of individuals who, although not actively engaged in a job search at present, are both capable of and desire to work. These individuals have engaged in employment or job hunting activities within the past calendar year, demonstrating their interest in the labor market. However, because the U.S. Bureau of Labor Statistics counts as unemployed only those who are actively seeking employment, these marginally attached workers are excluded from traditional unemployment figures. Despite their willingness and ability to work, their lack of ongoing active job searches renders them essentially invisible in standard unemployment metrics.
Mark-to-market: Mark-to-market is an accounting standard mandating companies to assign a value for their assets based on the current market prices.
Expanded Definition
‘Mark-to-market’ is a financial accounting practice, mandated by the Financial Accounting Standards Board (FASB) under Rule 157, that requires corporations to assess and record the value of their assets based on the current market prices. This rule is designed to provide a realistic appraisal of a company’s financial position. Instead of accounting for assets at the original cost (historical cost), this method allows for the valuation of assets to reflect their real-time worth in the present marketplace. Such a practice supports financial transparency, providing shareholders and potential investors clearer insight into a company’s true asset value.
Market (marketplace): A marketplace is a setting where businesses sell their goods or services to consumers who desire to acquire them. Essentially, it’s a platform for transactional interaction between buyers and sellers.
Expanded Definition
A ‘Market’ or ‘Marketplace’ is a conceptual or physical locus where a community of buyers and sellers interact with each other, facilitating the trade of goods, services, or resources. Through direct or indirect methods of exercise, this arena exists with the purpose of determining prices and enabling transactions, contributing significantly to the capital flow of economies. The interaction in the market may follow certain rules or mechanisms, often influenced by factors such as supply, demand, competition, and governmental regulations. It serves as a platform where consumer requirements meet the supplier’s proposition, leading to mutually agreed exchange values and the fulfillment of both parties’ objectives. Markets play a pivotal role in industrial organization and economic structure, operating in various modes from traditional physical markets to virtual online platforms.
Market basket: A Market Basket is a representative collection of goods and services used in measuring changes in consumer price indices and cost of living.
Expanded Definition
A ‘Market Basket’ refers to a curated selection of consumer goods and services, which have been specifically chosen to represent a broad spectrum of routine consumer spending behaviors. These may include items like groceries, clothing, healthcare services, and more. The prices of these goods and services in the market basket are carefully monitored and analyzed over time. This gathered data plays a crucial part in computing the Consumer Price Index (CPI) – a statistical tool used to gauge inflation. Additionally, changes in the cost of the market basket are used to evaluate the cost of living, providing a snapshot of economic conditions and consumer financial well-being. Thus, the concept of a ‘market basket’ serves as a key instrument for economic analysis and policy-making.
Market economy: A market economy is an economic system where production and distribution of goods and services are guided by the collective decisions of buyers and sellers, with prices determined through supply and demand.
Expanded Definition
A market economy is a type of economic system in which both the production and distribution of goods and services are guided by supply and demand dynamics rather than any centralized planning. In this system, business decisions regarding what to produce, how to produce, and for whom to produce are predominantly made by individuals and firms engaged in exchange activities. These entities interact in a marketplace freely, and their transactions, through a process called price mechanism, determine the allocation of resources as well as the prices of goods and services. As such, a market economy fosters competition and promotes efficiency, as the prices reflect both the cost of production and the value entities place on the products or services.
Market economy (elementary): A market economy is a system where trade of goods and services is determined by supply and demand, and prices are decided by buyers and sellers.
Expanded Definition
A market economy is an economic structure that operates on principles of supply and demand, wherein a multitude of independent entities – both individuals and businesses, participate in volitional transactions of goods and services. The exchange value or prices of these items are inherently derived from the interplay of the buyer’s willingness to pay and the seller’s willingness to accept, resulting in a self-regulated, competitive setting. This system offers significant autonomy to the engaging parties with minimal government interventions, which often is manifested through regulations to uphold fair competition and prevent exploitation.
Market failure: Market failure refers to the inefficient distribution of goods and services, often due to externalities, public goods, monopoly, monopsony, or asymmetric information affecting the functioning of a market. It denotes situations where the market does not account for the true costs and benefits of its activities, leading to societal costs.
Expanded Definition
‘Market failure’ is a term in economics that refers to a situation where a free market is unable to allocate resources in the most efficient manner. This misallocation can happen for several reasons. One such factor includes externalities, those indirect effects of a market activity that impact unrelated third parties. An example of this would be a chemical plant releasing pollution into the community, which subsequently has to bear the health and environmental costs, despite no direct economic association with the comp. Furthermore, market failures can also happen due to public goods, such as national defense or infrastructure projects which are exposed to the ‘free rider’ problem. The ‘free rider’ issue occurs when people consume a service without directly paying for it, relying instead on others to bear the cost, which ultimately discourages any private sector commitment. Also, markets can fail when there is imbalance in market power, for instance, in situations of monopolies (single seller) or monopsonies (single buyer). These imbalances usually result in skewed price-setting, inhibiting fair competition. Lastly, the prevalence of ‘asymmetric information,’ where one party in a transaction possesses significantly more or better information than the other, can lead to market failure. This could lead to suboptimal decision-making by the less-informed party, hampering the efficient working of the market.
Market power: Market power refers to the capacity of an entity or a small collective to significantly sway market prices.
Expanded Definition
Market power refers to the capacity of an individual entity or a closely-knit group of entities within a particular economic market to significantly sway market prices. This influence stems from their dominance or substantial control over a product, service, or resource. In essence, these entities can strategically manipulate supply or demand, allowing them to set prices in a manner that maximizes their profits, rather than being dictated by the conventional forces of the wider market competition. Such power is commonly held by monopolies or oligopolies within the market. It’s important to note that it could potentially hamper fair competition and consumer welfare, which is why market power is often regulated and monitored by antitrust and fair trade authorities.
Market price: Market price is the cost at which a product or service is traded when supply matches demand, also known as the equilibrium price.
Expanded Definition
‘Market price’ refers to the cost of a good or service that is set through the process of supply and demand in an open marketplace. It represents an agreed-upon value between buyers, who show the demand, and sellers, who provide the supply. When the volume of goods or services people wish to buy is equal to the volume sellers are willing to sell, the market price is known as the ‘equilibrium price’ or ‘market clearing price.’ This ensures that all available supply is sold without surplus or shortage, effectively ‘clearing the market’.
Marxism: Marxism is a socio-political and economic theory proposed by Karl Marx, advocating for the abolition of classes and the societal shift towards a proletariat-led, classless society. It serves as the foundational theory of communism.
Expanded Definition
Marxism is an intellectual, socioeconomic, and political theory postulated by Karl Marx and Friedrich Engels, who argue that society progresses via struggle and conflict. This theory emphasizes class struggle, suggesting that oppression and exploitation result from the capitalistic economic system. Marxism posits that a proletarian revolution, led by the working class, will eventually overthrow the bourgeoisie, or the capitalist class, bringing about a classless society where the means of production are collectively owned. Marxism served as the ideological groundwork for modern communism, but they are not identical concepts. Whereas communism is a socio-political system practiced in certain countries, Marxism is a rich, more complex theoretical framework that contains, among other things, varied intellectual perspectives on culture, history, and politics.
Mass production: ‘Mass production’ refers to the manufacturing process that utilizes specialized machinery and a divided labor force to produce standardized products, enabling economies of scale and a lower product price.
Expanded Definition
‘Mass production’ is a key manufacturing tactic that underwent significant advancements during the 20th century, particularly noted in relation to the Ford Motor Company’s operational methods. At its core, mass production involves creating a large volume of homogeneous products with the aid of specialized machinery and a divided labor force, where each worker or team is responsible for a specific part of the production process. This methodological approach brings about economies of scale, meaning that as the quantity of production increases, the cost per unit decreases, resulting in cost-efficiency. Consequently, manufacturers gain the capacity to reduce the pricing of their goods, enabling an expansion of their potential market share because their products become more affordable to a larger audience.
Maturity (of bonds): Maturity in bonds refers to the predetermined date when the bondholder is repaid the principal amount. It’s the timeframe in which the issuer makes interest payments and is measured in years, months, or weeks.
Expanded Definition
“Maturity (of bonds)” refers to the predetermined time frame within which a bond, or debt security, will make interest payments, known as coupon payments, to the bondholder. This period typically takes the form of a specified number of years, although it can also be expressed in terms of months or weeks. Upon reaching the maturity date, the issuer is obligated to repay the bond’s face value, also known as its principal amount, to the bondholder. Therefore, bond maturity is a crucial factor in investment decisions as it directly impacts the bond’s yield and risk profile.
Maximum employment: Maximum employment is the optimal job level an economy can hold without causing inflation to surge. It’s essentially the peak sustainable employment level before inflation becomes unstable.
Expanded Definition
‘Maximum employment’ is a term used in economics to signify the optimal level of employment within an economy, at which the job market is functioning at its highest possible capacity without triggering an unstable increase in inflation rates. This is an essential component of macroeconomic stability, as it represents a balance where the majority of individuals who are willing and able to work can find employment, without causing pressures that could lead to consistently rising prices. Factors such as the rate of unemployment, labor force participation, and wage growth can all contribute to understanding whether an economy has reached ‘maximum employment’. It is an aspirational target for policymakers who manage economic activity.
Means test: A ‘Means Test’ is a financial evaluation used to assess an individual’s ability to repay debts by analyzing their income and assets.
Expanded Definition
A ‘Means Test’ is a systematic financial analysis tool, often used by governmental or legal entities, to evaluate an individual’s fiscal status through assessing their income and assets. This procedure assists in determining whether an individual possesses adequate financial resources to fulfill their debt obligations. It helps to ascertain the individual’s eligibility for certain social benefits or legal debt relief, based on their ability to meet their economic responsibilities. In essence, it calculates economic capacity to ensure an equitable distribution of resources or repayment of debts.
Means-tested: Means-tested refers to programs where eligibility is determined by an individual’s current income or asset levels.
Expanded Definition
“Means-tested” refers to certain policies or programs where an individual’s eligibility for participation or benefits is determined based on their financial resources, including income and assets. In such programs, access to services and benefits is granted only when an individual’s income or accumulated wealth falls below a predefined threshold. These programs are designed with the intent to deliver aid or benefits specifically to those with the greatest financial need. Such determinations serve to ensure the efficient allocation of resources, prioritizing those in higher levels of poverty, thereby affirming the social justice objective of many public policies.
Median: The median is the middle value in a numerically sorted data set, dividing it into two equal halves.
Expanded Definition
The ‘Median’ is a statistical term representing the middle value in a particular set of data that has been arranged in ascending or descending order. In other words, it’s the value that separates your data into two equal halves, so that one half of the values are lower and the other half is higher than the median. If the dataset has an even number of observations, the median is calculated as the average of the two middle values. Overall, the median provides a useful measure of data’s central tendency, particularly when dealing with skewed data, as it isn’t influenced by outliers or extreme values.
Median earnings: Median earnings refer to the midpoint in the income distribution, where 50% of workers earn more than this amount and 50% earn less.
Expanded Definition
‘Median earnings’ refers to the mid-point income level in a set of salary data that separates the highest 50% of earners from the lowest 50%. Essentially, it’s the financial figure at which exactly half the employees in a specified group, sector, or nation earn more, and half earn less. The median is a useful measure when comparing salaries as it isn’t skewed by outliers, which allows for a more accurate understanding of the typical income within the distribution. This statistical measure provides meaningful insights into the earnings distribution within a given context.
Median value: The median is the central value in an ordered set of numbers, separating the data into two equal parts.
Expanded Definition
The ‘Median value’ is a statistical term that refers to the exact middle figure in a sequence of numbers arranged in ascending or descending order. It serves as a central point that separates the data set into two equal halves. Meaning, an equal number of data points fall both above and below the median. It’s particularly effective for providing an accurate representation of the middle of a data set when the data might be skewed by extremely high or low values, thereby managing the effect of outliers on the overall interpretation of the data set.
Medicaid: Medicaid is a U.S. government-funded healthcare initiative that provides medical coverage to low-income individuals, overseen by both federal and state bodies.
Expanded Definition
Medicaid is a comprehensive health care program in the United States that is co-managed by the federal government and individual state governments. The primary goal of Medicaid is to provide access to medical services for individuals and families with low income. Eligibility criteria and benefits can vary from one state to another due to states’ discretion in some aspects of program management. The range of services covered by Medicaid encompass preventative care, hospitalization, prescription medications, long-term care, and more. The program plays a significant role in the U.S. healthcare system by offering necessary medical care to qualifying individuals who might otherwise struggle to secure adequate coverage.
Medicare: Medicare is a U.S. federal program that covers certain medical expenses for individuals aged 65 and over, as well as some disabled persons under 65; it’s a part of Social Security system.
Expanded Definition
Medicare is a federally funded health care program in the United States. Primarily designed to serve individuals who are aged 65 and above, this program provides coverage for various medical services and hospital-related expenses to support their healthcare needs. Additionally, Medicare is also accessible to certain individuals who are below 65, primarily those who have specific disabilities recognized by the program. As part of the broader Social Security system, it plays a critical role in ensuring health protection to the aging population and those who face disability-related health challenges.
Medicare tax: Medicare tax is a payroll tax collected from both employees and employers as part of FICA to finance the medical benefits provided under the Medicare system, primarily to individuals aged 65 and over.
Expanded Definition
The ‘Medicare tax’ is a specified part of the Federal Insurance Contributions Act (FICA) payroll tax. This mandatory tax is collected from the majority of employed individuals and their employers, and it funds the hospital insurance portion of the Medicare program. Medicare is a vital national health insurance scheme in the United States, providing essential medical benefits primarily to individuals aged 65 and over. These benefits are also available to the spouses of working or retired individuals who have reached this qualifying age. The primary function of the Medicare tax is to financially sustain this health coverage to ensure that eligible citizens have access to necessary medical support in their senior years.
Medium of exchange: A medium of exchange is a universally accepted means employed in trading goods and services. It essentially serves as an intermediary instrument, like currency, facilitating trade by reducing the need for a coincidence of wants.
Expanded Definition
‘Medium of exchange’ is a term used in economics that refers to an instrument or system used to facilitate the sale, purchase, or trade of goods and services. This medium is broadly accepted within a market as an intermediary in trade transactions, enabling the process of exchange rather than direct barter. Common mediums of exchange include physical money, electronic funds, and digital or cryptocurrencies. It is a foundational concept in modern economies, vital in providing a standard measure for the valuation of goods and services, ensuring smooth and efficient commerce.
Medium-term notes: Medium-term notes are corporate-issued debt securities typically maturing in 1 to 10 years, often with fluctuating interest rates.
Expanded Definition
‘Medium-term notes’ refer to a category of debt securities that are typically extended by corporations to generate capital. As the name suggests, these notes typically possess a maturity period that ranges between 5 and 10 years, signifying that the invested capital along with accrued interest returns to the investor within this timeframe. However, the maturity term can be adjusted as per the requirements of the corporation and may extend to a minimum duration of 1 year. A standout characteristic of such financial instruments is their issuance at floating rates. This means that the interest rate on these notes isn’t fixed, but fluctuates in alignment with market or benchmark rates. Therefore, they are an investment avenue that provides a degree of flexibility to both investors and issuers when compared to traditional fixed-rate bonds.
Menu costs: Menu costs refer to the expenses businesses bear when they update prices, originating from the physical process of reprinting menus in restaurants due to price adjustments.
Expanded Definition
“Menu costs” is a term used in economics to refer to the expenses incurred by companies when they have to adjust their prices. It originates from the literal action of updating and reprinting restaurant menus when food prices change. However, in a broader business context, it includes a range of other administrative and communications costs. These may encompass expenses involved with altering computer systems, repricing items, updating online catalogs, retraining staff, and informing customers about these changes. Although they might seem minor, these costs can deter companies from changing prices frequently, and they can potentially distort economic efficiency by causing prices to be less responsive to shifts in supply and demand.
Mercantilism: Mercantilism is a 17th and 18th-century economic theory prioritizing national wealth accumulation through gold and silver reserves, primarily achieved by boosting exports, limiting imports, and curtailing free trade, premised on the notion of trade as a zero-sum game.
Expanded Definition
Mercantilism refers to an economic theory prevalent in the 17th and 18th centuries that emphasized the central role of national governments in controlling economic affairs. The main goal was to enhance the power and wealth of the nation, primarily through accumulation of precious metals such as gold and silver. To achieve this, Mercantilist policies encouraged the maximization of exports and minimization of imports, often through protectionist measures like tariffs and quotas. This approach was underpinned by the belief that international trade was a zero-sum game, meaning one nation’s gain was another’s loss. In contrast, Adam Smith, the father of modern economics, fundamentally disagreed with the Mercantilist approach. He advocated for the benefits of free trade and minimal government intervention in the economy. Smith argued that such arrangements lead to improved productivity through specialization, expanded markets for goods, and enhanced consumer benefits. He believed the wealth of a nation is determined not by its stock of gold and silver, but by its productive capacity, thereby effectively challenging and ultimately changing the prevailing Mercantilist mindset.
Mergers and acquisitions: ‘Mergers and Acquisitions’ (M&A) refer to the strategic management activities involving the consolidation of companies, typically undertaken for growth, profitability or market dominance. While genuine mergers are rare, acquisitions are common and often involve a larger company buying a smaller one, but these carry the risk of overpayment and potential cultural incompatibility.
Expanded Definition
‘Mergers and Acquisitions’ (M&A) refers to the strategic corporate exercises that revolve around the consolidation of companies or assets. Commonly abbreviated as M&A, it includes two key transactions – mergers and acquisitions. A merger occurs when two companies, often of comparable size, decide to combine their business operations and assets to form a single, unified entity. Acquisitions, on the other hand, typically involve a larger company purchasing a smaller one. In instances termed as ‘agreed’ acquisitions, the smaller company voluntarily accepts the deal. However, in ‘hostile’ acquisitions, the smaller company may exhibit resistance but ultimately gets bought over. These corporate events critically involve investment banks, consultants, and other professional advisors, and can be highly profitable for these entities due to their expertise in advising on or facilitating these transactions. However, the buyer firm needs to be conscientious. There is a potential risk of over-valuation, where the firm may pay a price higher than the intrinsic value of the target company. Additionally, a clash of corporate cultures could hamper the integration process post-deal, consequently limiting the return on investment. Therefore, due diligence, strategic planning, and careful study of corporate compatibility are essential components of the M&A process.
Metadata: Metadata is essentially data about data, providing descriptive details that offer context, facilitate usage and enhance understanding of a particular dataset.
Expanded Definition
Metadata is fundamentally defined as data about data, acting as an underlying descriptor or summary that gives context or clarifies the nature, characteristics, content, quality, and origin of the primary data it represents. It operates as a key asset in information management, enabling efficient organization, data discovery, comprehension, interoperability and usability. The use of metadata spans across various fields such as digital libraries, databases, and big data analytics, among others. By effectively “tagging” or labeling, metadata aids in locating and understand comprehensive data sets or data series. Thus, it plays a pivotal role in handling and managing vast data sources in a coherent and systematic way.
Metropolitan statistical area (MSA): A Metropolitan Statistical Area (MSA) is a high-density region centered around a major city, characterized by significant economic interconnectivity.
Expanded Definition
A Metropolitan Statistical Area (MSA) is a geographical zone, often encapsulating a large city and its surrounding regions, that is recognized for its high population density and close economic interconnectivity. The U.S. Office of Management and Budget designates these areas based on detailed, statistical criteria, highlighting areas where the city and suburbs are economically interwoven. It typically consists of one or more counties that include a city with 50,000 or more inhabitants, or includes a Census Bureau-defined urbanized area with a total population of at least 100,000. The defining factor implies a substantial interdependence within an area in aspects such as employment, commerce, and infrastructure.
Microeconomics: Microeconomics is the analysis of individual markets and their behaviors within an economy, focusing on the economic decisions and actions of individuals and firms.
Expanded Definition
Microeconomics is a specific branch of economics that investigates how individual parties, including consumers, businesses, and government units, make decisions to allocate limited resources. It primarily focuses on the patterns of supply and demand, as well as price formation in specific markets. At its core, microeconomics attempts to predict and understand how these factors influence the pricing of goods and services. It is thus able to provide a detailed analysis of how different sectors make up and interact within the larger scope of the economic system. Microeconomics is especially pertinent when understanding and developing responses to issues relating to efficiency, welfare, and market failure.
Microloan: A microloan is a low-interest, brief-term lending solution typically utilized by entrepreneurs or self-employed individuals for initial costs or inventory needs.
Expanded Definition
A ‘Microloan’ is defined as a modestly sized, typically short-duration financial loan disbursed at relatively low-interest rates. It is often sought by self-employed individuals or entrepreneurs. The intended usage of these loans can range from covering initial business costs, acquiring and maintaining inventory, to purchasing requisite equipment. This type of loan is commonly utilized to facilitate the inception or expansion of small businesses, thereby promoting economic growth and financial empowerment particularly among underserved or disadvantaged demographics.
Middle income trap: The ‘Middle income trap’ refers to a situation where a developing economy, despite its initial growth through low-value production, cannot transition towards more sophisticated sectors like services or technology, leading to stagnant income levels. It represents the struggle of such economies to ascend the economic ladder beyond a certain GDP per capita.
Expanded Definition
The term ‘Middle Income Trap’ is a theoretical economic challenge which may be encountered by developing nations as they attempt to rise from a low-income status to a high-income status. This condition is characterized by a slowdown in economic growth after a country has reached a middle-income level, inhibiting them from transitioning into a high-income status. Such countries typically experience initial growth spurts due to advantages in manufacturing inexpensive goods, but encounter difficulties moving into high-value sectors including services and technology. This difficulty stems primarily from insufficient innovation, lagging productivity growth, systemic inefficiencies, or infrastructure shortcomings. This perception, however, is subject to debate as denoted in this referenced article. Furthermore, the likelihood of countries, such as China, overcoming this growth impasse is discussed in this other article.
Minimum wage: Minimum wage is the lowest hourly pay that an employer can legally offer to workers.
Expanded Definition
‘Minimum wage’ refers to the lowest permissible monetary amount that employers are legally required to pay their employees for each hour of performed labor. This compensation measure is mandated by law and was established to safeguard workers from exploitation, intending to provide them with a basic standard of living that suits their economic circumstances. Specific minimum wage rates vary across different jurisdictions and can be influenced by various factors, such as the cost of living or the level of economic productivity. It is important to note that minimum wage laws are also in place to preclude the possibility of undue competition among organizations seeking to reduce labor costs.
Minsky moment: A Minsky moment is a sudden market collapse triggered by investor panic, often ensuing after a period of irrational exuberance and high leveraging, as conceptualized in economist Hyman Minsky’s financial instability hypothesis.
Expanded Definition
A ‘Minsky Moment’ refers to a sudden drastic drop in market value primarily caused by speculative investing and unsustainable financial activity. The term is coined in honor of the influential economist Hyman Minsky, who developed the Financial Instability Hypothesis. This hypothesis underpins the idea that during times of economic prosperity, investors often grow increasingly confident and exuberant, leading them to take on additional risk through leverage, or borrowing, to finance their investments. This behavior can inflate asset prices well beyond their intrinsic values, creating a market bubble. At a certain point, known as the ‘Minsky moment’, it becomes increasingly clear that these asset prices do not reflect the underlying value. Panic ensues, causing investors to suddenly lose confidence, hastily sell off these overpriced assets, and scramble to repay their debts. This selling frenzy then results in a drastic fall in market prices, leading to a market crash or severe economic downturn. A characteristic feature of a ‘Minsky Moment’ is its sobering effect, as it’s the point where investors become aware of the risky financial practices they have engaged in during times of economic prosperity. For a deeper understanding, consider referring to our Schools Brief.
Misery index: The Misery Index is a metric, developed by economist Arthur Okun, that quantifies economic hardship by adding together the inflation and unemployment rates.
Expanded Definition
The ‘Misery Index’ is a calculated economic indicator that serves as a measure of the general economic discomfort experienced by the general population. It is the aggregate of the prevailing inflation rate and the unemployment rate. The concept was conceived by Arthur Okun, a reputable American economist, in the 1970s during a period marked by ‘stagflation’ – a turbulent economic condition characterized by slow economic growth, high unemployment, and high inflation. The Misery Index is designed to facilitate a better understanding of the direct impact of economic policies on the average citizen’s welfare and standard of living.
Mixed economy: A mixed economy is an economic framework in which both the private market and government jointly make key decisions about production, consumption, pricing, and distribution.
Expanded Definition
A ‘Mixed Economy’ refers to an economic system that embodies elements of both market and planned economies. Certain aspects of the economy, such as what goods/services are to be produced, how they’ll be produced, their pricing, and distribution mechanisms, are determined by free-market forces. This means buyers and sellers interact and make choices based on their individual preferences and capabilities. However, in the same system, the government also plays a substantial role – typically through regulations or direct involvement – in designing and implementing policies related to the production, distribution, and pricing of goods/services. This fusion of market-based and state-controlled practices aims to balance economic efficiency, equity, and social welfare.
Mixed economy (elementary): A mixed economy is a blend of free-market mechanics and governmental regulation, where both entities participate in economic decision-making and trade.
Expanded Definition
A mixed economy, in comprehensive terms, represents an economic system that integrates both market and command economies. It features a blend of free market-based transactions between buyers and sellers, which influence the determination of prices for goods and services, and state intervention. This government involvement can include regulatory policies, economic planning, and direct or indirect ownership of certain sectors. The purpose is typically to balance the benefits of economic competition with societal goals such as fairness, equality, and public goods provisions.
Models: Models are simplified mathematical or graphical representations of economic relationships, used for hypothesis testing and adding rigorous clarity to economic discourse, albeit often criticized for oversimplified assumptions and overcomplexity.
Expanded Definition
‘Models,’ in the context of economics, refer to analytical tools that depict economic concepts in a simplified, systematic manner, serving as visual or mathematical representations of economic activities and relationships. They are fundamentally used to test hypotheses and forecast future scenarios, thus influencing policy-making and strategic decisions. While these models bring accuracy and clarity to economic discourse, they are inherently abstract and succinct – necessitating the simplification of the multifaceted and highly intricate variables of real-world economies. These models often invite criticism due to the idealized premises they are based upon, including the notion of perfect information where every market participant is assumed to have complete and accurate information or rational expectations that assume economic actors always make logically sound decisions aiming to maximize their benefits. Furthermore, the extensive use of complex mathematical formulations – an attempt to fetch precision and universality in interpreting economic phenomena – often leads to the accusation of economists emulating methods from physical sciences, termed ‘physics envy’, which can be problematic given the human behavioral complexities in economics compared to the more exact nature of the physical sciences.
Modern monetary theory (MMT): Modern Monetary Theory (MMT) posits that governments controlling their own currency can accumulate debt limitlessly, only checked by potential inflation increases. This economic school contends that fiscal policy should regulate the business cycle, contesting orthodox views which prioritize interest rates.
Expanded Definition
Modern Monetary Theory (MMT) is a contemporary economic school of thought that asserts sovereign governments, with the ability to create their own currency, can issue unrestricted amounts of debt and sustain considerably large deficits without the usual constraints of needing to balance revenue with expenditure. According to MMT, governments aren’t constrained by the need to finance deficits since the central bank can procure any additional debt or merely create the necessary funds. MMT stipulates that the only possible limit to this fiscal activity is the possibility of higher inflation, which only becomes a concern when economic resources are fully utilized. This suggests that as long as there is underutilized labor or infrastructure, governments can spend extra without triggering inflation. Proponents of MMT argue for fiscal policy such as government spending and tax decisions, over interest rates, as the primary tool for controlling the business cycle – the regular ups and downs in an economy. Critics of MMT, mainly from traditional economic theories, often question its practicality and caution against its discretion in terms of government spending and the risks of inflation. Several insightful critiques can be found in specialized articles and economics briefings.
Monetarism: Monetarism is an economic theory championed by Milton Friedman, positing that the money supply primarily influences inflation rates. Despite historical support, implementation struggles led to its replacement by inflation targeting policies.
Expanded Definition
Monetarism is an economic theory that primarily focuses on the role of governments in controlling the amount of money in circulation. Regarded as one of the significant theories proposed by the illustrious economist, Milton Friedman, monetarism holds the principle that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. It suggests that controlling the expansion of the amount of money can help regulate and tame inflation. Historically, incidents of hyperinflation have been linked to extravagant production of money, substantiating the core belief of monetarism. However, during the late 1970s and early 1980s, when several governments implemented monetarist strategies, they faced difficulties in managing the money supply. They also encountered challenges in identifying which metric of money supply (cash in circulation, checking accounts, savings accounts, money market funds, etc.), would be the most suitable to focus on for achieving desired economic outcomes. Due to these challenges, and the complex interrelationship between money supply and other economic factors, many governments gradually moved away from strict monetarist policies. Instead, they transitioned to a framework known as “inflation targeting”, that seeks to maintain a specified level of inflation, often through adjusting interest rates, as a way of stabilizing the economy. Despite this shift, the principles of monetarism continue to inform economics and fiscal policy to this day.
Monetary financing: Monetary financing refers to the process where the central bank directly funds government expenditure, often associated with hyperinflation. It differs from quantitative easing, which involves purchasing government bonds in the secondary market and paying interest on reserves.
Expanded Definition
‘Monetary financing’ is a term employed in economics to refer to the process by which a central bank provides funds directly to the government to finance its expenditures. This strategy was notably implemented during the hyperinflation period in Germany in 1923, which subsequently led to its widespread disapproval due to the economic instability it caused. Consequently, certain analysts viewed the practice of quantitative easing – injecting money into the economy by buying government bonds from the secondary market – with skepticism post the financial crisis of 2007-09. However, it’s crucial to understand the distinction between the two. Quantitative easing is not synonymous with monetary financing. The reasoning is twofold: firstly, central banks under quantitative easing purchase government bonds in the secondary market rather than directly from the government. Secondly, they pay interest on the reserves they generate, an action that is absent in classic monetary financing.
Monetary policy: Monetary policy is the strategic management by a central bank of its country’s money supply and interest rates, aimed at achieving economic stability and growth.
Expanded Definition
‘Monetary policy’ can be comprehensively defined as a set of strategies implemented by a country’s central bank to manage and control the nation’s money supply, primarily through the adjustment of interest rates and other financial instruments. This central bank action is primarily aimed at influencing economic outcomes like inflation, economic growth, exchange rate stability, and to promote a high level of employment. In essence, by adjusting these key economic levers, the central bank can maintain price stability, ensure steady economic growth, and implement measures to achieve maximum sustainable employment in the economy.
Monetary transmission: Monetary transmission is the process where changes made in the monetary policy affect the economy, particularly output, employment and inflation.
Expanded Definition
‘Monetary transmission’ can be professionally defined as the systematic procedure, or mechanism, through which modifications in the monetary policy specifically influenced by alterations in the policy rate or interest rate, affect the overall economy. This influence is visible in multiple economic factors, which include the aggregate production of goods and services often referred to as aggregate output, the level of employment indicating the health of labor market, and the rate of inflation, which reflects the degree to which the general level of prices for goods and services is rising thus eroding the purchasing power of money. By understanding the monetary transmission mechanism, policymakers can shape their strategies to guide economies towards desired goals like maximum employment, stable prices, and moderate long-term interest rates.
Money: Money is a medium of exchange universally acknowledged for acquiring goods and services.
Expanded Definition
Money is an economic instrument or medium that is universally accepted as a form of payment in transactions involving the transfer of goods and services. It represents a unit of accounting, which measures the comparable value of different items, and provides a standard of value that allows market participants to effectively exchange products and services. Money can exist in various forms, including physical cash, coins, digital currency, bank deposits, and more. Its primary function is to facilitate trade, establishing a common measure of value, making transactions more efficient and fostering economic growth.
Money creation: ‘Money creation’ is the process through which banks amplify the money supply by lending more than their reserves, leveraging the fractional reserve banking system.
Expanded Definition
“Money creation” refers to the process by which the overall supply of money in an economy is expanded. This expansion is primarily facilitated by the banking sector through its lending activities. Essentially, when a bank lends money to a borrower, it does not distribute existing money, but instead credits the borrower’s account with a new deposit, thereby generating more money in the economy. The bank holds only a fractional reserve of this amount, contributing to what is aptly called the ‘fractional reserve banking system’. This ability for banks to multiply their reserves into a larger amount of loans and deposits is often referred to as the ‘money multiplier effect’. It’s a key mechanism by which central banks control money supply to meet the country’s economic goals.
Money illusion: Money illusion refers to the tendency of people to perceive the value of money in nominal terms, rather than in real terms, thus neglecting the impacts of inflation or deflation on their income or savings.
Expanded Definition
‘Money illusion’ is an economic concept referring to the tendency of individuals to think about money’s value in nominal rather than relative terms. In other words, it’s the inclination to overlook the impact of inflation on purchasing power. An example can be seen in an employment context; workers might readily accept a 4% wage increase even if inflation is 6%, effectively reducing their real income, yet resist a wage freeze when overall prices are decreasing. Similarly, savers might be content with a 2% return on their investment when there’s no inflation, instead of earning a higher 4% return in a period of 6% inflation. The key aspect here is the individual’s focus on the face value of money, often letting ‘real terms’ or the adjusted value considering inflation, fall by the wayside. This concept emphasizes the essential difference between nominal and real values in financial planning and decision-making.
Money market mutual fund: A money market mutual fund is a registered investment fund focused on short-term debt instruments, with all assets holding a weighted average maturity of 90 days or less.
Expanded Definition
A Money Market Mutual Fund refers to a specialized type of mutual fund, registered with the Securities and Exchange Commission (SEC), that primarily allocates its investment resources towards money market instruments or other short-term debt securities. These could include Treasury bills, commercial papers, and certificates of deposit amongst others. With a focus on high liquidity and preservation of the initial investment, these funds are considered lower risk. Furthermore, to maintain their short-term status, all assets held within a money market mutual fund must have a weighted average maturity of 90 days or less, ensuring the fund remains responsive to changing market conditions. The structure and nature of these funds make them suitable for investors seeking safer investments with quick accessibility to their funds.
Money markets: Money markets refer to the sector where short-term borrowings and lendings, typically for periods less than a year, are conducted, often utilized by banks for regular financing.
Expanded Definition
Money markets refer to a sector of the financial market in which financial instruments with high liquidity and short maturities are traded. These markets are utilized by participants as a means for borrowing and lending in the short term, with typical maturities that usually last no more than a year. Financial organizations such as banks often depend on these markets to meet their short-term operational financing needs. In events where these markets experience a disruption or “freeze” – meaning transactions cannot be completed due to factors like lack of liquidity (as seen in 2008) – it can lead to significant financial crises, given the crucial role these markets play in the overall financial system.
Money multiplier: The money multiplier is a process in a fractional-reserve banking system, where banks can increase the money supply more than the actual reserves through lending.
Expanded Definition
The ‘Money Multiplier’ is an economic concept primarily utilized in a fractional-reserve banking system, referring to the potential expansion of a country’s money supply due to banks providing loans out of their reserve funds. Essentially, it reflects the maximum potential amount of money that can be created by financial institutions for every dollar of reserve held. The multiplier effect occurs because reserves are used to provide loans, which then become deposits, further contributing to the overall money supply. The money multiplier serves as a key analytical tool for central banks in managing economic stability and growth.
Money neutrality: Money neutrality is an economic concept positing that the money supply’s alterations only affect nominal values like prices and wages in the long-term, without impacting real elements like real GDP and unemployment.
Expanded Definition
‘Money neutrality’ is a principle in economics that posulates that alterations in the total amount of money in an economy, or the money supply, will ultimately influence nominal factors such as the level of prices and wages over a prolonged period. However, it does not significantly affect the ‘real’ economic variables, which are adjusted for inflation. These real variables include elements like real GDP, an adjusted measure of all goods and services a country produces, and real consumption, an inflation-adjusted measure of consumers’ spending habits. This theory essentially suggests that while increasing the money supply may alter the ‘face-value’ or nominal characteristics of the economy, it does not change the underlying real economic activity levels or employment rates.
Money order: A money order is a prepaid payment document guaranteed by its issuing authority, used to securely pay for goods, which the recipient can redeem for cash.
Expanded Definition
A money order is a financial instrument, typically issued by governmental entities or banking institutions, that serves as a guaranteed means of payment. In essence, it functions as a prepaid certificate; when a buyer purchases a money order, they pay the full value of the order upfront, plus a small service fee. This monetary value is then securely embedded in the document, which can be transferred to a third party – generally, a seller in a transaction. After receiving the money order, the seller can redeem it for the stated amount by presenting it to the same type of institution that issued it, providing a highly secure and relatively risk-free method of payment exchange.
Money supply: Money supply refers to the total amount of monetary assets available in a country’s economy at a specific time, primarily comprising of cash, coins, and checkable deposits. Sometimes it’s referred to as ‘money stock.’
Expanded Definition
The ‘Money Supply’ is a term used in economics that refers to the total amount of monetary assets available within a specific economy at a given time. It consists of various components, each reflecting a different degree of money’s liquidity. In the United States, the base components of the money supply include physical currency such as coins and banknotes, and checking account deposits, also known as demand deposits. These components are usually referred to as ‘M1’. This is the most liquid form of money as it represents funds that are readily accessible for transactions and spending. In addition to these components, ‘Money Supply’ can also encompass less liquid forms of money, like savings deposits, money market securities and mutual funds, depending on the measurement used (i.e., M2, M3, etc.). Commonly, the money supply is also referred to as ‘money stock’, signifying the vast pool of monetary assets circulating within an economy, which can be controlled or adjusted by the central bank to help manage economic stability.
Monoline bond insurers: Monoline bond insurers are firms that solely offer insurance on bond repayments, covering both principal and interest, thereby focusing on a single insurance line.
Expanded Definition
‘Monoline bond insurers’ can be defined as specialized financial security agencies that exclusively provide guarantees on the timely payments of principal and interest on insured bonds. This type of insurer serves a singular line of insurance, focusing solely on bonds. They offer a safety net for bondholders by assuring that they will receive their anticipated payments, even if the bond issuer defaults. Monoline bond insurers do not diversify their operations into other types of insurance products, hence the term ‘monoline’, which underlines their concentrated business model. This unidirectional focus allows these insurers to maintain an extensive knowledge of bond markets and their associated risks.
Monopolistic competition: Monopolistic competition refers to a market environment where numerous firms offer products that are close, but not perfect substitutes, hence generating a competitive environment.
Expanded Definition
‘Monopolistic competition’ refers to a type of market structure characterized by a large number of companies or firms that manufacture or supply products or services that are similar but not perfectly identical. Each firm in this market structure has a degree of market power, allowing it to influence the price of its product or service. This is primarily attributed to product differentiation, a strategy where companies convey unique features or variations in their products, leading consumers to perceive them as distinct from those offered by rivals. Therefore, even in a competitive environment, these firms can operate like monopolies to some extent by shaping consumer preferences and setting prices independent of the overall market.
Monopoly: A monopoly is a market condition where a single supplier dominates due to barriers that obstruct potential competitors and the absence of substitute products.
Expanded Definition
A monopoly, in economic terminology, refers to a distinct market condition where a single entity, referred to as the monopolist, serves as the exclusive provider of a particular good or service. Dominating the market, the monopolist possesses significant influence over market prices, largely due to an absence of comparable competition and impediments that obstruct potential contenders from entering the marketplace. In this circumstance, there exist no near-perfect substitutes that consumers can switch to, thereby strengthening the monopolist’s market power further.
Monopsony: A monopsony is a market scenario where there’s only one primary consumer, or the purchasing power is majorly concentrated with one entity.
Expanded Definition
Monopsony refers to an economic market structure whereby there is only a single, dominant buyer for a specific product, service, or type of labor. This buyer has significant market power due to the absence of competition, enabling them to influence prices or terms of trade to their advantage. Monopsonies are often contrasted with monopolies where there is only one seller dominating the market. The existence of a monopsony can create market imbalances and challenges, particularly for producers or laborers, as they often have limited or no alternatives for selling their products, services, or labor power.
Moral hazard: Moral hazard is the danger that one party in a deal may act in their own interest, negatively impacting the other party.
Expanded Definition
“Moral hazard” is a term primarily used in economics and finance that denotes a situation where one entity involved in a deal or agreement possesses the potential to adopt behaviors or practices that may be detrimental to the other party’s interest. This may occur because the party does not bear the full consequences and risks associated with their actions, thereby leading to imbalanced accountability. Thus, they may behave differently than they would have if they bore all the consequences. Examples often include insurance policyholders taking additional risks because they’re protected by insurance, or banks engaging in risky behavior knowing they would be bailed out during economic crisis. Understanding moral hazard is vital in designing contracts and structuring interactions between parties for optimal societal benefit.
Mortgage: A mortgage is a type of loan specifically utilized for acquiring real estate properties.
Expanded Definition
A mortgage is a type of long-term loan that a borrower secures from a financial institution, primarily intended for the acquisition of real estate property, such as a house. The lender provides the funds for the purchase, and in return, the borrower agrees to make regular payments over a predetermined period until the loan, including interest, is fully repaid. The property serves as collateral, meaning the lender can repossess it if the borrower defaults on the payments. Therefore, a mortgage is a legal agreement that ties the loan to the property, effectively ensuring that the property is the secured asset behind the loan.
Mortgage debt: Mortgage debt is the financial obligation resulting from a loan taken out to purchase residential or commercial property.
Expanded Definition
‘Mortgage debt’ refers to the outstanding amount of money that a borrower is obligated to repay due to a mortgage loan. This type of debt is generated when an individual borrows funds from a lending institution, typically a bank, to purchase a home or other real estate properties. The property itself serves as collateral for the loan. The repayment of a mortgage debt is typically structured over a fixed period of time, with regular installments that include both principal and interest. The failure to timely repay a mortgage debt can result in the lender taking possession of the property through a process known as foreclosure.
Mortgage-backed securities: Mortgage-backed securities are debt assets tied to the payments of residential mortgage loans, largely issued by Fannie Mae and Freddie Mac. They represent entitlement to principal and interest payments from these loans.
Expanded Definition
Mortgage-backed securities (MBS) are complex financial instruments that are categorized as debt obligations. These securities are akin to bonds, and they entitle the owner to a portion of the income generated from a pool of residential mortgage loans, precisely in the form of interest and principal repayments. The loans are grouped together by financial institutions and sold as securities to investors, who, in turn, receive these payments until the loans are eventually paid off. A significant portion of these MBS are issued by government-run agencies, namely Fannie Mae and Freddie Mac, due to their prominent role in promoting housing finance.
Most favored nation: The “most favoured nation” is a fundamental principle of the WTO and the GATT, stipulating that countries should accord equal trade treatment to all WTO members without showing favoritism to any single country.
Expanded Definition
The term ‘Most Favored Nation’ (MFN) refers to a central tenet upheld by both the World Trade Organisation (WTO) and the General Agreement on Tariffs and Trade (GATT). This principle requires all member nations to apply the same trading conditions, such as tariffs and trade regulations, to all other member nations as they would to their most preferred trading partner. This ensures equitable treatment across the board, preventing any one country from receiving preferential treatment over others. The MFN principle fosters a fair, transparent, and predictable global trading environment.
Multiplier: A multiplier is a measurable value that quantifies how a shift in one variable impacts another variable; used in contexts like government spending, monetary supply, and Keynesian economics.
Expanded Definition
A ‘Multiplier’ is a statistical measure that quantifies the changes in an internal (‘endogenous’) variable due to the fluctuation in an external (‘exogenous’) variable. Essentially, it indicates the rate at which the internal variable will increase or decrease in response to a unit change in the external variable. For instance, in economics, the multiplier can refer to policy multipliers such as the government spending multiplier. This specific type involves calculating the effect of an increase in government spending on aggregate output or income. The money multiplier, on the other hand, reveals the impact of fluctuations in the base money supply on the overall money in circulation within an economy. The Keynesian multiplier is another application, demonstrating how a change in autonomous expenditures, such as investment, influences aggregate demand and further, national income. In all these variants, the fundamental principle remains the same: identifying the degree of change in one factor as triggered by shifts in another. This understanding of multipliers helps in various fields, especially in policy decision-making and economic forecasting.
Mutual fund: A mutual fund is a financial vehicle that combines resources from various investors to purchase a diverse range of securities, with shares distributed among the investors.
Expanded Definition
A mutual fund is an investment vehicle fabricated by an asset management company that amalgamates capital from multiple investors to create a substantial pool of funds. This aggregate resource is then strategically allocated into various financial instruments, such as stocks, bonds, or other assets, to generate income or capital appreciation. In return for their investments, the participants are issued shares proportionate to the amount they have invested, these shares represent a fraction of the ownership of the mutual fund’s portfolio. This allows investors, particularly small-scale ones, to attain wide-ranging and expert-level portfolio management, potential diversification benefits, lower transaction costs, and liquidity on demand, all of which might be challenging to achieve independently.
Mutually beneficial trade: ‘Mutually beneficial trade’ refers to a situation where the trading parties achieve a price that aligns with their respective production costs, ensuring neither party is disadvantaged. Essentially, importers won’t exceed the production cost when purchasing, and exporters won’t sell below their production cost.
Expanded Definition
‘Mutually beneficial trade’ refers to a commercial transaction where all participating entities derive reciprocal advantages. For a trade to be classified as mutually beneficial, the monetary value of the good or service being exchanged must be positioned amid the opportunity costs borne by every producer involved in the trade. Importers – parties that bring in goods or services – will not pay more than the production cost, which includes all resources invested in producing the good or service. On the other side, exporters – those who dispatch goods or services internationally – will not approve a price that falls beneath their production cost. In essence, the price of the good or service must equitably reflect its production cost, ensuring fair profit distribution amongst all concerned parties. This principle of mutual benefits underpins free trade and aims to promote fairness and economic efficiency within the global market.

N

NAFTA (North American Free Trade Agreement): NAFTA is a tripartite agreement enacted in 1993 among the US, Canada, and Mexico to establish a tariff-free trading bloc. It was later renegotiated and renamed USMCA by President Trump, with a notable modification concerning automotive component manufacturing for tariff exemption.
Expanded Definition
NAFTA, or the North American Free Trade Agreement, is a landmark trade pact sealed in 1993 among the United States, Canada, and Mexico. Its primary purpose was to abolish tariff barriers for a free trade environment across these three countries, thereby bolstering the economic interaction among them. However, the agreement drew criticism from various political bodies in the U.S. due to concerns related to job loss and economic disruption. During his presidency, Donald Trump reconfigured NATO into a new trade deal known as USMCA (U.S., Mexico, Canada Agreement). Under this renegotiated agreement, the notable modification was that, in order to be exempt from tariffs, a greater fraction of the components used in vehicles had to be produced within America. This change was intended to further promote American industries and jobs.
NASDAQ: The NASDAQ is an electronic stock exchange platform where securities are traded digitally by brokers.
Expanded Definition
NASDAQ stands for the National Association of Securities Dealers Automated Quotations. It is an electronic, global stock exchange platform that facilitates the buying and selling of securities, particularly equities. Leveraging cutting-edge technology, NASDAQ offers a more streamlined and efficient trading mechanism compared to traditional floor-based exchanges. Its digital nature attracts a large concentration of technology companies, making it a significant barometer for the tech sector’s performance. Notable for its high liquidity and competitive transaction speeds, NASDAQ acts as a crucial component of the modern global financial ecosystem. Overall, it symbolizes the intersection of technology and finance in fostering economic growth and supporting capital formation.
Nairu (Non-Accelerating Inflation Rate of Unemployment): NAIRU, short for Non-Accelerating Inflation Rate of Unemployment, refers to the specific level of unemployment that doesn’t increase inflation, framing it as a threshold beyond which attempts to reduce unemployment would merely fuel inflation. Calculating NAIRU is complex and can fluctuate over time.
Expanded Definition
The ‘Non-Accelerating Inflation Rate of Unemployment’ (NAIRU) is a pivotal economic concept that identifies the threshold of unemployment which, when undercut, triggers an upswing in inflation and wages. This theory is an evolution of Milton Friedman’s ‘natural rate of unemployment’ hypothesis, asserting that a certain measure of unemployment is inevitable – be it from job transitions or skill enhancement periods. Endeavors to drive unemployment below this deemed ‘natural’ level only seeks to intensify inflation. Meanwhile, the determination of NAIRU possesses substantial complexity due to its variable nature over time. It’s crucial to note intertwined concepts like frictional unemployment – a byproduct of job transition periods – and the Phillips curve, which maps the inverse relationship between unemployment and inflation rates. Understanding NAIRU requires a comprehensive grasp of these associated concepts and carefully following economic indicators. In essence, NAIRU is a dynamic, complex economic idea that explains the delicate balance between unemployment rates and the potential inflation that may ensue if these rates are artificially manipulated to be too low.
Nash equilibrium: Nash Equilibrium refers to a state in a strategic interaction where each participant’s strategy is optimal given the strategies of all others, even though it may not necessarily be the best for the overall society.
Expanded Definition
The ‘Nash Equilibrium,’ formulated by American mathematician John Nash in the late 1940s, is a pivotal concept in the field of economics. It refers to a specific type of solution in game theory where each player, given knowledge of the strategies of the rest of the players, has no incentive to unilaterally change his or her own strategy. In simple terms, in a Nash Equilibrium, every participant’s chosen strategy is optimal against those of the others. Notably, while this condition represents an individual optimization standpoint, it may not necessarily result in the best overall outcome for the collective or societal good. John Nash’s work on this idea was recognized with a portion of the Nobel Prize for Economics in 1994.
National debt: National debt refers to the total amount owed by a country’s government, accumulated over time due to consistent budget deficits. It’s the sum of past borrowings that are yet to be repaid.
Expanded Definition
‘National debt’ or ‘government debt’ refers to the total amount of money that a country’s central government has borrowed to fund its operations and programs. Specifically, it accumulates through consecutive budget deficits, where the government’s financial obligations or expenditures exceed its income or revenues for a given period (usually a fiscal year). These borrowings can be in the form of treasury bonds, bills, or notes that are issued to domestic and international investors and can be measured as a ratio to the country’s Gross Domestic Product to evaluate the debt burden. It’s critical to note that while national debt can stimulate economic growth if efficiently managed, it may also pose risks to fiscal stability if it reaches unsustainable levels.
National income: National income is a measure of the total monetary value of all final goods and services produced in a country within a given period, encompassing both Gross Domestic Product (GDP) and Gross National Product (GNP).
Expanded Definition
National income refers to the total economic output of a nation, measured as the sum of the value of all goods and services produced within a given period. It encompasses two main indicators: Gross Domestic Product (GDP) and Gross National Product (GNP). GDP represents the total value of all goods and services produced within a nation’s geographic boundaries, including production by both domestic and foreign companies. GNP, on the other hand, measures the value of goods and services produced by residents of a country, regardless of their location. Therefore, National income provides a comprehensive picture of a nation’s economic health and can be an important tool for economic analysis and policy planning.
Natural experiment: A natural experiment is an observational study that leverages natural occurrences or circumstances, such as policy changes in one area but not another, as comparable conditions to mimic a controlled experiment, primarily used in economics.
Expanded Definition
A ‘Natural experiment’ refers to a research concept predominantly applied in the field of economics where conducting standard, controlled experiments on live economies is not typically feasible. Unlike laboratory-based scientists who can design and conduct experiments under thoroughly controlled conditions, economists often use real-world occurrences known as ‘natural experiments’ to analyze economic behavior and outcomes. This concept involves observing and analyzing the effects of naturally occurring events like policy changes, demographic shifts, or other unique situations. For example, when the minimum wage increases in one region but stays the same in another, economists can study the divergent economic impacts between the two areas as a natural experiment. Dr. David Card, a Nobel laureate, and the late Alan Krueger were trailblazers in employing this approach in economics enabling economists to investigate causal relationships and effects in a more complex, real-world environment. In essence, natural experiments provide valuable, spontaneous frameworks for economists to study economic phenomena in settings where traditional experimental design cannot be employed. These offer empirical evidence, lending credence to economic theories and principles.
Natural rate of unemployment: The natural rate of unemployment refers to the baseline level of joblessness in an economy that arises from non-demand related factors, excluding temporary fluctuations due to economic cycles.
Expanded Definition
The ‘Natural Rate of Unemployment’ is a concept within economics that refers to the baseline level of unemployment that exists in an efficiently functioning economy due to natural market forces, regardless of the state of aggregate demand. This rate is not influenced by cyclical trends or business cycles that impact the economy temporarily. Instead, it is determined by structural factors such as technological change and market imperfections learned through the natural process of jobs being created and destroyed, or the mismatch between the skills held by jobless workers and the skills needed by employers. This level of unemployment is often viewed as ‘inevitable’ in a dynamic economy and policy makers often use it as a benchmark to assess the overall health of an economy’s labor market.
Natural resources: Natural resources are materials or substances, originating from earth, which are utilized in the production of goods and services.
Expanded Definition
‘Natural resources’ can be professionally defined as tangible and intangible elements or commodities that exist inherently within our environment, without the addition of human intervention. They are naturally occurring entities, found either on or beneath the Earth’s surface, or in the atmosphere, which are harnessed and utilized for the production of various goods or the provision of services. The exploitation of these resources fundamentally contributes to societal growth, economic development, and the overall advancement and sustainment of human life. Natural resources encompass various categories including soil, water, minerals, forests, wildlife, air, sunlight, and fossil fuels, all of which form the bedrock of our vital production and consumption activities.
Needs: ‘Needs’ refer to the essential demands or requirements that hold a high priority, derived from an individual’s desire or necessity.
Expanded Definition
‘Needs’ are essential elements required for an individual or organization to function effectively, unlike ‘wants’ which are typically more discretionary. While ‘wants’ may be influenced by societal expectations, culture, or other factors, ‘needs’ are fundamental requirements that are crucial for survival, productive functioning, or ongoing stability depending on the context. These may include basic physiological needs like air, water, and food for individuals or prerequisites such as capital, resources, and skilled workforce for an organization. Consequently, ‘needs’ are typically afforded a higher level of priority compared to ‘wants’.
Negative amortization: Negative amortization is a situation where the loan balance grows because the payments aren’t enough to cover the due interest, resulting in unpaid interest being added to the loan’s principal.
Expanded Definition
Negative amortization refers to a financial scenario where the outstanding balance of a loan grows over time instead of reducing, as is typical in regular loans. This situation arises when the periodic loan payments, often monthly, are insufficient to cover the accrued interest for that period. Instead of the borrower reducing the principal loan amount, the unpaid interest gets added to the loan amount, leading to an increased debt. This approach to loan repayment is usually associated with certain types of mortgages and student loans and should be carefully considered, as it can result in a higher indebtedness over the lifespan of the loan.
Negative equity: Negative equity refers to the scenario where the outstanding loan amount on a property surpasses its current market value.
Expanded Definition
‘Negative equity’ is a financial term used to describe a situation where the outstanding balance of a mortgage loan surpasses the current market value of the associated property. This typically occurs when property values decrease or when an individual borrows excessively for a property. In this state, the homeowner effectively owns less of the house than they owe to the bank or lender. It’s a problematic situation for homeowners as it can limit their mobility and financial flexibility, as well as potentially leading to foreclosure if they can’t afford mortgage payments.
Negative externality: A negative externality is an unintended harmful consequence experienced by third parties due to the production or consumption of a good or service.
Expanded Definition
A ‘Negative externality’ refers to the unintended and adverse impacts that arise typically when a product or service is produced or consumed, indirectly affecting individuals or communities who aren’t directly involved in the economic transaction. Essentially, these are costs experienced by third parties detached from the process of the production or purchase of said good or service. These indirect effects could take several forms, such as environmental pollution, public health issues, or deterioration of communal resources. As they are not usually considered within the pricing mechanism of the goods or services involved, these externalities may give rise to social costs not reflected in market pricing. It’s one of the key reasons why regulatory intervention by governments is often considered necessary in markets.
Negative incentive: A negative incentive is a punitive measure aimed at deterring undesired actions or behaviors.
Expanded Definition
A ‘Negative Incentive’ is defined as a strategic deterrent or sanction that dissuades individuals or groups from exhibiting a particular behavior or making certain decisions. This mechanism works by linking adverse consequences – such as financial penalties, increased effort requirements, or the potential for disapproval or judgement – with the undesirable action, thereby motivating an alternative, more favorable course of action.
Negative income tax: Negative income tax is a system designed to aid the financially disadvantaged by supplementing their income to a specific threshold, serving as a more streamlined and less stigmatizing alternative to traditional welfare payments.
Expanded Definition
A ‘Negative Income Tax’ describes a specific type of economic policy designed to aid individuals living below a particular income threshold. In essence, it embodies a proactive financial mechanism that the government deploys to alleviate poverty conditions in society. Unlike traditional welfare systems that could possess complex administrative procedures and potentially attached social stigma, the negative income tax system promotes a more straightforward approach. In this case, the government directly issues payments to eligible individuals or households that fall below the predetermined income criteria. This method’s straightforwardness, accessible nature, and capacity for social empowerment make it a possible alternative to traditional welfare support systems.
Negative interest rates: Negative interest rates are a monetary policy tool where financial institutions are charged for depositing funds, effectively encouraging lending and investment to stimulate economic growth. Introduced post 2007-09 financial crisis, they are accepted because potential losses may be higher elsewhere, deflation could turn these rates into real gains, and keeping physical cash is impractical.
Expanded Definition
‘Negative Interest Rates’ refer to an unconventional monetary policy tool deployed in periods of severe economic downturn, such as the financial crisis between 2007 and 2009. This concept speculated to be outside the purview of traditional economic theory, involves requiring investing entities to essentially pay for depositing or lending their funds. Introduced as an innovative method by central banks to stimulate economic activity, negative interest rates have been accepted by investors for several reasons. They might anticipate greater losses in alternative investments, believe that depreciating prices could transform negative rates into positive figures in real terms, or find the physical storage and management of their funds (as cash or banknotes) to be inefficient or cumbersome. This strategy often comes into play when traditional approaches, such as lowering interest rates to near zero or the ‘zero lower bound’, are insufficient or impractical. More insight on this topic can be found in this dedicated article.
Neoclassical economics: Neoclassical economics, associated with Alfred Marshall, is a theory that emphasizes consumer preferences and utility to explain pricing, rather than just production costs, thereby enabling comprehensive economic modeling.
Expanded Definition
‘Neoclassical economics’ refers to an influential school of thought within economic theory, often linked to the work of English economist Alfred Marshall, that evolved during the late 19th and early 20th centuries. Unlike classical economics, which prioritized the cost of producing goods or services in price determination, neoclassical economics placed greater emphasis on consumer preferences and the perceived satisfaction or ‘utility’ derived from a product or service. By concentrating on both the producer’s and consumer’s perspective in utility maximization, the neoclassical economists were able to create comprehensive models explaining the function and interplay of diverse economic activities.
Neoliberalism: Neoliberalism is an economic ideology emphasizing on tax reduction, limited public expenditure, decentralized control via deregulation, and private ownership through privatisation, notably advocated by Margaret Thatcher and Ronald Reagan.
Expanded Definition
‘Neoliberalism’ is a socio-economic theoretical framework primarily associated with the economic policies implemented by Margaret Thatcher in the UK and Ronald Reagan in the US during the 1980s. The term is typically used by critics, rather than proponents, to describe this economic philosophy. Specific policy applications typically encompass substantial reductions in taxation, strict limitations on public expenditure, widespread adoption of privatization initiatives, and substantial deregulation of business and industry. Despite these approaches often being labeled as ‘neoliberal’, it’s important to note that neither Thatcher nor Reagan formally identified their policies with this term. This economic approach also aligns closely with the principles of supply-side economics, a theory promoting economic growth through policies that reduce barriers to produce goods and services. A comprehensive understanding of ‘neoliberalism’ thus requires a consideration of these elements, with acknowledgement that the term carries a range of interpretations depending on one’s ideological perspective.
Nest egg: A nest egg is a sum of money set aside for future financial goals like retirement or property purchase.
Expanded Definition
A ‘Nest Egg’ is a financial term used to describe a sum or pool of savings that is accumulated over a period of time, and is specifically earmarked for securing one’s future. It often serves a precise purpose, such as facilitating a comfortable retirement or enabling the purchase of a significant asset like a house. Additionally, ‘Nest Egg’ can be used to denote an amount set aside as a safety net to cover contingencies or emergency situations. The creation of this ‘Nest Egg’ is primarily governed by financial planning and disciplined savings habits.
Net exports: Net exports, a key GDP component, represent the value of a country’s total exports minus its imports, essentially capturing the country’s trade balance.
Expanded Definition
‘Net exports’ can be more precisely defined as a crucial component of a country’s Gross Domestic Product (GDP), representing the balance between goods and services that a nation exports and those it imports. Formulated by subtracting the value of imports from the value of exports, net exports could be positive or negative. A positive net export denotes that a country exports more than it imports, contributing favorably to the GDP. Conversely, a negative net export indicates that a country imports more than it exports, reflecting a trade deficit that could affect the GDP negatively. This concept is not limited to the U.S., but applicable worldwide.
Net pay: Net pay is the total earnings an employee receives after all taxes and other deductions have been subtracted from their gross income. It’s essentially the individual’s ‘take-home’ pay.
Expanded Definition
‘Net pay’ is a term employed in financial and payroll contexts, referring to the amount of money an individual actually takes home after mandatory deductions and taxes. This total includes, but is not limited to, subtraction of federal, state, and local taxes, social security contributions, health care and retirement plan premiums, and additional deductions like union dues or debt repayments. It’s essentially the ‘take-home’ pay that an employee receives in their bank account or paycheck, distinct from the ‘gross pay,’ which is the pre-deduction total. In essence, the ‘net pay’ offers a more accurate depiction of an individual’s expendable income.
Net present value: Net present value (NPV) is a financial metric that quantifies the profitability of a project, assessing its projected revenue against the current value of money, accounting for assumptions about future growth and the applied discount rate. It’s a crucial tool for evaluating the risk and return of investment decisions.
Expanded Definition
‘Net Present Value (NPV) is a widely adopted financial assessment tool utilized for evaluating the viability of a business investment or project. It represents the monetary difference between the present value of cash inflows and the present value of cash outflows over a certain period of time. The concept involves predicting all the anticipated future revenues generated by an investment and then discounting them back to the current dollar value, taking into account the time value of money. This means that the value of a specific amount of money today is typically higher than the identical amount in the future due to the potential earning capacity of money. The NPV calculation is significantly influenced by the projected growth rates of future revenue and the discount rate utilized, which essentially embodies the opportunity cost of capital. The inherent risk associated with NPV lies in the potential for overly optimistic estimates which may not materialize in reality. As such, a careful and conservative approach is advisable when using NPV for investment decisions.’
Net worth: Net worth is the total value of an individual’s assets after subtracting all owed debts, reflecting their financial health.
Expanded Definition
‘Net worth’ is a fiscal term that denotes the total wealth of an individual, corporation, or entity. It is quantitatively calculated by subtracting the value of all liabilities (debts, outstanding payments, bills, obligations etc) from the total value assets (cash, property, investments, valuables etc) owned. In a simple context, if all debts and outstanding payments were to be paid off in an instance, the remaining value or resources would embody the ‘net worth’. A positive net worth signifies an individual or entity’s financial strength, while a negative net worth could be indicative of financial instability or insolvency.
Network effect: The network effect refers to the increased value or utility a user gains from a product or service as the number of its users expands. It can either enhance or diminish a user’s experience.
Expanded Definition
‘Network effect’ refers to the phenomenon where the value or utility of a product, service, or platform increases as more individuals use it. This dynamic is predominantly seen in digital technologies and platforms. A positive network effect occurs when the addition of new users enhances the value of that good or service to existing users. For example, as more people use a social networking site, new content, connections, and interactions become available to other users, thus enhancing its value. In contrast, a negative network effect arises when the increasing user base results in a degradation of service quality or value for existing users, perhaps due to overpopulation, decreasing performance, or disruption of established systems and conventions. The principle of network effects is a vital consideration for businesses, particularly those in the digital and tech sectors, when strategizing growth and customer acquisition plans.
Network good: A ‘Network Good’ is a product or service whose value amplifies as its user base expands.
Expanded Definition
A ‘Network Good’ is a term that refers to a product or service whose perceived worth or utility for an individual user significantly intensifies as the number of overall users adopting or using that product or service increases. This concept is rooted in the principle of the ‘network effect’, where the growth in users tends to create a kind of cascading value, improving the overall experience or effectiveness of the product or service. Examples often include social media platforms, communication applications, or even subscription-based services, as their usefulness typically escalates with the breadth and activity level of their user base.
Nobel prize for economics: The Nobel Prize for Economics, initiated in 1969 by Sweden’s central bank in memory of Alfred Nobel, acknowledges outstanding contributions to the field of economics. Renowned laureates include Paul Samuelson, Simon Kuznets, and Milton Friedman.
Expanded Definition
The Nobel Prize for Economics, officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is a prestigious international award administered by Sweden’s central bank and was first rewarded in 1969. This award differs from the original Nobel Prizes, established by Alfred Nobel’s will; nonetheless, it was introduced to honour and extend Nobel’s legacy beyond his death. The Economic Sciences Nobel Prize recognizes remarkable contributions to the field of economics, with laureates selected for innovative theories, empirical research, or applied work that has had a significant impact on economic policy. Renowned laureates of this prize include economists like Paul Samuelson, Simon Kuznets, and Milton Friedman, all of whom have profoundly influenced economic understanding and policy worldwide.
Nominal: ‘Nominal’ refers to the current value of a currency, without adjusting for inflation.
Expanded Definition
‘Nominal’ refers to the assessment of economic, financial, or other numerical values based on the prices prevailing at the time of measurement, without adjusting for factors like inflation. This term is often used to describe the face value of a variable in current or today’s prices, not necessarily reflecting the real economic conditions, purchasing power, or comparative worth over time.
Nominal gross domestic product: Nominal GDP is the total economic output of a nation, including goods and services, measured at current market prices within a specific year. It’s also referred to as current-dollar GDP.
Expanded Definition
‘Nominal Gross Domestic Product’ refers to the comprehensive measure of a nation’s total economic activities within a particular year. It constitutes the total market value of all final products and services produced in a specified period, as calculated using the prevailing prices of that same year. This metric, often referred to as current-dollar GDP, does not adjust for inflation or price changes, hence the economic output is evaluated at the present market prices. This methodology ensures a transparent understanding of economic productivity and performances in the short-run, including the effects of pricing trends on a country’s economic value.
Nominal interest rates: Nominal interest rates are the advertised or declared rates of interest without considering the impact of inflation, which may diminish their real value.
Expanded Definition
‘Nominal Interest Rates’ are often described as the basic or advertised rates of interest, without factoring in elements like inflation or compounding effects. In essence, they represent the simplest form of quoted interest rate. For instance, if a financial institution proclaims a 5% nominal interest rate, it indicates the baseline interest you’d earn or owe. However, it is essential to understand that these rates don’t necessarily depict the complete picture. In situations where inflation rate is at 8%, the actual value, or purchasing power, of your capital is eroding, approximately by 3% in this case. Therefore, ‘Real Interest Rates’ – which account for the prevailing or anticipated inflation rates – are often deemed a more accurate measure of the true return or cost of borrowing.
Nominal value: Nominal value refers to the face value of a security or asset based in its current market price, without accounting for factors like inflation or purchasing power.
Expanded Definition
“Nominal value” refers to the face value or the stated value of a financial instrument or asset, such as bonds or stocks, at the time of issue. This value, which ignores the effects of inflation over time, often sets the benchmark for calculating interest or other related performance indicators. It is also the standard worth assigned to goods or services in contemporary market situations, distinctly separate from values adjusted for purchasing power or relative buying strength.
Non-interest-bearing account: A non-interest-bearing account is a type of banking account where the deposited funds generate no interest. It’s also known as a zero-interest account.
Expanded Definition
A non-interest-bearing account, also known as a zero-interest account, is a specific type of account where the monetary principal, essentially the sum of money deposited or the existing account balance, does not earn any interest. This means that the account owner will not receive any additional returns on their deposited amount from the bank or financial institution, the deposited money remains unchanged over time regardless of the duration it is held in the account. This kind of account is often used for transactional purposes and offers unlimited access to your funds.
Non-liquid asset: A non-liquid asset is a property or investment that cannot be quickly and smoothly traded for cash without a significant drop in value.
Expanded Definition
A ‘Non-liquid asset’ is a type of asset that cannot be readily converted into cash without potentially incurring significant loss in its original value. It is characterized by its lack of a readily accessible market where it can be sold quickly. Such assets often require substantial time or negotiations to convert them to cash. Examples of non-liquid assets include real estate properties, art collections, or certain types of investments or securities which may not have an immediate buyer.
Non-recourse loans: A non-recourse loan is a secured debt where the lender relies exclusively on the collateral for repayment, if the borrower defaults on the principal or interest payments.
Expanded Definition
A non-recourse loan is a specific type of loan that is safeguarded by pledged collateral, which can encompass a variety of assets. In this agreement, the lender accepts the provision that if the borrower does not meet the repayment obligations, such as the principal and interest payments, then the lender’s sole recourse would be seizing and liquidating the collateral. The key distinguishing feature of a non-recourse loan is that the lender cannot seek any additional compensation, even if the collateral’s value does not fully cover the defaulted loan amount. Hence, the financial risk is predominantly shouldered by the lender, as opposed to the borrower.
Nondischargeable debt: Nondischargeable debt is a financial obligation that remains obligatory and cannot be eradicated even after bankruptcy.
Expanded Definition
Nondischargeable debt refers to a specific category of obligations that are not absolved or cleared even when an individual or business entity undergoes a bankruptcy proceeding. In essence, bankruptcy does not absolve the debtor’s responsibility to repay these particular debts. They often involve financial commitments tied to a public good or moral responsibility, such as student loans, child support payments, recent taxes or fines imposed by government bodies. The objective behind such a ruling is to prevent individuals or organizations from evading the due fulfilment of these obligations under the guise of bankruptcy.
Nondurable good: A nondurable good is a product with a lifespan of less than three years, particularly items like food or apparel.
Expanded Definition
A ‘Nondurable Good’ is an economic term referring to goods that have a lifespan lasting less than three years, hence their consumption usually takes place within a single use to up to three years period. These goods are typically consumed or utilized almost immediately and they wear out or get used up at a rapid rate. Examples include perishables like food or drinks, disposable items, fuel, personal care products, or clothing. These are quick turnover items that necessitate frequent purchase and replacement, making them a crucial component of consumer spending and economic analysis.
Nonexcludability: Nonexcludability is a characteristic of a good or service that allows it to be accessed by individuals without needing to make a payment; essentially, no one can be prevented from benefiting from it.
Expanded Definition
Nonexcludability is an economic concept referring to the intrinsic challenge in preventing individuals, often termed as free riders, from gaining undue advantages or deriving benefits from a specific good or service without contributing to its cost or value. This typically occurs in the case of public goods and services, where exclusion of non-contributors is either unfeasible or highly impractical. In such scenarios, these goods or services are readily accessible to all individuals, regardless of whether they have paid for it or not, hence making it nonexcludable.
Nonexempt property: Nonexempt property refers to the assets a debtor is obliged to surrender during bankruptcy proceedings for the purpose of repaying creditors.
Expanded Definition
‘Nonexempt property’ can be defined as a specific category of assets that a debtor, who has sought legal insolvency through the bankruptcy process, is mandated to surrender. The purpose of relinquishing these assets is to partially or completely repay the outstanding debts owed to various creditors. The type of property classified as nonexempt can vary based on jurisdictional bankruptcy laws.
Nonprofit school: A nonprofit school is an educational institution, encompassing public schools to certain private schools and colleges, that functions without the aim of earning financial profit.
Expanded Definition
A ‘Nonprofit school’ is an educational institution ranging from elementary to higher level institutions such as colleges and universities, that is operated under public administration or as a separate entity outside the public school system. These schools are established with a primary goal of providing education rather than generating financial profit. Any surplus of revenue over expenses is typically reinvested back into the school to enhance educational services and programs, rather than being distributed to stakeholders as in a for-profit model.
Nonrivalry (in consumption): Nonrivalry in consumption refers to the characteristic of a good or service where its use by one individual doesn’t diminish its availability or usefulness to others.
Expanded Definition
Nonrivalry, in the context of consumption, refers to a unique characteristic of a particular type of good or service wherein the use or enjoyment by one individual does not detract from or diminish the ability of other individuals to simultaneously use or enjoy the same good or service. In other words, the consumption of a nonrival good by a consumer is not at the cost of another consumer’s ability to benefit from the same good. This is a key factor distinguishing such goods, often seen in the realm of digital or public goods, from typical physical goods which can typically only be consumed or used by one person at a time.
Normal distribution: The normal distribution, or bell curve, refers to statistical occurrences where the majority of data points center around the mean, with fewer instances of extreme values, often demonstrated in human heights. In finance, applying this model can pose risks due to unforeseen extreme events or ‘fat tails’.
Expanded Definition
The ‘Normal Distribution,’ also referred to as the ‘bell curve,’ is a prominent statistical concept that describes the distribution of various types of data or phenomena. In a normal distribution, the majority of the data points tend to gravitate towards the central value, known as the mean or average, thereby creating a symmetrical, bell-shaped curve when graphically represented. The further the data points are from the mean, the rarer they become, which indicates fewer outliers within the data set. A prime example of a normal distribution can be seen in the human population’s height. Most people’s heights are close to the average, while very short and very tall individuals constitute a smaller proportion, hence creating a bell-shaped distribution. Normal distributions are frequently utilized in various fields, including financial modeling by bankers. They often use this distribution to estimate likely outcomes and risks. However, this can sometimes lead to inaccurate predictions due to unexpected extreme events or ‘fat tails,’ which represent heavier tails in the distribution compared to a normal distribution. These extreme events, although rare, can deviate significantly from the mean, and their impact can be disproportionately large, hence potentially skewing predictions made on the assumption of a perfect normal distribution.
Northern Rock: Northern Rock was a UK-based bank, nationalized in 2008, with a primary focus on mortgage lending for home buyers.
Expanded Definition
Northern Rock is a notable United Kingdom-based banking institution that came under transient governmental proprietorship in February 2008. This was a key measure to ensure its stability and continuity in the face of financial distress. The bank predominantly focused its financial services on the provision of mortgage lending to private individuals. Its core goal was to facilitate home ownership, thereby playing an instrumental role in the residential housing market.

O

OECD: The OECD, established in 1961, is a coalition of developed nations that generates reports on member economies and functions as a central research source for policy options and economic data.
Expanded Definition
The Organisation for Economic Co-operation and Development (OECD), established in 1961, is an intergovernmental organization comprised predominantly of developed countries. Its main purpose is to promote policies that improve the economic and social well-being of its member nations and the international community. It undertakes extensive research and generates comprehensive reports on the health of individual economies, across topics such as economic performance, education, health, and the environment. To aid policy decisions, it provides a platform for dialogue, sharing of experiences, and collaborative exploration of crucial global issues. The OECD not only acts as a storehouse for a vast range of economic data but also provides an interactive space for exchange of ideas and scrutinizing policy options. For an in-depth understanding, refer to the provided OECD explainer.
OPEC: OPEC is a cartel of oil-producing countries with a historical ability to influence global oil supply and pricing, its impact having been notably experienced in the 1970s, although its sway has somewhat receded due to the emergence of other oil producers.
Expanded Definition
OPEC, an abbreviation for the Organisation of Petroleum Exporting Countries, is an intergovernmental entity founded in 1960 that comprises several oil-exporting nations. The chief objective of this organization is to synchronize and unify petroleum policies among its members, in order to ensure stability in oil markets, secure an economic and regular supply to consumers, fetch a fair return on capital for those investing in petroleum industries, and maintain a steady income to producers. This is primarily done by manipulating oil supply, which, in turn, can affect oil prices. OPEC gained significant influence during the 1970s when it amplified the price of oil fourfold, culminating in the ‘stagflation’ of that time – a term referring to a period of stagnant economic growth coupled with high inflation. However, the emergence of new oil producers such as Norway and the significant advancement in shale oil production in the United States impacted OPEC’s dominance in global oil markets. Presently, while OPEC’s authority has experienced some decline, it nevertheless remains a key player in the global petroleum industry. Notably, its decisions regarding oil production often involve consultation with non-member countries like Russia, highlighting its continued importance in influencing global oil prices and markets.
Office of Management and Budget: The Office of Management and Budget is a presidential agency that principally manages the development and implementation of the federal budget, enacting governmental policy across all departments.
Expanded Definition
The Office of Management and Budget (OMB) is a central agency within the executive branch of U.S. presidential administration. It acts as a crucial implementer and enforcer of presidential policy across all governmental departments. The OMB’s robust mandate is actualized through five key processes with budget development and execution being among the most significant. Its responsibilities entail not only framing the president’s fiscal policy but also overseeing its execution throughout the federal bureaucracy. This ensures coherence between the administration’s aspirations and day-to-day operations while fostering fiscal discipline and efficiency in government operations.
Office of Thrift Supervision (OTS): The Office of Thrift Supervision (OTS) is a division of the Department of Treasury responsible for regulating and supervising savings associations and their related entities, both domestically and internationally.
Expanded Definition
The Office of Thrift Supervision (OTS) is a government agency that acted as the federal authority in charge of monitoring and regulating savings associations, often referred to as “thrifts”, and their corresponding subsidiaries. In addition to this, the OTS had a scope of responsibility that extended to the management of both domestic and international operations carried out by holding companies and affiliates that had possession over these savings institutions. This office was a part of the larger administrative entity, the United States Department of the Treasury. The role of the OTS was essentially to ensure the health, stability, and compliance of these financial institutions within the regulatory framework.
Office of the Comptroller of the Currency (OCC): The OCC is a division of the U.S. Treasury Department responsible for regulating and supervising national banks and international banking entities’ federal branches.
Expanded Definition
The Office of the Comptroller of the Currency (OCC) is a key department within the U.S. Department of the Treasury. Its principal functions involve authorizing the establishment (‘chartering’) of national banks, setting regulations they must follow, and monitoring their activities to ensure compliance (known as ‘supervision’). Beyond domestic institutions, the OCC also lends its oversight capacity to federal divisions and representatives of foreign banks operating within the United States. The ultimate goal of the OCC is to ensure the soundness, safety, and fairness of the national banking system in the interest of consumers, businesses, and the broader economy.
Offshore haven: An offshore haven is a region or country with minimal or no taxes, often selected by corporations and wealthy individuals to decrease their tax liabilities and protect their financial assets, thereby causing significant global tax revenue loss.
Expanded Definition
‘Offshore Haven’ refers to a country or jurisdiction that imposes minimal to zero taxes on financial transactions or profits. It is strategically selected by multinational and financial companies to serve as a hub for certain operations in order to reduce their overall tax liability. Additionally, wealthy individuals may also place their assets in these offshore havens to decrease their personal tax expenses. According to the International Monetary Fund (IMF), the global usage of these tax-friendly offshore havens results in an estimated annual tax revenue loss ranging from $500 billion to $600 billion for governments worldwide. Please refer to this detailed explainer for further information.
Oligopoly: An oligopoly is a market condition where a limited number of large firms have significant control over the market share, due to high entry barriers and lack of viable product substitutes.
Expanded Definition
An oligopoly refers to an economic market structure typically characterized by the control of a specific market or industry by a small number of large corporations (sellers). This structure creates a unique scenario in which each firm operates with an awareness of the decisions of its competitors, as their actions directly influence each other’s market position. Additionally, an oligopolistic market often features significant barriers to entry, which restrict new competitors from entering the market. These barriers could include high startup costs, proprietary technology, or governmental regulations, among others. Furthermore, products or services offered within an oligopoly are usually relatively homogeneous, with few close or perfect substitutes available. This limitation further consolidates the market power of the existing companies. As such, oligopolies may have the potential to exercise substantial power over prices and other market factors, contributing to distinctive economic dynamics.
One-sided market: A one-sided market refers to a traditional economic model where buyers engage directly with sellers for transactions, without intermediaries.
Expanded Definition
A “one-sided market” refers to a conventional type of market structure in which purchasers conduct transactions directly with a single seller. It is a market dynamic characterized by a single entity, the seller, who influences the price and availability of a product or service. These markets operate on the model where the seller provides a product or service that is purchased and consumed by the buyers. The interaction between the buyer and the seller is direct and the economic activity is essentially linear, without the involvement of additional parties or intermediaries. This structure allows for straightforward pricing, supply and demand dynamics. Examples include traditional brick and mortar stores where customers directly buy goods or services from the seller.
Online banking: Online banking is a digital service provided by banks or credit unions, enabling customers to perform various financial transactions via their website or app.
Expanded Definition
‘Online banking’, often referred to as internet banking, is a digital banking service facilitated by financial institutions like banks or credit unions. It enables customers to perform a multitude of financial activities via the institution’s website or mobile application. Such activities could include but are not limited to, checking account balances, transferring funds between accounts, paying bills, and setting up account alerts. This service provides the convenience of managing one’s finances from any location at any time, eliminating the need for physical visits to the bank or credit union. In sum, online banking is a powerful tool offering modern banking conveniences tailored to meet today’s digital lifestyle needs.
Online(-only) bank: An ‘Online(-only) bank’ is an internet-exclusive banking institution that operates without physical branches.
Expanded Definition
An online-only bank, also known as a digital bank, is a financial institution that offers its services exclusively via internet-based platforms. Unlike traditional banks, these banks do not have physical branches for customers to visit, hence, all banking activities such as account opening, transactions, deposits, withdrawals, and customer service inquiries are conducted through secure websites or dedicated mobile applications. This enables customers to manage their finances and perform banking operations conveniently from anywhere, 24/7. It’s important to note that these banks are still regulated by the same entities as traditional banks, making them just as safe and secure.
Open data: Open data refers to data that is legally accessible to everyone, free of copyright restrictions, and available for unrestricted use.
Expanded Definition
“Open data” pertains to digital data that is intended for public accessibility and unrestricted use. This information is typically characterized by its unrestricted nature in terms of copyright, patents, or other mechanisms of control. Although this definition references the U.S. context, the concept is universal. In essence, “open data” is data made available to the public in an effort to encourage transparency, collaboration, and unrestricted use, all of which ultimately aim to generate sociotechnical advancement.
Open market operations: Open market operations refer to the Federal Reserve’s procedure of trading government securities to adjust bank reserves, thereby controlling money supply in the economy. Purchases increase reserves (injects liquidity), while sales decrease them (withdraws liquidity).
Expanded Definition
“Open Market Operations” can be aptly defined as the strategic financial activities orchestrated by the Federal Reserve, involving the purchase and sale of government securities, predominantly Treasury notes, to primary dealers in the open market. These actions are precisely aimed at controlling the money supply within the economy. When the Federal Reserve buys these government securities, the action effectively injects money into the banking system by increasing the reserves held by banks. Consequently, this course of action elevates lending capacity and stimulates economic activity by making credit more accessible. On the contrary, when the Federal Reserve sells these securities, it reduces the quantity of money in the banking system by decreasing the banks’ reserves, diminishing their lending capacity. This typically occurs in periods of heating economic conditions to avert inflation. Open Market Operations, therefore, serve a pivotal role in ensuring the balance and stability of the economy by maneuvering the money supply, influencing interest rates, managing inflation, and indirectly guiding the economic growth rate.
Opportunity cost: Opportunity cost is the trade-off value of the foregone alternative when a choice is made; it’s the sacrifice associated to decisions.
Expanded Definition
‘Opportunity cost’ is a key concept in economics, representing the potential benefits an individual, company, or economy misses out on when choosing one alternative over another. In essence, it refers to the trade-off in potential gain from other options when one option is chosen. It’s an important factor to consider in decision-making processes since every resource, be it time, money, or manpower, is limited. By understanding the opportunity cost, one can evaluate the true cost of a decision, which is not always reflected in its direct expenses. Essentially, it embodies the reality that when one decision is made, the potential value or benefit of all other possible decisions, also known as the next-best option, is surrendered.
Opportunity cost (elementary): Opportunity cost refers to the potential benefit or value that is forfeited when one alternative is chosen over another. It is essentially the cost of the next best option forgone.
Expanded Definition
Opportunity cost, in its elementary definition, refers to the potential benefit or value that an individual, business, or economy forfeits when they make a decision to choose one option over another. It is essentially the trade-off or the opportunity forgone by deciding to utilize a scarce resource for a particular purpose, resulting in the inability to use that same resource for the next best alternative choice. It is a key concept in economics that allows effective decision-making by assessing the implications and potential missed benefits of choosing one alternative from many available options.
Optimal currency area: An optimal currency area refers to an economic region where leveraging a shared currency would yield maximum efficiency, characterized by highly interconnected economies, flexible labor markets, and potential for between-nation fiscal transfers, as conceived by Nobel laureate Robert Mundell.
Expanded Definition
An ‘Optimal Currency Area’ (OCA), is a theoretical concept in the field of economics that identifies specific geopolitical regions where the use of a singular, shared currency would lead to the highest level of economic efficiency. This model was developed by esteemed economist Robert Mundell, who received a Nobel Prize for his contributions. The OCA model takes into consideration several vital criteria. For a region to be classified as an Optimal Currency Area, there should be a high degree of economic integration, indicating that the economies of the nations within the region are closely interlinked. This concept also posits that labor markets within the area should be flexible, meaning that workers can freely move across national boundaries within the region, without any administrative or legal hindrances, in response to labor demand and wage differences. Moreover, the existence of a mechanism for fiscal transfers between nations is another important condition. This suggests that there must be provisions for the redistribution of funds from one nation to another within the same region, especially to help countries experiencing economic difficulties. In summary, an Optimal Currency Area refers to a group of nations whose economic symbiosis and adaptability make them ideal candidates for using a single currency, maximizing monetary efficiency across borders for the collective prosperity of the region.
Option: An option is a contract granting the right, but not the obligation, to buy or sell a certain financial asset at a predetermined price.
Expanded Definition
An “option” is a term used in finance, representing a type of derivative contract that grants the holder the right, but not the obligation, to engage in a transaction involving a specific underlying financial instrument. This transaction could be a purchase or sale, and it is set at a price arranged in advance, commonly referred to as the ‘strike price’. The specific financial product involved in the transaction could range from stocks and bonds to commodities or even currencies. However, it must be noted that while an option holder has the right to execute the transaction, they can choose not to exercise this option based on their financial strategy or market conditions.
Option ARM (pay-option ARM): Option ARM, or pay-option ARM, is a type of adjustable-rate mortgage giving borrowers the flexibility to decide their monthly principal and interest payments, potentially leading to negative amortization, with the option period often confined to five years.
Expanded Definition
An Option Adjustable-Rate Mortgage (Option ARM), colloquially known as a pay-option ARM, is a form of home loan where the borrower has the flexibility to decide the amount of interest and principal payment to be made each month. This customized payment amoebability provides borrowers with a range of options to meet their financial needs and obligations within a given period. However, this freedom could lead to “negative amortization”, a situation where the outstanding loan balance increases instead of decreases because the borrower’s payments are not covering the interest owed. The period during which a borrower can exercise these payment options is typically restricted, often to a span of about five years. After this period, the mortgage reverts to a traditional payment structure where each payment contributes to both interest and principal. This type of mortgage, while offering initial payment flexibility, requires a high degree of financial knowledge and discipline to prevent potentially negative outcomes such as increased long-term payment obligations.
Originate-to-distribute model: The originate-to-distribute model refers to a lending approach where lenders create loans with the plan to sell them, making profit from buyer-paid fees rather than borrower payments, distinguishing it from portfolio lending.
Expanded Definition
The ‘Originate-to-distribute model’ is a business strategy utilized by lenders, under which they first generate loans with the eventual intention to either securitize these loans or sell them off. This model deviates from the traditional portfolio lending, wherein lenders hold onto the loans in their portfolio and receive income from the interest and principal payments made by borrowers. Conversely, in the originate-to-distribute model, the lenders’ primary source of income is not from the borrowers’ payments, but rather the fees that are paid by the third parties who purchase these loans. This model allows lenders to distribute risk and free up capital for additional lending.
Output: Output refers to the total goods and services produced as a result of economic activities, often quantified through metrics such as Gross Domestic Product (GDP) for a nation.
Expanded Definition
‘Output’ pertains to the culmination or outcome of various economic activities within a defined environment, such as a business organization or a country. The term broadly encompasses the goods and services produced within a particular period. One of its key measures at the national level is Gross Domestic Product (GDP). GDP quantifies the total value of all products and services generated within a country’s borders during a given period, thus encapsulating the nation’s total economic output. Therefore, output is a crucial determinant and indicator of economic performance and growth.
Output gap: The output gap is the disparity between an economy’s maximum sustainable production capacity and its actual production.
Expanded Definition
The ‘Output Gap’ is an economic concept that represents the discrepancy between a country’s actual Gross Domestic Product (GDP) and its potential GDP. The potential GDP refers to the maximum, sustainable amount of goods and services an economy can produce when it is fully utilizing all its resources, including labor and capital, without igniting inflation. The actual GDP, on the other hand, represents the real value of goods and services produced by the economy within a given period. Comparing the potential output to the actual output helps to determine whether an economy is operating at an efficient level (if actual output is equal to potential output), underperforming (if actual output is less than potential output – a negative output gap), or overperforming (if actual output is greater than potential output – a positive output gap), which in turn can inform economic and fiscal policy decisions.
Output potential: Output potential is the maximum level of production achievable at a given time, represented by the points on a production possibilities frontier. It is the zenith of productivity under prevailing productivity conditions and resource constraints.
Expanded Definition
‘Output potential,’ in a professional or expert context, is more accurately defined as ‘the maximum quantity of goods or services that can be produced by an economy at its highest level of efficiency’. This is represented by the points along the Production Possibilities Frontier (PPF), a theoretical model that illustrates the trade-offs between two goods or services in full utilization of available resources and optimal efficiency. Each point along this curve represents a potential level of output for each good or service that the economy can achieve.
Outputs: ‘Outputs’ are the tangible products or intangible services resulting from production or operational processes.
Expanded Definition
‘Outputs’ refer to the quantifiable, tangible, or intangible products or services that are effectively generated or manufactured as a result of a particular process or activity in a business or economic system. These can range from physical items like cars or machinery in a manufacturing setting, to intangible items such as solutions provided by a consulting firm, or educational courses from an institution. The central feature of ‘outputs’ is their direct relationship with the input and process contributing to their creation, forming an integral part of the overall production system.
Over-the-counter markets: Over-the-counter markets are decentralized venues for trading financial instruments, which are not formally recognized exchanges, facilitating daily trades in the trillions of dollars.
Expanded Definition
Over-the-counter (OTC) markets are robust financial arenas in which various types of securities are bought and sold. Unlike formal exchanges such as the New York Stock Exchange, OTC markets operate through a network of dealers who negotiate directly with each other, rather than through a centralized exchange platform. This dealer market platform trades an extensive range of financial instruments, such as currencies, stocks, bonds, and derivatives that are not listed on recognized exchanges. Given the magnitude of these operations, trillions of dollars in currencies exchange hands in these markets daily, engaging both institutional and retail participants worldwide. Despite the absence of a central physical location, the OTC market is highly regulated to provide an efficient, compliant, and effective trading network.
Overdraft: An overdraft refers to a situation where an account holder withdraws more money than is present in their account, typically via check, ATM, debit card purchase, or electronic payment.
Expanded Definition
An ‘Overdraft’ is a banking term that refers to a scenario where an account holder makes financial transactions — such as check issuance, ATM cash withdrawal, debit card purchases, or digital payments — exceeding the available balance in their account. This situation creates a negative balance, essentially providing a short-term loan from the bank. Banks typically charge overdraft fees for this service, and it’s considered a form of credit.
Overdraft fee: An overdraft fee is a charge incurred when you spend more money than is available in your checking account. It’s the bank’s penalty for extending credit to cover your excess spending.
Expanded Definition
‘Overdraft fee’ is professionally defined as a financial charge imposed by a bank or credit union when a client’s checking account balance falls below zero. This situation arises when an individual makes a purchase or withdrawal that exceeds the available funds in their account, resulting in a negative balance. The overdraft fee serves as a penalty for this financial discrepancy, effectively acting as a form of short-term loan from the banking institution. The specific amount of an overdraft fee varies among banks, and can often be prevented or mitigated through careful account monitoring and setting up certain safeguards like overdraft protection services.
Overdraft service: An overdraft service is a facility offered by banks that allows account holders to withdraw funds exceeding their account balance for a fee. This safeguards against failed transactions due to insufficient funds.
Expanded Definition
An ‘Overdraft Service’ is a special feature that is offered by financial organizations such as banks. This service comes into play when an account holder makes a transaction that exceeds the available balance in their account. Instead of denying the transaction, the financial institution completes it, effectively providing a short-term loan to the account holder. For this service, the financial institution charges an overdraft fee, essentially a cost for advancing funds temporarily. This service provides account holders with the convenience and flexibility of completing transactions regardless of short-term cash flow challenges, therefore avoiding potential embarrassment or inconvenience. However, users must be aware of the associated fees and should aim to replenish the account promptly to avoid increased charges.
Overheating: ‘Overheating’ refers to an economic condition where rapid growth leads to labor scarcity and resource limitations, leading to increased costs and inflation.
Expanded Definition
“Overheating” is an economic term used to describe a scenario where an economy experiences accelerated growth that overextends its capacity. This aggressive growth rate can lead to challenges for companies, such as difficulties in securing necessary resources or obtaining sufficient labor force due to high demand. As a result, the costs of resources and wages typically surge due to the stipulated supply-demand dynamics. Consequently, a gradual increase in the overall price level in the economy, often referred to as inflation, may ensue. If unchecked, this can potentially trigger economical imbalance, prompting necessary regulatory interventions to rebalance the economy.
Overshooting: Overshooting refers to the excessive fluctuation in financial markets, often driven by investor overreaction to trends or policy changes, which can result in assets being over- or undervalued. This phenomenon, sometimes a natural occurrence in exchange rates, can be prompted by various factors including central bank policies.
Expanded Definition
“Overshooting” in the financial context, refers to an economic situation when the reactive change in financial trends surpasses the expected equilibrium. A common scenario occurs when a currency’s value decreases, leading investors to lose faith and start selling their holdings, which eventually depreciates the currency’s value beyond its fair value. An additional instance of overshooting can be observed when investors respond excessively to the tightening of monetary policy by central banks, leading to a more significant increase in rate expectations than originally anticipated by the banks. However, it’s important to note that “overshooting” should not always be viewed as a irrational or ill-judged financial behavior. Renowned Economist, Rudi Dornbusch, demonstrated that under specific conditions, overshooting of exchange rates is a natural and foreseeable occurrence. Therefore, within the nuanced context of financial markets, “overshooting” is a complex mechanism that can heavily influence the dynamics of market trends and currency valuation.

P

Paradox of thrift: The Paradox of thrift is a Keynesian theory suggesting that increased saving during a downturn intensifies the recession by reducing aggregate demand, leading to overall economic decline instead of individual wealth growth.
Expanded Definition
The ‘Paradox of Thrift’ is an economic theory originating from the Keynesian school of thought, which suggests a counter-intuitive relationship between personal savings and overall economic health. According to this theory, while saving money is generally beneficial for individuals, if everyone collectively increases their savings during an economic downturn, it could inadvertently lead to a decrease in aggregate demand. Aggregate demand refers to the total quantity of goods and services consumers are willing to buy across an economy. A significant drop in aggregate demand due to increased savings could further suppress economic activity, leading to reduced consumption, lower economic growth, and thereby, potentially making everyone economically worse off rather than wealthier. This phenomenon elucidates the paradoxical nature of thrift at a macroeconomic level, hence the term ‘Paradox of Thrift.’
Pareto distribution: The Pareto distribution, also known as a power law, is a statistical concept denoting an unequal distribution of resources or outcomes, often observed as 80% of effects coming from 20% of the causes.
Expanded Definition
The Pareto Distribution is a statistical distribution model named after Italian economist Vilfredo Pareto, who first observed that a significant proportion of wealth within a society (80%) was possessed by a minority of the population (20%). This principle, known as the 80/20 rule or Pareto Principle, highlights an inherent imbalance and is frequently observed in various scenarios. The Pareto Distribution itself is a type of power law probability distribution that demonstrates this principle, where the highest frequency of a variable is found at its lower values, and the frequency tapers off at higher values. This type of distribution can be observed in a multitude of practical contexts, extending beyond economics. For instance, in healthcare, it’s often seen where a small percentage of patients (20%) account for a majority percentage of costs (80%). This distribution is thus a powerful tool for illustrating disparities in allocation and frequency across a range of applications, reinforcing the concept that outcomes are rarely distributed evenly across different categories or groups.
Pareto efficiency: Pareto efficiency is a state of optimal resource distribution where any further reallocation would harm at least one individual. Failure to achieve this signifies a potential for resource allocation improvement, highlighting a market failure.
Expanded Definition
Pareto efficiency, a concept named after economist Vilfredo Pareto, refers to a state of allocation of resources in an economy where it is impossible to make any individual or group better off without concurrently making at least one other individual or group worse off. Achieving this balance signifies optimum resource allocation and economic efficiency. If this equilibrium isn’t met, it is often viewed as a market failure — an indication that resource allocation could be improved or optimized. This concept is critical in welfare economics, where it is used to evaluate the efficiency and fairness of economic distributions.
Passive management: Passive management is an investment strategy aiming to mimic a specific market index, popularized due to often yielding higher returns than active management after accounting for costs.
Expanded Definition
‘Passive management’ refers to an investment strategy where a portfolio is built to mimic a specific market index. Typically employed within the equities asset class, the primary aim of a passively managed portfolio is to generate returns that closely match the overall performance of the chosen index. The passive management approach came into prominence during the 1970s after observations that a significant number of actively managed funds did not outperform their relevant indexes, especially after factoring in the costs associated with managing the fund. Due to its design, a passive management strategy minimizes these costs by reducing the frequency of buying and selling assets, hence directly eliminating related transaction fees. This strategy is best for investors who are comfortable with the market-average returns of their selected index and less frequent trading activities.
Patent: A patent is an exclusive license granted to an inventor to market a unique product for a set duration.
Expanded Definition
A patent is a legally granted authority that confers upon the creator or inventor of a novel product or process an exclusive right to manufacture, use, and sell their innovation for a set duration. This serves as a form of intellectual property protection, designed to give the patent holder a monopoly over their invention, thereby fostering creativity and promoting technological advancements. This exclusive right generally lasts for 20 years from the date of filing, though this duration may vary depending on the category of patent and the jurisdiction in which the patent has been filed.
Payday loan: A payday loan is a small, temporary loan typically meant to be repaid by the borrower’s next paycheck, also known as a paycheck advance.
Expanded Definition
A ‘payday loan’ is defined as a specific type of financial service, usually earmarked by its small loan amount and short repayment period. As the name implies, these loans are designed to provide financial assistance to borrowers as a stopgap measure until their upcoming payday. Borrowers can use these funds to cater to immediate or unexpected financial needs. Such loans are also often referred to as paycheck advances or payday advances. The unique feature of these loans lies in their requirement of full repayment by the next paycheck of the borrower, as opposed to regular loan schemes that have extended repayment schedules. Bear in mind that payday loans often carry higher interest rates due to their short-term nature.
Payroll deduction: Payroll deduction refers to the specific amounts deducted from an employee’s total, or gross, earnings. These deductions include taxes, insurance premiums, or retirement contributions among others.
Expanded Definition
‘Payroll deduction’ refers to specific amounts that are automatically deducted from an employee’s gross pay before they receive their net salary. These deductions can encompass various elements such as federal and state taxes, social security contributions, health insurance premiums, and employee-sponsored program contributions. The process of ‘payroll deduction’ helps ensure compliance with statutory regulations and helps employees automatically allocate funds towards necessary expenses and investments.
Penalties: Penalties are negative repercussions or punishments designed to discourage specific behaviors by adding undesirable consequences.
Expanded Definition
‘Penalties’ are disciplinary measures or sanctions imposed as a consequence for non-compliance with rules, regulations, or expected standards. These punitive actions, in a financial context, often involve monetary fines or increased charges and are intended to dissuade individuals or entities from repeating the offending behavior. They essentially serve as negative motivations, deterring certain actions or conduct by inducing a negative impact on the individual or entity’s overall societal, financial, or personal standing.
Pension funds: Pension funds are institutional investors managing portfolios for both current and future retirees, with returns either linked to the final salary or market performance, depending on the scheme.
Expanded Definition
‘Pension funds’ are specialized investment entities that manage investments for individuals preparing for their retirement. They operate as fiduciaries on behalf of current workers and future retirees, tasked with maximizing the long-term growth of the investment portfolio. The structure of these funds and the benefits provided vary based on the type of pension plan. There are two main types of pension plans: final-salary or defined benefit pensions, and defined-contribution pensions. Final-salary, or defined-benefit, pension funds provide a retirement income based on the employees’ final salary and years of service, offering a guaranteed pension payout regardless of market conditions. This type of pension is predominantly found in the public sector. On the other hand, defined-contribution pensions, more commonly offered to younger employees in the private sector, do not guarantee a specific payout. Instead, the retirement income depends on the performance of the investments made with the contributions from the employer and/or employee. Here, the market risk is borne by the individual, with the retirement income subjected to the volatility and performance of the market.
Per capita: ‘Per capita’ is a term indicating the average per person, calculated by dividing the total by the population size.
Expanded Definition
‘Per capita’ is a Latin term that translates to ‘per person.’ It is a measure used in statistics and economics to present data in a manner that accounts for the size of a population. The calculation is achieved by dividing the total amount of a quantity or resource by the total number of individuals within the population being assessed. By standardizing data in this way, fair comparisons can be made between different population groups or over different time periods, making this metric particularly useful in social, economic, and healthcare research.
Per capita gross domestic product: Per capita GDP is the measure of a country’s economic output per person, calculated by dividing the total GDP by the country’s population.
Expanded Definition
‘Per capita gross domestic product’ (GDP) is an economic indicator that refers to a nation’s total gross domestic product, or the market value of all the goods and services that the country produces within a specified time period, typically a year, divided by its total population. This metric offers an average economic output per person and serves as a measurement of a country’s economic prosperity and living standards. It provides a per person perspective on the nation’s economic activity, making it a useful tool for comparing the economic performance and wealth of different countries. However, it’s worth noting that this average measure might not fully capture economic disparities within a country.
Per capita measure: A per capita measure refers to a statistical metric that represents data in relation to each individual within a population. It is an average that disseminates aggregate data across an entire populace.
Expanded Definition
The ‘Per Capita Measure’ is an economic term defined as a statistical metric that essentially measures the average outcome per individual within a given population. It is calculated by dividing the total amount of a particular feature, item, or resource by the total population. This measure provides a mean aspect, indicating an equal distribution among all individuals, hence it is used to make comparisons and draw conclusions about the overall performance or state of different economies or demographics.
Per capita personal income: Per capita personal income is the average income earned per person in a specific area within a year. It’s calculated by dividing the total annual income by the population of that area.
Expanded Definition
‘Per capita personal income’ can be comprehensively defined as the average income received by each individual within a specific geographic area such as a state, region, or country during a specified year. This is calculated by dividing the total sum of all income (from wages, investments, and other sources) received by the inhabitants of the place within the year by the total population of the same area. This metric serves as a measure of economic health, wealth distribution, and the standard of living within that particular area. By considering the entire population, it provides an average that may be used for comparative purposes or to track economic trends over time.
Perfect competition: Perfect competition is an economic concept where numerous sellers offer a homogeneous product to a wide range of buyers in a market without any single entity having market control.
Expanded Definition
Perfect competition, in economic theory, refers to an idealized market structure where there’s a large number of buyers and sellers actively engaged. These actors freely trade a homogeneous product or service, thus none of them individually have the capacity to influence the price, due to its determination by the overall supply and demand within the market. Additionally, in a perfectly competitive market, all participants have full access to pertinent information, unrestricted entry and exit points, and negligible transaction costs, contributing to optimal efficiency and economic balance.
Peril: In insurance terms, ‘Peril’ refers to a direct risk or factor that may potentially lead to damage or loss.
Expanded Definition
‘Peril’ in the context of insurance refers to a specific event or circumstance which could potentially cause a loss or damage. This can encompass natural disasters such as floods or earthquakes, human-caused incidents such as theft or vandalism, or any other event that could lead to a financial loss. When acquiring a policy, the insurance company assesses the likelihood and potential magnitude of these perils to determine the coverage conditions and premiums. Understanding types and extents of perils covered under your insurance policy is essential for comprehensive protection against financial loss.
Permanent income hypothesis: The Permanent Income Hypothesis, formulated by Milton Friedman, posits that individuals spread their consumption over their lifetimes, moderating their expenditures based on anticipated lifetime earnings instead of current income, leading to less spending volatility than income volatility.
Expanded Definition
The ‘Permanent Income Hypothesis’ is a concept in consumer economics first posited by the prominent economist Milton Friedman. The theory propounds that individuals plan their consumption and savings not merely on their current income, but based on their perceived long-term income, which may be termed their ‘permanent income’. The principle suggests that people attempt to smooth out their consumption over their life span, anticipating future earnings and expenditures. As a result, an unexpected increase in income, such as a windfall or a bonus, will not lead to an immediate proportional increase in consumption. A substantial portion of this extra income would be saved or invested for future use. Similarly, in times of income reduction, for instance during job loss or retirement, individuals leverage these savings, maintaining a steadier flow of consumption. This theory explains why spending behavior tends to be more stable over time, as opposed to income that may experience more volatility. Also of note is it’s relation to the ‘Life-Cycle Hypothesis’, another theory of consumption, both of which emphasize the importance of long-term income expectations in influencing consumption and saving behavior.
Permanent insurance: Permanent insurance is a life insurance policy that provides lifetime coverage until death or age 100, without requirement for renewal.
Expanded Definition
‘Permanent insurance’ refers to a category of life insurance policy that remains active until the passing of the policyholder or until the policyholder reaches the age of 100, whichever comes first. Unlike term life insurance, which is set for a specific period, permanent insurance provides coverage for the entirety of the policyholder’s life provided premiums are paid as agreed. It often includes a component of cash value which may accumulate over time, offering an additional financial resource to the policyholder.
Persistent identifier (of data): A persistent identifier is a long-lasting reference point or URL on the internet where specific data can be accessed or downloaded.
Expanded Definition
A ‘Persistent Identifier (of data)’ is a long-lasting reference code or address used in digital networks to consistently locate and access specific information or data. Unlike typical Internet addresses that may change over time, persistent identifiers are designed to remain stable, ensuring that the data or digital resources they point to can be reliably accessed regardless of changes in the data’s location, management, or name. This ensures the longevity and perpetual accessibility of digital data, making them crucial tools for proper digital data management and preservation.
Personal consumption expenditures: Personal consumption expenditures refer to the spending by U.S. residents on goods and services.
Expanded Definition
‘Personal Consumption Expenditures’ (PCE) refers to the value of goods and services acquired and consumed by individuals and households within the United States. This economic indicator gauges the demand side of the consumer market, encompassing expenditures on all categories including durable goods, non-durable goods, and services. PCE offers a comprehensive perspective on consumer spending behavior and living standards, thus contributing significantly to understanding the overall economic performance and potential economic growth of the nation.
Personal identification number (PIN): A PIN is a unique code, known exclusively by the user, used to validate transactions by confirming their identity to an authorizing body.
Expanded Definition
A Personal Identification Number (PIN) is a unique numeric or alphanumeric password set by the user, most often used as a security measure to authenticate or grant access to certain financial accounts or electronic devices. The PIN must be entered into a designated terminal or device. This information, once entered, is submitted to the authorizing entity’s system. This system confirms the validity of the PIN, verifying the user’s identity, and securing the transaction in real time. This process mitigates potential fraud by ensuring that only authorized individuals – those who know the designated PIN – can perform transactions or access information.
Personal income: Personal income is the total earnings obtained from various sources like jobs, investments, and transfers such as social security benefits or pensions. It encompasses all forms of salaries, returns, and payments received by an individual.
Expanded Definition
‘Personal income’ is comprehensively defined as the total earnings accumulated by an individual from various possible avenues. These avenues cover not only regular compensations from employment such as wages and salaries, but also include additional financial benefits like dividends and interest derived from investments. It also encompasses gains from property such as rents, profits from running a personal business, and transfer payments, which are government-provided cash allowances like social security or unemployment benefits. Thus, personal income is a multifaceted measure of an individual’s overall monetary inflow.
Personal saving rate: The personal saving rate is the percentage of net income that is saved after taxes are deducted, representing the proportion of disposable income that isn’t spent.
Expanded Definition
The ‘Personal Saving Rate’ is an economic metric that measures the proportion of a person’s disposable income, which is the income remaining after all taxes have been paid, that is saved rather than spent on goods or services. It offers insight into individual financial behavior, demonstrating a person’s tendency to accumulate wealth for future use. A higher personal saving rate suggests a preference for future consumption over present spending, indicative of increased financial security. Conversely, a lower rate indicates higher current spending habits. It’s worthy to note, however, that this rate may vary based on a myriad of factors, including income levels, financial goals, age, economic climate, and personal financial habits.
Petition: A petition refers to the necessary legal documents and initial court filing fee required to initiate a bankruptcy case.
Expanded Definition
A ‘petition’, in the context of bankruptcy, refers to the comprehensive set of mandatory documents that initiate a bankruptcy proceeding. These documents typically include required forms, schedules, statements and a planned course of action for resolving debt, all of which provide a detailed overview of the debtor’s financial situation. Additionally, the petition encompasses the submission of a requisite court filing fee. Together, these elements form the initial steps towards the legal process of declaring bankruptcy.
Phillips Curve: The Phillips Curve is an economic theory suggesting a trade-off between inflation and unemployment rate, where a decrease in unemployment typically translates to a boost in inflation, and vice versa.
Expanded Definition
The Phillips Curve is a theoretical construct in economics that proposes a negative or inverse correlation between unemployment rates and inflation rates in an economy. This theory suggests that when unemployment is high, inflation is low, and vice versa. The underlying premise is that as more people become employed, their resulting increase in spending leads to an overall rise in price levels (inflation). Conversely, when high-levels of unemployment exist, there’s less spending power, which tends to suppress inflation. This key economic concept is used by policymakers and economists as a tool to balance inflation and unemployment rates through fiscal and monetary policy decisions.
Phillips curve: The Phillips curve is an economic theory suggesting an inverse relationship between inflation and unemployment. The validity of this theory is disputed due to observed deviations, such as simultaneous high inflation and unemployment (stagflation).
Expanded Definition
The ‘Phillips Curve’ is an economic principle that was first introduced by economist William Phillips. His groundbreaking theory postulated an inverse or ‘trade-off’ relationship between the rate of inflation and the rate of unemployment, implying that when inflation is high, unemployment tends to be low, and when inflation is low, unemployment tends to be high. This hypothesis was mainly based on historical data from the British economy collected between the years 1861 and 1957. However, the robustness of the Phillips Curve theory has been questioned due to inconsistencies observed during different economic periods. For instance, the 1970s stagflation period, characterized by both high inflation and high unemployment, contradicted the original principle. Similarly, the 2000s experienced relatively low rates of both inflation and unemployment, again contradicting the traditional Phillips curve framework. These anomalies suggest that the relationship between inflation and unemployment is complex and potentially affected by other economic variables or shifts in the structural elements of the economy. Therefore, while the Phillips Curve is a key economic principle, it may not be entirely stable or applicable in all scenarios. For a deeper understanding of this phenomenon, the associated Schools Brief provides an in-depth explanation.
Phishing: Phishing is a fraudulent act where an impostor, posing as a trustworthy entity, attempts to acquire sensitive personal information, often for malicious purposes.
Expanded Definition
Phishing is a fraudulent technique used in digital communications, where perpetrators pose as reputable entities, like financial institutions or government agencies, to deceive individuals into disclosing sensitive data. This can include personal information, such as usernames, passwords, credit card numbers, and Social Security numbers. The objective of this deceptive practice is typically identity theft, financial gain, or unauthorized access to systems. Recognizing phishing attempts requires cautious scrutiny of digital correspondence, particularly those prompting immediate action or requesting confidential data.
Physical capital: Physical capital refers to tangible assets, like machinery or buildings, utilized repetitively in the production of goods and services.
Expanded Definition
‘Physical capital’ can be defined as tangible assets, including machinery, buildings, and equipment, that are produced and utilized in the production of other goods and services. Forming an integral part of the industrial process, these assets are not consumed in a single use, but rather are employed repeatedly, thereby providing a sustained contribution to an organization’s productive capacity. They are often classified under capital goods or capital resources, distinguishing them from financial or human capital. These elements play a crucial role in enhancing the efficiency and scale of production, directly influencing the economic growth of an entity.
Physics envy: ‘Physics envy’ is a term used to describe the desire of other scientific fields to achieve the same level of mathematical precision and predictive success apparent in physics models.
Expanded Definition
‘Physics envy’ is a term used primarily in the realm of social sciences and other fields, representing a tendency to aspire towards the level of mathematical precision, predictability, and perceived legitimacy found within the discipline of physics. Thus, it alludes to the desire to replicate the precise models and absolute certainty that characterizes the physical sciences, which can sometimes lead to oversimplification or misapplication in fields where such stringent standards may not be achievable or applicable.
Platform: A platform is a business model that facilitates transactions between market participants, enabling them to interact and trade more efficiently.
Expanded Definition
A ‘Platform’ is defined as an intermediary business model that effectively facilitates the interaction and transaction process between two interdependent groups, usually buyers and sellers, in a marketplace setting. This digital or physical medium promotes a seamless exchange of goods, services, or information, by providing necessary tools and resources to enhance this trading process. In essence, a platform bridges the gap between supply and demand, thereby fostering a streamlined market ecosystem.
Platform company: A platform company is a modern business model which uses internet technologies to facilitate exchanges between suppliers and consumers, thriving on network effects exemplified by companies like AirBnB.
Expanded Definition
A ‘Platform Company’ signifies a modern business model that has emerged alongside the rise of digital technology, especially the internet. This type of company acts as an intermediary or facilitator, linking supply-side and demand-side users within a particular marketplace, often via an online platform. This can include a diverse range of industries, such as accommodation (e.g., Airbnb), transportation (e.g., Uber), or social networking (e.g., Facebook). At the core of a platform company’s success is the principle of network effects. This refers to the increased value or benefit gained by each user as the overall number of users increases. Essentially, a larger user base attracts additional users. For instance, on a home-sharing platform, a greater number of listed properties draw more holidaymakers, and similarly, a higher number of holidaymakers looking for accommodation encourages more homeowners to list their properties. In a broader perspective, this model presents scalable opportunities for growth due to relatively low physical asset requirements, instead heavily relying on digital infrastructure and user connectivity to drive their business. This unique fusion of digital technology and traditional marketplace dynamics enables platform companies to redefine customer value and continually shape the contemporary business landscape.
Point-of-sale (POS) terminal: A Point-of-sale (POS) terminal is a digital system used for processing card payments at sales locations.
Expanded Definition
A Point-of-Sale (POS) terminal is a technologically advanced device designed primarily to process transactions using different payment cards such as debit cards, credit cards, and gift cards. It is customarily situated at the location where the sales exchange occurs between a business and its customers. This area, denoted as the Point-Of-Sale, is where the terminal facilitates the completion of a purchase by enabling secure and efficient monetary transactions. The POS terminal is a key tool in modern retail and hospitality sectors, and its functionality often extends beyond payment processing, providing inventory management, sales reports, and customer relationship management features among others. It thus aids not only in closing the sales transaction but also in enhancing overall business operations.
Policy lags: Policy lags refer to the delay between identifying an economic issue, enacting a policy response, and witnessing its effects on the economy.
Expanded Definition
‘Policy lags’ can be defined as the delay or period of time that transpires between the identification of an economic issue and the noticeable effects of policies implemented to address that issue in the economic landscape. This period encompasses the stages of identifying the problem, deliberating on potential solutions, executing the chosen policy, and ultimately, witnessing the policy’s impact in real terms on the economy. Policy lags highlight the inherent complexities and time-consuming nature of macroeconomic policy adjustments and their consequential impacts.
Policy rate: The policy rate is the standard interest rate established by a central bank, like the Federal Reserve in the U.S., to communicate and guide its monetary policy, primarily using the federal funds rate.
Expanded Definition
The ‘Policy Rate’, often referred to as the key interest rate, is a primary tool utilized by a central bank to convey its official stance or methodology relating to monetary policy. This interest rate plays a critical role in manipulating economic activity, thereby influencing factors such as inflation and economic growth. In the context of the United States, the Federal Reserve uses the federal funds rate as the policy rate. This rate is established by the Federal Open Market Committee (FOMC) and it indicates the interest rate at which depository institutions, like banks and credit unions, lend reserve balances to other depository institutions overnight. Through changes to this rate, the Federal Reserve is able to effect alterations in the monetary supply, thus managing economic conditions.
Portable: “Portable” refers to something that is designed or able to be transported conveniently, often due to being lightweight or compact.
Expanded Definition
‘Portable’ refers to an object or device that is designed and structured in such a way that it can be easily moved or transported from one place to another. This incorporates not only the relative lightness of the object, but also attributes like shape, size, and lack of necessary permanent connections or installations, which collectively contribute to its overall convenience of mobility. Items labeled as portable offer increased flexibility and adaptability, useful in various situations across diverse environments.
Portfolio: A portfolio is a collection of financial investments held by an individual or a business entity.
Expanded Definition
A portfolio, in financial terms, refers to the consolidated selection or group of investments amassed by an individual or a corporate entity. These investments typically encompass different asset categories such as stocks, bonds, real estate, mutual funds, exchange-traded funds, and other financial instruments or securities. The composition of a portfolio is strategically designed by considering the investor’s specific goals, risk tolerance, and investment horizon. A sound portfolio is characterized by diversification, where investments are allocated across a variety of asset classes to mitigate potential risks and optimize returns. Each asset in the portfolio contributes to its overall performance and entails varying degrees of risk and return.
Positional goods: Positional goods are high-status, exclusive products with limited availability and high prices, such as luxury cars or properties, that people strive to acquire to distinguish themselves socially. They partly explain why increased living standards don’t necessarily reduce working hours.
Expanded Definition
‘Positional goods’ refers to specific commodities or services that are limited in availability and thus come with higher prices, making them a signal of wealth or high social status. These include, but are not limited to, real estate in prestigious locations, luxury cars, and high-end hotel stays. The concept of positional goods offers an explanation for the paradox where increases in living standards are not accompanied by reductions in working hours. This is because individuals often strive to acquire these goods to differentiate themselves from others, not solely for the utility the goods provide but also for the prestige associated with them. Hence, even as living standards improve, people continue to work long hours to afford these special status symbols.
Positive externality: A positive externality is an extra advantage or benefit received by someone who’s not directly involved in a transaction or activity.
Expanded Definition
A ‘positive externality’ is an economic term that refers to a benefit gained by an individual or group (the third party), as a result of a transaction, agreement, or interaction between two other parties. This benefit is received unexpectedly and without any involvement in the primary transaction. Positive externalities signify the broader societal benefits that often come from economic activities. One common example of a positive externality might include the beautification of a neighborhood because a resident decides to renovate their house, which can increase local property values despite other homeowners not contributing to this renovation.
Positive incentive: A positive incentive is a beneficial reward that motivates specific behavior. It is used to persuade an individual to take a particular action by offering an appealing outcome.
Expanded Definition
A ‘Positive Incentive’ is defined as a beneficial or reward-oriented stimulus that motivates individuals or groups towards certain behavior or actions. This incentive, typically delivered in the form of tangible rewards, monetary gains, public recognition, or personal achievements, serves as a driving factor stimulating positive behavior to achieve predefined goals. This motivational tool is frequently used in various sectors such as marketing, psychology, education, and management to administrate behavior, improve productivity, and encourage desired outcomes.
Post-neoclassical endogenous growth theory: The Post-neoclassical endogenous growth theory is a concept in economics that emphasizes the significance of internal factors such as human capital and technology in sustaining economic growth, challenging the traditional neoclassical growth model by introducing endogenous innovation and knowledge spillovers.
Expanded Definition
Post-neoclassical endogenous growth theory is an economic doctrine that extends the classical viewpoint of economic growth, arguing that growth is primarily an internal process that originates within a particular country or region – not externally. Second, it holds that knowledge, innovation, and human capital are crucial drivers for economic growth. This theory challenges the neoclassical view’s assumptions that technological development is an external force and that diminishing returns are applicable to capital. Instead, the post-neoclassical endogenous growth theory posits that institutions, policies, and internal structures play pivotal roles in determining the rate of economic growth and that there may be increasing returns to capital. This leads to a greater emphasis on knowledge (both public and private), research and development, and education as key influences on growth.
Potential GDP: Potential GDP refers to the maximum achievable economic output in a scenario where all available resources are efficiently utilized.
Expanded Definition
‘Potential GDP’, or Potential Gross Domestic Product, refers to the maximum possible output an economy can sustainably generate when it utilizes all available resources optimally, without inciting inflationary pressures. This theoretical level of performance is often associated with full employment conditions and efficient capital use. Notably, it accounts for economic inputs such as labor force, technology, capital stock, and the efficiency of labor productivity. It serves as a crucial benchmark for economists to assess the overall efficiency of an economy and its cyclical performance over time.
Potential output: Potential output is the maximum GDP an economy can achieve utilizing all its resources efficiently, without triggering inflation. It represents the highest level of economic activity feasible without straining production capacity.
Expanded Definition
‘Potential output’ represents the maximum level of real Gross Domestic Product (GDP) that an economy can achieve when all its resources – such as labor, physical capital, and technology – are fully utilized in the production process, without sparking off inflation or other economic imbalances. This concept is often used as a benchmark to gauge a nation’s economic health, particularly to determine whether an economy is underperforming (operating below its potential) or overheating (exceeding its potential). It’s essential to note that the potential output varies over time as it’s influenced by factors like changes in population, advances in technology, and the acquisition of new capital.
Poverty: Poverty is a state where individuals or households lack sufficient income to meet basic life necessities like food, shelter, and clothing, or when they earn less than a specific percentage of the median income. Globally, extreme poverty is characterized by living on less than $2.15 a day.
Expanded Definition
‘Poverty’ is a term that describes the state in which an individual or a household lacks the financial resources necessary to afford the basic necessities of life. There are two primary ways to measure poverty: absolute and relative. Absolute poverty refers to a condition wherein the financial means are not sufficient to meet essential needs, such as food, shelter, heating, and clothing. On the other hand, relative poverty, as opposed to measuring the lack, is gauged by comparing a person’s or family’s income to the median income, often set at 50% to 60%. At the international level, the World Bank has set criteria to define ‘extreme poverty’, which is living on an income of less than $2.15 a day. On this scale, the percentage of the global population considered to be experiencing extreme poverty has significantly decreased from over 35% in 1990 to under 10% in recent years. This term, therefore, impacts social-economic analyses, leading to initiatives to alleviate such conditions.
Poverty threshold: The poverty threshold is the financial benchmark set by the U.S. Census Bureau to classify an individual’s or family’s economic status as impoverished.
Expanded Definition
The ‘Poverty Threshold,’ as defined by the U.S. Census Bureau, comprises a specific dollar amount acting as a benchmark to categorize an individual or family’s financial status as being above or below the line of poverty. This amount is calculated considering various factors such as family size, age of the family members, and total yearly income. The threshold is used as a standard measure for a multitude of statistical, administrative, and research purposes. Falling below this financial limit implies that the family or individual is living in poverty and may be eligible for certain governmental aid programs.
Poverty trap: A ‘poverty trap’ refers to a situation where individuals are unable to elevate their economic condition due to systemic barriers such as high marginal tax rates and limited access to quality education and healthcare services.
Expanded Definition
The term ‘poverty trap’ refers to a complex situation where individuals or groups are unable to elevate themselves from a state of poverty due to a combination of economic, social, and institutional hindrances. The concept embodies the perpetual nature of poverty when systemic impediments hinder progress. A key example is the structure of the tax and social benefits system, whereby high effective marginal tax rates, resulting from the combination of increased taxes on earnings and simultaneous reduction in benefits as income increases, may result in minimal net income gain despite employment. This situation deters efforts to escape poverty, as the increased earnings do not significantly improve the economic condition of the individual. Another manifestation of the poverty trap is limited access to high-quality education and healthcare services. It restricts individuals from harnessing their potential, thereby limiting their opportunities for socioeconomic mobility. The poverty trap thereby underscores structural and systemic barriers that make it extremely difficult, if not impossible, for some to escape poverty.
Power law: A power law is a functional relationship between two variables where a relative change in one quantity yields a proportional relative change in the other, often characterized by heavy tails when portrayed in a probability distribution, like the Pareto distribution.
Expanded Definition
A ‘Power law’ refers to a statistical relationship between two quantities, where a relative change in one quantity results in a proportional relative change in the other quantity. This relationship is often represented by a linear function in logarithmic coordinates. In other words, it means that small occurrences are extremely common, whereas large instances are rare. This term is frequently used in the realm of physics and applied mathematics to denote a broad array of diverse phenomena that share these characteristics, such as the sizes of earthquakes, stock market fluctuations, the likelihood of certain words being used in a language, and many other phenomena. While a ‘Power law’ is akin to the Pareto distribution, it is not interchangeable. The Pareto distribution is a type of power law distribution but the power law concept itself extends beyond this particular distribution to include many other phenomena in natural and social sciences.
Precariat: ‘Precariat’ refers to a group of laborers in precarious, low-paying roles who often require government aid to supplement their income, particularly driven by labor market flexibilities and the rise of the gig economy.
Expanded Definition
The term ‘Precariat’ is used to characterize individuals who are employed in unstable, low-income positions, frequently with part-time hours or zero-hour contracts, where there are no guarantees of minimum hours of work. Due to these conditions, they may find difficulty in earning sufficient income to meet their basic needs, often leading them to rely on supplemental income from welfare support systems. Critics, particularly those with progressive political inclinations, attribute the evolution of the precariat to policies promoting labor market flexibility, initiated since the 1980s. This concept is closely related to the ‘gig economy’, which refers to a labor market characterized by the prevalence of short-term contracts or freelance work, as opposed to permanent jobs.
Precautionary motive: The precautionary motive refers to the practice of maintaining a certain portion of one’s assets as cash to cover unexpected expenses, as part of Keynes’ tripartite theory which also includes speculative and transactions motives.
Expanded Definition
The ‘Precautionary Motive’ is a term from the field of economics, originally coined by the renowned economist John Maynard Keynes. It refers to the practice of holding a portion of one’s total assets in the form of readily accessible and easily liquidated cash for the primary purpose of managing unforeseen or emergency expenses. This motive for holding cash is rooted in the innate desire for security and preparedness; it is aimed towards mitigating potential financial risks associated with unexpected events that might necessitate immediate expenditure. Keynes proposed three motives for cash retention, wherein the precautionary motive stands alongside the transactions motive, or the need for daily transactions, and the speculative motive, which allows individuals to take advantage of potential profitable investment opportunities. To understand this concept in ordinary terms, think of this like setting aside some of your income for ‘just-in-case’ situations or for emergencies.
Preferences: Preferences are subjective determinants of our choices, reflecting our individual tendencies towards liking or disliking things.
Expanded Definition
‘Preferences’ can be professionally defined as the systematic selection process where individuals express a higher inclination or favorability towards specific options, items, or experiences over others. These preferences serve as fundamental indicators of an individual’s likes and dislikes, playing a critical role in guiding their decision-making behaviors. This concept is not only crucial in personal and social contexts but also has significant implications in economic theory, consumer behavior, and market dynamics.
Preferred stock (equity): Preferred stock refers to a type of shareholder equity that has precedence over common shares during a company’s asset liquidation. It also guarantees fixed or floating dividends distribution before the common shareholders can receive theirs.
Expanded Definition
Preferred stock, also known as preferred equity, represents a unique class of ownership shares in a corporation. These shares have preferential rights over common stockholders, principally when it comes to the distribution of company assets during bankruptcy. In such an instance, owners of preferred shares have a higher claim to any residual assets once debt obligations have been fulfilled. Additionally, preferred shareholders have the right to receive dividends before any such payouts are made to common shareholders. These dividends follow a pre-determined schedule and are paid at a rate that can either fluctuate with market conditions (floating) or remain constant (fixed). Regardless of the structures, these dividends must be distributed to preferred shareholders prior to any dividend payments to owners of common stock. This hierarchy ensures that preferred shareholders have a higher level of income security compared to common shareholders. Therefore, preferred stock combines characteristics of both equity and debt, offering benefits like potential asset appreciation while also providing a steady income stream.
Premium: A premium is the amount charged by an insurance company for coverage, essentially the price a policyholder pays for their insurance policy.
Expanded Definition
‘Premium’ is generally defined as a financial amount that is periodically paid to an insurance company in exchange for insurance protection. It’s essentially a fee or payment, usually paid monthly, quarterly, annually, or in a lump sum, which ensures continued coverage under the specified insurance policy. The sum of this premium is determined by several factors including the type of coverage, the likelihood of a claim being made, and details about the insured item or individual. In pivoting on this continual financial contribution, insurance companies are then able to shoulder the financial responsibility or risk for potential future claims made by the policy owner.
Present bias: ‘Present bias’ refers to the tendency to prioritize immediate gratification over long-term benefits.
Expanded Definition
‘Present Bias’ is a cognitive tendency in which individuals give higher preference to immediate gratification or outcomes over future benefits. This tendency makes people more likely to choose actions that provide instantastisfaction, often at the expense of long-term progress or success. It is a central concept in behavioral economics and psychology, impacting decision-making processes across a variety of contexts, including finance, health, and environmental behaviors.
Present value: Present value is the current worth of a future sum of money, using a certain rate of return to calculate it.
Expanded Definition
Present value is a financial concept that involves determining the worth of a future sum of money in today’s terms, when accounted for a certain rate of return or discount rate. This provides an understanding of the diminishing value of a future sum due to factors such as inflation, risk, and opportunity costs. In other words, it helps to establish that a specific amount of money in the future is less valuable than the same amount in the present because it does not consider potential earnings, which could have been gained from an alternative investment during that timeframe. This pivotal principle is a keystone of finance, lending, investing, and many other economic decisions.
Present value equation: The present value equation, PV=FV [1/(1+i)n], calculates the current worth of a future sum of money, considering a specific interest rate (i), over a defined period (n).
Expanded Definition
The ‘Present Value equation’ is a mathematical formula employed in finance to determine the current worth of a sum of money that is expected to be received in the future. The equation is represented as ‘PV = FV [1/(1+i)n]’, where: 1. ‘PV’ stands for Present Value, which is the current value of future funds, the amount of which is currently unknown and needs to be calculated. Essentially, it represents the total amount of money required today to reach a specified financial objective in the future. 2. ‘i’ refers to the Interest Rate, which plays a significant role in determining the present value. In this equation, the interest rate must be represented in decimal form (for example, ‘0.03’ should be used instead of ‘3%’). An increase in the interest rate would reduce the present value, and vice versa. 3. ‘n’ denotes the number of times interest will be applied over a specified time period, or the total number of interest payments. It can correspond to the number of years, months, or any time unit consistent with how the interest rate is expressed. 4. FV stands for Future Value, that represents the amount of money expected to be received in the future. By manipulating these variables within the present value equation, we can accurately assess the current worth of future funds with consideration to the impacts of time and interest.
Price: ‘Price’ is the monetary cost of acquiring a good, service, or resource, set by the negotiation of buyers and sellers.
Expanded Definition
“Price” is essentially the financial value assigned to a product, service, or resource. This specific value, decided through a systematic process, involves an exchange between buyers and sellers within the market. Buyers express their demand, which is their willingness and ability to purchase at various price points, while sellers represent supply, their willingness to sell at these points. The point at which these forces intersect determines the ‘equilibrium price’ or the cost that a buyer is expected to pay to acquire the intended commodity. This fundamental economic concept transcends simple transactions and underpins commerce, effectively facilitating trade and resource allocation around the world.
Price (elementary): Price is the monetary value attached to a product or service that a buyer is expected to pay.
Expanded Definition
‘Price’ in an elementary context, refers to the monetary amount that a consumer is obligated to provide in exchange for a good or service. This amount is typically determined by various factors, such as production costs, market demand, competition, and perceived value of the item or service. Understanding the concept of price is fundamental in commerce, as it eventually dictates the market exchange, consumer decisions, and overall economic activity.
Price ceiling: A price ceiling is a government-imposed limit on how high a price can be charged for a product or service.
Expanded Definition
A ‘price ceiling’ is a legal measure imposed by a governing body that stipulates the highest price an entity can charge for a specific good or service. This economic policy is typically introduced to protect consumers from exorbitant prices during periods of high demand or reduced supply. This price boundary is established above the equilibrium price to prevent it from rising to perceived unacceptable levels. However, it’s critical to note that if the ceiling price is set below the equilibrium price, it may potentially lead to shortages, as the supply available might not be sufficient to satisfy the demand at that price point. The goal of this regulatory intervention is to ensure essential goods and services remain affordable and accessible to as many people as possible.
Price controls: Price controls are regulations limiting the pricing of goods or services, either setting a maximum cap (price ceiling) or a minimum price (price floor), altering the standard market equilibrium.
Expanded Definition
“Price controls” refer to the regulatory measures imposed by a government to set the maximum or minimum prices for certain goods or services, instead of allowing free-market economic forces to set them naturally. They are set either above (price floors) or below (price ceilings) the point where supply equals demand – this is known as market equilibrium. Price controls are usually implemented to protect consumers from price gouging in periods of short supply or to ensure a minimum income for providers of certain goods or services. However, they can also lead to under or overproduction if inaccurately set. Their intent is to balance the affordability and availability of essential goods or services.
Price discrimination: Price discrimination is a strategy where identical goods or services are sold at varying prices to different markets or segments.
Expanded Definition
‘Price discrimination’ is a strategic business practice where a company charges varying prices for the identical product or service to different consumers, instead of implementing a standard or uniform pricing strategy. This price variance doesn’t stem from the difference in the cost of production, but rather it is usually influenced by various market factors such as consumer’s willingness to pay, demand elasticity, market segmentation, or competitive environment. While it may present a dynamic business strategy to boost profits and market share, it is also a subject of regulatory scrutiny in some jurisdictions due to fair trade and anti-trust concerns.
Price elasticity: Price elasticity refers to the degree to which the demand or supply of a product reacts to a change in price, providing insights into price sensitivity.
Expanded Definition
“Price Elasticity” is an economic concept that measures the degree of response or sensitivity of the quantity demanded of a certain product or service as a result of a change in its price. Expressed as a numerical value, price elasticity elucidates the proportional change in quantity demanded given a particular percentage change in price. Its value can guide businesses and policymakers on pricing strategies and policies, allowing them to predict consumer behavior and optimize revenue or achieve social goals.
Price floor: A price floor is a legal minimum price set by the government, below which a product or service cannot be sold.
Expanded Definition
A ‘price floor’ is a regulatory measure, mandated by a governing body, that sets the lowest allowable price at which a particular commodity, product, or service can be sold in the market. This pricing strategy is typically enforced to ensure fair income for producers, protect certain industries from price volatility, and prevent possible exploitation of labor among other socioeconomic reasons. It provides a safety net for producers but, on the buyer’s side, it means the product or service cannot be purchased for any amount less than this established rate. It’s fundamental to note that this mechanism might sometime lead to surplus if the price floor is set above the equilibrium market price.
Price stability: Price stability is a sustained condition where the inflation rate is consistently low and unchanging.
Expanded Definition
‘Price stability’ refers to the economic situation where the general level of prices in an economy experiences very little or minimal fluctuation over a sustained length of time. Specifically, it is the condition where the rate of inflation – the overall increase in the price of goods and services – remains low and consistent, preventing significant erosion of purchasing power. Achieving price stability is often a key objective for economic policy makers, since it offers a predictable business environment, which is conducive for economic growth and prosperity.
Price-earnings ratio: The Price-earnings ratio (P/E) is a financial metric that evaluates the market value of a stock relative to its after-tax earnings, either based on historical or projected profits. In broader market terms, the cyclically adjusted price-earnings ratio (CAPE), developed by Robert Shiller, values the market using average profits from the previous ten years, adjusted for inflation.
Expanded Definition
The ‘Price-Earnings ratio’ is a widely implemented financial metric used to evaluate the relative worth of individual stocks and overall stock markets. Essentially, it establishes a relationship between the per-share price of a company and its after-tax earnings. Depending on whether historical or forecasted profits are used, the ratio can provide insight into a company’s past performance or its future potential. The P/E ratio appraises how much investors are willing to pay for a company’s profits, so a higher ratio could indicate that the company’s stock is overvalued, or investors expect high growth rates in the future. Renowned Nobel laureate Robert Shiller has further enhanced this metric to evaluate the entire market’s value. Known as the cyclically adjusted price-earnings ratio or CAPE, this method averages out a company’s earnings over the past decade, adjusted for inflation, to smooth out fluctuations due to business cycles and provide a more long-term, stable picture of a company’s profitability.
Primary Dealer Credit Facility (PDCF): The Primary Dealer Credit Facility (PDCF) is a Federal Reserve tool that offers overnight loans to primary dealers against eligible collateral, aiding their liquidity management.
Expanded Definition
The Primary Dealer Credit Facility (PDCF) is a financial instrument implemented by the Federal Reserve, the central bank of the United States. This facility operates as a source of overnight liquidity, akin to a short-term loan, extended to qualified financial institutions known as primary dealers. These dealers play a critical role in the trading and distribution of U.S. government securities. The PDCF grants these primary dealers instant access to liquidity in exchange for a variety of eligible collateral such as government securities or other forms of investment-grade debt. This ensures a stable and supportive financial environment, helping the dealers to continue their operations and facilitate efficient market functioning even during periods of economic strain or instability.
Primary balance: Primary balance is the difference between a government’s income and spending within a year, disregarding interest payments on its current debt. It’s an indicator of a country’s fiscal sustainability, where a primary surplus may lead to a reduction in its debt-to-GDP ratio over time.
Expanded Definition
The term ‘Primary Balance’ pertains to the financial difference between a government’s income, primarily through taxes and other forms of revenue, and its spending within a given fiscal year. Crucially, this measure does not include interest payments on the country’s pre-existing debt. The primary balance serves as a key metric assessing the sustainability and health of a nation’s financial structure. The value and impact of the primary balance rely heavily on the extent of the government’s present debt as well as current interest rates. Nonetheless, a nation maintaining a primary surplus, i.e., having revenue that exceeds non-interest expenditure, could realistically lower its debt-to-GDP ratio over time, enhancing its economic stability and confidence.
Primary credit rate: The Primary Credit Rate is the interest charged by the Federal Reserve for loans to banks through its main discount window program, often referred to as the “discount rate”, which is set by each Reserve Bank’s directors and confirmed by the Board of Governors.
Expanded Definition
The ‘Primary Credit Rate’ refers to the interest rate that the Federal Reserve (the U.S. central bank) charges for giving primary credit loans to financial institutions that accept deposits. The primary credit system is a key feature of the Federal Reserve’s “discount window” program, which is a mechanism for banks to borrow short-term funds directly from the Federal Reserve. Thus, the term “discount rate” is sometimes used interchangeably with the primary credit rate. The rate is determined by the Board of Directors in each of the Federal Reserve Banks. However, decisions about the rate are ultimately supervised and established by the Board of Governors of the Federal Reserve System. In essence, the primary credit rate plays a crucial role in influencing the cost of borrowing money within the banking system and can impact broader economic conditions.
Primary dealers: Primary dealers are financial entities, typically banks or broker-dealers, that engage in U.S. government securities transactions with the New York Federal Reserve Bank.
Expanded Definition
Primary dealers refer to a select group of financial institutions, typically banks and securities broker-dealers, that have been officially designated to engage in various transactions, specifically the buying and selling of U.S. government securities, directly with the Federal Reserve Bank of New York. Their role is crucial in implementing monetary policies and supporting the liquidity and efficiency of the government securities market. As such, these key intermediaries are pivotal in maintaining the stability and functionality of the financial system.
Primary market: The primary market is where new securities, such as stocks and bonds, are first issued and sold to investors, often through IPOs.
Expanded Definition
The primary market denotes a segment of the financial market where new securities, such as stocks and bonds, are issued for the first time to the public in a form commonly referred to as initial public offerings (IPOs). This market serves as an essential channel for firms and corporations to raise new capital for business expansion. It is facilitated by various intermediaries like investment banks, which engage in underwriting the deal, thereby ensuring the successful process of these new securities offerings. Principal transactions in the primary market set the stage for secondary market trading. The securities sold in this market are purchased directly from the issuing company, and offer investors an opportunity to support companies’ growth while potentially profiting from their success. The securities issued can range from common equity and preferred stocks to corporate and government bonds.
Principal: The principal is the initial sum of money invested or loaned, excluding any accrued interest or dividends.
Expanded Definition
‘Principal’ is a financial term that primarily refers to the initial sum of money that is either invested, deposited, or borrowed. In terms of investments or savings, this constitutes the original amount of capital that is placed in a financial instrument, not including any earnings gained or interest accrued over time. Meanwhile, pertaining to a loan, the ‘principal’ is the fundamental amount lent or owed, which does not take into consideration any interest charges or additional fees that may be appended over the repayment period of the loan. In both contexts, the principal serves as a baseline value from which all subsequent calculations or valuations stem.
Principal-agent problem: The principal-agent problem is a challenge in economic theory where one party (the agent) is tasked to act on behalf of another (the principal), but there exists a conflict of interest due to differing incentives and asymmetric information.
Expanded Definition
The ‘Principal-Agent Problem’ refers to a situation that arises when a principal (the party who delegates the task) outsources activities to an agent (the party performing the task) under conditions of asymmetric information and divergent interests. This arrangement often exists in various economic activities, such as the selling of a house, where the principal is the homeowner and the agent is the real estate broker, or in corporate structures, where the shareholders (principals) entrust their resources to the company’s managers (agents). The problem lies in the potential for misalignment of interests, where the agent might prioritize self-interest over the principal’s goals due to their superior information and control over the said activities. For instance, company managers might prioritize self-gain, like increasing their wages or personal benefits, over maximizing shareholders’ returns. This issue also relates to ‘agency costs,’ representing the expenses incurred by the principal to prevent or minimize such conflicts of interest. Furthermore, ‘asymmetric information’ refers to the imbalance of crucial knowledge between the principal and agent, further exacerbating the problem. For a more in-depth understanding, consider various academic resources or comprehensive briefs that dig deeper into the concept.
Private (or nonpublic) school: A nonpublic or private school is an educational institution that is privately owned and largely funded through sources other than state or federal government, such as individuals, corporations, or religious organizations.
Expanded Definition
A private (or non-public) school refers to an educational institution that is not administered or funded by state, federal, or local government. Instead, it’s owned and managed by private entities which could be individuals, religious organizations, partnerships, or corporations. These schools primarily rely on non-public funds for their operations, typically sourced from tuition fees, donations, and endowments.
Private equity: Private equity is a sector of finance that invests in and takes control of non-public companies, often by leveraging debt, with the goal of reducing costs and reselling at a profit. It often involves offering share options to management for added incentive.
Expanded Definition
‘Private equity’ refers to a distinct segment within the financial industry, primarily focusing on making investments directly into private companies or conducting buyouts of public companies resulting in the delisting of public equity. This form of investment management targets organizations that are not publicly traded on a stock exchange. Private equity firms typically manage the buyouts using leveraged capital, where a significant portion of the acquisition cost is borrowed. Post-acquisition, the management team is often provided with share options as a motivation tool to align their interests with those of the equity owners. The primary goal of a private equity firm after acquisition is to implement strategic, operational, and financial improvements to increase the company’s profitability and streamline its performance. This frequently involves cost reduction measures and business restructuring. After a few years of performance enhancement, the private equity firm seeks to divest its holdings, either through a sale to another company, a relisting on a public exchange, or other exit strategies. This is done with the objective of realizing a significant profit from the increased value of the business. This entire process, known as the investment lifecycle, is at the heart of private equity operations.
Private good: A private good is a product that can only be consumed by one individual at a time, given its exclusivity and rivalry characteristics. It signifies a commodity that, once used, cannot be reused by another person.
Expanded Definition
A ‘Private Good’ is a specific category of goods within economic theory. Once consumed or used by a single individual, its availability cannot extend to another individual, highlighting its non-shareable or non-transferable property. This distinct characteristic reinforces its nature of being ‘rival in consumption.’ Essentially, the use by one consumer inhibits or ‘rivals’ another consumer’s ability to utilize the same exact item. In addition to its rivalrous nature, a private good exhibits ‘excludability.’ This term refers to the condition where the owner or the provider of the good can control or restrict access to it, reserving usage or consumption to specific individuals who meet the necessary requirements, often expressed in terms of financial payment. As an example, a purchased car or a meal from a restaurant can be considered private goods, as they are both non-transferable after consumption and access is regulated by the provider.
Private good, “me-only” good: A “me-only” or private good is an item or service that exclusively satisfies the purchaser and requires payment for its utilization.
Expanded Definition
A private good, often referred to as a “me-only” good, is a term used in the field of economics to describe a product or service that is purchased and consumed by an individual or entity. A defining feature of a private good is its exclusivity in usage which denotes two main things: 1. Excludability: This feature ensures that the benefits derived from the good or service are confined only to the buyer, and those who have not paid for it are excluded. This preserves the buyer’s rights to the benefaction from the purchase. 2. Rivalry in Consumption: Once acquired, the consumption of the private good by one entity prevents or limits its availability to be simultaneously consumed by another. Essentially, a private good is characterized by its capacity to generate personal satisfaction for the consumer that purchases it, and you must buy it privately to use it, thus making it a ‘me-only’ good.
Private sector: The private sector encompasses all non-governmental economic entities, from individual businesses to large corporations.
Expanded Definition
The ‘private sector’ is defined as the part of a nation’s economy that is comprised of privately owned businesses and organizations. It encompasses a broad range of industries, from solo enterprises such as an individual window cleaning service, to colossal multinational firms. These entities function without direct control or management from any government authority, operating instead under market forces and the principles of profit-making. While they might be subject to governmental regulation, they do not fall under the public sector that comprises governmental operations and entities.
Private, for-profit college: A private, for-profit college is a higher education institution owned by private entities, operated with the objective of making profits.
Expanded Definition
A ‘Private, for-profit college’ is defined as an institution of higher learning that is owned and operated by private entities or businesses, rather than by governmental or public stakeholders. The underlying purpose of these establishments is to generate financial profit. This is achieved through collecting tuition fees and other charges from their enrolled students. They operate on business models akin to other for-profit organizations, with the surplus of income over expenditure being redirected towards creating shareholder value, investing in the growth and expansion of the college or for other profit-oriented initiatives.
Private-label prepaid card: A private-label prepaid card is a retailer-specific card, used exclusively for purchasing items from a specific merchant or chain. It’s not compatible with general-purpose card networks.
Expanded Definition
A ‘private-label prepaid card’ is a type of prepaid card issued by a specific retailer or chain of retailers, like Sears or JC Penney. This card is exclusive to the issuing merchant and is designed for customers to use for purchases at that particular retailer’s outlets or online store. Unlike general-purpose cards, which are accepted by a vast range of merchants, private-label prepaid cards are limited to the retailer that issues them and can’t be used on a widespread card network. They offer a convenient payment method for frequent shoppers at a specific brand or store.
Private-label securities: Private-label securities are mortgage-backed securities or other bonds generated and marketed by non-governmental enterprises, often backed by loans not qualified for purchase by Fannie Mae or Freddie Mac.
Expanded Definition
“Private-label securities” are a category of investment instruments within the financial and housing industries. They are typically mortgage-backed securities or different types of bonds that are created and marketed by a private corporate entity rather than a government-sponsored enterprise (like Freddie Mac or Fannie Mae). One distinctive attribute of these securities is that they are often backed by loans which do not meet the qualifying criteria for purchase by government-sponsored entities. Therefore, they provide a mechanism for different types of non-qualifying loans (such as subprime mortgages or jumbo loans) to be packaged together and sold to investors, expanding investment opportunities beyond those available through government-sponsored entities. However, they may also carry increased risk due to the nature of the collateralized loans.
Probability: Probability is the quantifiable measure of the likelihood that a certain event will occur. It essentially gauges the expected frequency of a particular outcome.
Expanded Definition
‘Probability’ is a mathematical term that quantifies the degree of certainty or uncertainty of an event occurring. It provides a numerical measure, typically ranging from 0 to 1, of the likelihood that a particular event will take place. A probability of 0 implies that an event is certain not to occur, whereas a probability of 1 suggests that the event is certain to occur. Probabilities expressed as fractions or percentages between 0 and 1 represent varying levels of uncertainty. This concept is extensively used in statistics, mathematics, science, and economics to predict outcomes and analyze data.
Producer price index (PPI): The Producer Price Index (PPI) is a statistical metric that tracks the fluctuation in prices received by manufacturers and service providers over a designated period.
Expanded Definition
The Producer Price Index (PPI) is a crucial economic indicator that tracks the variation in prices received by manufacturers and service providers for their commercial goods or services over a set period. This index provides significant insights into the inflationary trends within the producer sector. It’s an effective way of understanding cost pressure prior to it reaching the level of retail prices, and hence, it acts as a leading indicator of consumer inflation. Essentially, the PPI monitors the degree of change from the seller’s perspective before it impacts the end consumer.
Producers: Producers are entities that create products and offer services.
Expanded Definition
‘Producers’ can be more aptly defined as ‘entities, which might be individuals, businesses, or organizations, that contribute to the economy by creating and supplying goods and services. This production process can involve combining raw materials, labor, and technology to manufacture goods or orchestrating resources in a manner that creates a service. Producers thus play a critical role in determining the variety and quantity of products available in the market.’
Production: Production is the method of utilizing resources and goods to manufacture products or deliver services.
Expanded Definition
‘Production’ refers to the systematic method where resources such as raw materials and intermediary commodities are systematically utilized, manipulated, and transformed to manufacture tangible products or offer intangible services. This process embodies a variety of activities, including but not limited to, planning, coordination, and execution, all directed towards the generation of goods or services that can meet specific needs or demands in the market.
Production function: A production function refers to an economic methodology showcasing the linkage between physical input and output, essentially demonstrating how resources are deployed to generate goods or services.
Expanded Definition
A ‘Production Function’ refers to an economic principle defining the relationship between physical inputs or production factors, and the output or goods/services produced. It illustrates the maximum possible output that can be achieved using various combinations of input resources, maintaining a constant level of technology. This function is instrumental in understanding the efficiency of production processes, analyzing cost functions, and optimizing business operations. The resources or inputs typically include labor, capital, raw materials, and technology, and their efficient utilization leads to optimal output.
Production possibilities frontier: The production possibilities frontier (PPF) is a graphical depiction showcasing possible combinations of goods/services an economy can produce with its current resources and technology.
Expanded Definition
The ‘Production Possibilities Frontier’ (PPF), in the field of economics, refers to a theoretical model that visually represents the maximum possible production output combinations for two goods or services within a given economy. This is based on the available resources and technological capabilities at hand. It assumes all resources are fully and efficiently utilized without waste. This model offers insights into the concept of economic efficiency, opportunity cost, and the trade-offs faced by economies due to resource limitations. In essence, it’s a tool used to illustrate the choices an economy must make regarding the production of two goods or services, considering their limited resources and current technological advancement.
Productive capacity: Productive capacity refers to an economy’s highest possible production given its existing resources. It’s the peak output achievable with current assets.
Expanded Definition
Productive capacity refers to the greatest volume of goods or services that can be produced by an economy at its maximum efficiency, given the existing levels of labor, capital, technology and other resources at a given time. This concept points to the upper limits of production possibilities and serves as an essential tool to assess the potential growth and economic health of a nation or business entity. It indicates the threshold at which output cannot increase without additional resources or technological advancements.
Productive resources: Productive resources, or factors of production, are the primary assets like natural materials, human labor, and capital invested to create goods and services for economic output.
Expanded Definition
‘Productive resources’, also referred to as ‘factors of production’, encompass the essential inputs utilized in the creation of goods and services. There are primarily three categories of productive resources: 1) Natural Resources: These refer to gifts of nature that exist without human intervention. They are raw materials available from the earth, including land, water, minerals, forests, and so forth. 2) Human Resources: This comprises the hard and soft skills of individuals contributing to production. Knowledge, labor, skills, and expertise coming from people make up this category. 3) Capital Resources: These are resources made and used by people to produce and distribute goods and services. They involve tools, machinery, infrastructure, technology, and financial assets. These resources collectively provide the foundation for production processes, shaping the quantity and quality of output in an economy or a business.
Productivity: Productivity refers to the quantity of output produced by an employee within a given time period. It’s essentially a measure of efficiency in labor performance.
Expanded Definition
‘Productivity’ refers to a performance metric that quantifies the efficiency of a worker, by measuring the amount of output they can produce within a given timeframe. It is fundamentally a ratio, where the denominator represents the allocated time and labor, and the numerator signifies the resultant output. Higher productivity implies that more output is generated with the same input of time and manpower, indicative of efficient and effective work processes. This concept is vital in fields such as business operations, economic theories, and workforce management, where productivity enhancements can lead to improved profitability, competitiveness, and employee satisfaction.
Products (elementary): Products, in the elementary sense, refer to tangible items (goods) or intangible experiences (services) that are created or provided to meet consumer needs or wants.
Expanded Definition
‘Products (elementary)’ can be more precisely and professionally defined as ‘Tangible or intangible entities created or delivered through a business or industrial process. These may include goods, which are physical items that can be measured or quantified, such as clothing, furniture or food items. On the other hand, they may consist of services, which are non-material commodities provided to meet specific needs or wants such as consulting, cleaning, or educational services. Both goods and services are rendered with the aim of satisfying the demands or requirements of a market or customer base.’
Profit: Profit is the residual income a business has after covering all production costs from its revenue.
Expanded Definition
‘Profit’ is a financial term referring to the residual income that a business retains after deducting all the costs associated with producing a product or delivering a service. These costs typically include expenditures like materials, labor, overheads, and any other direct or indirect expenses linked to the production process. The level of profit indicates the financial success and sustainability of a business, serving as a key indicator of the efficiency and effectiveness of business strategies and operations.
Progressive Tax: A Progressive Tax is a fiscal policy where the tax rate increases as the taxable income increases, causing wealthier individuals to pay a greater share of their income in taxes than those with lower income.
Expanded Definition
A Progressive Tax is a fiscal policy structure where the tax rate incrementally increases as the taxable income of the individual or entity rises. Under this system, those who generate more income are taxed at a higher percentage, thus contributing a larger proportion of their income towards taxes compared to those who earn less. This design theoretically promotes financial equity, as it lightens the tax burden on low-income earners and places it more heavily on high-income earners. Essentially, the greater the income, the higher the tax paid, making it a method of economic redistribution.
Property: Property, in a broad sense, refers to all assets owned by an individual or entity, providing incentives for productive use and future investment. In a narrower context, it specifically denotes land and buildings as a type of asset.
Expanded Definition
‘Property’ is a comprehensive term typically associated with the ownership of assets in various economic systems, except for communism where assets are collectively owned. It could refer to a wide range of assets such as land, buildings, goods, and financial instruments, among others. The concept of property is fundamentally tied to economic motivations. Those who possess property are incentivized to deploy it productively, as they stand to gain future benefits or returns from such investments. The absence of property rights tends to diminish these incentives, leading to less productive use of resources, as evidenced by the often mentioned saying, “no one ever washed a rented car”, suggesting that people take better care of what they own. Another related concept is the “tragedy of the commons”, which illustrates the potential for overconsumption and degradation of common resources due to the lack of exclusive ownership. In a narrower definition, ‘property’ specifically refers to real estate assets, i.e., land and buildings.
Property rights: Property rights refer to the legally recognized ownership and control over assets or resources with economic worth.
Expanded Definition
“Property rights” refer to the acknowledged and legally enforced claims or entitlements of an entity or individual to own, manage, and use certain economic goods or resources. They are the regulations formulated by a country’s legal system that govern the preservation, utilisation, transfer, and disposal of those resources. The fundamental components of property rights typically encompass the right to use the property, the right to profit from it, the right to exclude others from it, and the right to transfer it to others. When we talk about “property,” it’s not limited to physical possessions, but can include intangible assets like intellectual property and contractual rights. Essential to fostering economic stability and growth, property rights form a critical basis for free market economies globally.
Proportional (Flat) Tax: A Proportional (Flat) Tax is a tax regime that applies the same tax rate to all income brackets, meaning everyone pays the identical percentage of their income in taxes.
Expanded Definition
A ‘Proportional (Flat) Tax’ is a type of taxation system where the tax rate remains consistent regardless of income level. This implies that all individuals or entities are taxed at the same percentage rate on their total income. The term ‘flat’ refers to the uniform tax rate applied to every taxpayer, irrespective of their earnings. Despite its simplicity in terms of calculation, this system is a topic of ongoing debate regarding its potential impacts on income inequality.
Proprietary data: ‘Proprietary data’ refers to information that is protected by U.S. copyright laws, allowing the author to control its distribution.
Expanded Definition
‘Proprietary data’ is defined as specific information that is protected under the United States copyright laws. This refers to data that is owned and controlled exclusively by the original creator or author. Owing to their proprietary nature, the holders of these rights have the legal authority to limit and control who is allowed to access, distribute, or reproduce this data. Consequently, proprietary data often bears considerable intrinsic value due to its unique, confidential, and limited-access nature.
Protectionism: Protectionism is an economic policy favoring domestic companies through methods like taxes, tariffs, or regulations limiting imports, thereby potentially increasing consumer prices and supporting less efficient domestic businesses.
Expanded Definition
Protectionism is an economic policy designed to shield domestic industries from foreign competition. It is executed typically through measures such as imposing tariffs, taxes, or restrictive regulations on imported goods or services. Although often politically favored due to its potential to preserve local jobs and stimulate domestic businesses, protectionism has its detractors. Critics, generally proponents of free trade, argue that such barriers deter global trade efficiency, prop up less competitive domestic firms, and result in higher consumer prices by restricting the range of goods and services available. Essentially, protectionism is an approach geared towards favoring local industries at the expense of foreign competitors.
Public choice theory: Public choice theory is a subfield of economics that examines the self-interested behavior of government officials and its implications, positing that these individuals may enhance their power or favor their constituencies, thereby contributing to government failures.
Expanded Definition
Public choice theory refers to a specialized subfield of economics that examines the behavior of individuals in public roles, including politicians and bureaucrats, and identifies that they may act motivated by their self-interest. This theory proposes that these public officials could seek to increase their influence and prestige by expanding their departments or structure policies that benefit the communities they represent. In consequence, this self-interested behavior could lead to shortcomings in governance, which are parallel to the way market failures occur in economies. Despite its focus on public sector behavior, public choice theory uses the same principles and methodologies as other economic studies, primarily treating people as rational, self-interested actors making decisions to maximize their outcomes.
Public good: A public good is a resource accessible to all without depletion by individual use. It remains available to everyone, regardless of one person’s consumption.
Expanded Definition
A “public good” is a term utilized within the field of economics to describe a commodity or service that is accessible to all members of a society and is not diminished by individual use. In more precise terms, a public good exhibits the characteristics of non-rivalry and non-exclusivity. Non-rivalry implies that one individual’s consumption of the good does not reduce its availability for others, while non-exclusivity denotes that no one can be effectively prevented from using the good. These attributes result in a universal benefit for society, making it challenging for the free market to adequately provide and regulate such goods, often necessitating governmental intervention. Examples of public goods can include public parks, clean air, and national defense.
Public good, “shared” good: A public good, or “shared” good, is a product or service that can be used by multiple individuals simultaneously without cost, and usage by one does not reduce its availability to others.
Expanded Definition
A public good, also often referred to as a ‘shared’ good, is a concept primarily used in the realm of economics. It refers to a particular class of goods or services that are inherently non-excludable and non-rivalrous. Non-excludability means that once the good or service is provided, no individual can be prevented from utilizing it, irrespective of whether they contribute towards its costs. On the other hand, non-rivalrous means that one individual’s consumption of the good or service does not diminish its availability to others. In other words, a public good is a commodity or service that provides concurrent benefits to an entire society or large group of individuals, and its use by one person does not deplete its availability to others, nor can anyone be effectively excluded from its usage.
Public school: A public school is an educational institution funded by government resources.
Expanded Definition
A public school, as currently defined, is an educational institution that primarily receives its operating funds from sources of public revenue. This typically includes state and federal government allocations, local taxpayer contributions, and other government grants or subsidies. As such, these schools are subject to government regulations and are mandated to be accessible for all children, regardless of their economic status or background. The functioning, curriculum, and educational standards of public schools are overseen by local, state, or national education authorities, ensuring that every child receives a standardized and equitable education.
Public sector: The public sector is the portion of the economy that is government-controlled or owned.
Expanded Definition
The “public sector” refers to the segment of the national economy that is under the control or ownership of government entities. It includes all government organizations at various levels – local, regional, and national – and encompasses sectors such as education, healthcare, defense, infrastructure, and public transportation. Activities within the public sector are typically funded through taxation and are often associated with providing public services that are considered essential for the welfare of society.
Public spending: Public spending refers to the portion of a country’s GDP that the government allocates to sectors such as health, welfare, and pensions, aiming at economic stability and growth. It is considered a critical driver in fiscal policy and can fluctuate based on economic conditions.
Expanded Definition
‘Public spending’ is a term that represents the amount of money that a government spends on public services, projects, and programs. This expenditure contributes significantly to the majority of economies, constituting approximately 30% to 50% of the GDP in countries that are members of the Organisation for Economic Co-operation and Development (OECD). This includes spending on critical sectors such as health, pensions, and welfare. There are intermittent attempts to minimize public spending through austerity programs. However, these efforts frequently result in extended periods of increased spending, due to the growing need to allocate budget for health, pension, and welfare programs as societal needs evolve. The economist John Maynard Keynes proposed that public spending should be augmented during periods of economic downturn, suggesting it as a method to stimulate demand in the economy, which could help in economic recovery. In addition to this, public spending also factors into a nation’s fiscal policy, the governmental strategy used to monitor and influence a nation’s economy, which consists of varying taxation levels and public spending.
Purchasing power: ‘Purchasing power’ refers to the capacity of a specific currency to acquire goods and services. It’s essentially a measure of the real value of money in buying goods.
Expanded Definition
‘Purchasing power’ refers to the substantive capability of a specific denomination of currency, such as a dollar or euro, to acquire a preset combination of goods or services. It is an essential economic concept that illustrates the functional worth of money in relation to its capability to procure desirable products or services. That said, the purchasing power of money is influenced by a variety of factors such as inflation, supply and demand, and relative pricing. A higher purchasing power means your money goes further, allowing you to buy more, whereas lower purchasing power means your money buys less. As a result, it serves as a vital indicator of economic health and consumer financial potential.
Purchasing-power parity (PPP): Purchasing-power parity (PPP) is a tool used to compare the cost of goods across different countries by adjusting exchange rates, theoretically indicating equivalent prices for the same goods. This method aids in determining if a currency is under or over-valued.
Expanded Definition
Purchasing Power Parity (PPP) is an economic theory that enables comparability between countries by adjusting exchange rates to reflect the relative prices of goods and services. This principle assumes that, in the absence of trade barriers and transaction costs, such as shipping or import taxes, the price of a standard basket of goods and services should remain uniform across different markets. The PPP is a useful tool in global economics to gauge whether a currency is undervalued or overvalued compared to another. Contrary to theory, it’s often observed that prices significantly differ from one country to another due to various factors such as market conditions, taxation policies, and economic environment. To resolve this, economists establish a PPP exchange rate – this differs from the market exchange rate that we typically encounter in foreign exchange markets. A popular and often cited example of PPP in a more casual context is The Economist’s Big Mac index. It indicates the price of a McDonald’s Big Mac in various countries to demonstrate relative costs and the effective purchasing power of different currencies. However, while a useful research tool and engaging illustration, this ‘burger benchmark’ inevitably simplifies a complex economic reality and shouldn’t be the sole base of rigorous economic analysis.

Q

Qualified distribution: A qualified distribution is a tax-free withdrawal from a Roth IRA, granted under specific conditions.
Expanded Definition
A ‘Qualified Distribution’ is a specialized financial term that refers to specific instances where you can make withdrawals from your Roth Individual Retirement Account (IRA) without incurring any tax liabilities. These instances are governed by certain rules, typically including the account being open for a minimum of five years and the account holder being of a certain age, most commonly 59 1/2. Other particular circumstances such as disability, first-time home purchase, or having unreimbursed medical expenses may also qualify for such distributions. This is an important concept for retirement planning as it can have significant implications on the tax efficiency and availability of your retirement savings.
Quantitative easing (QE): Quantitative easing (QE) is a central bank’s strategy of buying substantial amounts of financial assets to stimulate the economy and improve market conditions.
Expanded Definition
Quantitative easing (QE) is a strategic monetary policy employed by central banks that involves the large-scale purchase of financial assets, such as government bonds, from commercial banks and other financial institutions. The primary goal of this action is to inject a pre-determined quantity of money into the economy to stimulate economic activity, essentially by encouraging lending and investment. This is facilitated through increasing the excess reserves of the banks, hence promoting lower interest rates. Although this measure is often adopted under extraordinary economic conditions – such as a recession or when conventional monetary policies become ineffective – its main intention is to bolster the overall health of the financial system, thereby fostering stability and growth.
Quantitative tightening: Quantitative tightening is the process of reducing a central bank’s bond holdings to drain liquidity from the economy and increase bond yields, either by selling bonds back to the private sector or allowing bonds to mature without reinvesting. It acts as the reverse of Quantitative Easing (QE).
Expanded Definition
Quantitative tightening (QT) is a monetary policy action employed by a central bank aiming to decrease the amount of liquidity, or accessible money, in the economy. It primarily functions as the reverse procedure of Quantitative Easing (QE). In QE, the central bank boosts economic activity by purchasing bonds, which increases the availability of money circulating in the system. Conversely, in QT, the central bank reduces the excess liquidity in the economy by diminishing its bond portfolio. This is obtained through two techniques: either by selling held bonds back into the private sector, or by allowing them to reach maturity without reinvesting the returns. These actions lessen the overall money volume or liquidity, available in the economy, thereby putting upward pressure on bond yields. Higher bond yields mean loans become more expensive, and borrowing costs increase, thereby slowing economic activity. As of the current scenario, the application of quantitative tightening is in its nascent stages, and QE’s complete reversal appears to require an extended period. Therefore, it’s a gradual process and precise effects on the economy will unfold over time.
Quantity demanded: Quantity demanded refers to the volume of a product or service consumers are ready and capable of purchasing at a set price.
Expanded Definition
“Quantity demanded” is a term used in economics to describe the total volume of a particular good or service that consumers are prepared and financially capable of purchasing at a specified cost. This concept reflects the consumers’ behaviour or response to pricing changes in a market environment, assuming all other factors remain constant. It’s a critical component in the study of supply and demand, and it can illustrate the relationship between product pricing and consumer demand.
Quantity supplied: ‘Quantity supplied’ refers to the volume of a product or service sellers are prepared and capable to offer at a given price.
Expanded Definition
“Quantity Supplied” is a term typically used in the economic and market space, which denotes the total volume of a specific good or service that sellers or businesses are prepared to offer for sale at a particular price level. This quantity not only depends on the vendors’ willingness to sell, but also on their ability to produce or procure the good or service. Besides the price, it may also be influenced by other factors such as production costs, technology, and expectations of future prices. This concept is an essential component of the law of supply, which in general terms, states that the quantity supplied increases as the price rises, maintaining all other factors constant. The term represents an important economic principle that assists analysts and policy-makers in understanding market dynamics, pricing strategy, and economic forecasting.
Quantity theory of money: The Quantity Theory of Money is an economic concept that suggests an alteration in money supply directly impacts price levels, hinting at a direct proportionality between the two.
Expanded Definition
The Quantity Theory of Money is an economic theory that postulates a direct correlation between the supply of money in an economy and the overall price level. It suggests that if the amount of money in an economy doubles, then the overall prices will also double, maintaining a proportional relationship. This theory is often encapsulated in the equation MV = PT, where M represents money supply, V is the velocity of money (how quickly money changes hands in the economy), P signifies the general price level, and T denotes the volume of transactions of goods and services. This theory underscores the importance of controlling the money supply in order to maintain price stability in the economy.
Quartile: A quartile is essentially a type of quantitative division which splits a dataset into four distinct, equal segments.
Expanded Definition
A ‘Quartile’ refers to a statistical term utilized in data analysis. A dataset, when arranged in ascending order, can be divided into four distinct parts, each containing an equal number of observations. These divisions are known as quartiles. They help in understanding the dispersion and distribution of data points within the dataset, and are instrumental in identifying outliers. The first quartile (Q1) comprises the 25% lowest data points, the second quartile (Q2) represents the middle value or median, the third quartile (Q3) contains the 75% lowest data points, and the fourth quartile (Q4) includes all the data points above Q3.
Quit rate: The quit rate is a statistical measure indicating the rate at which employees voluntarily resign from their jobs, often signaling increased job market optimism and economic growth.
Expanded Definition
The ‘Quit Rate’ is a statistical metric predominantly used in labor market analysis, which quantifies the proportion of employees who voluntarily resign from their jobs as opposed to those who are laid off or terminated. It serves as a gauge of worker confidence within the job market; a higher quit rate is generally indicative of an optimistic workforce who likely foresee better employment opportunities elsewhere. This scenario is typically associated with an enlarging economy where job vacancies are increasing. As such, the quit rate, along with job vacancy rates, offers valuable insights into the overall health and dynamics of the employment market and broader economy.
Quota: A quota refers to a stipulated quantity limit on what can be imported into a country. It’s essentially a restrictive measure to control foreign goods entry.
Expanded Definition
A ‘Quota’ is a technical term used in international trade policy, specifically referring to a government-imposed regulation that sets a numerical or percentage-based ceiling on the volume of particular goods that can be imported into a country within a given time frame. It serves as a trade control measure designed to safeguard domestic industries from foreign competition, regulate market prices or rectify trade imbalances. The exact quantity is determined based on various factors including national economic conditions, domestic productivity levels, and trade relations with exporting countries.
Quoted company: A quoted company is a firm whose shares are publicly traded on a stock exchange.
Expanded Definition
A ‘quoted company’ refers to a corporation that has offered its shares for public ownership and trading by getting them listed on a recognized stock exchange. This process is often a means for the company to raise capital for expansion or other ventures. Buying shares in such a company signifies owning a portion of that business, and it makes the company’s financial information, including profits, losses and growth prospects, transparent to the investors and the public at large, following the regulations set by the securities exchange commission.

R

R*: ‘R*’ is the real interest rate that reflects an economy at its potential, indicating a boost from monetary policy when the set rate from the central bank is lower than R*. However, this crucial rate isn’t directly observable.
Expanded Definition
‘R*’ refers to the neutral or natural real interest rate that exists when an economy is functioning at its maximum sustainable capacity, meaning it’s neither overheating nor underperforming, and inflation is stable. It’s the rate at which the demand for savings and investment balance when the economy is at full potential. According to macroeconomic models, the central bank provides economic stimulus when it sets the prevailing real interest rate below ‘R*’. However, this critical economic indicator is intangible and cannot be distinctly measured. Instead, it is typically estimated or inferred from different macroeconomic factors.
Rate of return: The ‘Rate of Return’ is a metric that quantifies the profitability or efficiency of an investment, essentially showing the amount of returned income or loss made in a specific time period as a percentage of the investment’s initial cost.
Expanded Definition
The “Rate of Return” is a financial term proficiently defined as the gain or loss made from an investment over a specified period of time, expressed as a percentage of the investment’s initial cost. It is an essential metric for evaluating the effectiveness of different investments, as it provides a comparison of the potential profitability or financial success. This measurable degree of profitability can render invaluable insights to mindfully channel resources, making it instrumental for potential or current investors, and aids in creating a comprehensive wealth growth strategy.
Ratings: Ratings are evaluations of the credit risk profile of a financial instrument, offered by ratings agencies like Standard & Poor’s or Moody’s. They indicate the degree of risk and potential return, impacting the interest rates for debt instruments and influencing investment decisions.
Expanded Definition
‘Ratings’ in finance refer to the assessments or evaluations of the creditworthiness associated with a particular financial instrument. These evaluations are methodically performed by designated rating agencies – Standard & Poor’s, Moody’s, and Fitch being amongst the most notable. The purpose of these ratings is to gauge the level of risk a potential investor may encounter. A higher credit rating generally signifies decreased risk, which, in the context of debt instruments, means the borrower often benefits from a reduced interest rate. However, ratings falling below a particular threshold are considered to carry a high degree of risk and are commonly referred to as ‘junk bonds’. The credibility of these rating agencies was subjected to significant scrutiny during the 2007-09 financial crisis when numerous financial instruments, despite having received high ratings, experienced a steep decline in their value. Therefore, while these ratings can offer investors valuable insights into potential level of risk, they should not be the sole determinants of investment decisions.
Rational expectations: Rational expectations is the economic theory that individuals make decisions based on the most accurate information they have and learnings from past experiences. This theory suggests that consumers will foresee and adapt to government policy changes, making certain fiscal policies, like stimulation of demand through budget deficits, ultimately ineffective due to anticipatory saving behavior.
Expanded Definition
‘Rational Expectations’ is an economic theory suggesting that individuals utilize all accessible information to make informed decisions, adapting their actions based upon past outcomes and future predictions. Specifically, free-market and monetarist economists proposed that consumers would foretell governmental policy alterations and modify their actions to prepare for it. For instance, if a government incurs a large budget deficit to incite demand, consumers may foresee a potential increase in future taxes. As a result, they might opt to save a portion of the additional income gained from this stimulus as a preemptive measure for prospective tax liabilities. This concept, known as Ricardian equivalence, essentially suggests that macroeconomic policies, such as Keynesian fiscal strategies, may not yield their intended outcomes in the long term, as consumers’ anticipatory behavior may counterbalance the anticipated impact.
Raw materials: Raw materials are fundamental substances, such as oil or cotton, used in the production of goods.
Expanded Definition
‘Raw materials’ are fundamental commodities or substance inputs, such as oil, metals, or cotton, required by businesses during their manufacturing or production processes. These materials are typically extracted from the earth and undergo transformation to produce the final product. They serve as the essential starting point in the production chain, underpinning various sectors including manufacturing, construction, and agriculture. Understanding and managing the acquisition and use of these materials is crucial to a firm’s operational efficiency, environmental impact, and overall profitability.
Real: ‘Real’ refers to the monetary values, wages, or prices adjusted for inflation, expressed in terms of constant prices from a specific base period. It delivers a relative perspective on economic data by removing price level changes via a measure like the Consumer Price Index (CPI).
Expanded Definition
‘Real’ in financial terms refers to the adjustment of monetary values, wages, or prices to account for the impact of inflation, often measured using constant prices based on a specified base period. This adjustment ensures the values reflect the true purchasing power at a given time. ‘Real’ values are derived by adjusting ‘nominal’ (or current) wages or prices utilizing a price measure like the Consumer Price Index (CPI). This approach offers a more accurate comparison over time by factoring in the steady rise of the overall price level due to inflation. The ‘real’ value thereby offers a more consistent and meaningful analysis of economic trends.
Real asset: A real asset is a physical object, like property or commodities, that holds value due to its intrinsic qualities.
Expanded Definition
A ‘Real Asset’ is defined as a physical or tangible asset that possesses inherent value due to its intrinsic qualities and characteristics. It includes assets such as real estate properties, commodities, natural resources, agricultural lands, and even precious metals. The value attached to these assets is primarily driven by their physical properties, capabilities, or usefulness, independent of any contractual or legal claims. This allows real assets to often provide a hedge against inflation as their value tends to increase alongside the price level in an economy. This contrasts with financial assets such as stocks and bonds, whose value is dependent on contractual claims. Real assets form a significant segment of an investment portfolio, given their ability to generate returns and provide diversification benefits.
Real gross domestic product (GDP): Real GDP is the inflation-adjusted measure of the total economic output of a country in a given year, using prices from a base year to accurately compare across time periods.
Expanded Definition
‘Real Gross Domestic Product (GDP)’ is a comprehensive economic measurement that quantifies the total market value of all final goods and services generated within a nation’s economy in a specified time period, typically a year. To ensure a more accurate representation that considers the impact of inflation, it is calculated using the prices of a selected base year. In other words, Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. This measure is largely used by economists to compare the economic performance of a country over time, unimpeded by variations in price levels caused by inflation or deflation. Conversely, ‘nominal GDP’ refers to the raw measure which does not account for inflation, hence the need to adjust it to arrive at ‘Real GDP’.
Real interest rate: The real interest rate is the lending cost corrected for inflation, representing the true earning or expense power of money borrowed.
Expanded Definition
‘Real interest rate’ can be more thoroughly and professionally defined as ‘The actual cost or financial charge for the use of borrowed money, after taking into account the effect of inflation. It is a key economic indicator that presents the true return on savings and investments, and the real cost of borrowing. It effectively removes the influence of overall increases in price levels, providing a more accurate measure of the monetary value over time.’
Real rate of return: The real rate of return is the profitability of an investment after adjusting for inflation; essentially, it’s the gains from an investment once the erosion of purchasing power due to inflation is subtracted.
Expanded Definition
The ‘Real Rate of Return’ is defined as the annual percentage return earned on an investment, adjusted for inflation, thereby depicting the real purchasing power gained through the investment. It signifies the financial return or profit derived from an investment after considering the effect of inflation during the period of the investment. This rate is important because it provides a clear measure of the true profitability, by accounting for changes in price levels over time, and ensures that the return values remain consistent across different time periods with varying inflation rates.
Real value: Real value is the monetary amount factoring out inflation influence, demonstrating the buying power of money in a specific time.
Expanded Definition
“Real value” refers to an economic measure that accounts for the influence of inflation. It represents the purchasing power of an amount of money that reflects its actual capability to buy goods and services in a specific period, compared to other periods. In essence, this concept is designed to provide a more accurate representation of economic stability or growth, by freeing the monetary value from inflationary distortions. Hence, it enables a more detailed and equivalent analysis of financial performance over time. The real value does not merely give the face value of money, but instead presents its inherent worth in terms of its tangible purchasing capacity.
Real-time indicators: Real-time indicators are immediate data points like online job ads, traffic activity or credit-card spending used by statisticians to comprehend the current state of the economy, reducing dependency on lagging traditional economic data.
Expanded Definition
‘Real-time indicators’ are dynamic analytical tools that provide immediate, up-to-the-minute data driven by current activities or events. Unlike traditional economic data that is often delayed and reflective of past economic conditions, these indicators offer immediate insights into the present state of the economy, thereby offering a more accurate and timely decision-making basis for policymakers. These sources of real-time data can include but are not limited to, the number of online job advertisements, the level of activity on transportation routes, or the display of consumer confidence represented by credit card spending. As the importance and reliance on real-time data continue to grow, understanding and utilizing these indicators becomes crucial for economic forecasting and policy development.
Recession: A recession is a sustained period of economic downturn marked by falling incomes and increased unemployment. It signifies a widespread drop in spending and economic activity over a certain timeframe.
Expanded Definition
A recession is a term commonly used in macroeconomics to define a period during which a nation experiences a significant downturn in its economy. It’s typically characterized by a marked decrease in real gross domestic product (GDP), a drop in household income, rising unemployment rates, among other negative economic indicators. Essentially, a recession indicates a contraction in the country’s economy, where business activity slows and the economic output declines. This economic phase usually extends over a sustained period of time, often six months or more. It’s a part of natural economic cycles and is typically recognized retrospectively by economists, who wait to see two consecutive quarters of negative GDP growth before officially declaring a recession.
Reciprocal currency (swap) arrangements: Reciprocal currency (swap) arrangements are temporary agreements between a Federal Reserve Bank and a foreign central bank, allowing the latter to gain dollars for foreign exchange intervention or temporary liquidity needs, while the former receives an equal amount of foreign currency with a reinstatement guarantee at a predetermined exchange rate.
Expanded Definition
‘Reciprocal currency (swap) arrangements’ are temporary agreements established between the Federal Reserve Bank in the U.S. and a foreign central bank. In these arrangements, the foreign institution draws on the swap to gain access to U.S. dollars, which can be used in several ways such as stabilizing its own currency in the foreign exchange market or providing short-term liquidity to its domestic banking system to meet immediate financial demands. Meanwhile, the Federal Reserve Bank gains an equal amount of foreign currency, accompanied by a binding promise from the foreign central bank. This promise is to buy back its own currency at a predetermined exchange rate during the course of the swap. This ensures that the Federal Reserve Bank is not exposed to exchange rate risk, while providing crucial financial support to foreign central banks when needed. The overall goal of such arrangements is to promote stability in the global financial system.
Recycle: Recycle refers to the process of converting waste materials into reusable materials to manufacture new products.
Expanded Definition
‘Recycling’ is the systematic process involved in collecting, processing, and converting waste or used materials into new products or raw materials. This cyclical practice aims to minimize waste disposal, conserve resources, save energy, and reduce pollution by diverting worn-out products from landfills and incinerating plants to become valuable manufacturing inputs again. The recycling process typically encompasses the stages of collection, sorting, shredding, cleaning, and reformation. This ecologically-focused process is integral to sustainable waste management and responsible consumption. The key products that are commonly recycled include plastic, paper, glass, metal, and certain types of electronic waste.
Redlining: Redlining is the unlawful act of denying credit or insurance services to a specific community based on racial or ethnic discrimination.
Expanded Definition
Redlining refers to the illegal and discriminatory practice in which financial and insurance services are systematically denied or restricted to individuals within specific geographic areas, often based on the racial or ethnic composition of those regions. These services can include loans, insurance, access to healthcare, and even supermarket locations. Redlining effectively blocks the residents of these communities from accessing necessary financial resources and opportunities, hindering their socio-economic development. Despite being outlawed, the impacts of historical redlining are often still visible in unequal wealth distribution and resource allocation in today’s societies.
Reduce: “Reduce” refers to the act of decreasing the quantity of goods manufactured and consumed.
Expanded Definition
‘Reduce’ in the context of production and consumption refers to the strategic process of intentionally lessening the quantity of goods that are created and utilized. This implies ensuring efficiency in manufacturing activities to limit output, while simultaneously advocating for minimal usage or waste to decrease consumer demand. The aim is often driven by sustainability goals, promoting resource conservation, and embracing cost-effectiveness. It is an integral part of responsible environmental management and economic stability.
Refine: ‘Refine’ refers to the optimization of production methods to consume less energy, fewer intermediate goods, reducing the utilization of natural resources and waste production.
Expanded Definition
‘Refine’, in the context of industrial production and environmental sustainability, is defined as the process of enhancing and improving production methods. This development is designed to decrease the consumption of energy and the use of intermediate goods. Consequentially, this results in a reduction of natural resource exploitation and a decrease in waste production. The main objective of this refinement process is not only to increase production efficiency, but also to mitigate the environmental impact, promoting a more sustainable and responsible industrial activity.
Reflation: Reflation refers to strategies that boost economic activity, such as reducing taxes, raising public spending, lowering interest rates, or executing quantitative easing, often resulting in higher inflation. These tactics are typically implemented in periods of low inflation or deflation.
Expanded Definition
‘Reflation’ refers to various strategic actions or policies implemented by governmental or monetary authorities with the objective of stimulating a sluggish or recessive economy. These strategies primarily involve novel approaches to fiscal and monetary policy. In terms of fiscal policy, reflationary measures can include tax reductions and/or an increment in public spending. Lowered taxes can increase disposable income for both individuals and corporations, promoting increased consumption and investment. Heightened public expenditure can stimulate demand within the economy, leading to increased production, employment rates, and overall prosperity. Conversely, monetary policy adjustments for reflation may encompass the lowering of interest rates and/or quantitative easing. The reduction of interest rates encourages borrowing by making loans cheaper, thus fostering consumer spending and business investment. Quantitative easing is an unconventional strategy where a central bank introduces new money into the economy to increase the money supply, making more funds available for businesses and individuals, and encouraging spending and investment. While these measures generally lead to an upgraded inflation rate, this is not necessarily harmful, especially in cases where the economy is dealing with low inflation or deflation, as the goal of reflation is to restore the economy’s inflation rate to a healthier level. However, sustained and careful monitoring is required to prevent the risk of hyperinflation. As such, ‘reflation’ is a delicate balancing act between stimulating economic activities and maintaining inflation at manageable levels.
Regressive Tax: A regressive tax is a tax scheme where low-income earners pay a higher proportion of their income in taxes, contrastingly high-income earners remit a less proportionate amount.
Expanded Definition
A regressive tax refers to a taxation structure where the tax burden disproportionately falls on those with lower income levels. Under this system, individuals or entities with lower incomes pay a higher percentage of their income in taxes compared to those with higher incomes. Essentially, as an individual’s income increases, the proportion of tax they pay relative to their income decreases, hence the term ‘regressive.’ While such a system might seem counterintuitive, it is commonly applied to taxes on goods and services which all income groups consume similarly, regardless of income. However, the impact differs because lower income groups spend a larger portion of their income on these taxed goods and services. Ultimately, the regressive tax structure can contribute to income inequality.
Regulatory arbitrage: Regulatory arbitrage refers to a strategy companies use to exploit regulatory discrepancies, by altering their operations or structure to benefit from more lenient regulations. An infamous instance was the shadow banking system’s evasion of commercial banking rules, helping precipitate the 2007-09 financial crisis.
Expanded Definition
‘Regulatory arbitrage’ refers to the strategic maneuvering of a company’s operations or organizational structure with the purpose of exploiting disparities in regulatory environments. This often involves relocating elements of the business to jurisdictions with more lenient rules or reconfiguring the company’s structure so as to fall under less stringent regulatory categories. While this practice can provide competitive advantages for the company, it also raises concerns regarding potential risks and regulatory evasions. A notable instance of regulatory arbitrage was exhibited by the shadow banking system, which circumvented several regulations applicable to traditional commercial banks. The failure to adequately supervise this sector was a significant factor in the 2007-09 financial crisis, underscoring the potential dangers of unchecked regulatory arbitrage.
Regulatory capture: Regulatory capture is a scenario in which a regulatory agency, influenced by the industry it oversees, advances the interests of the sector over the public’s, often due to lobbying, staff recruitment strategies or future employment prospects.
Expanded Definition
‘Regulatory capture’ is a phenomenon that occurs when a regulatory agency, which is originally established to act in the public’s interest by monitoring and regulating certain activities within a specific industry, becomes influenced by the very industry it was supposed to oversee and control. This can happen due to several reasons. One of the main reasons is the disproportionate influence exerted by the industry through intense lobbying efforts. Due to their significant financial reserves, these industries often have the ability to outspend consumer advocacy groups, thereby steering regulations in their favor. Another contributing factor can be the revolving door between regulatory agencies and the industries they oversee. This refers to the trend where regulatory staff are employed from the industry sector they will regulate, or anticipate seeking employment within the industry after their regulatory service. The former can lead to biases due to personal identity and sympathy with the industry, while the latter can incentivize lenient regulation to ensure future employment opportunities. The risk of regulatory capture is hence the subversion of the regulator’s role, moving from protector of the public interest to facilitator of the industry’s interest. This can potentially compromise the welfare of consumers and undermine the overall effectiveness of the regulation.
Relative frequency: Relative frequency is a calculation of an event’s occurrences divided by the total trials, effectively reflecting the probability of these events in past trials.
Expanded Definition
Relative frequency is a statistical term that represents the frequency of a particular event or outcome happening within a given dataset or set of trials. It is calculated by dividing the number of times the specific event has occurred by the total number of completed trials. The resultant value is often considered as a probability, computed as a percentage or decimal, which serves as an estimate of how likely the event is to occur in any given instance. Its main function is to provide a comparative understanding of different events or outcomes within a statistical context.
Relative price: Relative price is the ratio of the price of one product or service compared to another, illustrating the trade-off between acquiring different items.
Expanded Definition
‘Relative price’ is a term used in economics that refers to the value or cost of one good or service when measured against, or compared to, another good or service. It is a way to analyze how much of one commodity is needed to purchase another. This concept is vital as it provides a perspective that goes beyond just evaluating absolute prices (i.e., prices measured in monetary value) and helps in understanding market dynamics and the trade-offs consumers make based on their preferences and the relative costs of different items. The relative price may change even if the monetary price stays the same, due to changes in the cost, availability, or desirability of the other good or service.
Relative scarcity: Relative scarcity refers to the imbalance between a product’s demand and its available supply.
Expanded Definition
‘Relative scarcity’ is a term primarily used in economics, referring to the situation where the demand for a particular resource, product, or service exceeds its available supply. This theory highlights the concept that all resources are finite and have alternative uses. Thus, relative scarcity can impact decisions on how to distribute or allocate these resources effectively to meet various needs and wants. It underscores the principle of economics: that we have unlimited wants but limited resources to satisfy them. This theory is fundamental to understanding market dynamics, prices, and resource allocation.
Relatively scarce: ‘Relatively scarce’ refers to an item that is not abundantly available according to the demand or desire for it. In other words, it is an item desired more than it is supplied.
Expanded Definition
“Relatively scarce” refers to an object, resource, or good whose availability is insufficient to satisfy the collective desire or demand of a population. This term underscores that scarcity is not just about the absolute quantity of an item, but is inherently tied to the level of want or need expressed by individuals or society as a whole. It denotes that the degree of scarcity is relative and may vary based on changes in demand, supply, or both.
Release: A ‘Release’ is a data publication in a computer-friendly format, typically composed of tables, without any included analysis or interpretations.
Expanded Definition
‘Release’, in the context of data management, refers to the dissemination of data sets that are often arranged in a structured format like tables, making it compatible with computer processing and convenient for database integration. This release typically excludes any associated analysis or commentary on the data. It primarily serves as a raw, unbiased source of information, enabling users to conduct their own explorations or analyses. The data presented in this manner encourages accessibility and can foster comprehensive data utilization, contributing to the fields of research, technology, and other data-dependent areas.
Reloadable card: A reloadable card is a pre-funded card that can be recharged or have additional funds added by the cardholder.
Expanded Definition
A ‘reloadable card’ refers to a specialized payment card that functions on a pre-paid basis, set apart by its unique feature to be ‘reloaded’ or ‘topped up’ with additional funds by the cardholder, as required. This financial tool offers convenience and control as it encourages pre-allocated spending according to individual budget limits. It also provides an option for those unable to secure traditional bank services or credit, thereby increasing financial inclusivity. The cardholder can essentially use the card for transactions until the pre-loaded funds deplete, and then conveniently replenish the balance at their discretion for continual use.
Remittances: Remittances refer to funds transferred by migrants to their homeland, often to sustain their families, which constitute a vital revenue stream for developing economies.
Expanded Definition
‘Remittances’ refer to the financial transfers initiated by individuals, commonly migrants, to their countries of origin. This act is predominant among individuals living or working in foreign lands who allocate a portion of their earnings to support their families back home. For many developing nations, these funds are a vital pillar of the economy, contributing substantially to the overall income. In recent years, they have gained global significance for their indirect influence on the financial stability of these nations. According to data from the World Bank, remittances to low- to middle-income countries reached a staggering amount of $626 billion in the year 2022 alone. This financial flow plays a crucial role in alleviating poverty, facilitating socioeconomic development, and increasing the standard of living in these regions.
Rent: ‘Rent’ is a monetary charge levied for the use or occupation of natural resources.
Expanded Definition
‘Rent’ is professionally defined as the monetary compensation provided, typically at regular intervals, for the use of an asset owned by another entity. While it can pertains to natural resources such as land, mineral reserves, or timber, it is more commonly associated with properties like residential apartments, commercial spaces, or certain equipment. The party who owns the asset is referred to as the ‘lessor,’ and the other party utilizing the resources and responsible for making payments is the ‘lessee.’ The agreed-upon rent is often contractually obligated, acting as a legally binding means of transacting value in exchange for the right to utilize an asset.
Rent controls: Rent controls are regulatory measures that cap the amount landlords can charge tenants, often making it lower than the prevailing market rates.
Expanded Definition
‘Rent controls’ refers to a regulatory measure implemented by authorities, aimed at limiting the rate at which a landlord can charge tenants for leasing their property. This policy is instituted primarily to ensure affordable housing in areas with high market rates, thereby preventing rapid or excessive price increases in the rental market. This intervention substantially benefits tenants by making rent costs predictable and manageable. However, it is critical to note that, while beneficial in the short term, rent controls may cause potential long-term issues such as decreased investment in housing or reduced property maintenance due to landlords’ constrained revenue.
Rent-seeking: “Rent-seeking” refers to the activities aimed at increasing one’s share of existing wealth without creating new wealth. This often involves manipulations, such as lobbying for favorable government regulations, that create an unfair competitive advantage.
Expanded Definition
‘Rent-seeking’ is a comprehensive economic term that refers to the attempt made by individuals or entities to increase their own wealth without creating new value or contributing to productivity. This concept can manifest in various ways, from pushing for government policies in favor of certain businesses, securing profitable contracts via non-competitive practices, or implementing regulations that hinder competition. This notion is commonly associated with ‘crony capitalism,’ where businesses thrive not as a result of risk-taking or innovation, but because of their close relationships with the government. A quintessential example in the private sector is a protection racket, where individuals or groups force business owners to share their revenue under the guise of providing protection, without adding any real economic value.
Rent-to-own contract: A rent-to-own contract is an agreement allowing individuals to acquire goods immediately with no upfront payment or credit check, typically granting an option to buy after a set rental period, or to return the item without penalty while committing to return the goods upon missing payments.
Expanded Definition
A ‘Rent-to-Own Contract’ refers to a legally binding agreement that permits consumers to lease and utilize certain items, such as new furniture or appliances, with instant delivery provision. It does not necessitate a down payment or credit score scrutiny, thus making it more accessible to a wider range of individuals. The renter has the liberty to return the leased item after a specified timeframe, as per the contract, without incurring any penalties. However, should the renter miss a scheduled payment, they are obligated by the contract to immediately return the leased item. Over time, and after repeated payments, the renter may gain ownership of the product, hence the term ‘rent-to-own’.
Repo: A ‘Repo’ is a short-term agreement where a borrower sells an asset and agrees to buy it back later at a pre-set price, often used in the finance sector for liquidity purposes.
Expanded Definition
“Repo” is an abbreviation for “repurchase agreement,” a financial transaction in which one party sells a security, typically a government bond or corporate bond, to a second party with the explicit promise to buy it back at a later date. This arrangement allows the selling party to raise short-term capital while letting the purchasing party earn interest. The repurchase date and price for the security are usually pre-agreed by both parties. This term is widely utilized in financial markets to refer to this type of secured, short-term loan transaction.
Repossess: ‘Repossess’ refers to the act of reclaiming ownership of an item due to missed payment by the buyer.
Expanded Definition
‘Repossess’ is a term used in the financial and legal realms. It refers to the act of a creditor or financial institution reclaiming ownership of an asset or item, such as a vehicle, house, or other valuable property, when the borrower has defaulted on their loan or financing agreement. The repossession is done to mitigate loss, as it allows the creditor to sell the item to recoup the outstanding debt. This process typically occurs after the buyer has consistently failed to meet their payment obligations.
Repurchase agreement: A repurchase agreement, or repo, is a short-term borrowing mechanism where one party sells a security, typically a government bond, and commits to repurchase it at a higher price in the future, effectively setting the interest rate. The repo market is a vital liquidity provider in the financial system.
Expanded Definition
A ‘Repurchase Agreement’, commonly referred to as a ‘repo’, is a financial transaction in which one party sells a security, typically a government or corporate bond, and agrees to repurchase it in the future at a stipulated price. This higher price accounts for the interest rate on the debt and the compensation for the buyer for the temporary lending of funds. Functioning as a form of short-term borrowing, the difference between the sale and the repurchase price essentially presents the ‘interest’ on the loan, which is determined by market rates. The design of the repurchase agreement is primarily to provide liquidity and manage credit risk, making it a critical tool in the financial markets. The repo market is vast, it is estimated to exceed $4 trillion in the United States alone. This market is heavily depended upon by numerous financial market entities, as it allows them to finance their operations in the near term. In essence, repurchase agreements enable financial participants to lend and borrow funds efficiently, combining aspects of collateralized loans with the transfer and return of assets. Consequently, it aids in the smooth functioning of financial markets and adds precision to monetary policy execution.
Required reserves: Required reserves are the minimum amount of funds that a bank must hold in cash, or with a Reserve Bank or correspondent bank, as mandated by regulatory authorities.
Expanded Definition
‘Required Reserves’ is a term used in the banking sector to refer to the minimum amount of cash that a financial institution, such as a bank or a credit union, is mandated to hold. This reserve can be in the form of actual physical cash stored within the bank’s vault or an electronic balance maintained either directly with the nation’s Central Reserve Bank or through another banking institution acting as an intermediary or correspondent bank, particularly if the vault’s cash fails to meet the stipulated requirement. This regulation ensures that the bank always has enough cash on-hand to meet its customers’ withdrawal demands and other obligations, thereby promoting financial stability.
Rescheduling: Rescheduling refers to the renegotiation process between the debtor and creditors to adjust payment terms, typically by reducing short-term interest and lengthening loan or bond duration, particularly when repayment difficulties arise.
Expanded Definition
Rescheduling, in a financial context, refers to the revision or modification of the repayment terms of a debt, typically instigated when the debtor faces difficulties in fulfilling the original payment commitments. This process often entails a temporary reduction in interest payments and a prolongation of the loan or bond maturity period to alleviate immediate financial burden. The objective is to devise a more manageable repayment plan, facilitating the debtor’s eventual fulfillment of the debt obligation. However, executing a rescheduling agreement generally necessitates protracted discussions between the debtor and creditors, as it involves adjusting the originally agreed upon repayment parameters.
Research and development: Research and Development (R&D) refers to the essential process of innovating and improving productivity within an economy, which can be funded directly by governments or incentivized via tax breaks. It constitutes a significant part of GDP expenditure in OECD countries.
Expanded Definition
‘Research and Development,’ often abbreviated as R&D, signifies the pivotal processes involved in the generation of innovative ideas, tools, procedures, and products, which, in turn, enhance overall productivity within an economy. This specific set of activities is frequently undertaken by businesses, academic institutions, and government entities, with the aim of developing new or improving existing technologies, services, or systems. While these processes can be financed internally, sometimes governments incentivize or assist R&D initiatives via tax incentives or direct funding mechanisms, particularly during times of conflict or crisis. As per the latest data, nations within the Organisation for Economic Co-operation and Development (OECD) allocate approximately 2.5% of their Gross Domestic Product (GDP) each year towards R&D activities. However, certain countries, including Israel, South Korea, and Taiwan, commit a considerably higher percentage of their annual GDP to R&D endeavors.
Reservation rate: The reservation rate is the minimum acceptable return that banks require to lend money. It’s essentially the floor price for their lending services.
Expanded Definition
The ‘reservation rate’ is a financial term that represents the minimum return or interest rate that a financial institution, such as a bank, is willing to receive for lending out its resources. This rate is often determined based on a number of factors including the perceived level of risk associated with the loan, the duration of the loan, and prevailing market conditions. Essentially, the reservation rate is a threshold, below which the bank would not find the loan transaction to be profitable or worth the potential risk.
Reservation wage: The reservation wage is the minimum income one requires to work, essentially quantifying the economic value of their free time.
Expanded Definition
The term ‘Reservation Wage’ refers to the absolute minimum pay rate that a prospective employee is willing to accept for a particular job or service offered. Put differently, it quantifies the monetary value that potential employees assign to their non-working or leisure time. The concept implies that for an individual to trade-off their leisure time to work, the wage offered must meet or surpass their individual ‘Reservation Wage’. This constitutes the baseline of their employment terms, dictating the lowest acceptable compensation which is generally influenced by factors such as skill level, experience, job requirements, or the current job market.
Reserve balances: Reserve balances are the funds that a bank holds at a Federal Reserve Bank, fulfilling regulatory requirements and facilitating transactions.
Expanded Definition
‘Reserve Balances’ are defined as the funds that a commercial bank keeps deposited in its designated account with the Federal Reserve Bank, which is the central banking system of the United States. These reserves play a crucial role in a bank’s overall operations, including ensuring regulatory compliance, managing liquidity risks, and facilitating financial transactions. Precisely, these deposits comprise a portion of a bank’s total assets held for the purpose of meeting withdrawal demands, settling interbank payments, and fulfilling statutory reserve requirements imposed by banking authorities. Hence, by managing these reserve balances efficiently, banks can ensure their monetary stability and operational readiness in different economic conditions.
Reserve currency: A reserve currency is a foreign currency stockpiled by a central bank for use in financial crises or interventions, predominantly the US dollar, but also the euro and yen. It’s used for stabilizing the home nation’s currency or aiding domestic banks.
Expanded Definition
A ‘Reserve Currency’ refers to a foreign currency that is stored by a nation’s central bank and can be utilized in exceptional situations. The purpose of holding this currency can vary. For instance, the central bank may use it to intervene in the foreign exchange market with the aim to stabilize or adjust the value of its domestic currency by buying its own currency using the reserve currency. This in turn can help control inflation, manage economic instability or maintain a certain exchange rate. Additionally, it could be lent out by the central bank to domestic banks during times of liquidity crisis. The prominence of each reserve currency extends on a global scale, with the leading reserve currency in use being the US Dollar, accounting for approximately 60% of the collective global reserves. However, other currencies like the Euro and the Japanese Yen also play significant roles as reserve currencies globally. These currencies are preferred due to their economic stability and strong international confidence, influencing global economic conditions and facilitating international trade.
Reserve maintenance period: The reserve maintenance period is the timeframe in which banks must meet, on average, the required reserve balances and contractual clearing balances.
Expanded Definition
The term ‘Reserve Maintenance Period’ refers to a specific time frame during which financial institutions must fulfill their reserve balance standards and contractual clearing obligations. These responsibilities need not be met daily, but rather, the institutions need to maintain an average balance that aligns with the requirement over the whole period. This average-based approach allows financial institutions to manage liquidity efficiently, given that deposits and reserves may fluctuate day-to-day. The flexibility of this period offers an additional layer of operational adaptability in managing financial reserves and clearing balances.
Reserve requirement: The reserve requirement is the mandated proportion of a bank’s deposits that must be held in liquid assets, like cash. As of March 2020, the Federal Reserve has reduced this requirement to zero.
Expanded Definition
The ‘Reserve Requirement’ is a banking regulation that sets the minimum amount of cash that a bank must hold against its liabilities, typically a certain percentage of the bank’s deposits. This cash can be held either in the bank’s vaults or in an account at a reserve bank. These reserves act as a cushion of capital for the bank to use in emergency situations or during times of financial instability. The reserve requirement is set and regulated by a country’s central bank – in the United States, this is the Federal Reserve. As of March 26, 2020, the Federal Reserve has set this requirement to zero, meaning banks are not currently required to hold any specific amount in reserves. This allows banks to loan out almost all of their deposits, thereby maximizing the potential for profit while also increasing the systemic risk within the financial system.
Reserves (bank): Reserves refer to the bank’s stash of cash-on-hand and their deposits kept with Federal Reserve banks, which ensure liquidity and stability in financial transactions.
Expanded Definition
‘Bank Reserves’ refer to the monetary holdings maintained by financial institutions for the purpose of managing their liabilities and meeting customer withdrawal demands. These reserves comprise both physical cash retained within the bank’s premises, known as vault cash, and digital currency held in accounts at Central Banks such as the Federal Reserve. These reserves are essential for ensuring financial stability, fulfilling regulatory requirements, and enhancing customer trust in the banking system.
Residential mortgage-backed security (RMBS): An RMBS is a type of asset-backed security that is paid through the cash flows collected from a group of residential mortgages.
Expanded Definition
A ‘Residential Mortgage-Backed Security (RMBS)’ is a type of investment instrument which is primarily backed by the cash flow derived from a bundled group of residential mortgages. These mortgages are pooled together to create a security, which is then sold to investors. The return on investment for the RMBS holder primarily comes from the mortgage payment interests made by the borrowers of these residential mortgages. RMBS is a subtype of asset-backed securities, and is similar to its counterpart, Commercial Mortgage-Backed Securities (CMBS), which is underpinned by commercial, rather than residential, mortgage loans.
Resource curse: The ‘Resource Curse’ refers to the paradox where countries with an abundance of natural resources, often struggle with economic growth, political stability, and development, due to the concentration of wealth in resource sectors and marginal performance in other industries.
Expanded Definition
The “resource curse,” also known as the “paradox of plenty,” refers to a socio-economic phenomenon that occurs in certain countries that possess a bounty of natural resources, like oil, gas, or minerals. Despite this wealth, these countries often struggle with economic growth, political stability, and social progress. This issue arises when political leaders excessively engage in rent-seeking behaviors, a term that refers to the practice of increasing one’s share of existing wealth without contributing to productivity. This could involve corruption, power concentration, and suppression of opposition, as leaders bask in the income generated by the resources. Moreover, because the revenues from these lucrative natural resources tend to outweigh and overshadow profits from other sectors, there is often insufficient investment in emerging industries, leading to a lack of economic diversification. As such, these nations become overly reliant on the unpredictable commodity market. When international resource prices fluctuate, the country’s overall economic stability can be significantly impacted. This stark contradiction, of resource-rich countries being locked in economic stagnation or regression, frames the essence of the ‘resource curse.’
Resources: ‘Resources’ refers to the combination of natural, monetary, and human elements utilized in the creation of goods and services, often termed as productive resources.
Expanded Definition
“Resources” refer to fundamental elements utilized in the production of goods or the provision of services. They encompass a wide range of inputs which can be primarily categorized into natural, capital, and human resources. Natural resources, also known as land resources, encompass all raw materials originating from earth that contribute to economic productivity. This includes physical land, water bodies, minerals, flora, and fauna. Capital resources represent manufactured assets used in the production process, such as machinery, buildings, or tools. They are used over again in the production process and are vital for increasing the output or improving the quality of goods or services. Human resources, on the other hand, represent the labor force employed to drive the production process. This includes not only the physical labor but also mental skills and creativity that contribute to productivity. In general terms, these categories collectively are often referred to as “productive resources” since they demonstratively contribute to the production capacity of an economy or a business entity.
Retail: Retail is the process where goods, either new or used, are sold directly to end consumers.
Expanded Definition
“Retail” refers to the business process wherein goods, both new and used, are sold directly to the end consumer for their personal use. This selling process can occur through various channels such as physical storefronts, online marketplaces, or through direct selling methods. The retail industry encompasses a wide range of goods including but not limited to clothing, groceries, electronics, and furniture. The goal of retail is not only to make these products accessible for consumer purchase, but also to provide value, convenience, and a positive shopping experience for the customer.
Retained earnings: Retained earnings are a firm’s accumulated net income saved or reinvested for future use or debt repayment.
Expanded Definition
‘Retained earnings’ refer to the accumulated net income that a corporation has retained – rather than distributing it to shareholders in form of dividends – since its inception. These earnings are often used to reinvest in the company’s main business or to pay off existing liabilities. They serve as an important financial parameter, reflecting a firm’s profitability overtime and its capability to self-finance growth and development activities.
Retirement: Retirement is the phase of permanently exiting one’s professional or active working life.
Expanded Definition
‘Retirement’ refers to the cessation of one’s professional or occupational activities, commonly after reaching a specific age or after several years of employment, resulting in leaving one’s job or career permanently. It generally represents a stage in life when an individual chooses to stop working full-time and transitions into a phase characterized by leisure, hobbies or part-time work, often sustained by sources of income such as pensions, savings, or investments.
Retirement Plan 401(k): A 401(k) is an employer-sponsored retirement plan that enables employees to invest and save for their future on a tax-deferred basis, oftentimes involving company stock distributions.
Expanded Definition
A 401(k) Retirement Plan is a type of employer-sponsored retirement savings program, designed to help employees set aside a portion of their earnings for their future retirement needs. It offers substantial tax advantages, including the ability for contributions and investment gains to grow tax-deferred until withdrawal. This means participants don’t pay any taxes on their 401(k) funds until they start withdrawing them in retirement. Additionally, many employers contribute to their employees’ 401(k) plans by matching a portion of their contributions as a part of employment benefit packages. Apart from accumulating personal savings, a 401(k) plan can also serve as a tool for employers to distribute company shares to their employees.
Return on Investment (ROI): Return on Investment (ROI) is a ratio that evaluates the performance of an investment by dividing the net profit by the initial cost, signifying the value received for each respective dollar invested.
Expanded Definition
Return on Investment (ROI) is a financial metric extensively used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost. The ROI calculation is designed to evaluate the efficiency of an investment or compare the efficiencies of several different investments. This metric is expressed as a percentage and is typically used for personal financial decisions, comparing the profitability of different companies, or evaluating the efficiency of different investments. In simple terms, the formula for ROI is: ROI = (Net Profit / Cost of Investment) x 100% Here, the ‘Net Profit’ is the gain from the investment subtracting the cost of the investment. This formula helps investors to rank various investment options based on their profitability. It’s an accessible way for individuals and businesses to measure the return of different scenarios to find the most profitable outcome or the best usage of capital.
Reuse: ‘Reuse’ refers to the repeated utilization of an item or deploying it for a new purpose, extending its functional lifespan.
Expanded Definition
‘Reuse’ is a concept that denotes the repeated utilization of an item, product, or resource, beyond its initial intended function or after its initial use period. This can be achieved either by repurposing the goods for a novel application or by employing the same item repeatedly for its original purpose. It is a sustainable practice aimed at minimizing waste, conserving resources, and reducing the impact on the environment. Furthermore, ‘reuse’ encourages creative problem-solving and innovation by identifying alternative uses for goods that would otherwise be discarded.
Revenue: Revenue is the total income generated by a business through its operations and sales activities.
Expanded Definition
‘Revenue’ refers to the total amount of income generated by the sale of goods or services related to a company’s primary operations. It is the gross income a company brings in before any expenses or taxes are deducted, often termed as ‘top-line’ money due to its position on the financial statement at the top line. This critical financial metric serves as a strong indicator of the business’s effectiveness in attracting and retaining customers.
Revenue (government): Revenue in government context is the financial income generated from taxes and other non-tax means.
Expanded Definition
‘Revenue (Government)’ is professionally defined as the composite financial influx that is garnered by a governmental body. This influx primarily encompasses the yield from taxes which are levied on corporations, individuals, and on goods and services. It also comprises less direct sources such as fees associated with licenses, permits, or specific governmental services, as well as earnings from government-owned or managed resources or businesses. The capital received through this revenue serves as the fiscal basis for government operations and public services.
Revolving credit: Revolving credit is a flexible borrowing option with a set limit, where balances can be paid off and re-borrowed as needed, with accrued interest.
Expanded Definition
‘Revolving credit’ refers to a financial arrangement that allows an individual or business to borrow up to a predetermined credit limit on an ongoing basis. Unlike a traditional loan, revolving credit does not have a fixed number of repayments. Instead, it allows the borrower to continually draw on the credit line as needed, provided they have not exceeded their limit. The accessible credit fluctuates as funds are borrowed and repaid, incurring interest charges in the process. This arrangement provides financial flexibility, as the borrower does not need to reapply for a new loan each time they need funds.
Rewards: ‘Rewards’ refer to beneficial incentives given to enhance an individual’s condition or situation.
Expanded Definition
‘Rewards’ may be defined as ‘Beneficial or favorable outcomes or stimulations that are provided as a response to individuals’ actions, behaviors, or performance. These rewards serve to enhance individuals’ overall condition, increase their motivation to accomplish tasks, and/or promote the replication of desired behaviors, subsequently leading to improved performance or beneficial changes in behavior. They represent a reciprocal exchange where value is provided as a form of appreciation or recognition.’
Ricardian equivalence: Ricardian equivalence is an economic theory positing that government’s borrowings don’t affect overall demand because individuals anticipate future taxes to repay the debt and thus save in advance, thereby neutralizing the stimulatory effects of Keynesian fiscal policies.
Expanded Definition
‘Ricardian equivalence’ is an economic theory postulated by the influential economist David Ricardo. It posits that the method of government financing – either through accruing debt or taxation – carries little consequence to overall demands within an economy. This theory proposes that people behave in a longitudinally rational manner. If the government invests in a public sector expansion by accruing more debt, individuals intuit the inevitability of future tax hikes in order to repay such debts. In anticipation, citizens save more to offset these anticipated tax increases, hence no real change in demand or spending is instigated. This view effectively challenges the efficacy of Keynesian stimulus programs, which advocate for increasing government expenditure to stimulate aggregate demand. The doctrine of Ricardian Equivalence is closely related to the concept of Rational Expectations, where it is believed that individuals’ expectations for the future impact their economic decisions today.
Rider: A rider is an add-on to an insurance policy that modifies its terms or provides extra benefits, potentially at an increased cost.
Expanded Definition
A ‘Rider’ is referred to as an official amendment, appended to an existing insurance policy, designed to modify, supplement, or qualify its conditions and benefits. It can alternatively extend or limit the policy’s coverage or even alter its scope. These modifications can provide protection beyond the standard policy parameters. However, the incorporation of a rider typically leads to an increase in the insurance premium, reflecting the enhanced coverage or modified terms. Despite the increased cost, riders provide policyholders with the flexibility to personalize their coverage to best meet their unique needs and circumstances.
Risk: ‘Risk’ refers to the potential for experiencing a negative outcome or loss in a certain situation or action.
Expanded Definition
‘Risk’ is traditionally understood as the probability or likelihood of experiencing a detrimental outcome or loss. In a sizable range of contexts, ranging from finance to public health, this term encapsulates the quantifiable uncertainty that is inherent in predicting future events or outcomes. It involves an exposure to danger or harm that can occur from a variety of sources, both known and unknown. Thus, risk does not solely denote the chance of a loss, but it further encompasses the potential degree of that loss and the severity of its consequences.
Risk averse: A ‘risk averse’ investor is one who prefers predictable returns over potentially higher, but uncertain profits.
Expanded Definition
“Risk averse” refers to an individual, traditionally an investor, who prefers stability over uncertainty when making investment decisions. Such individuals are typically inclined to choose an investment option with lower, but more certain returns, over a potentially high-yield investment that involves a greater amount of risk. Essentially, they prioritize the assurance of consistent returns over the possibility of optimal, but uncertain, returns. This concept embodies the fundamental principle of risk and reward trade-off in financial and investment contexts. It’s important to note that a risk-averse investor doesn’t completely avoid risk, but rather manages it in a way that aligns with their preference for lower volatility.
Risk premium: A risk premium is the additional return expected by investors for bearing the riskier proposition of certain assets versus risk-free instruments. It takes into account the absolute loss potential and the asset’s price volatility.
Expanded Definition
‘Risk premium’ refers to the additional returns that investors anticipate in exchange for investing in assets with higher risk, such as equities or stock shares, compared to the returns from risk-free assets such as cash in hand or government securities. Risk premium is essentially the compensation demanded by investors for assuming additional risk. There are two primary components that determine the risk premium. First is the potential for absolute loss, which can occur if the company goes bankrupt or defaults on a payment obligation. The second component is the asset’s volatility, represented by the fluctuations in its price. During a financial downturn or crisis, there can be a sharp drop in the value of these risky assets, leading to the possibility of investors having to liquidate them at a loss. Thus, to justify facing such potential risks, investors seek a risk premium when they choose riskier investments.
Risk-adjusted return: Risk-adjusted return is a measure that quantifies the level of risk taken to achieve a specific return compared to a benchmark or market. It accounts for potential volatility and provides a normalized evaluation of return potential for portfolios with differing risk profiles.
Expanded Definition
The term ‘Risk-adjusted return’ refers to a statistical method utilized in finance that considers the level of risk involved in achieving a specific return on an investment portfolio, thus providing a more comprehensive measure of returns. It’s essentially a calculation that quantifies the excess or deficit returns of a portfolio or investment, juxtaposed against the level of risk that the particular portfolio or investment incurs. To illustrate, imagine a fund manager achieves an annual return of 20%, while the overall market only returns 10%. One might initially think the manager’s strategy is exceptionally successful. However, this perception changes if we discover that the manager’s portfolio comprises only a few stocks. In this case, the portfolio is significantly riskier than the diversified market portfolio due to a lack of diversification leading to concentrated risk. Therefore, the higher return may simply be a compensation for the increased risk taken, rather than skill. Risk-adjusted return metrics aim to resolve this by incorporating the risk factor into performance assessment and thereby giving a more realistic insight into the performance. Simply put, risk-adjusted return is an investment’s return relative to the risk it carries. Its use is especially relevant because high returns can merely be a reflection of high risks, and these metrics provide a transparent measure to track performance without ignoring the associated risk. This way, we cannot just rely on raw returns, as they do not provide a full snapshot of potential downsides the investor may face in the future.
Risk-averse: ‘Risk-averse’ refers to a cautious behavior, typically in financial and investment sectors, where entities such as businesses, banks, and investors opt for safer options, reducing economic activities, due to uncertainty and potential losses. It often corresponds to a ‘risk-off’ market climate.
Expanded Definition
“Risk-averse” can be best defined as the inclination towards minimizing exposure to potential harm or loss in any economic context. Businesses, banks, or investors exhibiting this behavior display a reluctance towards activities that are perceived as risky, aiming instead to ensure financial safety. For example, businesses may avoid investing in new infrastructure due to the potential of a non-profitable return, just as banks may adopt a conservative approach by restricting their lending. On a similar note, investors often prefer secure investments such as government bonds over more volatile options like equities. Financial analysts typically describe such tendency under uncertain economic conditions as “risk-off” markets. The term essentially captures the essence of economic hesitation, or the lack of ‘animal spirits’, a theoretical concept referring to the human emotion that drives consumer confidence.
Risk-free return: Risk-free return refers to the expected yield on assets perceived as safe, like cash or government bonds. However, it’s critical to note that such assets aren’t entirely risk-free due to inflation or rising yields risks.
Expanded Definition
The term ‘Risk-free return’ refers to the potential gains derived from investments that are considered inherently secure, such as cash holdings or government bonds. This concept serves as a fundamental principle within financial modeling, where it is used to assert that investors will expect an additional return, referred to as a ‘risk premium’, beyond the risk-free rate to compensate for taking on riskier investments. Nonetheless, it is essential to highlight that so-called ‘risk-free’ investments do carry some degree of risk. For instance, the realized returns may end up being lower than the rate of inflation, leading to a loss in real economic terms. Moreover, in the case of government bonds, an increase in yields can lead to capital losses. An interesting note was observed in the latter part of the 2010s when government bonds in some regions traded on negative yields, resulting in some financial experts joking that they were offering “return-free risk”.
Risk-reward relationship: The risk-reward relationship refers to the correlation between the potential for loss in an investment and the potential for gain; higher risk entails greater possible returns and vice versa.
Expanded Definition
The ‘Risk-reward relationship’ refers to the principle asserting a correlation between the level of risk undertaken in an investment and the potential rate of return it could generate. In essence, an increased possibility of losing the original investment or ‘principal’ comes with a higher potential for significant returns. This increased ‘risk’ could manifest through various factors such as market volatility, liquidity risks, economic conditions, or company-specific risks. On the other hand, if an investment carries a lower risk of principal loss, indicating higher safety levels, it usually implies a lower return potential. It is an essential concept to understand for every investor when making investment decisions, adopting strategies, and balancing their portfolios.
Rivalry (in consumption): ‘Rivalry in consumption’ refers to the characteristic of a good or service which, when consumed by one party, prevents other parties from benefiting from it. Simply put, it’s a ‘when one consumes, the other can’t’ scenario.
Expanded Definition
‘Rivalry (in consumption)’ pertains to a characteristic inherent in certain goods or services where the consumption or use by one individual or entity prohibits or limits its simultaneous consumption or use by another party. This means that the benefit derived from the consumption of a ‘rival’ good or service cannot be shared concurrently by multiple parties. For example, if one person purchases and eats an apple, that apple cannot be eaten by someone else. The good, in this case being the apple, has effectively been ‘rivalrous,’ as its consumption has been exclusive to one consumer only.
Rule of 72: The Rule of 72 is a quick calculation used to approximate the time period required for an investment or debt to double in value, calculated by dividing 72 by the annual interest rate.
Expanded Definition
The ‘Rule of 72’ is a financial concept used to provide a rough estimate of the length of time—specifically, in years—it would take an investment or debt to double in value or cost, respectively. This calculation is achieved by dividing 72 by the annual rate of return or interest rate, represented as a percentage. The resulting number provides an approximation of the years needed for the investment or debt to double. This rule offers a simplified initial projection and aids in understanding the time-based implications of different rates on financial growth or obligations.
Rule of law: The ‘Rule of Law’ is the principle asserting that all governmental actions must be grounded in existing laws and regulations, ensuring lawful operation and equal justice.
Expanded Definition
The ‘Rule of Law’ is a foundational principle in legal theory, asserting that every entity, including the government and its officials, is subject to and accountable under the law. It underscores that the power exercised by the government and its officers should align with pre-determined rules and legal principles, preventing the arbitrary or discriminatory use of authority. The Rule of Law ensures fairness, transparency, and predictability, forming a democratic society’s bedrock where laws are publicly promulgated, equitably enforced, and independently adjudicated.
Rules of origin: ‘Rules of origin’ are criteria used to establish the national source of a product, playing a key role in determining eligibility for tariff-free treatment within free-trade areas.
Expanded Definition
“Rules of origin” can be expanded and comprehensively defined as guidelines or sets of criteria established by national governments and international trade agreements meant to identify the economic nationality of a product. These rules enable the relevant authorities to determine the ‘nationality’ of a product based on where its components were sourced or where the bulk of its manufacturing or transformation process took place. Importantly, these rules play a pivotal role in defining how these goods will be treated in global trade scenarios. More specifically, within the context of a free-trade area, the rules of origin are leveraged to ascertain whether a product can be classified as ‘originating’ from a participating country. If so, it may be eligible for preferential treatments, such as tariff-free entry, facilitating smoother and more cost-effective cross-border trade within that specified free-trade zone. Therefore, adherence to and understanding of rules of origin are key for businesses seeking to maximize the benefits of international trade agreements.

S

Salary: A salary is a fixed annual compensation for an individual’s labor, typically paid in monthly or bimonthly installments, based on a standard work week of approximately 40 hours.
Expanded Definition
‘Salary’ is a term that refers to the regular, often annual, monetary compensation that an individual receives in exchange for their professional services within a workforce. Typically denominated in a yearly amount and dispersed on a monthly or bimonthly basis, a salary operates as a fixed sum irrespective of the specific number of hours an individual works each week, although generally for a full-time position, this approximates to 40 hours. Salaries serve as one of the main forms of remuneration in a labor market, providing a steady and predictable income stream for employees.
Sales tax: Sales tax is an indirect tax levied on the sale of goods and services, collected by intermediaries such as retailers. It’s a significant source of government revenue, and in Europe, it’s applied as a value-added tax at each supply chain stage.
Expanded Definition
‘Sales tax’ is a prevalent method employed by governments globally to generate revenue. Essentially, it is an indirect tax since it is not directly paid by an individual to the government, but rather collected on behalf of the government by retailers or other intermediaries when a product or service is sold. The customer pays this tax as part of the purchase price. In Europe, a similar system is used, known as Value Added Tax (VAT). With VAT, the tax is applied at every stage of the supply chain, from production to point of sale, which captures the value added at each step. Such an approach ensures broad revenue generation, while also allowing businesses to reclaim VAT they’ve paid during the production process.
Sanctions: Sanctions are measures implemented often by nations or international bodies to restrict economic access or activities, such as trade, travel, or investments, with the intention of maintaining international order and influencing a nation’s behavior.
Expanded Definition
“Sanctions” can be broadly understood as measures commonly used within the sphere of international relations, typically enforced by one or multiple nations against another. They are methods used to impose a certain degree of economic and/or political pressure, often with the aim of promoting changes in behavior or influencing political decisions. Sanctions can come in numerous forms such as trade embargoes (which restrict import/export activities), bans on travel and investment (which limit movement and economic interaction), and asset freezes (which halt access to financial resources both domestically and abroad). These measured, punitive actions have risen to prominence in recent times as a widely utilized tool in foreign policy. A prominent example of their usage has been in response to Russia’s invasion of Ukraine in 2022. Our related briefing and article provide more comprehensive insights into the history, application, and effectiveness of sanctions.
Save: ‘Save’ refers to the process of reserving a portion of income or funds for future use or expenditure.
Expanded Definition
‘Save’ in the context of finance and personal management can be defined as the process of setting aside a portion of one’s income or resources instead of using it immediately. This accumulated amount is typically earmarked for future use, such as for investments, emergencies, or specific goals like purchasing a home, funding an education, or ensuring a comfortable retirement. The act of saving encourages financial prudence, sustainability and long-term stability.
Saving: Saving is the portion of income not used for immediate expenses or taxes, held back for future use or investments.
Expanded Definition
‘Saving’ is a financial strategy that essentially denotes the portion of an individual’s income that is set aside and not used for immediate expenditures, such as current living expenses or taxes. It reflects a deliberate act of conservation by forgoing immediate consumption in order to be able to fulfill future spending needs. This process facilitates longer-term financial security and can provide a buffer against unexpected expenses or enable the accomplishment of planned future financial goals. It’s a critical aspect of personal finance management that promotes financial flexibility, independence, and resilience.
Saving (elementary): ‘Saving’ refers to the act of setting aside a portion of one’s income for future purchases or expenses.
Expanded Definition
‘Saving (Elementary)’ refers to the deliberate process of setting aside a portion of one’s earnings or income with the objective of securing financial resources for future expenditure. This can encompass various intended uses such as emergency funds, purchasing of essential or desired items, investments, or planning for major life events. This fundamental concept of personal financial management underscores the importance of forward planning and the exercising of fiscal discipline.
Saving rate: The saving rate refers to the proportion of income that is set aside or saved.
Expanded Definition
The ‘saving rate’ can be more formally and elaborately defined as the proportion of an individual’s or entity’s total income that is earmarked or reserved for savings. It is calculated by dividing the amount of money set aside for savings by the total income, and then multiplying the result by 100 to get the percentage. This rate has significant indications with respect to financial health and future financial security, making it a crucial parameter in personal financial planning and macroeconomic analysis.
Savings: Savings refers to the portion of income unspent and stored for future use.
Expanded Definition
‘Savings’ can be professionally defined as ‘The systematic accumulation of financial resources, segregated from regular income, with the intention to utilize it for prospective expenditures or investments. It constitutes a critical component of personal financial planning, promoting fiscal discipline and offering a safety net for unexpected financial needs or long-term goals.’
Savings (elementary): ‘Savings’ refers to the portion of income not immediately consumed but reserved for future expenditures or investments.
Expanded Definition
“Savings, in its fundamental term, refers to the portion of income that is not consumed immediately, but rather is preserved or allocated for future expenditure. This term encapsulates the concept of financial prudence and planning, where individuals or entities refrain from expending some segments of their income to build a reserve or a contingency fund. The core objective of this financial strategy is to provide security against unpredictable financial emergencies, enable specific future purchases or investments, or to secure income for retirement. The magnitude of savings can be influenced by aspects like income levels, spending habits, financial goals, and personal discipline.”
Savings account: A savings account is a financial product offered by banks and credit unions which allows depositors to accumulate interest on stored funds over time.
Expanded Definition
A savings account is a type of financial account offered by a bank or credit union that allows individuals to store their money securely while also earning interest on the deposited funds. These accounts function as a safe place to keep money that is not needed for immediate access or spending. They provide both a method of planning for the future and an opportunity to grow one’s funds through the accumulation of interest, which is essentially a reward for keeping money in the account. This type of account, regulated by specific rules regarding withdrawals and access, not only promotes fiscal responsibility but also provides a level of insurance for the funds, making it an integral part of an overall financial planning strategy.
Savings and loan associations: Savings and loan associations are chartered financial entities that take in savings deposits and primarily invest in mortgages.
Expanded Definition
‘Savings and Loan Associations’ can be officially defined as federated or state-sanctioned financial organisms, whose chief objective is to garner savings in the form of deposits from the public. The major portion of these collected deposits is then strategically allocated for investment in mortgage loans. By investing in such secured loans, these institutions play a substantial role in stimulating and supporting the housing market. Their key practices revolve around encouraging savings, offering residential mortgage loans, and providing other banking services. Consequently, these institutions are pivotal in fostering individual savings habits and promoting homeownership in the economies they operate within.
Savings goal: A savings goal refers to the financial target set for future acquisitions of goods or services.
Expanded Definition
A ‘savings goal’ refers to a financial objective set aside for the future procurement of a specific product or service. This objective serves as a monetary target, the attainment of which is meant to facilitate a significant planned purchase, investment, or expenditure. The goal is often achieved through regular, disciplined saving over a set period. This concept is an integral part of personal finance management, fostering discipline, foresight, and strategic planning for future financial needs or aspirations.
Savings plan: A savings plan is a strategic roadmap designed to attain a specific savings goal through the completion of various financial tasks.
Expanded Definition
A ‘savings plan’ is an organized and strategic financial blueprint, designed with the objective to accumulate a certain amount of money over a specified period. This involves allocating a portion of personal income towards savings, following a systematic schedule of tasks. The culmination of these tasks aims to facilitate the individual in achieving their predetermined financial goals. It serves as a roadmap for disciplined and consistent savings, fostering financial security and planning.
Say’s law: Say’s Law, developed by French economist Jean-Baptiste Say, is the principle that supply generates its own demand, informed by the idea that income from product creation fuels purchase of other products. It was used to argue that recessions could self-correct without government intervention.
Expanded Definition
Say’s Law is a concept in economics developed in the 19th century by Jean-Baptiste Say, a prominent French economist. This principle stipulates that the act of supplying or producing a good inherently stimulates the demand for it. Crucially, this law pertains to the overarching economy’s aggregate demand rather than demand for singular products. As an entrepreneur produces goods, they invariably contribute to the economy by dispersing salaries to employees, purchasing raw materials from other businesses, and incurring related operational expenses. The payout from these activities subsequently circulates back into the economy when these recipients use their earnings to purchase other goods and services. Classic economists have referenced Say’s Law to advocate for the self-correcting nature of markets during economic downturns or recessions, suggesting that government intervention is unnecessary. They base their arguments on the belief that market forces naturally realign supply and demand, thereby restoring economic equilibrium over time.
Scarcity: Scarcity refers to the basic economic problem of having finite resources to meet unlimited human wants.
Expanded Definition
‘Scarcity’ is the economic principle describing the fundamental phenomenon of finite resources in the face of limitless human desires. It highlights an inherent systemic limitation where resources available for utilization — including tangible resources like raw materials and capital, as well as intangible like time and labor — are perpetually insufficient to satisfy all human needs and wants. This economic condition necessitates choices about the allocation of limited resources to fulfill the most pressing demands.
Scraping: Scraping refers to an automated process of capturing and downloading data from websites, often without authorization.
Expanded Definition
‘Scraping’, often known as ‘Web Scraping’, is defined as the digital process through which data is extracted from websites. This process is typically automated, meaning software applications, commonly referred to as ‘bots’ or ‘spiders’, are programmed to search the web pages and systematically collect information. These bots usually pull a variety of data, including but not limited to textual content, images, links, and other crucial data enclosed in the website’s coding. This is often conducted without explicit permission from the website owner, raising some ethical and legal considerations. While this description is fairly technical, in simpler terms, web scraping is like a robot going through a book and taking notes of important points—in this case, from a website’s pages instead of paper ones.
Search costs: Search costs refer to the monetary and time-related expenses incurred by consumers when trying to find a trading partner for a transaction.
Expanded Definition
Search costs refer to the expenses, both monetary and non-monetary, that consumers incur while seeking a suitable party with whom to undertake a business transaction. This can encompass direct financial outlays, such as travel or postage, as well as indirect costs, such as the time spent researching, comparing options, and negotiating terms. These costs arise due to the imperfect nature of information in the marketplace, as buyers and sellers may need to expend significant effort to identify each other and come to agreeable terms.
Seasonal patterns (in data series): Seasonal patterns in data series refer to recurring fluctuations in data values, attributed to annual events or phenomena.
Expanded Definition
‘Seasonal patterns within data series’ are fluctuations or variations that manifest consistently at specific intervals in a year due to the cyclical nature of certain events or factors. These patterns reflect repetitive and predictable trends in data that occur at corresponding points annually. Whether it is monthly, quarterly, or semi-annually doesn’t matter, as long as the pattern repeats every year. From business sales to meteorological data, these patterns can be evident, providing valuable forecasts and enabling informed decision-making.
Seasonal unemployment: Seasonal unemployment is joblessness linked to the cyclical patterns of certain industries that ramp up or down depending on the time of year. It refers to periods of unemployment when regular, predictable work is not available due to seasonal variations.
Expanded Definition
‘Seasonal unemployment’ is a type of unemployment that occurs when there is a regular, predictable fluctuation in the demand for certain types of work throughout the year. This is typically influenced by variations in weather or the changing of the seasons. Common in industries such as tourism, agriculture, and construction, seasonal unemployment is characterized by a period of high demand for labor during peak seasons, followed by a significant reduction or cessation of activity during off-peak seasons, leading to temporary unemployment. Despite its cyclical nature, strategies like retraining or obtaining secondary employment can be employed to mitigate the impacts of seasonal unemployment.
Seasonally adjusted: ‘Seasonally adjusted’ refers to the mathematical modification of data to eliminate fluctuations resulting from seasonal events, thereby allowing for more accurate observation of cyclical and nonseasonal trends.
Expanded Definition
“Seasonally adjusted” refers to the statistical method applied to numerical data to mitigate variations that predictably occur within specific periods of the year, such as increased retail employment during the holiday season. Recognizing that these fluctuations follow a somewhat consistent annual pattern, seasonal adjustment removes this effect to provide a more accurate representation of underlying trends. By making such adjustments, we can more effectively scrutinize cyclical and other nonseasonal movements in a data series, thereby providing clearer insights into the overall trajectory of the data. This improved precision aids in more informed decision-making and forecasting.
Second mortgage: A second mortgage is a loan taken out on a property that already has a primary mortgage, with rights to the property’s assets being secondary to the first mortgage in the event of a default.
Expanded Definition
A ‘second mortgage’ is a type of loan that is secured against the same property upon which a primary or ‘first’ mortgage has already been applied. The term ‘lien position subordinate to the first mortgage’ implies that in the case of default or the sale of the property, the primary mortgage loan would be repaid before the second one. That’s why it’s termed as a ‘second’ mortgage. It’s typically riskier for lenders than the first mortgage because they would be the second in line to be repaid in case of a default. Hence, usually, second mortgages have higher interest rates compared to first mortgages. This type of loan is commonly used by homeowners to acquire funds for large expenses, like home repairs, education, or to pay off debts.
Secondary market: The secondary market is where investors trade securities already issued, rather than buying newly released ones directly from the issuer.
Expanded Definition
The secondary market essentially refers to the virtual or physical marketplace wherein pre-existing financial instruments such as stocks, bonds, options, and futures are traded among investors. Unlike the primary market, where companies issue new securities to investors for the very first time, the secondary market allows for the transfer of ownership of these financial assets from one investor to another. Essentially, it provides a robust platform for the buying and selling of these financial securities after their initial public offering. This market is crucial in determining the pricing of securities based on supply and demand. It also offers liquidity, making it easier for investors to convert their assets into cash.
Secured debt: Secured debt is a loan guaranteed by the borrower’s collateral, ensuring the lender’s repayment if default occurs.
Expanded Definition
‘Secured debt’ is a form of credit or loan agreement in which the borrower pledges a tangible or intangible asset, referred to as collateral, to the lender. This collateral is intended to act as a safety measure or insurance for the lender – in the event that the borrower defaults or fails to meet the repayment terms, the lender has the legal recourse to take ownership of the collateral. Secured debts commonly include mortgages, auto loans, and secured personal loans, among others, where the pledged collateral can be the property, vehicle, or asset being financed. This form of debt offers reduced risk for lenders, often enabling them to offer lower interest rates to borrowers. Ultimately, a ‘secured debt’ ensures a form of repayment protection for the lender while offering potential borrowing benefits to the debtor.
Secured loan: A secured loan is a credit agreement in which the borrower pledges property as collateral, thereby guaranteeing the lender its repayment.
Expanded Definition
A ‘Secured Loan’ is a type of financial lending agreement where the borrower provides an asset—known as collateral—which acts as a security measure for the lender. Should the borrower fail to meet repayment terms, the lender has the legal right to seize and/or sell the collateral to recover any outstanding debt. This form of lending arrangement reduces the risk carried by the lender, while it requires the borrower to guarantee the loan obligation with personal or business property. This can encompass a range of assets, from real estate and vehicles to financial holdings such as stocks or bonds.
Securities: Securities are tradable financial assets like bonds and stocks.
Expanded Definition
‘Securities’ is a comprehensive term that pertains to a broad category of negotiable and tradable financial instruments. These instruments represent a form of monetary value and are used to amass capital in the financial markets. Notable examples include bonds, which are debt-based securities where the issuer owes the holders a debt and is obliged to pay interest and/or repay the principal at a specified future date; and equities, which primarily take the form of shares of stock in a company, offering partial ownership to the holder and potentially a proportion of the company’s profits. This versatile categorization of securities facilitates variety in investment strategies and capital generation methodologies in the global financial marketplace.
Securities and Exchange Commission (SEC): The SEC is a U.S. governmental body mandated by Congress to oversee and regulate the securities industry.
Expanded Definition
The Securities and Exchange Commission (SEC) is an autonomous governmental organization in the United States that was instituted by the U.S Congress. The primary objective of the SEC is to enforce laws, develop regulations, and supervise the nation’s securities industry, which includes the stock and options exchanges, electronic securities markets, and other related organizations and individuals. This entity is essentially responsible for fostering fair and equitable markets, protecting investors against fraudulent activities, ensuring the release of accurate financial information, and encouraging capital formation. It is committed to maintaining investor confidence in the integrity of the securities market while promoting economic growth.
Securitization: Securitization is the process of grouping similar assets, like mortgage loans, then issuing securities backed by this collective pool.
Expanded Definition
Securitization is a complex financial procedure where specific assets or financial instruments, such as mortgage loans, credit card debt, or auto loans, are consolidated into a distinct group or ‘pool’. This pooled group is then repackaged into marketable securities which can be sold to investors. These securities provide the investors with income in the form of the cash flows generated from the underlying assets. This practice allows financial institutions to distribute risk, optimize their balance sheets, and improve liquidity. Securities that represent these consolidated pools, often referred to as Asset-Backed Securities (ABS), straddle both the debt and equity sectors, recasting often illiquid individual debts into tradeable financial products. This mechanism is a cornerstone in modern financial markets, effectively linking investors to borrowers via a mediated, structured process.
Security deposit: A security deposit is an upfront payment made by a tenant to a landlord, held as a safeguard against potential damages or unpaid rent, and typically refundable at the end of the lease, subject to state laws.
Expanded Definition
A ‘Security Deposit’ can be succinctly defined as a monetary amount collected by a landlord from a tenant prior to occupancy. The purpose of this upfront payment is to secure financial protection for the landlord should the tenant cause damage to the property, fail to comply with the lease agreement, or neglect to pay rent. Throughout the tenancy, the landlord must safeguard this deposit. Upon termination of the lease, the landlord may deduct any outstanding debts or repair costs from this deposit before returning the remainder to the tenant. The timeline for the return of the deposit depends on local and state laws to ensure fairness and efficiency.
Segregation: Segregation refers to the deliberate separation of people based on race, religion, or other distinguishing characteristics implemented through policies or practices.
Expanded Definition
Segregation is often referred to as the systematic practice or institutionalized policy whereby individuals are divided or isolated based on their race, religion, or other characteristics. This divide can be manifested physically or socially, often reflected in areas such as housing, education, and public services. The motive behind segregation typically stems from notions of racial or cultural superiority, leading to enforced limitations or denial of access, and contributing to social and economic disparities. This term is most commonly associated with historical and contemporary socio-political instances wherein particular groups have been systematically marginalized or excluded.
Seigniorage: Seigniorage refers to the profit governments earn by issuing currency, specifically the differential between the production cost and the actual value of money. For smaller denominations like pennies, the manufacturing cost may exceed their face value.
Expanded Definition
‘Seigniorage’ refers to the profit that a government accrues by issuing currency, specifically the difference between the production cost of the currency and its actual face value. Historically, governments profit from this difference because the cost to manufacture money is typically less than the money’s face value. For example, if it costs 5 cents to produce a $1 bill, the government makes a seigniorage profit of 95 cents. However, it’s worth noting that this may not always result in profit. There can be instances, often with smaller denominations like the American penny, where the production cost exceeds the face value of the money, leading to a loss rather than a gain.
Self-interest: Self-interest is the motivation to act for personal benefit or advantage.
Expanded Definition
‘Self-interest’ represents the motivation to seek and promote objectives or conditions that are beneficial to oneself, typically within economic, social, or psychological domains. This concept does not exclusively refer to financial gain but encompasses a broader range of personal benefits, such as improved health, increased knowledge, stronger relationships, or enhanced status. It is a fundamental aspect of human behavior, often used to predict actions and decisions in theories of social science, economics, and psychology. However, self-interest can be tempered by ethical considerations and social norms to ensure fair and mutually beneficial outcomes.
Senior debt: Senior debt is a type of loan that takes priority over other debts in case of bankruptcy, often backed by collateral, ensuring the lender is the first to be repaid.
Expanded Definition
‘Senior debt’ is a type of financial obligation or liability prioritized above other types of debts in case of the issuer’s insolvency or bankruptcy. Legally, the debtor is obligated to repay senior debt in full before any payment is made to other creditors, who may carry junior or subordinated debt. Often, lenders mitigate the risk associated with senior debt by acquiring a first lien status on a specific set of collateral assets. This grants them the right to seize and liquidate these assets as their first form of recourse to recover their investment, if the debt issuer defaults or fails to meet their financial obligations. In essence, ‘senior debt’ represents the least risk to lenders as it takes precedence in repayment and is frequently secured by collateral, ensuring there are tangible assets tied to the commitment.
Senior secured debt: Senior secured debt is a type of borrowing, backed by physical assets, that has the first right to a company’s cash flows before any other liabilities are serviced.
Expanded Definition
‘Senior Secured Debt’ is a term typically used in financial or corporate industries. It describes a type of borrowing where a company, whether it operates in a financial or non-financial sector, pledges tangible, physical assets as collateral. This collateralization gives lenders a degree of protection in case of default as they can seize these assets to recoup their investment. Within the context of a company’s capital structure, ‘senior’ denotes the highest priority in terms of claim on the company’s cash flows or assets. This means that if the company experiences financial distress or undergoes liquidation, repayments on senior secured debt take precedence over other forms of debt or equity. It’s an important concept in risk management and credit analysis as it underpins the relative security of certain types of borrowings.
Seniority: Seniority refers to the hierarchy of creditors’ rights to repayment when a company goes bankrupt, where senior debt, being less risky, is prioritized over junior debt.
Expanded Definition
‘Seniority’ is a term often used in the context of a company’s financial obligations, particularly when it pertains to bankruptcy. This term establishes the hierarchy in which creditors must be reimbursed if a company goes bankrupt. At the top of this hierarchy sits senior debt, which must be fully repaid before any other class of debt, particularly junior debt or subordinated debt, can be considered for payback. Due to its position atop the hierarchy, senior debt presents a lesser risk to lenders, as it is likely to be repaid first. Consequently, senior debt usually carries a lower yield or return on investment compared to other types of debt, primarily because its safer nature reduces the risk-reward ratio for the creditors.
Services: Services are actionable provisions designed to fulfill individual needs or desires.
Expanded Definition
“Services” refers to a broad category of economic activities that entail the provision of intangible products or offerings. These can be various forms of professional expertise, assistance, advice, or other less tangible commodities that don’t involve the ownership of a physical object. These are typically conducted with the purpose of fulfilling the needs, desires, or demands of a customer or client, thereby contributing to their satisfaction. Services typically involve some level of interaction between the provider and the recipient and can span various sectors including, but not limited to, healthcare, education, hospitality, financial and professional services.
Services (elementary): ‘Services (elementary)’ refer to the actions performed by individuals that directly benefit others, such as professional expertise or manual labor.
Expanded Definition
“Elementary Services” refer to the fundamental and often essential tasks or activities performed by individuals or businesses aimed at fulfilling a specific need or demand for others. These services can span a broad range of sectors, including but not limited to health care, education, maintenance, transportation, and professional consultation. The individuals or businesses who offer these services often possess specialized expertise, training, or equipment, enabling them to provide a quality standard of service in their respective domains.
Shadow banks: Shadow banks are unregulated financial entities engaged in lending and derivatives trading, their rapid growth in the early 2000s greatly contributed to the 2007-09 financial crisis.
Expanded Definition
‘Shadow banks’ denotes to a set of financial institutions that are not subject to traditional regulatory oversight applicable to banking systems, yet engage in various financial activities such as lending and trading in derivatives. These operations essentially function parallel to the regulated banking sector. Witnessing significant expansion in the early 2000s, these shadow banking entities were extensively involved in the credit proliferation process, a decision that later became contributory to sparking off the international financial crisis between 2007 to 2009. Notably, a key aspect of their activities included trading in subprime mortgages, which are home loans provided to borrowers with lower creditworthiness, often posing higher risks to lenders due to the increased possibility of loan default.
Share options: Share options are incentives offered to executives at large corporations, allowing them the right to buy company shares at a predetermined price. This strategy aims to align the interests of managers and owners by promoting an increase in share price, but it may also foster short-termism as executives might avoid investments that could negatively affect the share value.
Expanded Definition
‘Share options’, also known as ‘stock options’, are a key incentive tool used in large companies to motivate executives. Simply put, these are contractual agreements granting individuals the right, though not the compulsion, to buy the company’s shares at a predetermined price. Originating from the intent to mitigate the principal-agent problem, this method ensures that the business goals of management match those of the shareholders, all of whom have a vested interest in seeing the company’s stock value appreciate. While the widespread use of share options since the 1980s has been largely concurrent with an upward trend in equity markets, leading to significant prosperity for executives, the practice has not been without its critics. Detractors argue that options can spur myopic approaches to management, whereby executives, aiming to boost the share price, may avoid making longer-term investments that might temporarily reduce stock value. For a more detailed understanding, one should also explore the concept of ‘options’.
Sharecropping: Sharecropping is a farming practice where individuals cultivate someone else’s land and give a share of the yield to the landowner.
Expanded Definition
Sharecropping is a type of agricultural system wherein individuals cultivate and farm a parcel of land that is owned by another party. In exchange for their labor and resources used for farming practices, the sharecropper is entitled to a specified percentage of the harvested crop as remuneration. The remainder of the harvest yield is given to the landowner, hence the term ‘sharecropping’. This arrangement allows individuals who lack ownership of land to engage in agricultural activities, albeit at the expense of parting with a significant portion of their produce to the landowner. It has historical context in post-Civil War America, particularly in the southern states, but can be found in varying forms globally.
Shareholder value: Shareholder value is a business strategy focused on enhancing returns for shareholders, often critiqued for encouraging short-term gains and neglecting societal and environmental responsibilities. This concept delegates wider social obligations to government regulation, contrasting with stakeholder capitalism.
Expanded Definition
‘Shareholder value’ is a corporate governance philosophy that emerged as highly influential during the 1990s and early 2000s. It is predicated on the notion that a company’s primary obligation is toward its shareholders, focusing primarily on enhancing shareholder returns. Advocates of this approach contended that the responsibility for achieving broader societal objectives rests not with corporations, but with government regulatory frameworks. Detractors argued that this philosophy propagated a short-term financial outlook, often neglecting employees’ rights and environmental considerations. This concept is contrasted with ‘stakeholder capitalism’, a governance model that upholds the interests of all entities, including employees, customers, and the community, in addition to shareholders.
Shares: Shares are units of ownership interest in a corporation or financial asset, representing a claim on part of the corporation’s assets and earnings.
Expanded Definition
‘Shares’ refers to units of ownership interest in a corporation or financial asset that provide for an equal distribution in any residual profits, if any are declared, in the form of dividends. Often used interchangeably with ‘equities’, shares represent a claim on part of the corporation’s assets and earnings. Owning shares in a corporation essentially makes the shareholder a fractional owner in the corporation.
Shoe-leather costs: ‘Shoe-leather costs’ refer to the expenses and efforts associated with managing money during inflation periods, particularly when increased banking interactions are required due to the devaluation of currency held in non-interest-bearing accounts.
Expanded Definition
‘Shoe-leather costs’ represent a metaphorical concept in economic theory, which pertains to the resources expended, such as time and effort, when people endeavor to strategically manage their cash during periods of high inflation. The term originates from the notion of an individual wearing out their shoes due to frequent trips to the bank to withdraw smaller sums of money, as a response to minimize the negative impact of inflation on cash holdings, particularly in non-interest-bearing accounts. Essentially, these costs reflect the indirect struggles and inconveniences that individuals and businesses endure when coping with an inflationary environment.
Short selling: Short selling is a speculative strategy where an investor sells securities they don’t own, anticipating a price decrease. A “naked” short entails greater risk as it’s an unhedged position.
Expanded Definition
‘Short selling’ is a financial practice where an investor sells a stock or other security that they don’t currently possess, with the aim to buy it back later at a lower price. By doing so, the investor is speculating a decrease in the stock’s price. They essentially ‘borrow’ the stock, sell it, and then hope to buy it back when the price decreases to make a profit from the difference. A variation of this practice, referred to as a “naked” short sale, involves selling without first arranging to borrow the securities. This procedure is termed ‘naked’ because it carries higher risk, as the investor is not protected, or ‘hedged’, against potential losses if the value of the security rises instead of falling.
Short-run aggregate supply curve: The ‘short-run aggregate supply curve’ is a graph illustrating the direct relationship between the general price level and the total goods or services produced by firms in an economy in the short run.
Expanded Definition
The ‘Short-run aggregate supply curve’ is a visual tool used in economics that represents the relationship between the overall price level in an economy and the total quantity of goods and services that businesses are willing and able to produce during a specified short-term period. It assumes that the prices of resources, such as labor and capital, are sticky or fixed, and only the selling price of goods and services can change. Therefore, this curve illustrates how changes in aggregate price levels impact production outputs, aiding in understanding and predicting the short-term behavior of an economy.
Short-selling: Short-selling is a trading strategy where investors borrow shares to sell, intending to repurchase them at a low cost to realize a profit. This technique, though often criticized, can help identify market irregularities and prevent inflated prices.
Expanded Definition
‘Short-selling’ is a financial strategy where an investor or trader anticipates a decrease in a stock’s price. In this strategy, shares of a company are borrowed, typically from a broker, and sold in the market at the current price. The goal of a short-seller is to repurchase these shares in the future at a lower price, returning the borrowed shares and keeping the difference as profit. As this strategy relies on the decline of a stock’s value for profit, short-sellers are often seen unfavorably because they appear to benefit from the misfortune of others or negative market trends. Regulatory bodies sometimes limit or prohibit short-selling during financial crises when markets are already volatile, as this practice can potentially exacerbate instability. However, short-sellers can also contribute positively to market functioning. By betting against the market or certain securities, they can assist in identifying overvalued stocks or fraudulent activities, thereby offering a form of market correction. Consequently, short-selling serves as a tool for price discovery and risk management, playing a vital role in maintaining market integrity and efficiency.
Short-term savings goal: A short-term savings goal refers to funds set aside for purchases or expenses anticipated to occur within a few weeks to months.
Expanded Definition
A ‘short-term savings goal’ refers to a financial objective set to reach within a relatively brief timeframe, typically ranging from several weeks to a couple of years. These goals are established for purchasing goods, services, or covering expected expenses in the near future. They often entail setting aside a certain proportion of income over a designated period to enable the acquisition of desired item or provision of a certain service without resorting to borrowing or compromising long-term savings strategy. This concept is fundamental in personal finance management, emphasizing budgeting, discipline, and strategic planning.
Short-termism: ‘Short-termism’ is the propensity to prioritize immediate gains or profits, overlooking sustained, long-term growth, often observed in businesses emphasizing quarterly results or investors with brief holding periods.
Expanded Definition
‘Short-termism’ is professionally defined as an undue prioritization of immediate gains or outcomes, often manifesting at the detriment of long-term strategic planning and sustainable growth. In a business context, this manifests in an imbalance of focus towards achieving short-term profit goals, such as quarterly earnings targets, thus potentially jeopardizing longer-term business health and future prospects. Similarly, in the financial investment sector, short-termism can be observed in strategies where institutional investors retain their holdings for brief periods of weeks instead of adopting a long-term investment timeline spanning multiple years. This term is also closely associated with the concept of share options, which is an investment tool that can potentially promote such short-term outlooks.
Shortage: A shortage is a scenario where the demand for a commodity surpasses its supply at a set price, creating a market imbalance.
Expanded Definition
A ‘shortage’ is a term used in economics to denote a situation where the demand for a specific product or service surpasses its supply at a given price. This typically occurs when consumers are willing and able to purchase more of the good or service than producers are willing or able to produce at the specified price level. In this scenario, the market equilibrium is not balanced, leading to increased prices until demand drops to meet the level of supply, effectively resolving the shortage.
Signal: A signal is a method used to convey valid data to another entity.
Expanded Definition
A signal is a method of conveying reliable, validated information from one entity to another. It involves communication mediums that can span from digital platforms to physical actions, all used to facilitate the transfer of an intended message. In a broader context, the signal aids in interpreting complex data, assessing spatial relationships or predicting behavior patterns, among others. It is a central element in fields like telecommunications, cognitive psychology, economics, and biological sciences. Each signal’s credibility and effectiveness rely on its clarity, relevance, and accuracy.
Simple interest: Simple interest is the interest calculated solely on the initial sum (or principal) deposited or borrowed, without considering the compounded effect over time.
Expanded Definition
‘Simple interest’ is a basic form of calculating interest, applicable generally to short-term loans or savings accounts. In this method, interest is evaluated and generated solely on the original amount of money deposited or borrowed — known as the ‘principal.’ Therefore, it doesn’t take into account the interest accrued over time, meaning each period of calculation is independent of others. It is a straightforward model, primarily used where money is borrowed or lent for a short duration.
Sit-in: A ‘Sit-in’ is a protest strategy where individuals occupy a business to deter transactions by monopolizing seating areas or obstructing entrances, thereby discouraging other consumers.
Expanded Definition
A ‘Sit-in’ is defined as a method of non-violent protest wherein individuals strategically occupy a place, such as a business establishment, in a bid to voice their disapproval, disrupt normal operations, or to draw attention to their cause. This action involves the protestors refraining from patronizing the business’s goods or services, while simultaneously preventing others from doing so by occupying all available seats or obstructing the physical entrance. This tactical civil disobedience is typically aimed at influencing change or triggering dialogue on specific issues.
Skill premium: ‘Skill premium’ refers to the wage disparity between individuals holding a four-year college degree and those without such higher education.
Expanded Definition
The term ‘skill premium’ refers to the wage disparity between individuals who have completed a four-year collegiate education and those who have not. It encapsulates the economic benefits garnered through higher education, manifesting as median earnings potential. Essentially, it is a measure of the additional financial reward conferred by acquiring specialized skills and knowledge through a university degree, when compared to individuals who have not pursued such a level of education.
Skill-biased technological change (SBTC): Skill-biased technological change (SBTC) refers to the trend where advancements in technology increase the demand and wages of skilled workers while decreasing those for lower-skilled workers, leading to higher income inequality.
Expanded Definition
Skill-Biased Technological Change (SBTC) is a socio-economic theory proposed to account for the observed increase in income inequality particularly in developed nations. This theory posits that advancements in technology carry an inherent bias towards skilled labor, in that they predominantly boost the productivity, and subsequently the wage levels, of highly-skilled workers. This preference arises from the fact that these individuals are more likely to efficiently utilize and adapt to novel technology. Consequently, this dynamic creates a disparity, where low-skilled workers, who are less proficient with the new technology, may experience wage stagnation or even reduction. This is because their skills are comparatively devalued due to the technological advancements rendering some previously valuable skill-sets obsolete. Such a scenario amplifies income inequality, as high-skilled workers derive greater economic benefit from technological progress than their low-skilled counterparts. The SBTC theory provides a pivotal perspective for economic and employment policies in our increasingly digital world, highlighting the importance of skill development and education in ensuring inclusivity in the benefits of technological progress.
Skimming: Skimming is a fraudulent tactic where a device captures and stores credit card details for unauthorized transactions or card replication.
Expanded Definition
‘Skimming’ refers to a fraudulent act typically associated with credit card theft, executed through the utilization of a compact, high-tech electronic device. This discreet tool operates by scanning, capturing, and storing vital credit card data from the magnetic stripe of a card. Once this process is completed, the stolen data can be maliciously employed to conduct unauthorized transactions digitally or create counterfeit versions of the original card, inflicting financial damage to the legitimate cardholder.
SmartPay Program: The SmartPay Program is a ranking global government charge card operation enabling authorized U.S. government employees to conduct purchases for official use.
Expanded Definition
The ‘SmartPay Program’ is defined as an extensive, globally recognized governmental payment and credit card program. This initiative enables designated U.S. government employees to conduct purchases on behalf of the government. It’s not just the largest of such programs within the United States, but holds that distinction worldwide. By furnishing authorized workers with a means of purchasing necessary goods or services directly, the SmartPay Program facilitates more efficient, streamlined transactions to support the conduct of government operations.
Social Security: Social Security is a U.S. government program that provides financial support for retirees, the disabled, and their dependents, funded by payroll deductions from both employees and employers.
Expanded Definition
‘Social Security’ is a comprehensive federal program in the United States that functions as a safeguard against various economic risks and challenges faced by citizens. This program aims to provide financial assistance to individuals in their old age, survivors of deceased workers, those with disabilities, and people needing hospital care. The system is primarily funded through mandatory payroll contributions made by both employers and employees, where a set portion of an employee’s wages is withheld and transferred into designated Social Security accounts. Thus, resources accumulated in these accounts are later distributed as benefits to qualifying individuals.
Social Security income: Social Security income is the monthly financial benefits received by retirees who contributed to the Social Security program during their employment.
Expanded Definition
‘Social Security income’ can be succinctly defined as a consistent, monthly financial benefit that retired individuals receive as a result of their prior contributions to the Social Security system during their active employment periods. This monetary support serves as a form of economic security in their retirement and is determined by the Social Security Administration based on the individuals’ earnings history.
Social Security tax: The Social Security tax is a payroll levy from both employees and employers under the FICA, designated to finance Social Security benefits such as old-age, survivors, and disability income.
Expanded Definition
The term ‘Social Security tax’ refers to a specific levy that is deducted from the earnings of the majority of employees and matched by their employers in the United States. This tax is an integral component of the Federal Insurance Contributions Act (FICA), under which it operates. The funds collected through the Social Security tax are utilized to support the Social Security program, a federal initiative designed to furnish financial assistance to individuals who have reached retirement age, those with significant disabilities and surviving family members of deceased individuals who had paid into the system during their working years.
Socialism: Socialism is a political ideology advocating for limited collective ownership and wealth redistribution through progressive taxation and welfare systems, without fully abolishing the private sector unlike communism.
Expanded Definition
Socialism is a complex and multifaceted political and economic ideology that places emphasis on collective ownership and the equitable distribution of resources and wealth within a society. Socialists typically advocate for certain levels of collective ownership over key sectors of the economy, favoring public control over capital and resources to ensure they benefit society as a whole. Nevertheless, this does not necessarily mean the complete abolition of the private sector, as socialism differs from communism in this regard. In a socialist system, private property and businesses can exist, but they generally operate alongside state-owned enterprises and under significant regulatory oversight. A central feature of socialism is its focus on reducing economic disparities. Through progressive tax policies that require wealthier individuals to contribute a larger proportion of their income, and comprehensive welfare systems that aim to support the less fortunate, socialists strive to create a more balanced society where wealth is not concentrated in the hands of a few. However, socialism does not aim to eliminate all income differentials, recognizing that some degree of economic inequality may be necessary to incentivize productivity and innovation. The ultimate goal is to create a just society where every citizen has an equal opportunity to thrive and succeed.
Socially optimal quantity: The socially optimal quantity is the level of output where private production costs and societal impacts are balanced, optimizing overall benefits.
Expanded Definition
‘Socially optimal quantity’ refers to the level of production of goods or services wherein both the personal costs, borne by the producers, and the social costs, incured by society at large due to the production, are considered and balanced. This ideal production level is intended to maximize societal benefit, as it aims to minimize negatives such as environmental damage or other potential disruptions to third parties. Thus, the ‘socially optimal quantity’ represents a state of equilibrium where the manufacturing of goods or the provision of services is as beneficial as possible to all stakeholders involved.
Soft inquiry: A soft inquiry is a non-lending review of a person’s credit report, such as a background check, self-check, or routine check by a current financial institution.
Expanded Definition
A ‘Soft Inquiry’, in the domain of credit reporting, represents any examination of an individual’s credit report that is conducted not for offering or assessing loan suitability but for other informative purposes. This type of inquiry can occur during background checks, self-conducted credit score reviews, or assessments done by financial institutions where the individual is an existing customer. These inquiries, unlike the ‘hard inquiries’ done by potential lenders, do not affect the individual’s credit score and are typically not visible to other parties scrutinizing the credit report.
Soft skills: Soft skills are an individual’s interpersonal and intrapersonal abilities used to interact effectively with others and manage one’s tasks, encompassing areas like communication, teamwork, problem solving, and leadership.
Expanded Definition
‘Soft skills’ refer to a broad set of non-technical, transferable skills that are deeply intertwined with a person’s character traits, attitudes, and behaviors. These skills are essential in fostering interpersonal relationships and effective communication. They involve collaboration and teamwork, facilitating the accomplishment of common goals. Major components include both verbal and written communication skills, which enable clear and accurate information exchange. Dependability speaks to one’s reliability in fulfilling tasks, while problem-solving skills denote the capacity to identify, analyze, and address issues effectively. Leadership involves guiding a group towards a goal, encouraging productivity and motivation. Time management displays the proficiency in organizing and planning how long one spends on specific activities to increase efficiency or productivity. Creativity signifies an individual’s ability to envision original and innovative ideas or solutions. Altogether, soft skills contribute significantly to an individual’s adaptability to different environments and situations.’
Solvency: Solvency is a company’s capacity to fulfill its long-term financial commitments and debts, which is crucial for its sustainable operation.
Expanded Definition
‘Solvency’ refers to a company’s capacity to fulfill its long-term financial commitments. It is a fundamental metric of financial health, indicating whether a company possesses sufficient assets, generates adequate profits, and maintains manageable debt levels to meet its future liabilities. This financial capability allows a company to sustain its operations over the long haul. Solvency ratios, such as the debt-equity ratio and the solvency ratio, are commonly used metrics to assess a company’s solvency status. If a company is considered solvent, it implies it is financially stable and well-equipped to service its impending obligations even amidst fluctuating market conditions.
Sovereign risk: Sovereign risk refers to the potential for a country’s government to fail in repaying its financial obligations, such as bonds or loans.
Expanded Definition
‘Sovereign risk’ is a financial term that refers to the uncertainty or potential for a country’s government to fail in fulfilling its financial obligations, particularly in regards to repaying its debts such as bonds or loans. This risk can be influenced by numerous factors, including economic stability, political changes, and shifts in regulatory policies. It is a key consideration for investors, lenders, or entities in international trade who need to assess the relative safety of investing in or lending money to a specific country.
Sovereign-wealth funds: Sovereign-wealth funds are state-owned investment portfolios, often funded by energy proceeds, aimed at diversifying a nation’s assets to buffer against economic or industry-specific downturns.
Expanded Definition
Sovereign wealth funds (SWFs) are specialized investment vehicles, created and owned by government entities. They are established primarily from the nation’s surplus reserves, which are often accrued from revenue generated by the country’s natural resources, with prominent examples being petroleum in countries such as Norway, Abu Dhabi, and Kuwait. They can also be derived from trade surpluses, as is the case with China. These funds serve a multitude of economic objectives. They provide an opportunity for countries to diversify their investment portfolio beyond their domestic economy or primary industries, thereby reducing risk and enhancing economic stability. Moreover, by strategically investing in varied sectors and geographical areas, SWFs help nations to shield themselves from potential economic shocks, industry declines, or cyclical downturns. In summary, sovereign wealth funds are essentially state-owned investment tools that aid in preserving and increasing national wealth, promoting economic resilience, and securing long-term financial stability for their respective nations.
Special drawing right (SDR): The Special Drawing Right (SDR) is an international reserve asset, devised by the International Monetary Fund (IMF), that is backed by a mix of five major currencies and can be increased to bolster global liquidity during crises.
Expanded Definition
‘Special Drawing Right (SDR)’ is an international reserve asset, established by the International Monetary Fund (IMF). It’s designed to supplement the official reserves of its member countries. The value of an SDR is based on a basket of five major currencies: the US dollar, euro, Japanese yen, Chinese yuan, and British pound. This framework helps ensure stability in the international monetary system. During periods of global financial stress or crisis, such as the 2009 financial crisis and the 2021 pandemic, the IMF can decide to create new SDRs. These are distributed amongst member countries in relation to their monetary contributions to the IMF. By receiving these additional assets, countries can bolster their foreign exchange reserves. This boost enhances liquidity worldwide, which is vital for maintaining financial stability and supporting economic growth. It allows countries to mitigate their balance of payments problems without resorting to measures that could harm national or global prosperity.
Special purpose districts: Special purpose districts are specialized governmental units dedicated to a specific function such as fire protection, libraries, or transportation.
Expanded Definition
‘Special Purpose Districts’ can be defined as distinct governmental units that are established to fulfill specific responsibilities or meet particular service needs within a community. These districts often operate independently from other local governments and concentrate on specific functions such as fire protection services, library services, public transportation, and more. Their primarily designation and operations are focused on ensuring these special functions are effectively delivered and managed, thus supplementing the traditional scope of services provided by general-purpose governments like cities or counties. Special Purpose Districts serve as an integral part of local governance framework, catering to the unique needs of the community they serve.
Special purpose vehicle (SPV): A Special Purpose Vehicle (SPV) is a limited liability company primarily established for achieving specific financial objectives, often involving the securitization of assets into various components (tranches). It aids in bankruptcy-remote operations by holding the assets and issuing new claims, thereby insulating the parent company from bankruptcy tied to the assets.
Expanded Definition
A Special Purpose Vehicle (SPV) is a separate legal structure set up with a specific, typically time-bound, function in mind. Most often, it is a subsidiary company established as a Limited Liability Company (LLC), making it a standalone entity with its own set of assets and liabilities. SPVs are primarily designed to isolate financial risks, as their obligations are kept separate from the parent company, ensuring bankruptcy of the SPV doesn’t trigger insolvency for the parent company. The SPV helps in asset securitization, where it holds a portfolio of various assets such as mortgages, loans, or corporate bonds, which it segregates into various components or ‘tranches’, each having different levels of risk and return. One of the main reasons for creating SPVs is to transfer assets and risks associated with these assets, which can encourage investors as the financial risk is remote from the originating entity. Thus, SPVs play a powerful role in risk management and financial planning for businesses.
Specialization: Specialization refers to focusing on the production of specific goods or services, potentially those with lower opportunity costs, rather than producing a wide variety.
Expanded Definition
‘Specialization’ is a strategic approach applied in the field of production, where entities focus their efforts on the production of a limited range of products or services. Rather than diffusing their resources across a wide array of goods or services, they specialize in those areas where they possess a comparative advantage or where the opportunity costs are minimal. This method of limiting production is essential because it allows entities to leverage their skills, knowledge, technology, or resources to maximize efficiency and productivity. As a result, while these specialized companies or industries may consume a broad array of goods and services, they limit their actual production to a focused few, enhancing their competitive advantage in those specific areas. This concept of specialization is a fundamental principle of economics, driving global trade and fostering interdependence among nations or businesses.
Specialization (elementary): Specialization refers to focusing on a single task or service within a job and relying on others for different tasks. It emphasizes efficiency through the division of labor and tasks.
Expanded Definition
‘Specialization,’ in its elementary sense, refers to the process and strategy where an individual, group, or company concentrates on a single or limited scope of activities, jobs, or productive functions. The purpose is to generate a particular good or service with enhanced efficiency and quality. This approach allows tasks to be shared among various individuals, teams, or entities, fostering a collaborative environment where each entity depends on other entities to deliver different elements of the complete product or service. This interdependence expands the overall workforce’s capacity, increasing productivity and optimizing the use of resources.
Speculation: Speculation is a short-term financial activity that involves high risk and leverage, with no intrinsic connection to the speculator’s personal or business interests. Its purpose is to profit from price fluctuations, often providing the necessary counterparty for businesses mitigating their risks.
Expanded Definition
‘Speculation’ is essentially a form of financial strategy wherein individuals or entities make decisions, often short-term, based on anticipated changes in market prices, rather than on the fundamentals of the asset itself. This process might involve the use of leverage or borrowed funds, increasing both potential gains and potential losses. While the term ‘speculator’ can sometimes bear negative connotations, these participants play an integral role in the financial markets by providing liquidity and assuming risks that others might not be ready to accept, such as businesses seeking to hedge or mitigate their financial exposure. This allows for a more dynamic market where risk and reward are managed across a wider spread of participants. Still, it’s important to note that speculation is considered a high-risk activity due to its reliance on market volatility.
Speculative motive: Speculative motive refers to the intent to hold cash in anticipation of a drop in asset prices, allowing for potentially profitable future purchases. It’s one of Keynes’ three theories explaining why individuals retain cash.
Expanded Definition
The ‘speculative motive’ is a term originating from renowned economist John Maynard Keynes. It refers to one of three primary reasons that individuals or businesses may choose to hold onto cash. The speculative motive is driven by the expectation or anticipation of fluctuations in asset prices. For example, an investor may hold cash in the belief that the prices of certain assets, such as stocks, real estate, or commodities, will decrease in the future. This cash reserve enables them to purchase the assets at lower prices when the predicted drop occurs. This motive is inherently speculative, hence the name, and involves a certain level of prediction and risk-taking. Other related motives for holding cash, also proposed by Keynes, include the precautionary motive, where cash is kept on hand for unforeseen expenses, and the transactions motive, which relates to keeping cash for day-to-day operational expenses. These motives together explain the various ways in which individuals or businesses use and hold cash in financial planning and operations.
Spending: Spending refers to the act of allocating one’s earnings towards the purchase of desired goods or services.
Expanded Definition
‘Spending’ is a financial term that refers to the action of allocating or utilizing a portion or all of one’s earned income to purchase goods, services, or assets based on immediate needs or wants. It involves the active exchange of money for products or experiences, facilitating everyday life, supporting economies, and expressing personal lifestyle choices. This process can incorporate a wide range of expenditures, from essential living costs such as housing and food to discretionary expenses such as entertainment and luxury items. It’s fundamental to personal finance management, encompassing both conscious budget allocations and impulsive purchases. While spending practices can be driven by immediate gratification, it’s also essential to balance present needs with future financial security through saving and investing strategies.
Spot price: The spot price is the immediate purchase price of a commodity, contrasting with its futures price which is the price for a later delivery.
Expanded Definition
The ‘Spot price’, in financial terminology, refers to the current market price at which a particular asset – be it a commodity, security, or foreign exchange rate – can be bought or sold for immediate delivery and payment. This immediate transaction, often within two business days, sets it apart from future pricing, where the assets are intended for delivery and payment at a future date. Prevalently observed in commodity and foreign exchange markets, the spot price serves as a valuable benchmark indicating the immediate value of a specific asset.
Spread: ‘Spread’ refers to the gap between two different prices, rates, or yields. Essentially, it’s the discrepancy measured between points in any financial transaction.
Expanded Definition
‘Spread’ is a financial term referring to the divergence between two values in the context of markets. Often used in arenas such as stocks, bonds, commodities, or interest rates, it quantifies the gap between two price points, yields or interest rates. For example, in stock trading, the ‘spread’ may represent the disparity between the bid (the highest price someone is willing to pay for an asset) and the ask (the lowest price at which someone is willing to sell the same asset). In the context of interest rates, it could refer to the difference between rates offered for borrowing and lending. In every case, the ‘spread’ serves as a crucial gauge of market dynamics and potential profitability.
Stagflation: Stagflation is an economic scenario where inflation and unemployment rates are concurrently high.
Expanded Definition
‘Stagflation’ is an economic term referring to a unique and often challenging situation in which an economy experiences concurrent conditions of inflation and unemployment at notably high levels. Inflation, in this context, refers to a general increase in the price levels of goods and services over time that erodes purchasing power. Conversely, unemployment signifies a scenario where a significant portion of the workforce is without employment and actively seeking work. Ordinarily, these two phenomena do not co-exist as per conventional economic principles. Therefore, a stagflation scenario presents a complex dilemma for economic policy makers, as measures to reduce inflation may increase unemployment, and vice versa.
Stagnation: ‘Stagnation’ refers to an extended duration of minimal or no increase in economic activity.
Expanded Definition
‘Stagnation’ refers to an extended timeframe during which an economy experiences minimal or no growth. Characterized by sustained periods of static or declining economic output, it often arises from reduced investment, low consumer demand, or inefficient production capabilities. This can result in high unemployment rates, low inflation or deflation. It’s a serious concern for economic policymakers because it hampers improvements in standard of living and can lead to economic recession if not addressed.
Stakeholder capitalism: Stakeholder capitalism is the business practice of prioritizing the needs of all stakeholders, including workers, suppliers, and the broader society, over merely focusing on immediate shareholder profits, for long-term economic health.
Expanded Definition
“Stakeholder capitalism” refers to the business model that embraces a broadened perspective of corporate responsibility. It argues that businesses should not solely focus on enhancing shareholder value, but also account for the interests of diverse stakeholders such as employees, customers, suppliers, and the broader society. Advocates of this concept assert that such an approach significantly benefits the economy in the long term, as it encourages sustainable growth and stability, and diminishes the risks of short-sighted profit-driven decisions. They further posit that businesses that overlook these broader stakeholder considerations might eventually face challenges or setbacks. This model of capitalism stands in contrast with the shareholder value model, which primarily, if not exclusively, focuses on maximizing returns for shareholders.
Standard: A ‘Standard’ is a mandatory criterion that must be satisfied, typically tied to health, safety or environmental codes, to enable trade.
Expanded Definition
A ‘Standard’ is generally defined as a formal and established benchmark, guideline, or framework that sets forth certain criteria that need to be adhered to. This prerequisite, particularly within the context of trade, is aimed at regulating and maintaining commonalities or protocols when it comes to aspects such as safety, health, environment, or even quality control. These standards are usually set by recognised entities or standardisation bodies and serve as a measure to ensure that products, services, procedures or systems, meet specific requirements, promoting compatibility, sustainability, and consumer safety while facilitating smooth commerce and fair trade.
Standard of living: Standard of living refers to the quantity and quality of material goods and services available to individuals in a country, often measured by per capita real GDP, serving as an index of economic prosperity.
Expanded Definition
The ‘standard of living’ refers to the abundance and quality of material goods and services accessible to individuals living in a specific geographic location, usually a country. It serves as an economic barometer to gauge the overall well-being and prosperity of the population. The standard of living takes into account a variety of factors that include but are not limited to income, quality and accessibility of housing, employment opportunities, availability of healthcare and education, life expectancy, and the overall economic and social health of a place. These aggregate factors are quantified into a single measurable value known as the ‘per capita real gross domestic product (GDP)’. This allows for comparison between different countries or regions and provides insight into economic growth or decline over time. The higher the per capita real GDP, the higher the standard of living is considered to be.
State capitalism: State capitalism is a system where the government engages in and heavily controls economic activities, often embodying characteristics of authoritarian capitalism.
Expanded Definition
State capitalism is a socio-economic model wherein the state possesses a considerable control over the means of production and the allocation of resources, while still maintaining elements of a capitalist economy. While operating within the capitalist framework, the government guides economic growth through its substantial presence in the market, direct business ownership, influential stakes in publicly listed companies, or indirect control over economic sectors. This could lead to an appearance of authoritarian capitalism, given the strong role of the state; yet, it is not inherently authoritarian, depending on how the state employs control and the level of economic freedom in other sectors.
Sticky prices: Sticky prices refer to the sluggishness of price changes in response to shifts in supply and demand, potentially leading to market imbalance. This phenomena can be due to factors like the expenses involved in price alteration and asymmetry of information between sellers and buyers.
Expanded Definition
‘Sticky prices’ is a term used primarily in economics to describe a situation where the prices of goods or services do not react or change promptly to shifts in the overall economic environment, such as changes in supply and demand. This lack of responsiveness often creates a temporary state of market disequilibrium, a condition where the quantity supplied does not equal the quantity demanded. This can deter consumers from making purchases, thereby affecting market activities. Commonly observed in sectors like automotive fuel, where reductions in crude oil prices do not instantly or adequately reflect in retail petrol prices, the concept of sticky prices can lead to perceptible anomalies in the market trends. Factors contributing to sticky prices can be complex and multifold. They may include the administrative costs of altering price points, such as changing labels or updating systems. Additionally, information asymmetry, where producers and consumers have unequal access to relevant market information, can lead to inaccurate pricing. For instance, a producer may have more comprehensive knowledge about the product and its cost structures, thereby possessing an advantage in price determination that a consumer might not have access to. Understanding these factors is essential in studying market dynamics, predicting consumer behavior, and implementing effective pricing strategies.
Stigma: Stigma refers to a damaging mark on one’s reputation, symbolizing dishonor or disgrace.
Expanded Definition
‘Stigma’ is a complex social concept that refers to a perceived mark of disgrace or disrepute that affects an individual’s or group’s reputation. The term ‘Stigma’ is often used to highlight negative notions and prejudices, which are generally based on stereotypes. This affects individuals or groups who deviate from conventional social norms or possess attributes viewed unfavorably by society. Stigmatization can lead to social exclusion and discrimination, thereby potentially impeding individuals’ life opportunities and social interactions.
Stimulus: Stimulus refers to measures implemented by authorities like the government or central bank to spur economic development and expansion.
Expanded Definition
A ‘stimulus’ is a carefully strategized measure or set of actions implemented by governing bodies such as government entities or central banks. These measures might encompass a range of financial, policy-related, or regulatory interventions aimed to bolster economic activity, stimulate growth, and alleviate potential or actual economic downturns. They are often used to counteract economic recessions, reduce unemployment, and motivate spending in the economy. Stimulus can materialize in various forms, including tax cuts, reduction in interest rates, increased government spending, or infusion of capital into markets, with the ultimate goal of fostering a robust and resilient economic environment.
Stimulus packages: Stimulus packages are governmental financial strategies employing tax reductions, funding boosts, and subsidies to stimulate economic growth.
Expanded Definition
A ‘Stimulus Package’ is a strategic financial intervention orchestrated by a government to stimulate economic growth during a period of downturn or recession. It involves deliberate allocation of fiscal resources to boost economic activity. The components of stimulus packages often include reductions in taxation levels to increase consumers’ disposable income, subsidies to support specific industries or sectors, and escalation of public sector expenditure to trigger job creation and capital investment. The fundamental aim of these measures is to reinvigorate the economy and counter socioeconomic impacts associated with economic stagnation or contraction.
Stock: A stock represents a unit of ownership in a corporation, typically bought and sold on public exchanges.
Expanded Definition
‘Stock’ refers to a type of investment that represents an equity stake in a corporation. When an individual purchases a stock, they are acquiring a proportional claim to a company’s assets and earnings. This essentially means they own a fraction of the corporation. Stocks, classified into common and preferred types, are primarily bought and sold on public exchanges, such as the New York Stock Exchange or Nasdaq. Their prices fluctuate based on various market conditions and individual corporate performances. Common stockholders have the potential to vote at shareholders’ meetings, while preferred stockholders have a higher claim on earnings and assets. However, every stock purchase signifies an investment in the company’s potential and a vote of confidence in its management.
Stock exchange: A stock exchange is a specialized marketplace where shares in public companies are traded between buyers and sellers.
Expanded Definition
A stock exchange is a regulated financial institution where participants can buy, sell, and trade publicly listed securities, primarily shares of publicly traded companies. Serving as an intermediary, it facilitates and maintains an orderly and transparent system for transactions, ensuring fair pricing through principles of supply and demand. In addition to company shares, other forms of securities such as bonds, commodities, and derivatives, might be traded. Examples of stock exchanges include the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). The activity on these exchanges is instrumental in economic health and growth, offering companies access to capital and investors opportunities for wealth creation.
Stock market index: A stock market index is a representative sample of stocks, selected to quantify the performance of a specific market sector.
Expanded Definition
A stock market index is a composite value derived from a weighted average of a preselected assortment of publicly traded companies’ stock prices, meant to provide a snapshot of a specific segment of the overall market. These segments can be distinguished by company size, industry, market capitalization, or other criteria. The performance of a stock market index is considered a mirror to the overall performance of the respective market or sector it represents. Examples include the S&P 500, which represents the largest publicly traded corporations in the United States, and the NASDAQ Composite, which illustrates the condition of technology and biotech sectors.
Stock mutual fund: A stock mutual fund is a pooled investment vehicle that amasses capital from investors to purchase equities, aiming to generate returns.
Expanded Definition
A stock mutual fund, also known as an equity mutual fund, is a type of investment vehicle that pools capital from multiple investors to purchase a diversified portfolio of stocks. Managed by professional fund managers, the primary goal of a stock mutual fund is to provide investors with capital appreciation and, in some cases, consistent dividend income. By owning shares in a mutual fund, investors can gain exposure to a wide array of companies and sectors, thus reducing risk through diversification. Profits from the fund’s investments are typically distributed back to the investors in the form of dividends or added to the fund’s overall value, thereby increasing the price of the individual shares.
Store of value: “Store of value” is the function of an asset or currency to maintain its value without depreciating over time. It’s essentially the capacity of an item to preserve its value, useful for future use or investment.
Expanded Definition
A ‘Store of Value’ is a crucial economic concept, which refers to an asset, commodity, or form of currency that maintains its value over time, instead of depreciating. These assets can be saved, retrieved, and exchanged in the future without significant erosion of their purchasing power. Essentially, a ‘Store of Value’ allows individuals or entities to preserve surplus purchasing power and utilize it at a later time, acting as a hedge against inflation or economic downturns. It’s a foundational component in economics and finance, contributing greatly to the functionality and stability of markets.
Strategic industry: A strategic industry refers to a sector identified by the government as crucial for the economy’s health and vitality, warranting privileged support like subsidies or protection from international competition. The designation of such industries, ranging from evident sectors such as defense to less apparent ones like dairy, is often motivated by factors like national security, self-sufficiency, R&D promotion, or nurturing emerging sectors, potentially leading to protectionistic measures.
Expanded Definition
A ‘Strategic Industry’ refers to a sector determined by a governing body as vital for the economic stability and advancement of a nation. Such industries often receive preferential treatment, including tax incentives, government subsidies, or safeguards against international competition, as outlined within the framework of a nation’s industrial policy. The selection of strategic industries ranges widely and may include areas such as defense, technology, or various manufacturing sectors – at times, even extending to unexpected sectors such as dairy production. The reasons for granting strategic industry status are varied: achieving self-reliance, bolstering national security, promoting research and development initiatives, or aiding the growth of nascent industries. While this policy plays a crucial role in driving national economic goals, it frequently culminates in protectionism, a practice wherein the government introduces measures to shield domestic industries from foreign competition. These protective measures can sometimes become controversial due to their influence on global trade dynamics.
Stress test: A stress test is a regulatory evaluation performed on the largest U.S. banks to ensure they have enough capital to survive under unexpected intense economic conditions. It measures the robustness of these financial institutions against potential economic downturns.
Expanded Definition
A ‘Stress Test’ is an analytical tool used by federal banking officials and thrift supervisors in the United States to evaluate the financial resilience of the largest U.S. banking institutions. It aims to ascertain whether these banks possess adequate capital reserves, also known as capital buffers, to endure potential financial shocks in more demanding and adverse economic scenarios than presently anticipated. Essentially, it is a preemptive measure that helps to ensure the stability of the banking system and prevent potential economic fallout.
Structural adjustment: Structural adjustment refers to the set of economic reforms implemented to enhance long-term growth, often stipulated by organizations like the IMF or World Bank as a condition for providing loans.
Expanded Definition
‘Structural Adjustment’ refers to an economic strategy aimed at promoting sustainable, long-term economic growth and stability. Often instigated as a condition for securing loans by international financial institutions such as the International Monetary Fund (IMF) and the World Bank, these structural transformations emphasize economic liberalization, fiscal discipline, and deregulation. The goal of structural adjustment programs is to rectify economic imbalances, particularly in developing nations, by restructuring their economies towards market-oriented models. The measures often involve policy and institutional reforms, such as controlling inflation, reducing public spending, and liberalizing trade. These recommendations are frequently underlined in publications such as The Economist as key components of structural reform.
Structural unemployment: Structural unemployment is persistent unemployment emerging from a disparity between job seekers’ skill sets and skills required by job providers.
Expanded Definition
Structural unemployment refers to a prolonged state of unemployment primarily due to a disparity between the skills required by employers in the labor market and the competencies possessed by job seekers. This discrepancy can be derived from numerous factors such as technological advancements, shifts in the economy, or evolving socio-economic conditions, which alter the nature of skill sets needed in the workplace. Effectively, it signifies a structural change in the economy rendering certain skills obsolete, hence causing the affected individuals to remain unemployed until they acquire the requisite skills demanded by employers.
Structured investment vehicle (SIV): A Structured Investment Vehicle (SIV) is a specialized entity that finances its investments in diverse financial assets, like asset-backed commercial paper (ABCP), using short-to-medium term borrowings.
Expanded Definition
A Structured Investment Vehicle (SIV) is a distinct legal entity, specifically created for financial transactions, that operates by investing in diversified portfolios of financial assets. These assets can include residential mortgages, credit card receivables, auto loans, and the like. This investment is typically funded by issuing short or medium-term debt,e.g., asset-backed commercial paper (ABCP). SIVs aim to profit from the spread between the yield of their long-term investments and the shorter-term cost of their funding. However, it is important to note that these vehicles, due to their dependence on constant borrowing and market liquidity, carry considerable risk in periods of financial instability.
Student loan default: Student loan default refers to the inability or unlikely occurrence of a borrower repaying their educational loan.
Expanded Definition
“Student loan default” refers to a situation where a borrower fails to repay their student loan as stipulated by the terms of their loan agreement. This commonly occurs after a borrower has not made a payment for a significant period, indicating severe financial distress or a strong possibility that the loan will not be repaid. The consequences of default can be serious and long-lasting, impacting the borrower’s credit history and potentially complicating future borrowing endeavors.
Stylized fact: A stylized fact is a recurring economic pattern observed in data, yet not conclusively explained by theoretical models.
Expanded Definition
A ‘Stylized Fact’ refers to an observed economic pattern or trend that consistently recurs in empirical data, but which lacks a universally accepted theoretical explanation. It is a well-documented and generally accepted phenomenon in the field of economics, even though a formalized theory or model may not necessarily justify its existence or behavior. Due to its empirical regularity, such a fact becomes an important consideration in the development of new economic theories or modification of existing models.
Subordinate financing: Subordinate financing is a secondary mortgage or lien that ranks below the primary or first mortgage in terms of repayment priority. It’s considered a high-risk loan since it is not the first to be repaid if a borrower defaults on payments.
Expanded Definition
Subordinate financing refers to a type of debt that is ranked below other debts in terms of the priority for claiming repayment from a debtor’s pool of assets in the event of a default. This term is commonly used in the real estate industry to describe any mortgage or lien that has a lesser priority than the primary, or first mortgage. In simpler terms, if a property is sold due to foreclosure, the proceeds from the sale first go towards paying the primary (or “first”) mortgage. Then, any leftover funds will be used to repay the subordinate (or “second”) mortgage. If these funds do not fully cover the amount owed on the subordinate mortgage, the debt might not be paid off in full. As such, lenders often attach higher interest rates to these loans due to their increased risk. In some cases, subordinate financing helps buyers secure adequate funds needed for a property purchase.
Subprime mortgage loan: A subprime mortgage loan is a type of loan offered to individuals with poor credit histories or high risk financial profiles, and often features characteristics such as limited income documentation, high loan-to-value ratios, and high payment-to-income ratios.
Expanded Definition
A ‘Subprime mortgage loan’ is a classification typically assigned by financial lenders to signify loans allocated to borrowers with compromised credit profiles. These individuals may have a history of missed debt payments or perhaps an insufficient credit history. Additionally, several characteristics of the mortgage loan itself can influence its classification as a subprime. These may include factors such as limited or no documentation offered about the borrower’s income or assets, disproportionate loan-to-value ratios, or excessive payment-to-income ratios. Significantly, this term ‘subprime’ suggests a higher risk of default on the part of the borrower, therefore, these types of loans often come with higher interest rates to account for said risk.
Subsidized loan: A subsidized loan is a lending arrangement where the interest is covered by the government for a determined period, mitigating the financial burden on the borrower.
Expanded Definition
A ‘subsidized loan’ is a special type of loan typically endorsed by government entities, where the accruing interest is paid by the government for a predetermined period. This interest-free phase may be while the borrower is in school, during a grace period, or during certain deferment periods. Such a financial aid instrument is designed to offer accessible education or other necessary provisions to individuals who may not have the means to bear the total cost upfront. This can substantially lessen the financial toll on borrowers, allowing them to repay the principal amount at a more manageable pace.
Subsidy: A subsidy is a financial aid provided by the government to an industry to bolster its operations and growth, without receiving any goods or services in return.
Expanded Definition
A subsidy is a financial contribution issued by a government to encourage the growth and stability of particular sectors of the economy, or to support specific businesses, industries, or even products. Rather than a direct exchange for goods or services, a subsidy serves as an investment or supportive tool, enabling the subsidized entity to reduce their costs, enhance their operations, rise their market competitiveness or expand their productive capacity. Subsidies can take various forms such as direct cash payments, tax reductions, or low-interest loans, each designed to improve the affordability, availability, or viability of a certain economic activity. This economic tool is designed to bolster public welfare, stimulate economic development, and rectify market imbalances.
Substitute: A substitute is a comparable product where an increase or decrease in its price can directly affect the demand for the other product.
Expanded Definition
A “substitute” in the context of economics refers to a product or service that is considered similar or comparable to another, fulfilling essentially the same function or satisfying the same consumer need. It’s a concept inherent to market dynamics and consumer choice. The characteristic feature of substitute goods is that they follow a concurrent price-demand relationship. This means, if the price of one product increases, the demand for its substitute is likely to rise, as consumers may switch to the less expensive, yet functionally comparable option. Conversely, if the price drops, the demand for the substitute might decrease, as consumers may prefer the original, now more affordable item. This interplay between price and demand underscores the influence of economic variables on consumer behavior in a competitive marketplace.
Substitute (resource): A substitute resource refers to materials or inputs that can interchangeably be used for production. It allows one resource to be replaced with another without affecting productivity.
Expanded Definition
‘Substitute (resource)’ is a term in the field of economics and business which refers to various types of productive assets or inputs that are interchangeable with each other in the operations of a business or the production of goods and services. These resources can effectively replace each other without significantly impacting the outcome or the overall efficiency of the process. They are often used as alternatives in scenarios where one resource may become scarce, expensive, or unavailable, thereby ensuring the continuity and stability of production.
Substitution effect: The ‘Substitution Effect’ refers to the consumers’ behavioral switch to a lower-priced alternative when the price of a preferred product increases, a factor considered while calculating inflation indices.
Expanded Definition
The ‘Substitution effect’ can be comprehensively defined as a fundamental economic concept, which states that as the price of a specific product or commodity increases, consumers seek to replace it with a more affordable alternative that serves a similar purpose. For example, if the price of beef escalates, consumers might opt for chicken, considering they both are sources of protein. This effect is a critical aspect for statisticians while calculating inflation indices, as they need to account for variations in consumer behavior due to price fluctuations. By adjusting for the substitution effect, statisticians can provide more accurate reflections of the cost-of-living and the economy’s inflation rate.
Sunk cost: Sunk cost refers to an expense already paid and irrevocably lost, which should not impact future decision-making.
Expanded Definition
A “sunk cost” refers to an expenditure that has been made and cannot be recouped or reversed. Often the result of past decisions, these costs have no bearing on future events or outcomes, as they are independent from any actions moving forward. They are, in essence, “sunk” into a project or venture, with no potential for recapture. A crucial concept in economics, understanding sunk costs helps decision-makers to avoid the common pitfall of the “sunk cost fallacy”, which can lead to further unnecessary investments based on perceived obligations to past, non-recoverable expenses.
Supplemental Nutrition Assistance Program (SNAP): SNAP is a U.S. federal assistive initiative that provides electronic funds to low-income entities for the procurement of food, replacing the older food stamp system.
Expanded Definition
The Supplemental Nutrition Assistance Program (SNAP) is a U.S federal assistance program devised to assist people and families with low income in buying nutritious food. Implemented by the U.S Department of Agriculture (USDA), SNAP formerly known as the Food Stamp Program, has evolved from issuing literal stamps or coupons to a sophisticated system which now leverages Electronic Benefit Transfer (EBT) cards. The beneficiaries of this program can use these EBT cards, functioning as debit cards, to purchase eligible food products at authorized retails. The objective of SNAP is to aid in reducing food insecurity and malnutrition by offering the means to acquire wholesome food, thus fostering overall health and well-being in low-income communities.
Supply: ‘Supply’ is the amount of a product or service a provider is prepared and able to distribute for purchase, during a set frame of time.
Expanded Definition
‘Supply’ can be defined as the total amount of a specific good or service that is available to consumers. This quantity is generated by producers who have the capacity and willingness to produce and sell this offering during a specified time period. The supply can change based on several factors including price levels, production costs, and market demand. A comprehensive understanding of ‘supply’ is fundamental to understanding the dynamics of product availability and pricing mechanisms in a market economy.
Supply and demand curves: Supply and demand curves are graphical representations of the relationship between the price of a good and the quantity suppliers are willing to produce (supply) and consumers are willing to purchase (demand), with the intersection denoting the equilibrium price.
Expanded Definition
‘Supply and Demand Curves’ are fundamental concepts extensively introduced in economics studies. They offer visual representations of the relationships between the price of goods and their market supply and demand. ‘Supply Curve’ shows how the quantity of a good or a service supplied by producers varies with its market price. Typically, being upward-sloping, it illustrates that as the price of a specific good increases, the quantity that sellers are willing to supply also increases – this is simply because higher prices convey higher revenue and potential profit opportunities. On the other hand, the ‘Demand Curve’ demonstrates the relationship between the price of a commodity and its quantity demanded by consumers. It generally slopes downwards, representing that as the price of a good decrease, the quantity that consumers are willing to buy increases, given their desire to spend less to obtain more. Therefore, when plotted onto the same graph, an intersection point of the supply and demand curves is created. This point represents the ‘Equilibrium Price’, which is the price at which the quantity supplied coincides with the quantity demanded. This indicates a state of market balance, with no tendency for change unless external factors intervene. There are some notable exceptions in relation to these general tendencies. These include ‘Veblen Goods’, luxury items that see greater demand as their prices rise, and ‘Giffen Goods’, essential items that people continue to consume more of as their prices rise due to the absence of available substitutes. Thus, Supply and Demand Curves are instrumental in understanding pricing mechanisms and predicting market patterns.
Supply curve: A supply curve is a graph showcasing how much of a specific good or service producers are prepared to offer at various price points within a designated timeframe.
Expanded Definition
A ‘Supply Curve’ is a graphical depiction that showcases the relationship between the prices of a good or service and the quantity of that good or service that manufacturers are ready and capable of selling within a specific timeframe. It is instrumental in economic analysis as it visually presents the correlation, often positive, between price and production: as the price rises, so typically does the willingness or ability of producers to manufacture more of that particular product. This curve aids in understanding market dynamics and predicting producers’ behaviour under different pricing scenarios.
Supply shock: A supply shock is an unexpected event that abruptly disrupts the supply of key goods or significantly alters their pricing, typically leading to higher inflation and reduced output. These shocks, often linked to energy supply fluctuations or significant geopolitical events, pose complex challenges for policymakers.
Expanded Definition
A ‘Supply Shock’ is defined as an unexpected event that disruptively impacts economic functionality by causing a significant halt in the availability of vital products or by triggering a dramatic increase in prices. While these effects can stem from various factors, historical and contemporary examples tend to highlight energy-related incidences. For instance, the oil embargo enforced by OPEC in the 1970s and the subsequent constriction of gas supplies following Russia’s invasion of Ukraine in 2022 have had noteworthy impacts. The Covid-19 pandemic also illustrates such an event where forced business closures created a pronounced supply shock. These incidents typically result in a dual repercussion of heightened inflation and decreased output, presenting a challenging conundrum for policymakers who must simultaneously address rising costs and curtailed production.
Supply-side economics: Supply-side economics is a macroeconomic theory suggesting that economic growth can be most effectively fostered by lowering taxes and decreasing regulations to boost productivity and entrepreneurship. Established as a response to Keynesian economics, it supports labour market flexibility and business-friendly policies.
Expanded Definition
‘Supply-side economics’ is a macroeconomic theory proposing that economic growth can be most effectively created by lower taxes and decreased regulation. By reducing taxes on businesses and the wealthy, this theory argues, you can stimulate investment in industry and, consequently, raise production within the economy. This approach also encourages labor market flexibility to increase productivity, such as making employment terms and conditions more flexible. Conceived in the 1970s, supply-side economics emerged as an alternative to Keynesian economics. While Keynesian economics focuses on driving demand through public and private spending, supply-side economics emphasizes the influence of production (i.e., the ‘supply’) on economic prosperity.
Surplus: ‘Surplus’ is a condition in a market where the supply of a product surpasses its demand at a given price, implying there are more goods/services available than what consumers want to buy.
Expanded Definition
‘Surplus’ in an economic context, is the situation that occurs when the supply of a specific good or service surpasses its demand at a certain price level. Essentially, it reflects an excess of production or availability in comparison to what the consumers are willing or able to consume. It is a crucial concept in economics that helps to facilitate adjustments in market price, influencing future production and strategic business decisions. This situation usually prompts suppliers to decrease their prices to increase demand and balance the market conditions.
Swap: ‘Swap’ is the act of trading goods or services directly, without monetary exchange.
Expanded Definition
‘Swap’, as a term, refers to an exchange procedure where two parties trade items or services of comparable value. This transaction does not involve monetary exchange. In effect, it’s a modern equivalent of the age-old barter system, wherein goods or services are traded directly, eliminating the need for an intermediate currency-based transaction. Although simplistic in concept, swapping can encompass sophisticated fiscal mechanisms such as swap agreements in financial markets.
Systematic risk: Systematic risk is the inherent, unavoidable risk inherent in the entire market or entire market segment that can’t be eliminated through diversification.
Expanded Definition
‘Systematic risk’ refers to the inherent uncertainty tied to the entire financial market or a broad segment thereof, and therefore it cannot be eliminated simply through portfolio diversification. This means that even if an investor holds securities from various companies across different sectors, the potential economic downturn or substantial market movements impacting the entire market would still pose a risk. Systematic risk foments from macroeconomic factors like inflation, political instability, interest rate changes, or events of global magnitude. Therefore, it is also often referred to as ‘non-diversifiable risk’ or ‘market risk’. Despite individual investment strategies or the performance of specific companies, systematic risk affects all participants in a market to some degree. It is a pervasive, inherent risk in investing, and therefore, investors must recognize it as a part of the broader investment landscape.
Systemic risk: Systemic risk refers to the potential for a breakdown in an individual entity or sector that can trigger instability throughout the entire financial system. It is a cascading risk where the failure of one component can provoke a domino effect.
Expanded Definition
Systemic risk refers to the potential for a major disruption within a single firm, market segment, or financial settlement system to ripple out and cause significant instability or difficulties in other firms, different market segments, or the broader financial system as a whole. Such a risk is not isolated or contained but could spread and escalate financial instability and economic damage in multiple sectors or even the entire financial system. This highlights the interconnected nature of financial entities and suggests that mismanagement or failure in one area can have far-reaching, negative effects on the overall economic environment.

T

Tangible assets: Tangible assets are physical and measurable properties owned by a business, such as real estate, equipment, or inventory, that have quantifiable value.
Expanded Definition
‘Tangible assets’ refer to physical resources and property owned by a business or an individual that have measurable value and can be physically touched. They include real estate and buildings, vehicles, machinery, and equipment, inventory, and any other material or physical goods. These assets often serve as a foundation for the operation and performance of a business because they can be used to produce goods or services. Conversely, intangible assets are non-physical resources and rights with value, such as patents, trademarks, copyrights, brand reputation, and customer relationships.
Tariff: A tariff is a tax imposed on imported goods upon their entry into a country.
Expanded Definition
A tariff is a financial charge imposed by a government on imported goods before they can enter a country. Often used as a tool for trade policy, it not only generates revenue but also serves to protect domestic industries from foreign competition. The cost of the tariff is typically borne by the importer, and often subsequently passed on to consumers in the form of higher prices for the imported goods. The rates can vary depending on the type of goods and the countries of origin or destination. Its effect on trade and the domestic economy fluctuates based on its implementation and the reactions of international trading partners.
Tariff-rate quota: Tariff-rate quotas (TRQs) are a trade policy tool that sets a specific limit on imported goods which can enter a country at lower or zero tariffs, while any excess quantity is subject to higher tariffs. This mechanism is utilized in alignment with the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization’s standards.
Expanded Definition
A ‘Tariff-rate Quota’ is a trade policy tool utilized by countries to regulate the importation of specified goods. It permits a predetermined quantity of a specific product to be imported at a reduced, or completely waived tariff rate. However, any quantities exceeding this set quota are subject to tariffs at an elevated rate. The application and dynamics of tariff-rate quotas are maintained as part of the trade commitments of countries under the auspices of the General Agreement on Tariffs and Trade (GATT) as well as the World Trade Organization (WTO). This strategy provides a balanced approach to protect domestic industries while allowing controlled access to foreign goods, contributing to international trade harmony.
Tax avoidance: Tax avoidance refers to the legal utilization of the tax regime to reduce the amount of tax that is payable by means that are within the law. It often involves multinational companies using tax havens and differing tax jurisdictions to minimize their tax liabilities.
Expanded Definition
‘Tax avoidance’ refers to the utilization of all legal methods and regulations to minimize one’s tax liabilities. This strategy is often employed in a global economy marked by unrestricted capital flow and competing tax jurisdictions, particularly by multinational corporations. Tax avoidance typically involves leveraging various tax deductions, exemptions, and credits within the framework of existing tax laws. Despite its legality, it serves as a controversial issue due to its potential to create significant disparities in tax burdens. It is important to differentiate tax avoidance from tax evasion, the latter being an illegal practice involving deliberate falsification of information to lower one’s tax obligations. For more detailed information, please refer to the informative guide on offshore havens and the explanation on tax evasion.
Tax base: The tax base refers to the total value, in terms of dollars, of the assessed wealth including income, property, or expenditures that are subject to taxation.
Expanded Definition
The ‘Tax Base’ can be professionally defined as the total value, quantified in monetary terms, upon which a government or other tax authority imposes a tax. This can include a wide range of economic activities and assets such as income earned by individuals or corporations, the value of a property, or the monetary amount spent on purchasing goods or services. The tax base significantly influences the revenue generated by a tax system, hence its accurate determination is crucial for fiscal policy decisions and revenue forecasting.
Tax competition: ‘Tax competition’ refers to the strategy used by different jurisdictions to attract businesses and high-wealth individuals by lowering their tax rates, often leading to debates about inequities in tax contributions, particularly in an era of free capital movement and tax havens.
Expanded Definition
Tax competition refers to the economic maneuver wherein different jurisdictions, such as states or countries, attempt to incentivize businesses and individuals’ relocation through reduced tax rates. This strategic competition can act as a check and balance against excessive taxation by authorities, providing taxpayers a choice between jurisdictions. However, the effectiveness of this balance is contingent on the taxpayers’ mobility and the ease with which they can transfer assets and operations. For instance, under the Bretton Woods system, where capital controls were stringent, moving money across countries was challenging. This limited tax competition, leading to generally higher tax rates on corporations and wealthy individuals. Today, however, increased capital mobility and the prevalence of tax havens pose new challenges. These developments have led to criticisms that corporations and wealthy individuals can easily shift assets to minimize their tax liabilities, potentially undermining the tax base of their original jurisdictions. Critics argue that such trends lead to tax inequity, where a disproportionate burden of tax falls on the less mobile – often less wealthy – taxpayers.
Tax credit: A tax credit is a reduction in the total tax bill, decreasing the amount a taxpayer owes to the government.
Expanded Definition
A tax credit is a provision in tax law that allows a taxpayer to subtract a specific amount from their tax liability. Essentially, it is a sum deducted not from taxable income, but directly from the total amount of tax that the taxpayer owes the government. Unlike a tax deduction, which lowers the amount of income subject to tax, a tax credit reduces the actual tax itself, often dollar for dollar. They are typically awarded to promote certain actions, like investments in sustainable energy solutions, or to provide relief for certain financial burdens, such as child care costs.
Tax deductions: Tax deductions are specific amounts allowed by tax laws that individuals can subtract from their gross earnings to lower their taxable income. These deductions, whether fixed or percentage-based, essentially decrease the overall tax liability.
Expanded Definition
‘Tax deductions’ refer to specific allowable expenses that taxpayers are permitted to subtract from their gross income as stipulated by taxation authorities. These deductions, which can be a fixed amount or a percentage, function to lower one’s overall taxable income. As a consequence, the amount of tax owed is reduced, consequently lessening the taxpayer’s overall financial obligation to the government. The nature of these deductions can vary and may encompass a range of expenses such as healthcare, education, or business costs.
Tax evasion: Tax evasion refers to illegal practices to pay less tax, often punishable by fines or imprisonment when detected. Unlike tax avoidance, it involves breach of tax laws.
Expanded Definition
‘Tax Evasion’ is a term used to describe deliberate actions taken by individuals or companies to illegally reduce their tax liabilities. This involves misrepresenting or hiding factual circumstances from tax authorities to minimize tax payment. Methods may involve underreporting income, inflating deductions, or hiding money and income in offshore accounts. Legal penalties for tax evasion, when detected and proven, can range from hefty monetary fines to incarceration. This term is different from ‘tax avoidance’, which involves using legal methods to lessen one’s tax burden.
Tax exemption: Tax exemption is a deductible amount, subject to yearly change, which can be subtracted from taxable income to lessen income tax liability. It exists in two forms: personal for the taxpayer, and dependency linked to the number of dependents the taxpayer claims.
Expanded Definition
A ‘Tax exemption’ refers to a monetary allowance or reduction sanctioned by the Internal Revenue Service (IRS) explicitly designed to diminish the overall amount of income tax an individual or entity is obligated to pay. This reduction is applicable against a taxpayer’s taxable income. The IRS typically effects tax exemptions in two principal categories: personal and dependency. A ‘Personal’ exemption pertains to the individual taxpayer, providing a reduction in the total income subject to tax. At its essence, the personal exemption operates as a deduction for the taxpayer’s own personal circumstances. The ‘Dependency’ exemption, on the other hand, is applicable based on the number of dependents a taxpayer is financially responsible for. Each qualifying dependent further lowers the amount of income that can be taxed. The magnitude of these exemptions, established by the IRS, isn’t fixed but is adjustable annually to account for price inflation and other pertinent economic factors. Therefore, taxpayers should stay updated with year-to-year changes in exemption values for accurate tax estimation.
Tax haven: A tax haven is a region or country offering minimal tax liabilities, thus magnetizing sizable investments from corporations and affluent individuals, and boosting local economy through increased banking transactions and professional services.
Expanded Definition
A ‘Tax Haven’ is a region or country that offers minimal or zero tax liabilities to foreign individuals and businesses. These jurisdictions leverage extremely low tax rates as a strategy to encourage economic influx. This results in substantial financial benefits by attracting capital deposits to their local banks and generating increased demand for professional services such as legal assistance and accounting. Thus, Corporations and wealthy individuals often take advantage of these havens for tax planning strategies to reduce their financial liabilities. While these practices are generally legal, they can lead to significant potential revenue loss for the trader or investor’s home country.
Tax incidence: Tax incidence refers to the actual distribution of a tax’s financial burden, reflecting how it affects stakeholders like shareholders, customers, or workers. It’s the real-world impact of a tax, or the “effective” incidence, as compared to the “formal” incidence which is who is legally liable for the tax.
Expanded Definition
‘Tax incidence’ is a financial concept referring to the ultimate bearer of a tax burden, which may not necessarily align with the legally responsible party. When a company is taxed, the actual cost may be distributed to various entities such as its shareholders through decreased dividends, its customers through increased prices, or its employees through reduced wages. This process can be complex. For instance, a sales tax initially paid by consumers might eventually impact retailers’ profits if it leads to reduced demand. The term also encompasses the idea of the ‘effective’ tax incidence, highlighting the qualitative difference between the person or entity legally responsible for paying the tax (‘formal’ incidence) and who actually carries the economic burden of the tax. This concept is crucial for understanding the real-world implications and impacts of taxation policies.
Tax neutrality: Tax neutrality is the concept that tax laws should not influence economic choices made by individuals or companies, but instead these decisions should be based purely on economic benefits. However, this principle is often compromised due to political agendas and corporate lobbying.
Expanded Definition
‘Tax neutrality’ is a principle that advocates for the creation and setting of tax regulations and policies such that the decisions businesses and individuals make concerning economic activities or investments are based purely on their inherent value, and not influenced by any tax benefits or liabilities that may arise from them. Essentially, this principle suggests that tax influences should not dictate the economic behavior of entities; instead, decisions should be driven by market mechanisms and efficiency. However, in practical terms, this rationale is often compromised due to various factors. These include the policy objectives of political leaders seeking to stimulate or moderate specific sectors of the economy, and the influence of corporate lobbying aimed at shaping taxation laws to benefit specific interests or industries. Consequently, the ideal of tax neutrality is infrequently achieved in real-world application.
Tax refund: A tax refund is the reimbursement given to taxpayers when their overall tax contributions exceed their tax liability. It’s essentially the government returning the excess payments.
Expanded Definition
A ‘Tax Refund’ is a reimbursement credited to taxpayers when they have paid more in taxes throughout the financial year than what was due. This surplus payment arises when the cumulative tax payments or deductions from their income – either due to withholding, estimated tax payments, or overpayment from the previous year – exceed their total tax liability. It’s essentially an excess payment returned to individuals or businesses from the government after their annual income tax return has been processed.
Taxable income: Taxable income is the portion of an individual’s or entity’s annual earnings that is subject to income tax, calculated by deducting permitted exemptions, deductions, and credits from the adjusted gross income.
Expanded Definition
‘Taxable income’ is a financial term that captures the net income amount subject to income tax after accounting for various permissible subtractions. These subtractions include allowable tax exemptions, deductions, and credits, which one qualifies for based on relevant tax laws and regulations. It originates from the ‘Adjusted Gross Income’ (AGI), which itself is total income earned within a year, adjusted for certain reductions like contributions to retirement savings or certain business expenses. The ‘Taxable Income’ is, therefore, the portion of the AGI that is legally required to be taxed under the prevailing income tax laws, after considering all allowed reductions. The lower the taxable income is, the lesser the tax one is required to pay. Given the specialized legal and finance terminologies involved, assistance from tax professionals may be necessary for computation.
Taxes: Taxes are compulsory financial charges imposed by government on individuals, corporations, and other entities to fund public goods and services.
Expanded Definition
“Taxes” can be defined as obligatory financial charges or levies imposed upon individuals, families, commercial entities, or legal institutes by different levels of government – local, state, or national. These collected funds are primarily used to finance public goods and services, infrastructural development, and other governmental operations. The requirement and amount of these impositions can vary significantly based on the entities’ income, capital gains, sales, and other criteria established by the applicable tax laws and policies.
Taxes (elementary): Taxes are obligatory charges levied by the government upon individuals or institutions to fund public goods and services.
Expanded Definition
Taxes, in a fundamental context, refer to the financial charges or levies that individuals or businesses are legally obliged to pay to the government. These compulsory contributions are crucial for funding public goods and services, infrastructure development, social welfare initiatives, defense expenditures, and other operations necessary for the function and prosperity of a society. The amount of tax one is required to pay often varies, typically determined by factors such as income level, property value, or the nature and volume of purchased goods or services.
Taylor rule: The Taylor Rule, proposed by economist John Taylor, is a monetary policy guideline for adjusting interest rates in response to changes in inflation and economic output, presuming a standard 2% real interest rate. It provides a framework for central banks, like the Federal Reserve, regarding the raising or lowering of interest rates based on the gap between real inflation and target rate, and the magnitude of the output gap.
Expanded Definition
The “Taylor Rule” is a monetary policy recommendation proposed by the renowned American economist, John B. Taylor. This policy guideline provides a framework for the Federal Reserve (the central bank of the United States), or any central bank, for adjusting interest rates based on specific economic conditions. The rule stipulates that a ‘normal’ or baseline real interest rate is 2%, which can be adjusted depending on variations in inflation and the current economic output. Under the Taylor Rule, if actual inflation deviates from a set target, or if the economic output, measured as the difference between actual and potential GDP (the output gap), expands or contracts, the Federal Reserve should raise or lower interest rates, respectively. This reactive mechanism aims to stabilize the economy, dampen inflation, and reduce unemployment. Despite its rational thought process and prudenthal approach, central banks often use the Taylor Rule as a reference rather than a prescriptive measure. This preference for policy discretion allows central banks to respond to a range of factors and maintain flexibility in their monetary decisions. Yet, the Taylor Rule remains a crucial theoretical guide in the realm of monetary economics and policy setting.
Technical progress: Technical progress refers to the development and implementation of new technologies, systems, and efficiencies, often driven by innovation and policy, which enhance productivity and stimulate economic growth.
Expanded Definition
‘Technical progress’ refers to the advances in technology, such as the inventions of the steam engine, the internal combustion engine, or the development of electrification methods, that significantly enhance productivity and catalyze long-term economic expansion. While individual brilliance often leads to these groundbreaking discoveries, the endogenous growth theory postulates that with appropriate policies in place, governments can also play a crucial role in stimulating and facilitating this technological evolution. These policies can create an environment conducive to innovation, fostering technical progress and consequently driving economic growth. For a deeper dive into this concept, please refer to the linked article.
Technological advance: ‘Technological advance’ refers to the progressive development or improvement in the sphere of technology, often termed as ‘technological change’.
Expanded Definition
‘Technological advance’, also referred to as ‘technological change’, refers to the process of innovation and enhancement in a specific field of knowledge. It encompasses the invention, development, and implementation of new technologies, methods, or techniques, resulting in increased efficiency, productivity, and capabilities. This can potentially lead to breakthroughs in various areas, from industrial to scientific applications, altering the way we live, work, and interact. Please note that this evolution progresses cumulatively, building on existing knowledge and technology.
Technological capability: Technological capability is the skillset that empowers organizations with the technological prowess necessary for gaining a competitive edge.
Expanded Definition
‘Technological capability’ is a sophisticated concept that encompasses an organization’s potential and proficiency in adapting, utilizing, and developing technologies. It equips an organization with the technological prowess needed to outperform competitors, innovate, and adapt in an ever-changing digital landscape. At its core, technological capability provides the organization with a vantage point for creating a distinct edge in competition. It involves aspects such as the implementation of technological processes, adoption of digital tools, continuous technological learning, and the ability to transform these accomplishments into marketable products or services. Therefore, technological capability can be seen as a strategic instrument for business growth, competitiveness, and sustainability.
Technological change: ‘Technological change’ refers to improvements or breakthroughs in specific fields that enhance our collective knowledge and capabilities, often known as technological advances.
Expanded Definition
‘Technological change’ can be comprehensively defined as the progressive development, improvement, or refinement in the field of technology. This encompasses advancements in knowledge, techniques, tools, and systems within a particular technological domain. Often referred to as ‘technological advancement’, it is an integral element of industry progression, economic growth, and societal evolution. This term not only covers the introduction and adoption of new technologies but also the modification and enhancement of existing ones to drive better efficiency, productivity, and usability.
Technology: Technology is the utilization of scientific knowledge for practical purposes, particularly in the creation of goods and services.
Expanded Definition
‘Technology’ is a broad term that essentially defines the utilization of meticulous understanding, skills, techniques, and processes in generating and creating goods and services. It outlines the innovative use of intellectual expertise for practical purposes, often involving the application of the latest scientific knowledge. In other terms, technology is a robust tool that aids in navigating and modifying the physical world, making things easier, more efficient, and often more environmentally friendly. It plays an integral role across various sectors, from improving productivity in industries to enhancing quality of life.
Term: ‘Term’ refers to the specific period designated for the repayment of a loan.
Expanded Definition
A ‘Term’ in a financial context, frequently denotes the scheduled duration of a loan or other financial agreement. It specifically refers to a predetermined period in which a borrower is expected to meet their repayment obligations towards a lender. This period is defined at the outset of the loan agreement and can span several months to several years depending on the type of loan. It acts as an essential element in calculating monthly payments, interest rates, and overall costs associated with the loan. Understanding the term of a loan is crucial to effectively managing debt and maintaining financial health.
Term Asset-Backed Securities Lending Facility (TALF): The Term Asset-Backed Securities Lending Facility (TALF) is a Federal Reserve program that offers non-recourse loans to holders of AAA-rated asset-backed securities (ABS), such as student loans, auto loans, and Small Business Administration (SBA) guaranteed loans. Active until December 2009, it was designed to stimulate ABS issuance backed by consumer and small business loans, with the U.S. Treasury providing $20 billion in credit protection.
Expanded Definition
The Term Asset-Backed Securities Lending Facility (TALF) is a financial mechanism set up by the Federal Reserve to bolster the issuance of asset-backed securities (ABS). These ABS are underpinned by a variety of loans such as student, automobile, and credit card loans, and also those guaranteed by the Small Business Administration (SBA). Essentially, the Federal Reserve Bank of New York (FRBNY) extended a maximum of $200 billion in non-recourse loans to debt instrument holders—particularly of AAA-rated ABS that were backed by freshly instigated yet recent consumer and small-scale business loans. The size of the loan from FRBNY was determined based on the current market value of the ABS, with a deduction for risk (‘haircut’), with the ABS itself providing ongoing security for the loan. Moreover, similar assistance came from the US Treasury Department in the form of $20 billion in credit protection under the Troubled Assets Relief Program (TARP), part of the Emergency Economic Stabilization Act of 2008. However, it should be noted that the TALF initiative concluded operations in December 2009.
Term Auction Facility (TAF): The Term Auction Facility (TAF) is a Federal Reserve initiative where eligible depository institutions can bid for short-term funds, collateralized and typically of 28 or 84 days maturity. The final auction occurred on March 8, 2010.
Expanded Definition
The Term Auction Facility (TAF) is a program established by the U.S Federal Reserve to boost liquidity in the U.S. financial system. Under this program, the Federal Reserve provided short-term loans, usually with a maturity of 28 or 84 days, to depository institutions such as banks and credit unions via a competitive bidding process. Every institution eligible for the Federal Reserve’s primary credit lending program could participate in these TAF auctions. Any loan made through this program was required to be entirely secured by collateral, which ensures the Federal Reserve would recover its funds, even if the borrowing institution could not repay the loan. This particular mechanism was instrumental during periods of financial stress; however, the last TAF auction occurred on March 8, 2010. The program has not been used since then, but it remains as one of the tools Federal Reserve can employ to maintain stability in the financial market.
Term Securities Lending Facility (TSLF): The Term Securities Lending Facility (TSLF) was a Federal Reserve program that increased market liquidity by loaning Treasury securities to primary dealers for a one-month term, using a competitive auction process. This facility closed in 2010.
Expanded Definition
The Term Securities Lending Facility (TSLF) refers to a lending mechanism put in place by the Federal Reserve to ensure liquidity and stability within the Treasury and other financial collateral markets. The program operated by offering loans of Treasury securities from the System Open Market Account (SOMA), a portfolio managed by the Federal Reserve, to primary dealers for a term of one month. These loans were backed by other eligible general collateral provided by the dealer. The allocation of these securities loans was decided based on a competitive single-price auction, meaning that all securities were sold at the same price to the highest bidders, which are commonly major financial institutions. This mechanism was used to distribute risk and stabilize financial markets during periods of economical stress. However, the TSLF program was discontinued on February 1, 2010. Despite its closure, its mechanisms and principles continue to inform the Federal Reserve’s approaches to maintaining stability and liquidity in the financial markets.
Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP): The Term Securities Lending Facility (TSLF) is a Federal Reserve lending program offering primary dealers short-term, fixed-rate loans in exchange for program-eligible collateral. The TSLF Options Program (TOP) tailors this initiative to provide enhanced liquidity during periods of high collateral market stress, like quarter-end dates.
Expanded Definition
The Term Securities Lending Facility (TSLF) and the TSLF Options Program (TOP) are instruments used by the Federal Reserve to maintain market stability. The TSLF functions as a short-term lending program specifically designed to provide primary dealers, who are major financial firms with established relationships with the Federal Reserve, with low-interest loans. These loans are backed by high-quality collateral such as U.S. Treasury and federal agency securities. The TSLF Options Program (TOP) enhances the overall effectiveness of the TSLF by providing primary dealers with the option to access additional liquidity (i.e., short-term funds) during times when the collateral market is under increased stress, such as at the end of each fiscal quarter. This ‘safety net’ helps to make the borrowing market more resilient during these peaks in demand, ultimately contributing to the overall smooth functioning of the financial market. Simply put, these programs aim to support financial industry participants in managing their short-term funding needs and in dealing more efficiently with periods of increased demand for secure investments, thereby helping to uphold the health and stability of financial markets.
Term insurance: Term insurance is a type of policy offering coverage for a designated timeframe, after which it ceases to exist.
Expanded Definition
Term insurance can be professionally defined as a type of life insurance policy that provides coverage for a designated period or “term.” This set period typically ranges from 10 to 30 years. If the policyholder passes away during this term, the death benefit will be paid out to the beneficiaries. However, once the specified term concludes, the policyholder’s coverage ceases, meaning that no death benefit would be distributed if the insured passes away after this term, unless the policy is renewed or a new one is purchased. Term insurance offers more affordable premiums compared to other types of life insurance, making it a popular choice for individuals seeking significant coverage over a specific duration.
Term repurchase (repo) agreements (transactions): A ‘Term Repo Agreement’ is a short-term financial transaction where securities are sold and later bought back at a set price and date, serving as a tool the FOMC utilizes to adjust banking system reserves for monetary policy implementation.
Expanded Definition
A “term repurchase agreement” (often referred to as a “repo agreement” or simply “repo”) is a financial transaction where one party sells securities to another party and simultaneously commits to repurchase these same securities at a later date and at a specified price. It essentially operates as a short-term loan, with the securities serving as collateral. The Federal Open Market Committee (FOMC) specifically uses repo agreements involving eligible securities as critical tools to modulate the quantity of banking system reserves. The alterations in the reserve levels play a key part in executing monetary policy, as these can influence interest rates and by extension, overall economic activity. Hence, a repo can be seen as more than a simple transaction, but rather a sophisticated financial mechanism with broader implications for the macro economy.
Terms of trade: The ‘Terms of Trade’ refers to the ratio of a country’s export prices to its import prices. This measures a nation’s trade balance, which can be influenced positively or negatively by changes in commodity prices.
Expanded Definition
‘Terms of trade’ refers to the ratio between a country’s average export prices and its average import prices. It outlines the value and quantity of exports a country can gain per unit of import, essentially giving us an understanding of a country’s trading relationships and exchanges. When discussing ‘terms of trade shocks’, there are generally two predominant types. For developing nations, these shocks often occur when there’s a downturn in commodity prices. This negatively impacts the value of their exports, effectively damaging their trade balance by reducing the resources they can gain through exports. On the other hand, developed economies can experience a terms of trade shock due to an escalation in commodity prices. This situation raises the costs of imports, adversely affecting their trade balance by requiring more resources than usual to purchase the same amount of goods. Therefore, a nation’s terms of trade is a significant economic indicator as it can influence a country’s balance of trade, its income from trade, and, ultimately, the standard of living of its citizens.
The Truth in Lending Act: The Truth in Lending Act is a US federal law mandating clear disclosure of credit costs, specifically the finance charges and annual percentage rate (APR), on all financial forms and statements.
Expanded Definition
“The Truth in Lending Act (TILA) is a piece of United States federal legislation that mandates lenders and credit providers to deliver comprehensive, unambiguous information about the financial implications of a credit product or loan to the consumers. This law enforces the transparent and upfront disclosure of vital financial details such as finance charges – the total cost borne by consumers for borrowing – and the annual percentage rate (APR) – the annual rate that consumers are charged for borrowing or earned through investments, reflecting the yearly cost of the credit expressed as a percentage. These crucial pieces of information must be prominently exhibited on all associated documentation and statements. Thus, TILA empowers consumers, promoting informed decisions by providing clear insights into the full cost of credit.”
Time series data: ‘Time series data’ is a dataset collected at regular intervals over a specific period, allowing for the analysis of patterns, trends, and changes over time.
Expanded Definition
‘Time series data’ refers to a sophisticated set of data points or observations that are gathered systematically over sequential intervals of time. This type of data is specifically organized and registered in time-order, providing a chronological record of changes and patterns. It allows professionals in various fields, such as finance, economics, or science, to track changes, perform trend analysis, forecast future events, or understand the underlying structures and behaviors within the data. Thus, time series data offers an essential resource for extracting valuable insights over time.
Time value of money: The ‘Time value of money’ is a financial concept which posits that money available today holds greater value than an identical sum in the future, due to its potential earning capacity. It entails adjusting future cash flows to present value via a chosen discount rate.
Expanded Definition
The ‘Time Value of Money’ (TVM) is a fundamental financial concept that emphasizes the greater worth of money in the present when compared with obtaining the same amount in the future. This premise originates due to the potential earning capacity of money, which means that money can earn interest or returns over time, thus becoming more valuable in the future. When considering the worth of an investment, it’s crucial to use TVM to compute a ‘Net Present Value’ (NPV). This process involves determining the present value of future cash inflows by discounting them at a chosen ‘discount rate.’ The discount rate — often synonymous with interest rate, inflation, or risk factors — is particularly essential as it significantly influences the NPV. A higher discount rate will reduce the NPV because it decreases the value of future cash inflows, signifying that money today is worth more relative to the same amount in the future. This helps in comparing the profitability of various investments and making informed financial decisions.
Tobin tax: The Tobin tax, proposed by economist James Tobin, is a proposed global levy on currency transactions intended to minimize volatility and speculation in the foreign exchange market; its implementation is uncertain due to international consensus challenges.
Expanded Definition
The ‘Tobin tax’ is a concept proposed by renowned American economist and Nobel laureate, James Tobin. It is a proposed international tax, designed to be levied on all currency exchanges conducted over international borders. Tobin’s main objective was to curtail excessive volatility that often arises from speculative financial transactions in the foreign exchange market. By implementing a small, uniform tax on each currency transaction, Tobin’s theory suggests that short-term, speculative currency trades would be discouraged, thereby stabilizing exchange rates and fostering economic growth. However, the application of the Tobin tax has remained theoretical up until now, primarily due to the complexities involved in achieving a global consensus on its implementation and enforcement.
Too-big-to-fail: ‘Too-big-to-fail’ refers to the governmental safeguarding of major banking entities from market consequences, under the belief that their collapse would cause significant economic and financial upheaval due to their integral role and interconnectedness in the marketplace.
Expanded Definition
‘Too-big-to-fail’ refers to a governmental policy wherein certain large financial institutions, especially banks, are considered so vital to the economy and their relationships with other institutions so interconnected that their failure could trigger severe economic and financial disruptions. Consequently, these institutions are shielded from usual marketplace forces through practices such as government bailouts or other forms of protection, essentially suggesting their importance is such that they cannot be allowed to fail.
Total factor productivity: Total factor productivity (TFP) is the efficiency and effectiveness of input use, reflecting the productivity growth beyond increased inputs, often driven by improved technology or enhanced efficiency.
Expanded Definition
‘Total Factor Productivity’ (TFP) can be defined as a comprehensive metric that assesses productivity by examining the ratio of output to the combined inputs of labor and capital. More specifically, TFP is calculated by dividing an index of total output by an aggregate index of labor and capital inputs. The principal advantage of TFP lies in its ability to measure productivity growth that is independent of any increases in inputs. As such, growth in TFP typically manifests from enhancements in efficiency or from the implementation and utilization of novel technologies. In this way, TFP becomes an indispensable tool for gauging how effectively a company or nation is leveraging its resource base, apart from simply augmenting input quantities.
Total return: Total return is the complete gain from an investment, encompassing both the income earned and the capital appreciation.
Expanded Definition
‘Total return’ is a comprehensive performance measurement for an investment over a certain period. It signifies the complete gain or loss, expressed as a percentage, an investment has generated. It not only includes the rise or fall in the investment’s market price (capital gains), but also any income produced by the investment, such as dividends, interest, rental income etc. Therefore, it provides an integrative view of all potential revenue sources associated with a particular investment. This broad-based assessment allows investors to establish a more accurate and holistic understanding of their investment’s performance.
Total revenue: Total revenue is the total income generated from selling a given amount of goods or services. It is calculated by multiplying the product’s price by the number of units sold.
Expanded Definition
Total revenue refers to the total receipts from selling a specific quantity of goods or service. It’s calculated by multiplying the selling price of the goods or service by the quantity sold. Essentially, it’s the total income of a business from its business activities before any expenses are deducted. It signifies the total demand for a company’s goods or services during a specific period. It is a crucial tool for businesses to track their overall sales performance.
Trade: Trade is the process of swapping goods, services, or resources, either directly or in exchange for money.
Expanded Definition
Trade, in economic terms, refers to the process via which entities, such as individuals, businesses, or nations, engage in an exchange of valuable resources, commodities, or services. Solutions can be traded directly in a barter system, or they can be exchanged for a medium of exchange, most commonly money. This process allows for the redistribution and reallocation of resources and goods, contributing to economic efficiency and increased overall wealth. Trade can occur within a local market or cross-country, known as international trade, and can involve tangible products, like materials and goods, or intangible ones, such as skills and information.
Trade (elementary): Trade is the process of swapping goods, services, or money between parties to fulfill each other’s needs or wants.
Expanded Definition
“Trade, at its most elementary level, can be defined as a fundamental economic activity that involves the swapping or bartering of goods and services between parties. These transactions can be made in two predominant forms – barter trade and monetary trade. Barter trade involves directly exchanging one set of goods or services for another, without the use of currency. On the other hand, monetary trade involves the use of money as a medium to facilitate the interchange. Essentially, trade represents a mechanism for the equitable distribution and access to diverse products and services within a social or economic community, thereby fostering interconnectedness, growth, and prosperity.”
Trade barrier – government imposed: A government-imposed trade barrier is a state-enacted action, such as tariffs, quotas, embargos, or standards, designed to impede or regulate international trade.
Expanded Definition
A ‘Government-Imposed Trade Barrier’ is a policy or regulation implemented by a nation’s government to restrict or limit the free flow of goods and services between countries. These barriers are intended to protect domestic industries from foreign competition. These can take several forms including tariffs, quotas, embargoes, and standards: 1. Tariffs: These are taxes imposed on imported goods and services, making them more expensive and less attractive to consumers, thus favoring domestic suppliers. 2. Quotas: A quota is a limit set on the quantity of a particular product that can be imported or exported within a given period. 3. Embargoes: This is an extreme form of trade barrier where a government bans commercial trade with a specific country or the exchange of specific goods and services. 4. Standards: These are guidelines or rules set by the government for product quality, safety, and manufacture, which foreign goods must also meet to be allowed into the country. These standards can be burdensome for foreign producers and act as an indirect trade barrier. Therefore, a government-imposed trade barrier intervenes in and disrupts free international trade by adding costs or limits to the exchange of goods or services.
Trade barrier – natural: A natural trade barrier is a geographic or environmental condition, like distance, mountainous terrain, or harsh weather, that hinders the flow of goods and services.
Expanded Definition
A “Natural Trade Barrier” refers to any type of physical or geographical impediment that inherently challenges or restrains the flow of goods, commodities, or services between regions or countries. These barriers can include geographically driven obstructions such as extensive distances, onerous mountain ranges, treacherous terrains, extremes of climate like high temperatures, or choppy sea conditions. These factors can directly affect the ease, cost, and efficiency of transportation and communication, ultimately impacting the overall viability and profitability of trade.
Trade bloc: A trade bloc is an agreement between nations to lessen trade barriers such as tariffs, exemplified by the European Union. It’s essentially a more specific type of free-trade area.
Expanded Definition
A ‘Trade Bloc’ refers to a type of arrangement amongst a specific group of countries, in which they collaboratively agree to minimize or completely dissolve trade barriers like tariffs, quotas, and import restrictions within the bloc. This concept promotes easier flow of goods, services, and resources among the member countries, fostering economic integration. The European Union is a prime example of this agreement, demonstrating significant financial interdependence among the participating nations. It’s important to note that a trade bloc is closely related to a free-trade area, although the latter primarily focuses on reducing barriers specifically on goods and not necessarily on services and factors of production. In essence, both are constituents of regional economic integration aiming to enhance trade and cooperation among member nations.
Trade deficit: A trade deficit occurs when a country’s import value surpasses its export value signifying more money is going out than coming in.
Expanded Definition
A ‘trade deficit’, often referred to as a ‘negative balance of trade’, is a macroeconomic measure indicating the economic scenario where a country’s total imports’ monetary value surpasses the total exports’ value during a specific time period. This suggests that the country is consuming more goods and services from overseas than it is capable of supplying to other international economies. Such a situation often implies the country’s dependence on foreign economies to meet its domestic consumption, which can influence the nation’s economic stability and international trade relations. Hence, managing trade deficits is a critical aspect of a country’s fiscal policy.
Trade routes: Trade routes are established networks navigated by merchants for the exchange or transportation of goods and resources.
Expanded Definition
‘Trade routes’ can be comprehensively defined as ‘established paths, networks, or channels that are routinely used by commercial traders to transport goods, resources, and sometimes, people from one geographical location to another. These routes can be navigable by land, water, or air, and effectively facilitate the exchange of goods, promoting economic, cultural, and technological interactions between diverse regions. They are essential conduits of global commerce and intercultural exchange.’
Trade surplus: A trade surplus is when a country’s export revenue surpasses its import expenditure.
Expanded Definition
A ‘trade surplus’ is a favorable economic situation that arises when a country’s total monetary value of exported goods and services surpasses the total monetary value of its imported goods and services over a certain period. Essentially, it indicates that a country’s earnings from its overseas sales are greater than the expenditure on its imports, making it a net lender to the rest of the world. This condition can contribute to economic growth, as it signifies an excess of production over domestic consumption. A persistent trade surplus could, however, impact other economies by causing trade imbalances. Conclusively, it makes up an integral part of a country’s balance of trade.
Trade unions: Trade unions are organizations composed of workers advocating for improved employment rights and wages; they have historically been most influential in the post-WWII manufacturing sector and remain strong in the public sector, despite declining memberships due to globalization and deindustrialization.
Expanded Definition
Trade unions, also known as labor unions, encompass organized groups of workers who unite to negotiate for improved employment rights and enhanced wages. These associations were particularly influential in the developed world during the 30 years following World War II, a period characterized by an abundance of manufacturing jobs and significant union membership rates. However, the onset of globalization and a subsequent decrease in manufacturing employment post-1980 led to a decline in union membership. Today, trade unions maintain considerable influence predominantly within the public sector. To gain a more in-depth understanding of the evolution and current standing of trade unions, refer to the associated article.
Trade-off: A ‘Trade-off’ is the process of sacrificing a certain aspect or feature to benefit from another, indicating a balancing act between competing preferences or objectives.
Expanded Definition
A ‘trade-off’ refers to a situation where one must make a decision involving a compromise between two or more options, or elements that can’t be simultaneously obtained or achieved. It essentially involves giving up a certain quantity, quality, or attribute of one entity or aspect to gain that of another. In economics, trade-offs are necessary because the resources available are limited and need to be distributed or allocated optimally. This decision-making process, often involving a prudent balance of loss and gain, serves as a fundamental principle in the science of choices and scarcity.
Trade-weighted exchange rate: The trade-weighted exchange rate is a measure of a country’s currency strength relative to its major trading partners, considering the volume of trade with each. It’s a useful tool for assessing competitiveness on the international market.
Expanded Definition
The ‘Trade-Weighted Exchange Rate’ is a complex financial term that represents the average exchange rate of a particular country against the currencies of its principal trading partners. It is computed by assigning different ‘weights’ or importance to each of the partner’s currencies based on the volume or proportion of trade conducted with them. In simple terms, if a country does a lot of business with another, that country’s currency would be given more weight in the calculation. This aggregated exchange rate provides a valuable indication of the competitive standing of a country in the international market. Fluctuations or trends in the trade-weighted exchange rate can imply changes in a country’s competitiveness, making it a useful tool in economic analyses and strategizing trade policies.
Tragedy of the commons: The ‘Tragedy of the commons’ refers to the exploitation and depletion of shared resources because of unclear ownership rights.
Expanded Definition
‘Tragedy of the commons’ refers to an economic theory that illustrates the complications arising from shared resources management. This term describes a situation when individuals acting independently and rationally, according to their self-interest, deplete or spoil a shared resource, even when it is clear it is contrary to the group’s long-term best interest. This predicament is often a result of poorly delineated or enforced property rights, which allow open, unregulated access to a resource, be it water, land, air, or even wildlife, leading to overconsumption and potential exhaustion or degradation.
Tranche: A tranche is a segment of a securitized financial offering, such as bonds derived from mortgages, that has been divided according to differing risk classes. Each class is distinguished by the level of risk, the order of claim on cash flow, and varying interest rates, with riskier tranches usually providing higher returns.
Expanded Definition
The term ‘Tranche’ refers to a concept used in structured finance where financial instruments, particularly mortgage-backed securities, are divided into ‘slices’, each with differing degrees of risk and return. When mortgages are packed together and securitized to create mortgage bonds, these bonds are often partitioned into various tranches in the same transaction. Each tranche is essentially a different portion of the loan pool’s risk spectrum. This segmentation is marked by distinct ‘classes’, such as Class A, Class B, and Class C securities, each as defined by the transaction documentation. Importantly, these classes indicate the priority of claims on the cash flows stemming from the bundled mortgages underlying the bonds. Class A securities, being the least risky, have first dibs on the cash flow. Once the Class A bondholders are paid, any remaining cash flow is allocated to the next class, Class B, and so on. The process continues up the scale of risk until it reaches the riskiest tranche, which has the residual claim on any remaining cash flow. Notably, bonds associated with riskier tranches will generally command higher interest payments to compensate for the elevated risk profile.
Transaction costs: Transaction costs are expenses incurred during the process of buying or selling goods, services, or financial assets.
Expanded Definition
‘Transaction costs’ refer to the comprehensive assortment of expenses incurred during the process of completing a trade of goods, services, or financial assets. These expenses can encompass both direct and indirect costs. Direct costs may include brokerage fees, levies, or commissions that are specifically related to the transaction process itself. Indirect costs, on the other hand, can include the time, effort, and resources expended in search, information gathering, negotiation, or the enforcement aspects of a transaction. Taken as a whole, transaction costs provide a more accurate understanding of the actual expenses involved in a trading activity beyond the basic purchase price.
Transactions motive: The transactions motive refers to the need to hold cash for day-to-day purchases and routine financial obligations. It’s one of three motives, along with the precautionary and speculative motives, proposed by Keynes to explain why people hold cash.
Expanded Definition
The ‘Transactions Motive’ is a term derived from economic theories suggested by renowned economist John Maynard Keynes. This term indicates one of the three principal reasons why individuals prefer to hold their assets in cash. The underlying idea of the ‘transactions motive’ is the necessity for liquid assets (cash) to facilitate day-to-day transactions, such as purchasing goods or services. This signifies the most fundamental and straightforward justification for holding money, as carrying out transactions is a routine aspect of life. This term should be distinguished from the other two motives for holding cash as suggested by Keynes: the ‘Precautionary Motive’, which proposes holding money for unexpected costs or emergencies, and the ‘Speculative Motive’, which refers to holding money with the expectation of investing it in opportunities that may arise in the future.
Transfer: A transfer is a unilateral payment where no goods, services, or cash are reciprocated.
Expanded Definition
‘Transfer’ is generally understood as the process of conveying or moving something or someone from one place or person to another. In financial terms, however, this definition could be misinterpreted. While the term does imply a movement of funds from one point to another, it is not accurate to define it as a “one-way payment for which no money, good, or service is given or exchanged”. Instead, a ‘transfer’ can be more accurately defined as the act of relocating assets, typically funds, from one party to another. This process can be facilitated through various methods such as bank wire or online transactions. A transfer does not necessarily denote a one-way transaction or a lack of exchange of goods or services, as the transferred funds can often be compensation for goods or services provided by the receiving party.
Transfer payments: Transfer payments are monetary disbursements made by the government to individuals who don’t provide any goods, services, or labor in return.
Expanded Definition
Transfer payments are financial disbursements made by the government to individuals or entities, where the recipient does not provide any goods, services, or labor in return. These payments, typically given as part of a social welfare program, do not directly result in any economic production. Examples include pension payments, unemployment benefits, or subsidies. The aim of such payments is often to re-distribute wealth and support those in societal sectors who need financial assistance.
Transfer payments (elementary): Transfer payments are funds redistributed from one group of individuals to another, typically through taxation and public assistance programs.
Expanded Definition
Transfer payments refer to the redistribution of a nation’s wealth by the government, where funds from taxes or other sources are collected from certain segments of the population and reallocated to others. These payments, most often in the form of welfare benefits, pensions, or subsidies, serve as financial aid to individuals or groups and assist in achieving social and economic objectives. Importantly, these payments do not reflect compensation for goods or services rendered and thus do not directly contribute to economic production.
Transfer pricing: Transfer pricing refers to the costs allocated for transactions between different entities of a multinational corporation, often optimized to shift profits towards low-tax jurisdictions, thereby minimizing overall tax liabilities. Despite regulations aiming to prevent this practice, it persists as a form of tax avoidance strategy.
Expanded Definition
Transfer pricing refers to the methods applied in determining the price of goods, services, or intellectual property transacted between units of the same multinational corporation, which may be located in different countries. This practice, driven by corporate strategy and tax regulations, offers an avenue for such corporations to potentially maneuver their global tax obligations. By strategically setting prices either low for sales (or high for purchases) a subsidiary in a high-tax country might transact with another subsidiary in a low-tax country, majority of the profit can be allocated to the low-tax jurisdiction. While this can lead to tax avoidance, international tax laws, such as those established by the Organisation for Economic Co-operation and Development (OECD), have laid out regulations to prevent this abuse. Nonetheless, transfer pricing intricacies do occur and continue to be a complex area in international business and taxation law.
Transfer programs: Transfer programs are government initiatives that redistribute wealth to reduce economic disparity. They aim to balance income and assets among different social groups or classes.
Expanded Definition
Transfer programs are a type of government initiatives aimed at enhancing economic fairness. They involve the reallocation of resources, predominantly through financial means, from certain sections of the economy or population to others. The main purpose of these programs is to reduce economic disparities by providing support to individuals or groups who are less advantaged or face financial hardship. This could involve initiatives such as welfare benefits, social security payments, and subsidies. The ultimate goal is to ensure a more balanced and equitable distribution of wealth across society, thereby promoting economic justice and social stability.
Travelers checks: Travelers checks are secure documents provided by banks, functioning as protected cash replacements, with insurance against theft or loss.
Expanded Definition
‘Travelers checks’ are a form of prepaid instrument, issued by financial institutions, that serve as a secure and convenient alternative to carrying large amounts of cash during travels. They work similarly to regular checks but offer enhanced security. If lost or stolen, these checks are often replaceable by the issuing institution, providing an element of risk protection for the user. Travelers checks typically come in fixed amounts and are accepted at many international outlets, making them a preferred choice among travelers worldwide.
Treasuries: Treasuries refer to a range of U.S. government debt securities, including bills, notes, and bonds, issued by the Treasury Department.
Expanded Definition
‘Treasuries’ is an overarching term referring to the various debt securities issued by the U.S. Treasury Department on behalf of the federal government. This includes Treasury bills (short-term debt instruments), Treasury bonds (long-term debt securities), and Treasury notes (medium-term debt obligations). These securities are essentially loans from investors to the federal government and they serve as reliable investment tools, considering they are backed by the full faith and credit of the U.S. government. Their primary function is to finance the national debt and implement monetary policy.
Treasury bill: A Treasury bill, or T-bill, is a short-term government debt security maturing in less than a year, where the interest is the difference between the buying and redemption price.
Expanded Definition
A Treasury bill, often abbreviated as T-Bill, is a short-term debt instrument issued by the U.S. Treasury Department. It has an original maturity period of up to one year, making it a highly liquid investment. Instead of offering periodic interest payments, T-Bills are sold at a discount from their face value. The ‘interest’ investor earns, also known as the yield, is the difference between the discounted purchase price and the face value that is paid back to the investor when the T-Bill matures. Therefore, the investor’s income is realized at the end of the T-Bill term, reflecting its yield rather than traditional interest. This financial instrument is widely considered to be one of the safest forms of investment available due to the reliability of the U.S. Treasury.
Treasury bills: Treasury bills are short-term debt instruments issued by the U.S. government, as well as other governments, with a maturity of less than one year, and offer a highly liquid market.
Expanded Definition
‘Treasury bills’ are defined as debt securities or financial instruments issued by a government to finance its short-term funding needs, with a maturity date of less than one year. The phrase ‘Treasury bills’ is predominantly used to refer to those issued by the United States government, within which it enjoys a highly liquid market, enhancing the ease with which they can be bought and sold. However, it should be noted that numerous other nations, including but not limited to the United Kingdom, also release their own versions of Treasury bills. These instruments are regarded as one of the safest forms of investment due to the backing of the full faith and credit of the issuing government.
Treasury bond: A Treasury bond is a long-term, government-issued debt instrument with a fixed interest rate, maturing beyond 10 years.
Expanded Definition
A ‘Treasury bond’ is a type of debt instrument that the Department of Treasury of a country, like the U.S., issues to investors. It has a fixed interest rate, which means the return on investment does not fluctuate over its lifespan. This product’s distinguishing feature is that it typically has a maturity term exceeding 10 years, up to 30 years in some cases. During this term, bondholders receive periodic interest payments, usually semi-annually, until the bond reaches its maturity, at which point the original amount invested, the bond’s face value, is returned to the investor. Treasury bonds are considered a secure investment, having the backing of the government issuing them.
Treasury note: A Treasury note is a government-issued, interest-earning bond with a maturity period between 1 to 10 years. It offers a fixed-rate return on investment.
Expanded Definition
A Treasury Note, often referred to as a T-Note, is a type of government debt security characterized by a fixed interest rate. This investment product is issued by the U.S. Department of the Treasury. Unlike short-term Treasury Bills which have maturities of a year or less, Treasury Notes possess a maturity period longer than one year but no more than ten years. This denotes that they are considered intermediate-term investments. The owner of a Treasury note can expect periodic interest payments over the life of the note until it matures, at which point the face value of the note is also paid. Due to the backing by the U.S. government, these notes are widely regarded as a relatively safe investment, despite offering lower yields compared to higher-risk investments.
Tri-party repurchase agreement: A tri-party repurchase agreement is a deal involving three entities – an investor, a bank, and a clearing bank – where the investor deposits funds with the clearing bank, who in turn loans it to the bank, streamlining large scale cash and securities transactions.
Expanded Definition
A ‘Tri-party repurchase agreement’ is a sophisticated type of financial transaction that involves three distinct entities: an investor, a financial institution (often a broker-dealer), and a clearing bank. This clearing bank serves a critical role as the intermediary. In most scenarios, these deals comprise substantial volumes of capital and securities. The process starts with the investor who places funds into the clearing bank. The clearing bank, understanding the risk profiles and needs of both sides, subsequently loans these funds to a financial institution. This setup has the dual benefit of providing the investor with a low-risk avenue for investment while furnishing the financial institution with essential operating capital.
Troubled Asset Relief Program (TARP): The Troubled Asset Relief Program (TARP) was a U.S. government initiative established in 2008 to buy distressed assets, particularly mortgage-backed securities, from financial institutions to stabilize the financial system. It concluded in 2009.
Expanded Definition
The Troubled Asset Relief Program (TARP) refers to a U.S governmental initiative that was authorized under the Emergency Economic Stabilization Act of 2008. Its main aim was to increase the liquidity of the secondary mortgage markets by buying illiquid mortgage-backed securities (also known as ‘troubled assets’), thus preventing the collapse of major financial institutions. These troubled assets were primarily owned by financial institutions on the brink of insolvency due to the financial crisis of 2008. The U.S. Treasury had the authority to acquire and fund these assets to ensure financial market stability. The TARP initiative, however, was formally closed on December 23, 2009, signifying the end of its active asset purchase phase.
Troubled assets: “Troubled assets” are predominantly residential or commercial mortgages, and related securities originated before March 14, 2008, that the Treasury has the power to purchase to maintain financial market stability. The category also includes any other financial instrument deemed necessary for market stability by the Treasury Secretary, given congressional notice.
Expanded Definition
‘Troubled assets’ refer to financial instruments identified under the Emergency Economic Stabilization Act. Enforced by Congress, this act allows the Treasury to allocate up to $700 billion for procuring such assets. Two types of instruments qualify as ‘troubled assets’: (i) Those associated with residential or commercial mortgages. These may include securities, obligations, or other forms that are substantiated by or associated with these mortgages. However, such assets must have been originated or issued no later than March 14, 2008. The prerequisite for their purchase lies in the Secretary of Treasury’s determination of their role in maintaining financial market stability. (ii) Any other financial instruments deemed necessary for purchase by the Secretary to sustain financial market stability. This determination, however, must be made in consultation with the Chairman of the Board of Governors of the Federal Reserve System and should be communicated formally in writing to the appropriate committees of Congress.
Trust: Trust refers to the confidence and faith that economic entities maintain with one another, whereby suppliers have assurance in their customers’ payment and customers trust in the quality of goods. The degree of trust often correlates with the pace of economic growth.
Expanded Definition
‘Trust’ is a fundamental element required for the successful functioning of economic activities. It implies a faith or belief in the reliability, truth, ability, or strength of another party. From a supplier’s perspective, trust refers to having confidence that their customers will fulfil their fiscal obligations by paying for the goods or services provided. Conversely, from a customer’s perspective, trust means believing that the products they purchase will meet their expectations in terms of quality and functionality. Trust plays an integral role in fostering not only immediate transactions but also in strengthening long-term business relationships and partnerships. According to several studies, an environment or society with high levels of trust tends to exhibit faster rates of economic growth over time. This is primarily because trust reduces transaction costs, enhances cooperation, and encourages innovation and investment. For an in-depth understanding, refer to this article.
Truth-in-Lending Act (Regulation Z): The Truth-in-Lending Act (Regulation Z) is a federal law that mandates creditors to disclose credit costs, both as a distinct finance charge and an annual percentage rate (APR), to ensure consumers make informed credit decisions.
Expanded Definition
The Truth-in-Lending Act, also known as Regulation Z, is a federal law enacted in the United States to ensure consumers are fully informed about the terms and associated costs of a credit agreement before entering into it. The legislation mandates creditors, such as banks, credit card companies, and auto loan lenders, among others, to clearly convey how much it will cost the consumer to borrow money. This cost is represented in two ways: first, as a finance charge, which is the total monetary cost of the credit, incorporating interest and other fees; and secondly, as an Annual Percentage Rate (APR), which expresses the finance charge as a yearly percentage. This dual representation allows consumers to make direct comparisons between different credit offers. The intention of this law is to enhance transparency, support fair competition among creditors, and aid consumers in making well-informed decisions.
Two-sided market: A two-sided market is an economic platform involving an intermediary that simultaneously serves two distinct user groups, typically buyers and sellers, facilitating transactions between them.
Expanded Definition
A two-sided market, also known as a dual-sided or multi-sided market, represents a unique economic landscape where two distinct user groups interact within the same platform, facilitated by an intermediary entity. This intermediary acts as a bridge, enabling transactions or exchanges between the two groups. Usually, these groups comprise buyers and sellers. However, they could span various scenarios, such as advertisers and consumers or service providers and service users. While the platform’s value growth generally depends on the size of both user groups, the dynamics of the relationship between these groups often influence pricing strategies and the platform’s overall economic sustainability.

U

U.S. Treasury securities: U.S. Treasury securities are debt instruments the U.S. government sells to fund its operations. They include bonds and notes.
Expanded Definition
U.S. Treasury securities encompass a range of investment products issued by the U.S. Department of the Treasury to fund the government’s operational undertakings. These financial instruments include, but are not limited to, Treasury bonds, notes, and bills. Each type of security has specific characteristics in terms of maturity dates and interest payment schedules. They are perceived as extremely secure, as they are backed by the full faith and credit of the U.S. government, making them an attractive option for risk-averse investors or those seeking to diversify their portfolio. Their role is crucial in managing the country’s debt, stimulating economic growth, and ensuring the continuous function of public services.
USMCA (United States-Mexico-Canada Agreement): The USMCA is a trilateral trade agreement between the United States, Mexico, and Canada that replaces the original NAFTA (North American Free Trade Agreement), optimizing trade relations and fostering economic growth among the countries.
Expanded Definition
The United States-Mexico-Canada Agreement (USMCA) is a trilateral trade agreement that replaced the former North American Free Trade Agreement (NAFTA). It came into effect on July 1, 2020. This new agreement was designed to create a more balanced and reciprocal trading platform amongst the three countries, offering opportunities to boost economic growth, job creation, and prosperity. It included modifications in areas such as agriculture, automotive trade, labor provisions, and digital trade to address modern day trade issues and promote fairer competition.
Unbanked: ‘Unbanked’ refers to individuals without any form of banking or financial institution relationship.
Expanded Definition
The term ‘Unbanked’ refers to individuals who do not hold an account with any banking or financial institution. This includes checking or savings accounts, credit cards, mortgages or any other type of financial product provided by such institutions. These consumers are outside the traditional banking system and typically rely on cash transactions, check cashing services and other forms of alternative financial arrangements for their monetary needs.
Uncertainty: ‘Uncertainty’ refers to a condition where the probability of an event or outcome cannot be precisely determined, addressed in-depth in concepts like Knightian Uncertainty and risk. It depicts situations with unknown probabilities, distinguishing it from quantifiable risks.
Expanded Definition
‘Uncertainty’ is a term used to describe a situation or condition in which there is a lack of sureness or predictability. It refers to a state of being uncertain, such as not being able to predict an outcome due to insufficient information or unpredictable variables. In economic context, the term is often associated with ‘Knightian uncertainty’ and ‘risk’. ‘Knightian uncertainty’, named after Frank Knight, refers to a situation where the probabilities of particular outcomes are not known or measurable. This type of uncertainty often arises in unique or unprecedented situations, where there is no existing historical data that could potentially be used to predict outcomes. On the other hand, the term ‘risk’ identifies situations where the probabilities of specific results are known, or at least can be estimated. This enables individuals or companies to make calculated decisions based on their understanding of potential likelihood and the associated consequences. The distinction between ‘risk’ and ‘Knightian uncertainty’ is crucial, particularly in decision-making processes, as dealing with known risks can be fundamentally different from managing unknown uncertainties. Various strategies and approaches may be employed to manage these differences, ranging from risk mitigation strategies for known risks to more flexible and adaptive approaches when facing Knightian uncertainties.
Underbanked: Underbanked refers to individuals or enterprises that have inadequate access to mainstream banking facilities, and hence, resort to non-traditional financial services.
Expanded Definition
‘Underbanked’ pertains to consumers or commercial entities that experience insufficient access to the fundamental services extended by traditional banking institutions. Their partial or inconsistent access could stem from various circumstances including geographical limitations, low income, credit issues, or lack of financial literacy. As a result, these individuals or businesses often resort to using alternative financial providers or non-traditional methods to fulfil their monetary needs. Such alternatives might include payday loans, check cashing services, and pawnshops. While these services provide immediate financial relief or convenience, they often come with higher costs or risks when compared to standard banking services. The underbanked population, therefore, remains in a potential financial vulnerability due to this deficient or constrained access to mainstream banking facilities.
Underemployed: ‘Underemployed’ refers to the state of working less than full-time or in a role below one’s skill level, resulting in lower income than one’s qualifications could command.
Expanded Definition
‘Underemployed’ refers to a state of employment in which an individual is engaged in a job that does not fully utilize their skills and abilities, often characterized by part-time hours despite a preference for full-time employment. This can also include situations where the individual is overly qualified for their current position yet receive a compensation that is notably lower compared to the remuneration typically associated with jobs demanding a higher proficiency or skill level. It essentially describes a mismatch between a person’s employment status and their potential job capacity, whether in terms of working hours or job scope.
Underemployment (resource): Underemployment refers to the inefficient use of valuable resources in productivity, failing to optimize their highest potential for good and service output.
Expanded Definition
Underemployment, as it pertains to resources, is a circumstance whereby necessary or significant materials, human talent, financial capital, or other resources are not optimally utilized in relation to their maximum potential value within the processes of good and service production. This might occur when these resources are used in lower-value contexts or tasks, or when they are left idle and thus do not contribute effectively to productivity. It represents an inefficiency in the allocation of these vital elements within an economic framework.
Unemployment: Unemployment is the scenario in which individuals over 16 years old are jobless and vigorously seeking work.
Expanded Definition
“Unemployment” is regarded as a state in which individuals, aged 16 or above, are devoid of formal occupational engagements, despite earnestly seeking such roles. This term typically refers to members of the labor force who are willing and able to work and are actively striving to secure employment, but are unable to do so. This measure is crucial in economic studies as it provides an indication of the overall health of the workforce and the economy at large.
Unemployment compensation: Unemployment compensation is a program that gives financial aid to workers who involuntarily lost their jobs, often referred to as unemployment insurance.
Expanded Definition
‘Unemployment compensation’ can be more precisely defined as a government-administered program that provides financial assistance to individuals who have involuntarily lost their jobs and are actively searching for employment. This assistance consists of monetary benefits provided for a predetermined period of time or until the individual secures new employment, whichever occurs first. The program, sometimes referred to as unemployment insurance, is designed to offer an economic lifeline to individuals during their job transition phase, helping them manage their essential expenses with the understanding that the job loss was not a result of their personal actions or performance.
Unemployment insurance (compensation): Unemployment insurance is a benefit program that offers temporary financial aid to employees who have involuntarily lost their jobs.
Expanded Definition
Unemployment insurance, also referred to as unemployment compensation, is a government-administered program designed to provide monetary support to individuals who have involuntarily lost their employment, meaning that they were not responsible for their job loss. The recipients of this program receive these benefits on a temporary basis, typically while they actively seek new employment. The duration of coverage and the amount disbursed vary based on factors such as previous employment, reasons for job loss, and regulations specific to the region or country. The primary aim of unemployment insurance is to alleviate the financial hardships associated with job loss and provide economic stability during the transition period.
Unemployment rate: The unemployment rate refers to the proportion of the labor force actively seeking but not currently engaged in work.
Expanded Definition
The ‘unemployment rate’ is a critical economic indicator, often expressed as a percentage. It represents the segment of individuals within the active workforce, who are both able and keen to work, yet are without any form of employment at the current time. These individuals must also be actively involved in a job search. The active workforce refers to working-age individuals who are in employment or looking for it, excluding those who are retired, pursuing education, or otherwise not keen on working. This rate is not static and may fluctuate based on economic conditions, prevailing in the labor market, at any given point.
Uninsured motorist insurance: Uninsured motorist insurance is a policy that covers your costs in accidents caused by drivers lacking liability coverage.
Expanded Definition
Uninsured motorist insurance is a form of auto insurance coverage that provides financial protection to policyholders when they encounter a road accident caused by another driver who doesn’t have liability insurance. This policy covers costs associated with bodily injury or property damages sustained in the accident. It essentially steps in to fulfill the financial obligations that the at-fault driver’s lack of insurance fails to cover, ensuring that the policyholder does not bear the brunt of the costs resulting from the accident.
Unintended consequences: Unintended consequences refers to unpredicted outcomes that arise from any action or decision. These are results that weren’t originally intended or foreseen.
Expanded Definition
‘Unintended consequences’ can be professionally defined as the unforeseen and unanticipated outcomes that emerge from a particular decision or action. These outcomes can occur in any given situation where the effects of the implemented intervention diverge from what was originally planned or intended. It is important to consider that these consequences can be positive, neutral, or negative, and they may impact individuals, communities, or systems in various ways.
Unions: Unions, also known as trade unions, are organizations of workers that negotiate with employers collectively for improved working conditions and better wage.
Expanded Definition
“Unions,” often referred to as “trade unions” or “labor unions,” denote organized groups of workers who come together to achieve common goals such as advocating for safer working conditions, securing better wages, and obtaining fair work hours. Unions use their collective strength to negotiate with employers, striving to provide workers with the ability to influence policies that directly impact their livelihoods. Often operating within certain industries or professions, they offer a platform for workers to have a unified voice in discussions concerning their employment conditions, rights, and protections.
Unit of account: A unit of account is a standard measurement utilized for valuing economic items, streamlining comparison of goods and services.
Expanded Definition
A “unit of account” refers to a standardized metric that serves as a medium for attributing economic value to goods, services, assets, and liabilities in a consistent manner. It functions as a critical tool in financial reporting and economic analysis by providing a uniform framework for comparison and evaluation across different types of goods, services, and transactions. Essentially, it allows disparate items to be assessed on a ‘common playing field’, thereby facilitating the decision-making process and enhancing economic efficiency. Its prevalent examples include national currencies like the US dollar, Euro, etc., which help establish benchmark values and streamline the process of trade and commerce.
Universal basic income (UBI): Universal Basic Income (UBI) is a financial program designed to alleviate poverty by providing all citizens with sufficient income to meet basic needs, potentially replacing parts of the current social benefits system. Its effectiveness and impact on labor motivation and tax rates remain subjects of debate.
Expanded Definition
Universal Basic Income (UBI) refers to a proposed socio-economic model which advocates for the provision of a predetermined amount of money to all citizens of a particular jurisdiction, irrespective of their income, employment status, or socio-economic background. The premise is to provide a level of income sufficient to meet basic living expenses, thereby addressing issues related to poverty and income inequality. UBI programs can vary substantively in their design; some propose to replace existing welfare instruments entirely, while others suggest supplementing them. However, the UBI concept is met with certain criticisms. It may necessitate substantial increases in marginal tax rates to fund the distribution, which could potentially burden the economy. There’s also a concern that guaranteeing an income could potentially dissuade individuals from seeking employment. It’s noteworthy that the effectiveness and impact of such a scheme would largely depend on the specifics of the UBI program’s implementation and whether it could be tailored appropriately for different societal and economic contexts.
Universal resource locator (URL): A URL is a specific string of characters that leads one to a specific resource on the internet, essentially serving as the address for online data.
Expanded Definition
A Universal Resource Locator, commonly known as a URL, is a unique string of characters that functions as the address for a specific resource on the internet. Whether it’s a webpage, an image, or a file, each accessible entity on the World Wide Web has a distinct URL. This URL not only points to where the resource exists within the complex structure of the internet, similar to how a physical address operates in the offline world, but it also instructs the internet browser on how to retrieve that resource. Therefore, a URL forms an integral link in internet navigation, enabling users to directly access and interact with data or information housed on various websites throughout the web.
Unsecured loan: An unsecured loan is a credit provided by a lender to a borrower without calling for any form of asset or property as security against potential defaulting.
Expanded Definition
An unsecured loan is a type of financial lending that does not require the borrower to provide any form of tangible security, known as collateral, to back the loan. This type of loan is largely dependent on the borrower’s creditworthiness, demonstrated through their credit score and financial history. Since the lender assumes a higher risk due to the lack of collateral, unsecured loans often feature higher interest rates compared to secured loans. Common examples include credit cards, personal loans, and student loans.
Usury: Usury is the practice of charging extremely high rates of interest on loans, a practice often regulated or prohibited by laws due to its potential to inhibit trade and business growth.
Expanded Definition
‘Usury’ is fundamentally defined as the practice of levying exorbitant interest rates, typically in the context of a loan. Historically, this concept has often been regarded negatively, with numerous ancient philosophers objecting to the idea of interest payments as a whole. During the Middle Ages, the aversion was so prevalent that laws prohibiting usury were commonplace. In an era where lending carried substantial risk, these laws significantly deterred the expansion of trade and inhibited the establishment of new businesses. In the contemporary world, the topic of usury persists. Even though the risks associated with lending have been mitigated by various economic advancements, certain jurisdictions continue to enforce regulations designed to prevent the excessive interest rates typically associated with exploitative lending practices or “loan sharking”. These laws aim to guard against predatory lending and promote fair business practices.
Utility/Satisfaction: Utility or satisfaction refers to the total pleasure or fulfillment derived from the consumption of goods or services.
Expanded Definition
‘Utility/Satisfaction’ can be comprehensively defined as the cumulative measure of pleasure or fulfillment that a consumer derives from the consumption or use of goods and services. This includes the positive experiences, advantages, or benefits a consumer gains, which can be both tangible and intangible, from the consumption or use of specific products or services. These can range from the direct functional benefits of a product to the emotional satisfaction derived from purchasing or using a particular service. The concept of utility or satisfaction is a key concept in economic theory and consumer behavior analysis, used to explain consumers’ choices and personal preferences in the marketplace.

V

Vacancy rate: Vacancy rate refers to the percentage of all available units or properties in a rental area that are unoccupied or not rented. In a broader economic context, a high vacancy rate usually indicates an issue with the local economy or overproduction of properties.
Expanded Definition
‘Vacancy rate’ is a critical metric in the real estate and property industry. It denotes the percentage of rentable properties that are presently unoccupied or unrented. This rate serves as a vital economic indicator, reflecting the health of the property market. A heightened vacancy rate might signal economic difficulties, such as an imbalance between supply and demand, which occurs when excessive property construction outpaces demand. Conversely, a low vacancy rate indicates a competitive market with high demand for properties. Note that in the employment context, ‘vacancy rate’ can also refer to job vacancies, reflecting the percentage of positions that are currently open or unfulfilled within a given organization or job market.
Value: ‘Value’ refers to the degree of importance, usefulness, or satisfaction a person assigns to a good or service.
Expanded Definition
‘Value’ refers to the quantitative or qualitative worth and appreciation that an individual derives from a product or service. It signifies the level of satisfaction, fulfillment, or happiness one gains from the utilization of a good or service. More than mere monetary cost, value encompasses the emotional, intellectual, or experiential reward associated with the product/service usage. It contributes to the person’s decision-making process and is a critical influencer in the overall consumer behavior.
Value added: ‘Value added’ refers to the financial gain achieved when the selling price of a product or service exceeds the cost of its production, whether considered at a firm or sector level. It’s the basis for assessing value added tax.
Expanded Definition
‘Value added’ can be comprehensively defined as the economic worth that has been created over and above the original cost to produce a product or service. This worth is calculated by subtracting the costs associated with production, such as raw materials and labor, from the final selling price of the product or service. This concept can be applied on multiple levels. For instance, on a firm level, the value added acts as the foundation for determining the value added tax. More broadly, at an industry or sector level, value added calculations provide insights into productivity and economic contributions of different sectors. This concept of ‘value added’ plays a significant role in showcasing the economic value generated by organizations and sectors and is key to understanding their contribution to the overall economy.
Value at risk (VAR): Value at Risk (VAR) is a statistical technique used to quantify the level of financial risk within a firm or investment portfolio over a specific time frame. It demonstrates the maximum potential loss that may occur given market conditions and probability.
Expanded Definition
Value at Risk (VaR) is a statistical technique utilized in finance and investment sectors to quantify the level of financial risk within a firm, portfolio or an individual position over a specific time period. It essentially provides an estimate of the maximum potential loss that could be incurred from adverse market movements, expressed in monetary terms. This estimate, calculated with a certain confidence level, indicates the potential loss that should not be exceeded over the defined period under normal market conditions. However, one limitation of VaR is its inability to accurately predict losses during extreme events, also known as ‘fat tails’. This was evident in the financial crisis of 2007-09 when several institutions that relied on VaR underestimated their actual risk exposure. So, while VaR is a useful tool for risk management, it should be used alongside other measures to account for extreme market fluctuations.
Variable costs: Variable costs are expenses that fluctuate in direct correlation to a business’s production volume.
Expanded Definition
‘Variable costs’ are defined as business expenditures or outlays that vary or fluctuate directly in proportion to the volume or level of goods and services a business generates. These outlays could include raw material costs, direct labor charges, and other expenses directly linked to production activity. Consequently, the higher the production, the more a business incurs variable costs and vice versa, making them an important factor in business profitability and pricing decisions.
Veblen goods: Veblen goods are luxury items that become more desirable as their price increases, often serving as indicators of the buyer’s high social status or wealth. Named after Thorstein Veblen, they embody the concept of “conspicuous consumption.”
Expanded Definition
“Veblen goods” are a specific category of luxury items and services that exhibit an unusual economic behavior: rather than diminishing, demand for these goods increases as their prices rise. This phenomenon defies the typical law of demand in economics which states that as the price of a good increases, the demand decreases. Named after economist Thorstein Veblen, these goods often symbolize wealth and social status due to their high cost and exclusivity, enhancing their allure and making them more desirable to consumers who can afford them. Veblen coined the term “conspicuous consumption” to describe the practice of buying such luxury goods as a visible means of displaying their superior socio-economic standing. Simply put, the increased price tag doesn’t deter the upper-echelons of society but instead, signals a status symbol, making the Veblen goods even more desirable. The concept of Veblen goods encapsulates the idea that for some consumers, higher price itself is a feature and not a drawback. As suggested by the popular adage, ‘If you have to ask the price, you can’t afford it,’ these goods cater primarily to affluent individuals who view high price as part of the appeal and distinction of these goods.
Velocity of circulation: Velocity of circulation is the rate at which money is exchanged in an economy, integral to the quantity theory of money.
Expanded Definition
The ‘Velocity of Circulation’ is an economic term that describes the speed at which money is exchanged from one transaction to another in an economy. Essentially, it quantifies the rate in which money is used for purchasing goods and services. It serves as a crucial element in the Quantity Theory of Money, a fundamental economic theory which posits that the general price level of goods and services is directly proportional to the amount of money in circulation within a specific economy. Thus, the velocity of circulation can provide insights into economic activity levels — a higher velocity typically indicates a more active economy, and conversely, a lower velocity may suggest less economic activity or financial transactions.
Venture capital: Venture capital is a specific sector of investment management that funds start-ups and emerging companies, banking on their long-term profitability, despite acknowledging a high-risk factor. It’s significantly contributed to the growth of tech firms in regions like Silicon Valley.
Expanded Definition
Venture capital is a specialized segment of the investment management domain that focuses on providing financial support to start-ups or newly established businesses. The objective of venture capital investment is to aid these companies in reaching their full potential and achieving substantial long-term growth. The inherent nature of investing in high-risk early-stage companies means that there is a significant rate of unsuccessful ventures. However, the substantial profits from the few companies that do progress to success often offset these losses, potentially generating favorable overall returns. This investment approach has been integral to the funding and growth of numerous technology companies, particularly in regions known for innovation and entrepreneurial activity, such as Silicon Valley.
Visible trade: Visible trade refers to the import and export of tangible products like raw materials or manufactured items. It contrasts with invisible trade, which involves non-tangible services or assets.
Expanded Definition
‘Visible trade’ refers to the international trade involving physical goods or tangible commodities. It includes the import and export of goods that are touchable, range from raw materials, such as oil and ore, to components like machine parts, to fully manufactured products such as automobiles and electronics. The term ‘visible’ implies that these transactions can be seen, inspected, and documented for customs and record-keeping. It contrasts with ‘invisible trade,’ which encompasses services, transfers, and other non-physical goods.
Volatile: ‘Volatile’ refers to something prone to rapid and unpredictable shifts or changes.
Expanded Definition
“Volatile” is a term used to describe a condition, object, or situation that is prone to rapid, unpredictable, and often significant changes. In various contexts, particularly within finance, chemistry, and computer science, it describes situations or elements that exhibit high levels of variability and instability, or can switch suddenly between extremes without warning or immediate apparent cause. It indicates a lack of consistency or a degree of unpredictability and risk.
Volatility: Volatility refers to the rate at which the price of an asset moves for a set period of time. It’s essentially the degree of variation of a trading price series over time.
Expanded Definition
‘Volatility’ refers to the degree of variation in the trading price of a financial instrument over a certain period of time. It is commonly used to quantify the risk or uncertainty related to an asset. High volatility embodies substantial fluctuation and potentially large swings in asset values, while low volatility indicates smaller, steadier changes. Volatility does not specify the direction of price changes — an asset’s value could either spike or plummet. This metric is instrumental for investors in estimating the potential range of returns and adjusting their strategies accordingly.
Voluntary unemployment: Voluntary unemployment refers to the state where able and willing workers choose not to be employed, potentially due to seeking better pay or job fit. It encompasses situations like frictional unemployment and high quit rates.
Expanded Definition
“Voluntary unemployment” represents a category within the sphere of economic non-engagement, encompassing individuals who, despite having the necessary skills, means, and available opportunities, opt not to engage in employment. The choice for unemployment may be attributed to frictional unemployment, a term referring to the temporary period of joblessness experienced by people in search of better job prospects that adequately compensate their skills or align more closely with their career aspirations. This type of unemployment can often be gauged through the quit rate, which measures the rate at which workers voluntarily leave their jobs.
Volunteering: Volunteering refers to the act of offering services or skills freely to others or organizations without seeking monetary compensation.
Expanded Definition
‘Volunteering’ can be defined more expertly as ‘the practise of willingly providing one’s time and skills towards a task, activity, or service in aid of an individual, group, or organization, without any financial compensation. This act, often associated with philanthropic objectives, typically aims to contribute to societal good, enrich communities, and promote civic responsibility. The volunteering activities vary widely, ranging from education, disaster relief, healthcare, to environmental conservation, among others. Such selfless contributions not only foster personal growth but also strengthen the fabric of community by fostering empathy and cooperation.

W

W-2 form, Wage and Tax Statement: The W-2 form is a yearly salary and tax summary provided by employers to their employees, used for tax return reporting. It outlines the total earned income and withheld taxes from the previous year.
Expanded Definition
The W-2 form, also known as the Wage and Tax Statement, is a crucial document issued by employers to their employees. It provides a detailed summary of an individual’s total yearly earnings along with the amount of taxes that have been withheld from their paycheck over that same year. This form is mandatory for all employees who have had income, social security, or Medicare taxes deducted from their wages, and it must be provided by employers no later than the end of January for the preceding year’s employment. The information contained in a W-2 form is instrumental in preparing an employee’s annual tax returns as it provides necessary details regarding their income and tax payments. Not only does it serve to ensure accuracy and compliance in reporting to the Internal Revenue Service (IRS), but it also enables employees to track and understand their earnings and taxes withheld over the fiscal year.
W-4 form, Employee’s Withholding Allowance Certificate: A W-4 form is a document filled out by employees to assist employers in calculating the appropriate income tax withholdings from their paycheck.
Expanded Definition
A W-4 form, officially known as the Employee’s Withholding Allowance Certificate, is a mandatory document that every U.S. employee needs to complete at the start of a new job. This form is utilized by employers to ascertain the correct amount of federal income tax that needs to be withheld from an employee’s regular paycheck. Through this form, employees can specify their personal financial situation, accounting for factors like marital status, number of dependents, other potential income sources, and any tax credits they opt to claim. The completion of this form ensures that employees do not overpay or underpay their taxes throughout the year.
Wage garnishment: Wage garnishment is a legal directive instructing an employer to deducted a specified amount from an employee’s paychecks to repay a debt owed by the employee.
Expanded Definition
‘Wage garnishment’ is a legally mandated procedure enforced through a court order, demanding an employer to divert a specified portion of an employee’s salary or wages directly to a person, agency, or business to which the employee has an outstanding debt. This is commonly executed to ensure the repayment of debt. The garnishment continues until the entirety of the debt is completely paid or arrangements have been made to pay off the debt. Hence, it serves as a prominent tool for debt recovery.
Wage inflation: Wage inflation refers to a continuous rise in the average salary levels.
Expanded Definition
Wage inflation is an economic phenomenon characterized by a consistent and prolonged rise in the average level of wages across an economy. This generally indicates that employers are paying higher wages in order to attract, retain, or motivate workers. While wage inflation can often result in increased purchasing power for individuals and enhanced standard of living, it’s also a key cause for concern for businesses, as it can lead to higher production costs. Furthermore, if wage inflation happens faster than price inflation, the discrepancy could potentially lead to damaging economic effects. Hence, tracking wage inflation is critical for economists and policy makers in managing the health and sustainability of an economy.
Wage-price spiral: A wage-price spiral is an economic scenario where increased inflation leads to higher wage demands, consequently driving businesses to elevate prices, often leaving workers disadvantaged as wages fail to match the raised prices.
Expanded Definition
The ‘wage-price spiral’ is an economic concept referring to a circular cause and effect relationship where periodic increases in inflation trigger a demand for higher wages by employees. In turn, to accommodate these wage hikes, businesses often increase their prices to mitigate the added costs. Consequently, this further stimulates inflation, thus creating a recursive loop. However, employees often bear the brunt of this cycle, as wage increment often lags behind the real cost of living, ultimately diminishing their purchasing power. To delve deeper into this subject, refer to this article [link to the article].
Wages: Wages refer to the compensation received for the amount of labor provided, generally calculated by multiplying the hourly rate by hours worked.
Expanded Definition
‘Wages’ refer to the financial compensation that an individual receives in exchange for their work or services provided in a labor market. This income, often calculated on an hourly basis, is determined by multiplying the agreed upon hourly pay rate by the total number of hours the individual has worked. This merit-based payment system is typically used in various employment fields ranging from manual labor to expert services.
Wages (elementary): Wages refer to the monetary compensation received by individuals for their labor or services rendered.
Expanded Definition
‘Wages’ is a term primarily defined as the financial compensation that individuals earn in exchange for their professional services or labor. It is typically decided on a fixed hourly, daily or piecework basis, although it can also be calculated weekly, monthly, or annually, depending on the employment contract. Wages serve as the primary source of income for many people, and are a critical aspect of the economic stability and overall well-being of individuals and communities. It is influenced by various factors such as the nature of work, skills required, experience, and market demand.
Wants: ‘Wants’ are the cravings for goods and services which, when consumed or utilized, fulfill these desires.
Expanded Definition
‘Wants’ is a term commonly used in economics and marketing to refer to the desire or aspiration of consumers to acquire goods or services that meet their personal satisfaction or fulfil their needs. Unlike needs, which are essential for survival, wants are often shaped by socioeconomic factors, cultural values, marketing campaigns, and individual tastes or preferences. The fulfilment of these wants is achieved through the consumption of various goods or services, contributing to overall consumer behavior and market demand.
Warrant: A warrant is a financial instrument enabling the owner to purchase the issuer’s stock at a predetermined price within a set timeframe.
Expanded Definition
A ‘warrant’ refers to a type of financial instrument issued by a corporation. This instrument gives the holder the right, but not the obligation, to purchase the company’s common stock at a predetermined price, known as the exercise or strike price, at any time on or post a certain date. This investment tool typically has an expiration date, beyond which the right to purchase no longer exists. The intention behind issuing warrants is often to incentivize potential investors or to raise additional capital. The particular terms and conditions, such as the amount of stock available or the duration of the warrant, are typically outlined in a document called a ‘warrant agreement’.
Warranty: A warranty is a pledge from a manufacturer or dealer ensuring a product’s or service’s functionality and performance as per the stated terms.
Expanded Definition
A warranty refers to a legal commitment given by a manufacturer or seller to a purchaser, guaranteeing that the product or service will operate as advertised during a specified period of time. This assurance minimizes the purchaser’s risk by pledging rectification, whether it be via repair, replacement, or reimbursements if the product or service underperforms or fails within the warranty period. Essentially, it functions as a trust-building tool in consumer transactions, inspiring assurance in the reliability and quality of a product or service.
Washington consensus: The Washington Consensus refers to policy guidelines proposed by international bodies like the IMF and World Bank to developing countries, emphasizing deregulation, trade liberalization, privatization, and fiscal discipline. Many criticize its generic approach and insufficient consideration of democratic governance and poverty alleviation.
Expanded Definition
The ‘Washington Consensus’ originated from the works of British economist John Williamson. It encapsulates policy recommendations generally endorsed by prominent institutions such as the International Monetary Fund and the World Bank for developing nations. The central tenets typically embrace deregulation, which involves reducing state interference in the economy, trade liberalization, aiming to increase international trade through removal of tariffs and import quotas, privatization, encouraging transfer of ownership from public to private sector, and fiscal restraint to maintain budget balance and reduce inflation. However, the prescriptive nature of this consensus has been critiqued for its generalized “one size fits all” approach without considering the unique socioeconomic contexts of different nations. Critics also note the consensus can overlook crucial aspects such as democratic accountability and strategies for poverty alleviation.
Waste: ‘Waste’ refers to the inevitable leftover material after a product has been used or created.
Expanded Definition
‘Waste’ refers to the residual material, often unavoidable, that emerges as a byproduct after the consumption or production process of a particular item or substance. It includes all materials discarded or abandoned in the course of activities, ranging from household refuse, industrial byproducts, and agricultural residues, among others. This leftover material, commonly seen as valueless, could be harmful or potentially useful depending on its substance and proper management.
Wealth: Wealth refers to the accumulated value of an individual’s assets.
Expanded Definition
‘Wealth’ is commonly defined as the cumulative value of an individual’s financial and non-financial possessions accrued over time. In a broader context, it represents the total monetary worth of all assets owned by a person, including but not limited to cash, investments, real estate, and personal property, after deducting any liabilities or outstanding debts. This amassed worth is often the result of many factors including income generation, savings, and investment growth. In essence, wealth delineates the financial health and economic status of an individual by reflecting the tangible and intangible properties they possess, that can be converted into monetary value if required.
Wealth effect: The wealth effect refers to the change in consumer spending due to fluctuations in the value of their assets resulting from shifts in overall market prices. Essentially, it’s how perceived wealth impacts consumer behavior.
Expanded Definition
The ‘Wealth Effect’ is an economic theory suggesting a correlation between consumers’ spending behavior and their perceived wealth. Specifically, it refers to the psychological phenomenon where individuals spend more as the value of their assets, like homes or retirement accounts, increases. If the aggregate price level changes – due to factors like inflation, market volatility, or fluctuations in property values – the purchasing power of consumers’ assets might increase or decrease accordingly. This perceived change in wealth can then influence consumers’ willingness to spend or save, ultimately impacting the overall economy.
Wealth tax: A wealth tax is a type of levy that targets the assets of the affluent, often proposed to address socio-economic inequality. While it may encourage consumption over saving and investment, and often generates low GDP revenue due to tax evasion efforts, it historically played a crucial role in reducing wealth disparity, as seen with inheritance taxes on European elites in the early 20th century.
Expanded Definition
A “Wealth Tax” refers to a tax system that imposes a levy on the total value of personal assets owned by individuals. This can include items such as cash; property; investments; trusts; or significant assets, all which contribute to one’s overall wealth. The appeal of wealth taxes, particularly among progressive factions, lies in their potential to address wealth disparities by redistributing economic power and reducing socioeconomic inequality. A well-known form of wealth tax is the Inheritance tax, which was significantly impactful in mitigating wealth disparities in the first half of the 20th century, by decreasing the concentrated wealth of European aristocracies. Despite these perceived benefits, there are noteworthy obstacles to implementing effective wealth taxation systems. For instance, a high potential for tax avoidance exists among the affluent as they often can access comprehensive strategies to minimize their tax liabilities. As a result, revenue generated from such taxes often forms a rather small proportion of a country’s Gross Domestic Product (GDP). Moreover, some economic experts argue that wealth taxes could inadvertently distort economic structure by encouraging consumption rather than saving and investment. This is due to the fact that capital (wealth) is penalized, thus discouraging individuals from making investments or saving, lowering overall capital formation and potentially affecting long-term economic growth. Thus, the implementation of a wealth tax should be carefully calibrated to balance its objectives of wealth redistribution against potential impacts on economic incentives and behaviour.
Welfare: Welfare refers to social benefits provided by the state to support individuals who are unemployed, sick, retired, or have low incomes, which has evolved significantly since its inception, particularly after the Great Depression leading to the formation of welfare states. On average, welfare spending constitutes about 20% of GDP across OECD nations as of 2019.
Expanded Definition
‘Welfare’, particularly in the context of U.S. social policy, refers to a system of social assistance measures designed to support individuals who are unemployed, ill, retired, or living with low incomes. This system evolved significantly over time, beginning largely in the 20th century. Initially, the welfare benefits provided were kept minimal in an effort to dissuade exploitation by those deemed as the ‘undeserving poor’. However, the devastating socio-economic impacts of the Great Depression engendered a major shift in perception towards social assistance, underlining the crucial necessity of such programs. Consequently, in the post-World War II era, developed economies commenced the construction of comprehensive ‘welfare states’ – essentially, states in which the government plays a key role in the protection and promotion of the economic and social well-being of its citizens. As recently as 2019, spending on welfare constitutes an average of approximately 20% of the Gross Domestic Product (GDP) across countries of the Organization for Economic Cooperation and Development (OECD).
Welfare-to-work programs: Welfare-to-work programmes are initiatives designed to incentivize employment among welfare recipients through measures like job training, education and relevant tax credits for both individuals and companies.
Expanded Definition
‘Welfare-to-Work’ programs are strategic initiatives that motivate individuals receiving welfare support to secure employment, while also incentivizing employers to facilitate these opportunities. To bridge the transition from welfare to employment, the program provides resources such as vocational training and educational opportunities for potential employees. Concurrently, to mitigate the potential financial impact on individuals no longer receiving benefits, they may receive tax credits or similar income supplements. On the employers’ side, the program encourages hiring through various tax benefits or incentives. The ultimate goal of such programs is to reduce dependency on welfare and promote self-sufficiency through gainful employment.
Wholesale: Wholesale refers to the bulk selling of products to retailers who then resell to consumers.
Expanded Definition
‘Wholesale’ refers to the commercial practice of acquiring goods in substantial volumes in order to sell them onward, typically not to the end consumers but to other operators in the supply chain such as distributors, retailers, or professional users. It involves the bulk purchase of goods from manufacturers or producers at a low cost, taking into consideration economies of scale, with the intention of redistributing these goods in smaller allotments for a profit. Essentially, the wholesale function operates as a vital link between the producer and retail sectors, enabling the flow of goods to various marketplaces and segments for ultimate purchase by the end consumers.
Willingness to pay: ‘Willingness to pay’ is the highest price a customer is prepared to spend on a product or service.
Expanded Definition
‘Willingness to pay’ refers to the highest monetary value that a consumer is prepared to offer in exchange for a specific good or service. This is a key concept in economic theory and marketing research that helps to understand pricing thresholds, capture consumer perceived value, and formulate pricing strategies. It elucidates consumers’ purchasing behavior and decision-making process, showing how much they value the benefits that the product or service provides. The concept encompasses both purchased products and those yet to be bought, and can be influenced by factors such as income level, personal preferences, alternative options and perceived quality of the good or service.
Windfall gains: Windfall gains refer to sudden and unexpected increases in wealth, like an inheritance or lottery win. According to the permanent income hypothesis, these should be largely saved, but consumer behavior often varies.
Expanded Definition
‘Windfall gains’ refer to any substantial amount of money or assets received abruptly and unexpectedly. Common examples include lottery wins, significant inheritance, or a substantial legal settlement. The ‘Permanent Income Hypothesis,’ a theory in economics, suggests that individuals would usually choose to save or invest the majority of such significant, unexpected gains instead of spending them immediately. However, it’s important to note that individual behaviors can widely vary, and not everyone conforms to the hypothesis, with some choosing to spend a larger portion of their windfall gains.
Windfall taxes: Windfall taxes are specific levies imposed on companies that experience considerable profit increases following an economic shift, though their efficacy is debated due to potential stifling of future investment.
Expanded Definition
“Windfall taxes” refer to the fiscal charges enforced upon corporations that have experienced substantial profit increases, often due to unanticipated economic shifts. These surges in profit may come from geopolitical events, market deregulation, or substantial changes in commodity prices. A recent illustration of this was seen with certain energy companies experiencing significant profit increases following Russia’s invasion of Ukraine in 2022, which led to their incomes being subject to windfall taxes. However, the application of windfall taxes is a complicated subject of discussion within economic circles. Critics argue that such taxes may deter businesses from future investment, as they seek to safeguard their financial health against potential downtrends in profitability. Additionally, businesses often rely on occasional high-profit periods to counterbalance any losses they may incur during less economic prosperous frames. These push-pull dynamics make windfall tax policies a contentiously debated fiscal instrument. For a more detailed examination of opposing viewpoints on this topic, refer to the linked article provided.
Winner-takes-all markets: ‘Winner-takes-all markets’ refer to economic environments where top performers secure a disproportionately large share of market rewards, while the remaining competitors receive significantly less or even negligible profits.
Expanded Definition
‘Winner-takes-all markets’ refer to highly competitive markets where the majority of the rewards are accumulated by a small number of top-performing individuals or entities. This phenomenon is prevalent in industries where performance is highly valued and publically noticeable, such as entertainment, sports, and high-level professional services. For example, many individuals may have talents in singing or playing football, yet the vast proportion of revenue is earned by those outstanding performers who can fill large concert venues or participate in premier league clubs. Similarly, in professional sectors such as accounting, law, or fund management, those who are perceived as the best in their field tend to attract a larger client base and, consequently, command significantly higher fees. These markets are distinguished by their sharp disparity in rewards between the most successful participants and the rest, thereby creating a disproportionately skewed distribution of income and wealth.
Withdrawal: ‘Withdrawal’ is the act of removing funds from an account.
Expanded Definition
‘Withdrawal’ can be comprehensively defined as the act of removing a specific amount of money from a personal or business account. This can include various types of accounts such as checking, savings or investment accounts. The process may be executed through different methods such as using an ATM, writing a check, or making an electronic transfer. The withdrawal decreases the balance of the account accordingly. It’s essential to ensure enough funds are available in the account to avoid potential fees or penalties.
Withholding allowance: A withholding allowance is a set deduction from an employee’s paycheck that the employer pays to the government as an advance on the employee’s tax liability. It covers federal, Social Security, and in some cases, state and local income taxes.
Expanded Definition
A ‘withholding allowance’ is a predetermined amount of an employee’s income that an employer retains from their paycheck to satisfy various tax obligations. These funds are held as an in-advance payment towards the employee’s year-end tax liabilities and are later contributed directly to government entities on behalf of the employee. The amounts withheld serve specific purposes; such as contributions to federal income taxes, the Social Security Program, and, where applicable, state and local income taxes. Once the employee files their annual tax return, these withheld amounts are credited against the total tax liability, possibly leading to a refund if the withholdings exceeded the tax obligation.
Withholding tax: Withholding tax is a charge deducted from income, such as wages, dividends, or interest, before it’s disbursed to the recipient. It represents a pre-collection of tax liabilities.
Expanded Definition
“Withholding tax” refers to the process by which governmental and fiscal entities require diverse sources of income to be taxed at the moment they are generated, rather than at a later date. This pre-emptive levying practice applies to the monetized yields of certain transactions, involving interest or dividends, for example. Additionally, withholding tax is commonly executed on employment income, withholding the tax directly from employee’s salaries before they are dispersed. The main objective of this tax system is to ensure that the tax owed is collected in advance, minimizing the risk of non-payment or underpayment in the future, thereby facilitating a steady stream of revenue for the government.
Working from home (WFH): Working from home (WFH) is a practice, popularized during the COVID-19 pandemic, where office-based employees conduct their duties remotely using digital tools, leading to the rise of hybrid working models. It has proven, for the most part, to not greatly impact productivity.
Expanded Definition
‘Working From Home’ (WFH) is a trend that significantly increased during the COVID-19 pandemic due to many office-based workplaces shutting down to curb the spread of the virus. This situation prompted a shift to remote work, primarily affecting occupations within sectors like administrative or professional services, and not as much in industries such as retail or manufacturing, where physical presence is essentially required. Advanced technology facilitated this transition, with video conferencing and other digital communication tools enabling businesses to maintain continuity. While the transition induced concerns about potential productivity drops, there were no substantial indications that productivity was adversely affected on a large scale. As the world began to regain control over the pandemic, a new ‘hybrid’ model of work gained traction, integrating both remote and in-office work, dependent on the ability of the role to adapt to such a model. For more in-depth information, please refer to our ‘Special Report’.
Workout: A workout is a revision of loan terms or lender concessions to prevent a borrower’s default, foreclosure, or bankruptcy.
Expanded Definition
‘A workout’ refers to a proactive financial strategy in which the conditions of a loan are altered or the lending party consciously allows some degree of latitude. This approach is deemed necessary to alleviate a potential default situation, where the debtor is unable to meet scheduled payments, thus preventing severe outcomes such as foreclosure on property or bankruptcy. This strategy serves as a preferable compromise for the lender to recover as much of the debt as possible, as well as providing the debtor a means to protect their resources and maintain credit status.
World Bank: The World Bank is an international financial institution that primarily offers loans and consultation to developing nations, in addition to conducting research on global issues like poverty and migration.
Expanded Definition
The World Bank is a globally recognized financial institution, established as part of the Bretton Woods agreement alongside the International Monetary Fund. With a primary focus on offering financial assistance and advisory services to developing nations, the World Bank plays a pivotal role in fostering economic development and reducing poverty. It extends loans at preferential rates and gives developmental aids to these nations to improve infrastructure, healthcare, education, and more. In addition to its funding functions, the World Bank also conducts deep-dive research on pressing global issues such as poverty reduction strategies, population migration trends, and international development, providing valuable insights and data to guide policy decisions. Please refer to this ‘Explainer’ to learn more about the extensive work of the World Bank.
World Economic Forum: The World Economic Forum (WEF) is a prominent global research and conference organization, renowned for its annual meeting held in Davos, Switzerland, which assembles influential leaders and thinkers worldwide.
Expanded Definition
The World Economic Forum (WEF) is a prominent international organization known for conducting extensive research and forging public-private partnerships to tackle global issues. Recognized for its annual conference held in Davos, Switzerland, it convenes leaders from various fields including business, politics, academia and civil society to debate and shape global, regional and industry agendas. This renowned meeting often creates buzz, epitomized by the colloquial reference to “Davos man” which signifies influential individuals typically espousing progressive ideas. However, due to its exclusivity and decision-making impact, it has also been the subject of speculation and conspiracy theories. The forum’s main aim, however, remains focused on fostering cooperation and dialogue to work towards commonly defined goals and challenges.

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Yield: ‘Yield’ is the average income return on a bond, reflective of its purchase price, coupon rates, and maturity timeframe.
Expanded Definition
“Yield” refers to the average income return on an investment, typically expressed as a percentage, on an annual basis. In the context of a bond investment, yield is calculated based on the original purchase price, the periodic interest payments known as coupon payments, and the time remaining to the bond’s maturity date. It is an essential measure in bond investing because it allows investors to compare the potential returns among various bonds. The concept of yield accounts for both the bond’s current market price and its projected income payments, providing a comprehensive view of the bond’s profitability over time.”
Yield curve: A yield curve is a chart displaying the interest rates of bonds varying by maturity date, offering insights into future interest rate changes and economic activity.
Expanded Definition
A yield curve is a graphical representation that plots the interest rates on debt for a range of maturities. It illustrates the yields of bonds – typically government bonds – with varying maturity dates, from the shortest to the longest term. This curve provides valuable insights into the future predictions of interest rate movement and economic activity. A normal yield curve slopes upward, reflecting higher yields for bonds with longer maturities, a phenomenon often attributed to the risks associated with long-term investments. However, yield curves can also be flat or inverted, which typically signal economic disturbances. Viewing a yield curve provides investors, economists, and policy makers with essential information about the conditions within the financial markets and the overall economy.

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Zero coupon bond: A zero coupon bond is a debt security sold at a discount that does not pay periodic interest, instead providing a profit at maturity when it’s redeemed for its face value. This can offer tax benefits in places where capital gains are taxed less than interest income.
Expanded Definition
A zero coupon bond is a type of debt security that does not distribute periodic interest payments to its investors. Instead, it is issued or sold at a price lower than its face value, also known as a discount. Upon reaching its maturity date, the bondholder is paid the full face value. The difference between the purchase price and the face value represents the bondholder’s return or profit. The tax implications vary, as some regions might offer favorable treatment for capital gains – which is how profits from zero coupon bonds are classified – compared to regular interest income.
Zero lower bound: The ‘Zero lower bound’ refers to the theoretical limit on how low central banks can set interest rates, traditionally assumed as zero, though recent experiences have shown instances of negative rates for commercial banks.
Expanded Definition
The ‘Zero Lower Bound’ is an economic term relating to the monetary policy operations of central banks. It refers to the theoretical lower limit of interest rates at zero percent. Traditionally, it was posited that central banks, in their ceaseless quest to manage economic performance, could not enforce a negative interest rate policy as it implies a charge to depositors for holding their money in a bank, which seemed counterintuitive and unfeasible. However, following the financial crisis of 2007-09, it was empirically proven that central banks can, indeed, introduce negative interest rates, albeit predominantly for commercial banks and not typically for individual accounts. This realization expanded the monetary policy toolkit available to central banks, challenging the fundamentals of the ‘Zero Lower Bound’ concept. Further exploration of this topic, as well as its implications, can be found in this featured article.
Zero-hours contracts: Zero-hours contracts are employment agreements within the gig economy where workers are only called upon when needed, resulting in variable income and less job security.
Expanded Definition
‘Zero-hours contracts’ refers to a type of employment agreement, predominantly observed within the gig economy, that provides substantial flexibility to employers at the cost of diminished job stability for workers. In such contracts, employees are called upon only when their services are required. Therefore, the predictability of their income, availability for other employment opportunities, or commitments such as childcare can be uncertain. This is because their work schedule and consequently, their earnings, can fluctuate based on the varying needs of the employer.
Zero-sum game: A zero-sum game is an economic concept where the gains of one party are exactly offset by the losses of another, implying a finite resource pool. It’s often cited as a rationale for protectionism, despite common economic consensus favoring open trade for mutual benefit.
Expanded Definition
A ‘zero-sum game’ is a theoretical scenario in economic or strategic contexts, where one participant’s gains or losses are exactly counterbalanced by the losses or gains of other participants. This concept implies that the total resource pool remains the same and is merely distributed differently among players. In the context of international trade, a protectionist viewpoint may suggest this zero-sum game, arguing that a country’s economic gain can only occur at the cost of another country. However, mainstream economics generally advocate for open trade, asserting that it fosters shared benefits and promotes overall growth through a principle known as ‘comparative advantage’. This counter argument rebukes the zero-sum game perspective by emphasizing that countries can specialize in producing certain goods more efficiently than others, leading to increased trade and shared prosperity.

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