ECONOMIC TERMS GLOSSARY.pdf

8/20/2019 ECONOMIC TERMS GLOSSARY.pdf

1/12

[1]©Chronicle IAS Academy

C H

R O

N I C L E

I A S

A C A

D E M Y

ECONOMIC TERMS

GLOSSARY

CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE

Absolute Poverty: Poverty defined withrespect to an absolute material standard of living. Someone is absolutely poor if theirincome does not allow them to consumeenough to purchase a minimum bundle of consumer goods and services (includingshelter, food, and clothing). An alternativeapproach is to measure relative poverty.

• Accelerator, Investment: Investmentspending stimulates economic growth,

which in turn stimulates further investmentspending (as businesses enjoy strongerdemand for their products). This positivefeedback loop (investment causes growthwhich causes more investment) is called theaccelerator.

• Balanced Budget: An annual budget (suchas for a government) in which revenuesperfectly offset expenditures, so that thereis neither a deficit nor a surplus.

• Bank for International Settlements: Aninternational financial regulatory organiza-tion based in Berne, Switzerland, whichdesigns international regulations regardingcapital adequacy and other banking practices.The BIS is governed by governmentappointees from the world’s largest capitalisteconomies.

• Banking Cycle: An economic cycle whichresults from cyclical changes in the attitudesof banks toward lending risk. When

economic times are good, bankers becomeoptimistic that their loans will be repaid,and hence they expand their lending. Morecredit means even stronger economic times,and so on. The opposite occurs when theeconomy becomes weaker: bankers begin tofear more defaults on their loans, hence theyissue fewer loans, and hence the economyweakens even further.

• Bill of Exchange:

There are 3 parties in the bill of Exchange.

BEO is a written negotiable Instrument whichcontains an unconditional order which is

1. Signed by the Maker

2. Directs a certain person to pay

3. Certain sum of Money only to Certainperson or the bearer.

The parties are Drawer, Drawee and Payee.Drawer:

The person who orders to pay Drawee:

The person who is directed to pay Payee:

The person who is authorized to obtain apayment

Please note that A minor can be a Drawer butnot a Drawee because he can not incur liability.Once the Drawee accepts the BOE, he becomesacceptor.

• Bond: A financial security which representsthe promise of its issuer (usually a companyor a government) to repay a loan over aspecified time period, at a specified rate of interest. The bond can then be bought andsold to other investors, over and over again.When the rate of interest falls, bond pricesrise (and vice versa) – since when interestrates are lower, the bond’s promise to repayinterest at the specified fixed rate becomesmore valuable.

• Capital: Broadly defined, capital representsthe tools which people use when they work,in order to make their work more

productive and efficient. Under capitalism,capital can also refer to a sum of moneyinvested in a business in hopes of generatingprofit. (See also: circulating capital, fixedcapital, human capital, machinery andequipment, physical capital, and structures.)

• Capital Adequacy: Capital adequacy rulesare loose regulations imposed on private

banks, in hope of ensuring that they havesufficient internal resources (including themoney invested by the bank’s own

shareholders) to be able to withstandfluctuations in lending and profitability.

• Capital Flight: A destructive process in


2/12

[2] ©Chronicle IAS Academy

C H

R O

N I C L E

I A S

A C A

D E M Y

which investors (both foreigners anddomestic residents) withdraw their financialcapital from a country as a result of whatare perceived to be non-favourable changesin economic policies, political conditions, orother factors. The consequences of capitalflight can include a contraction in real

investment spending, a dramatic deprecia-tion in the exchange rate, and a rapidtightening of credit conditions. Developingcountries are most vulnerable to capitalflight.

• Capital Gain: A capital gain is a form of profit earned on an investment by re-sellingan asset for more than it cost to buy. Assetswhich may be purchased for this purposeinclude stocks, bonds, and other financialassets; real estate; commodities; or fine art.

• Carbon Tax: An environmental tax which isimposed on products which utilize carbon-

based materials, and hence contribute togreenhouse gas pollution (including oil, gas,coal, and other fossil fuels). The level of thetax should depend on the carbon (polluting)content of each material.

• Commodity: Anything that is bought andsold for money is a commodity – includingproduced goods and services, inputs (such

as capital or raw materials), and evenlabour.

• Consumer Price Index: The consumer priceindex (CPI) is a measure of the overall pricelevel paid by consumers for the various goodsand services they purchase. Retail priceinformation is gathered on each type of product, and then weighted according toits importance in overall consumer spending,to construct the CPI. Monthly or annualchanges in the CPI provide a good measure

of the rate of consumer price inflation.

• Consumption: Goods and services which areused for their ultimate end purpose, meetingsome human need or desire. Consumptioncan include private consumption (byindividuals, financed from their personalincomes) or public consumption (such aseducation or health care–consumptionorganized and paid for by government).Consumption is distinct from investment,

which involves using produced goods andservices to expand future production.

• Corporation: A corporation is a form of business established as an independent legal

entity, separate from the individuals whoown it. A major benefit, for the owners, of this form of business is that it provides forlimited liability for its owners: potential lossesresulting from their ownership of thecompany (should it lose money, face legaldifficulties, or experience other problems) are

limited to the amount initially invested bythe owners. The owners’ other personalwealth is kept separate and protected fromclaims against the corporation. Thecorporation is thus well-suited to the jointstock form of ownership.

• Corporatism: A system for managing wagedetermination and income distribution, inwhich wage levels are determined centrally(across industries or even entire countries)on the basis of productivity growth,

profitability, and other parameters, followingsome process of consultation or negotiationinvolving unions, employers, and oftengovernment. Variants of this system are usedcommonly in Scandinavia, parts of continental Europe, and parts of Asia.

• Counter-Cyclical Policies: Governmentscan take many different actions to offset theongoing booms and busts of the private-sector economy. These policies include fiscal

policies (increasing government spendingwhen the economy is weak), monetarypolicies (cutting interest rates when neededto stimulate more spending), and socialpolicies (like unemployment insurance) tomaintain household incomes and spendingeven in a downturn.

• Credit: The ability to purchase somethingwithout immediately paying for it – througha credit card, a bank loan, a mortgage, orother forms of credit. The creation of credit

is the most important source of new money,and new spending power, in the economy.

• Credit Squeeze: At times private banks become reluctant to issue new loans andcredit, often because they are worried aboutthe risk of default by borrowers. This iscommon during times of recession or financialinstability. A credit squeeze can dramaticallyslow down economic growth and job-creation.

• Cash Reserve Ratio: The Cash ReserveRatio is the amount of funds that the banksare bound to keep with Reserve bank of India, with reference to the demand and


3/12


C H

R O

N I C L E

I A S

A C A

D E M Y

time liabilities (NDTL) to ensure the liquidityand solvency of the Banks. Please note thatearlier RBI was empowered to fix RBI

between 3-20% by notification. However,from 2006 onwards the RBI is empoweredto fix the CRR on its discretion without anyceiling. The CRR is maintained fortnightly

average basis.• Capital to Risk Weighted Assets: It is a

standard metric to measure balance sheetstrength of banks. BASEL I and BASEL IIare global capital adequacy rules thatprescribe a minimum amount of capital a

bank has to hold given the size of its riskweighted assets. The old rules mandate

banks to back every Rs. 100 of commercialloans with Rs. 9 of capital irrespective of the nature of these loans. The new rules

suggest the amount of capital neededdepends on the credit rating of the customer.The Risk Weighted Assets refer to the fund

based assets such as Cash, Loans,Investments and other assets. This meansthat they are the total assets owned by theBanks, however, the value of each asset isassigned a risk weight (for example 100%for corporate loans and 50% for mortgageloans) and the credit equivalent amount of all off-balance sheet activities. Each creditequivalent amount is also assigned a riskweight.

• ‘Current Account Deficit’: A measurementof a country’s trade in which the value of goods and services it imports exceeds thevalue of goods and services it exports. Thecurrent account also includes net income,such as interest and dividends, as well astransfers, such as foreign aid, though thesecomponents tend to make up a smaller

percentage of the current account thanexports and imports. The current account isa calculation of a country’s foreigntransactions, and along with the capitalaccount is a component of a country’s

balance of payment.

• Debt: The total amount of money owed byan individual, company or otherorganization to banks or other lenders istheir debt. It represents the accumulatedtotal of past borrowing. When it is owed by

government, it is called public debt, and itrepresents the accumulation of past budgetdeficits.

• Debt Burden: The real economic importanceof a debt depends on the interest rate thatmust be paid on the debt, and on the totalincome of the consumer or business thatundertook the loan. For public debt, the mostappropriate way to measure the debt burdenis as a share of national GDP.

• Deficit: When a government, business, orhousehold spends more in a given period of time than they generate in income, theyincur a deficit. A deficit must be financedwith new borrowing, or by running downprevious savings.

• Deflation: A decline in the overall averagelevel of prices. Deflation is the opposite of inflation.

• Depreciation: This represents the loss of value from an existing stock of real capital

(for an individual company or for the wholeeconomy), reflecting the normal wear-and-tear of machinery, equipment, andinfrastructure. A company or country mustinvest continuously just to offsetdepreciation, or else its capital stock willgradually run down.

• Depression: A depression is a very deep,long, and painful recession, in whichunemployment rises to very high levels, andeconomic output does not bounce back.

• Derivatives: A derivative is a financial assetwhose resale value depends on the value of other financial assets at different points intime. Its value is thus “derived” from thevalue of other financial assets, and is hencevery difficult to predict. Examples of derivatives include futures, options, andswaps.

• Discretionary Fiscal Policy: Somegovernment taxing and spending programs

can be adjusted by government in responseto changing economic circumstances. Thesediscretionary measures (increasing ordecreasing particular taxes or spending) areusually used as a counter-cyclical policy.

• Distribution: The distribution of incomereflects the process by which the real outputof goods and services produced by theeconomy is allocated to different individualsand groups of people. Distribution can bemeasured across individuals (comparing

high-income and low-income households),or across classes (comparing the incomes of workers, small businesses, and capitalists).


4/12


C H

R O

N I C L E

I A S

A C A

D E M Y

• Dividends: Many companies pay a cashdividend (quarterly or annually) to theowners of its shares. This is an enticementto investors to purchase that company’sshares, and represents a way of distributingsome of a company’s profits to its ultimateowners. Individual investors can capture

profits in other ways, as well – such asthrough capital gains.

• Economic Growth: Economic growth is theexpansion of total output produced in theeconomy. It is usually measured by theexpansion of real GDP.

• Economies of Scale: Most economicproduction requires the producing firm ororganization to make an initial investment(in real capital, in engineering and design,in marketing) before even the first unit of production occurs. As total production thengrows, the cost per unit of that initialinvestment shrinks. For this reason, mostindustries demonstrate economies of scale,whereby the unit cost of production declinesas the level of output grows. Because of economies of scale, larger companies havean advantage in most industries, and theeconomy usually operates more efficientlywhen it is busy and growing (than when it

is shrinking or stagnant).• Effective Demand: The theory of effective

demand was developed separately in the1930s by John Maynard Keynes and MichalKalecki. It explains why the capitalisteconomy is normally limited by the totalamount of spending (that is, the economy isdemand-constrained ), and hence whyunemployment almost always exists.

• Employment: Employment is a specific formof work, in which the worker performs their

labour for someone else in return for amoney wage or salary.

• Employment Rate: This measures the shareof working age adults who are actuallyemployed in a paying position. Theemployment rate can be a better indicatorof the strength of labour markets than theunemployment rate (since the unemploymentrate depends on whether or not a non-working individual is considered to be “in”

the labour force).• Enclosures: A historic process in Britain and

other European countries, in the very early

years of capitalism, in which lands formerlyheld and used in common were fenced off and formally assigned to private owners.This painful and often violent process wasessential to the creation of a landless,desperate new class of people who werecompelled to work in the new industrial

factories.• Environmental Taxes: Taxes which are

imposed on particular activities, orparticular products, which are consideredto be especially damaging to theenvironment, with the goal of changingeconomic behaviour and reducing pollution.A carbon tax is an important example of anenvironmental tax.

• Equilibrium: In neoclassical economics,equilibrium exists when supply equals

demand for a particular commodity. Generalequilibrium is a special (purely hypothetical)condition in which every market (includingmarkets for both final products and factors of production, the latter including labour) is inequilibrium.

• Equity: The proportion of a company’s totalassets which are “owned” outright by thecompany’s owners. A company’s equity isequal to its value less its debt owed to

bankers, bond-holders, and other lenders.

• Exchange Rate: The “price” at which thecurrency of one country can be convertedinto the currency of another country. Acountry’s currency is “strong,” or itsexchange rate is “high,” if it can purchasemore of another country’s currency. Acountry’s currency appreciates when itsvalue (compared to other currencies) grows;it depreciates when its value falls.

• Exports: An export is the sale of a product

from one country (either a good or a service)to a purchaser in another country.

• Externalities: Many economic activities havecollateral effects (sometimes positive, butmore often negative) on other people whoare not directly involved in that activity.Examples of externalities include pollution(which imposes a cost on the naturalenvironment and everyone who uses it),congestion (which slows down travel andproductivity), and the spill-over impacts of

major investment or plant closure decisions.• Factors of Production: The basic productive

resources (labour, capital, and natural


5/12


C H

R O

N I C L E

I A S

A C A

D E M Y

resources) that are essential inputs to everyeconomic activity.

• Feudalism: A type of economy (such as thatin Europe in the Middle Ages) that isprimarily agricultural, but productiveenough to support a class of artisans andmerchants. Feudal societies are composed

of two main social classes: nobles andpeasants. The nobility extracted theagricultural surplus from peasants througha system of tradition, mutual obligation, and(when necessary) brute force

• Fiscal deficit: When a government’s totalexpenditures exceed the revenue that itgenerates (excluding money from

borrowings). Deficit differs from debt, whichis an accumulation of yearly deficits. A fiscaldeficit is regarded by some as a positive

economic event. For example, economist JohnMaynard Keynes believed that deficits helpcountries climb out of economic recession.On the other hand, fiscal conservatives feelthat governments should avoid deficits infavor of a balanced budget policy

• Final Products: Products (either goods orservices) which are intended for finalconsumption. They are distinct fromintermediate products, which are productsused in the production of other products

(such as raw materials, capital goods, orproducer services).

• Finance: Monetary purchasing power,typically created by a bank or otherfinancial institution, which allows acompany, household, or government tospend on major purchases (often on capitalassets or other major purchases).

• Financialization: The trend underneoliberalism through which real production

in the economy is accompanied by anincreasing degree of financial activity andintermediation (including various forms of lending, financial assets, and securitization).One way to measure financialization is bythe ratio of total financial assets to realcapital assets in an economy.

• Fiscal Policy: The spending and taxingactivities of government constitute its fiscalpolicy.

• Fixed Capital: Real capital which is installed

permanently in a specific location, including buildings, in frastructure , and majormachinery and equipment.

• Flat-Rate Tax: A form of income tax inwhich every taxpayer pays the same rate of tax on their personal income, regardless of their income level. It differs from a progressive tax, in which higher-incomeindividuals pay a higher rate of tax.

• Foreign Direct Investment: An investment

by a company based in one country, in anactual operating business, including realphysical capital assets (like buildings,machinery and equipment), located inanother country.

• Foreign Exchange: The process by whichthe currency of one nation is converted intothe currency of another country.

• Formal Economy: The sector of the economywhich produces goods and services in return

for monetary payment, and is fullyintegrated into the formal structures(including tax systems) of the economy. It isdistinct from the informal economy, in whichproduction and exchange occurs on a non-monetary, subsistence, or barter basis.

• Fractional Reserve System: A bankingsystem in which private banks are requiredto hold a specified proportion of assets onhand in their banks, to underpin a muchlarger amount of lending to the bank’s

customers.• Free Trade Agreements: An agreement

between two or more countries whicheliminates tariffs on trade between thecountries, reduces non-tariff barriers to trade,cements rights and protections for investorsand corporations, and takes other measuresto guarantee a generally liberalized, pro-

business economic environment.

• Full Employment: A condition in which

every willing worker is able to find a paying job within a very short period of time, andhence unemployment is near zero.

• General Equilibrium: Neoclassicaleconomics assumes that production,employment, investment, and incomedistribution are all determined by acondition of equilibrium (with demandequalling supply) in every single market(including markets for both factors of production and produced goods and services).

• Gini Coefficient: A statistical measure of inequality. A Gini score of 0 implies perfectequality (in which every individual receives


6/12


C H

R O

N I C L E

I A S

A C A

D E M Y

the same income). A Gini score of 1 impliesperfect inequality (in which one individualreceives all of the income).

• Globalization: A generalized historicalprocess through which more economicactivity takes place across national borders.Forms of globalization include international

trade (exports and imports), foreign directinvestment, international financial flows, andinternational migration.

• Goods: Tangible products which areproduced in the economy – includingagricultural products, natural resources,manufactured goods, and construction.

• Government Production: Some productionin the economy is undertaken directly bygovernments (or various kinds of government agencies) in order to meet

public needs (as distinct from the productionfor profit which is undertaken by privatecompanies). Examples of governmentproduction include education, health care,policing, and other public services.

• Gross Domestic Product: The value of allthe goods and services produced for moneyin an economy, evaluated at their marketprices. Excludes the value of unpaid work(such as caring reproductive labourperformed in the home). GDP is calculated

by adding up the value-added at each stageof production

• Gross Domestic Product, Deflator: A priceindex which adjusts the overall value of GDP according to the average increase inthe prices of all output. The GDP deflatorequals the ratio of nominal GDP to realGDP.

• Gross Domestic Product, Per Capita: Thelevel of GDP divided by the population of a

country or region. Changes in real GDP percapita over time are often interpreted as ameasure of changes in the average standardof living of a country, although this ismisleading (because it doesn’t account fordifferences in the distribution of incomeacross factors of production and individuals,and it doesn’t consider the value of unpaidlabour).

• Heterodox Economics: Various schools of thought (including post-Keynesian,

structuralist, Marxian, and institutionalisteconomics) which reject the precepts of dominant neoclassical theory.

• Hoarding: A situation in which financialinvestors, companies, or individualconsumers choose to hold hoards of cash orother liquid assets, rather than spendingand re-spending that money. Hoarding oftenresults from intense fears about futureeconomic and financial turbulence – yet

ironically hoarding can create the veryrecession which hoarders fear!

• Households: The basic unit of individualeconomic behaviour. Households offerlabour supply to the labour market, earnincome (from employment and othersources), make consumer purchases, andcare for each other through unpaid labourwithin the home.

• Hyper-Inflation: A situation of extremelyrapid inflation (reaching 100% per year ormore), often resulting from a condition of economic or political breakdown.

• Imports: Goods or services which areproduced in a foreign country andpurchased domestically. Imports includemoney spent on vacations or purchases inforeign countries.

• Industrial Policy: Government policiesaimed at fostering the domestic developmentof particular desirable or productive

industries, in order to boost productivity,create higher-paid jobs, and enhanceinternational trade performance. Tools of industrial policy can include measures tostimulate investment in targeted industries;trade policies (such as tariffs, exportincentives, or limits on imports); andtechnology policies.

• Inequality: The distribution of income acrossindividual households typically demonstratesinequality between higher-income and lower-income households.

• Inflation: A process whereby the average price level in an economy increases over time.

• Informal Economy: The informal sector of the economy represents the production of goods and services for the own-use of theproducers, or for informal or “underground”trade in particular communities (as opposedto the formal economy). It is particularlyimportant in developing countries.

• Innovation: Producers (including privatecompanies) will endeavour to develop newproducts (new goods or services) and new


7/12


C H

R O

N I C L E

I A S

A C A

D E M Y

processes (new ways of producing thosegoods or services), with the goal (in acapitalist context) of enhancing marketshare and hence profitability. Moregenerally, innovation simply refers to finding

better ways to produce better goods andservices.

• Interest: A lender charges interest as theprice of lending money (or some other asset)to a borrower. Interest is typically chargedas a specified percentage of the loan’s value,per specified time period (eg. percent peryear).

• Intermediate Products: Products (including both goods and services) which are notproduced in order to be consumed, butrather are produced in order to be used inthe production of some other good or service.Capital goods and raw materials areexamples of intermediate products.

• International Monetary Fund: Aninternational financial institution establishedafter World War II with the goal of regulating and stabilizing financialrelationships among countries, and ensuringfree flow of finance around the worldeconomy. Based in Washington, D.C., it isgoverned by a system which grants

disproportionate influence to the wealthiereconomies (based on their contribution tothe Fund’s operating resources).

• Investment: Investment representsproduction which is not consumed, butrather is utilized in the production of otheradditional output. Investment also representsan addition to the capital stock of aneconomy.

• Joint Stock: A form of business in whichthe company’s assets are jointly dividedamong a large number of different individualowners, each of whom owns a specifiedshare of the company’s total wealth. Jointstock companies are governed by a weightedvoting system in which investors’ influencedepends on the number of shares they own.

• Labour Intensity: The ratio of labour effortexpended, compared to total on-the-jobcompensated labour time. A higher ratio of labour intensity reflects a more successful

employer labour extraction strategy.• Macroeconomics: The study of aggregate

economic indicators such as GDP growth,

employment, unemployment, and inflation.Conventional economics makes a distinction

between macroeconomics andmicroeconomics (the study of individual

businesses or industries).

• Market Income: A household’s total pre-tax income obtained from its activities in

the formal economy, including wages andsalaries, investment income, and small

business profits . Excludes governmenttransfer payments.

• Market Socialism: A form of socialism inwhich productive companies are ownedthrough public or non-profit forms, butrelate to each other through markets andcompetition (with little or no central planning).

• Mercantilism: An economic theory frompre-capitalist times which held that acountry’s prosperity depended on its abilityto generate large and persistent surplusesin its foreign trade with other countries.

• Microeconomics: The study of the economic behaviour of individual “agents” such asparticular companies, workers, orhouseholds.

• Monetarism: Strictly speaking, monetarismwas a right-wing economic theory

(associated with the work of MiltonFriedman, in particular) which believed thatinflation could be controlled or eliminated

by strictly controlling, over long periods of time, the growth of the total supply of money in the economy. This theory wasproven wrong in the 1980s (when it becameclear that it is impossible, in a modernfinancial system, to control the supply of money). More broadly, monetarism believesthat inflation is a major danger to economicperformance, and should be controlledthrough disciplined policies; modern “quasi-monetarists” agree with this view, but nowuse high interest rates (rather than monetarytargeting) to indirectly regulate the moneysupply.

• Monetary Policy: Monetary policy reflectsthe use by government and governmentagencies (especially the central bank ) of interest rate adjustments and other levers

(such as various banking regulations) toinfluence the flow of new credit into theeconomy, and hence the rate of economic


8/12


C H

R O

N I C L E

I A S

A C A

D E M Y

growth and job-creation. A “tight”monetary policy tries to reduce the growthof new credit (through higher interest rates);a “loose” monetary policy tries to stimulatemore credit-creation and hence growth.

• Monetary Targeting: A policy whichattempts to directly limit the growth in the

total supply of money in the economy. Itwas the main policy tool used by strictmonetarists. This policy approach failed inthe 1980s, when it became clear that thesupply of money could not be directlycontrolled by a central authority.

• Money: Broadly speaking, money isanything that can be used as a means of payment (for example, to settle a debt). Itincludes actual currency, bank deposits,credit cards and lines of credit, and various

modern electronic means of payment.• Mortgage: A mortgage is a special kind of

credit, usually longer-term in duration, usedto finance the construction or purchase of property or a long-lasting structure (suchas a home or building).

• Multinational Corporation: A multinationalcorporation (MNC) is a company whichdirectly undertakes productive facilities oroperations in more than one country. Foreigndirect investment is the act of investing in, orexpanding, those actual productiveoperations in other countries.

• Multiplier: An initial stimulus to spending(in the form of new business, consumer, orgovernment purchases) usually results in alarger final increase in total spending,production, and employment in theeconomy. This magnifying effect is calledthe multiplier. The strength of the multiplierdepends on many factors, including the type

of initial spending, the importance of imports in spending, and the amount of unused capacity that initially existed in theeconomy

• Mutual Fund: A financial vehicle whichinvolves pooling investments in the sharesof many different joint stock (or publiclytraded) companies, in order to reduce therisk and overhead costs associated withinvesting in corporate shares. An investor

buys a unit in the mutual fund, and receives

a pro-rated portion of the fund’s totalincome (including both dividends and capital gains).

• Neoclassical Economics: Neoclassicaleconomics is the dominant approach toeconomics currently taught and practicedin most of the world (and especiallydominant in Anglo-Saxon countries). Itattempts to explain the behaviour of theeconomy on the basis of competitive, utility-

maximizing behaviour by companies,workers, and consumers. Their actions inthe markets for both factors of production and final products will ensure that all availableresources are fully utilized (that is, theeconomy is supply-constrained) and everyfactor is paid according to its productivity.

• Neoliberalism: A modern, more harshincarnation of capitalism which becamedominant globally beginning in the early1980s, largely as a reaction to international

economic and political problemsencountered at the end of the postwar“Golden Age.” Neoliberal policies haveemphasized deregulation (including of labour markets), privatization, globalization,and strict monetary policy.

• Nominal GDP: Nominal gross domesticproduct measures the total value of all thegoods and services produced and traded formoney in the formal economy, evaluated at

their current money prices. Nominal GDPcan grow from one period to the next because of an increase in actual (real)output, and/or because of an increase inaverage prices (that is, as a result of inflation).

• Non-Accelerating-Inflation Rate ofUnemployment (NAIRU): This theory is avariant of the neoclassical natural rate of unemployment. As in original natural ratetheory, NAIRU advocates believe that

unemployment cannot be reduced below acertain level without sparking a continuousacceleration in inflation. Unlike the originalnatural rate theory, however, the NAIRUdoctrine does not strictly define this positionas “full employment.” The policyprescriptions of the natural rate and NAIRUtheories are practically identical (namely,don’t try to reduce unemployment throughdemand-side measures, but instead attackunions and minimum wages to allow labour

markets to function more “efficiently”).

• Non-Tradeable: Some products cannot betransported over long distances, or


9/12


C H

R O

N I C L E

I A S

A C A

D E M Y

otherwise sold to consumers from far-off locations. These products (including somegoods and most services) are henceconsidered non-tradeable: they must beconsumed near to where they are produced.Non-tradeable products include mostconstruction, some manufacturing (such as

highly perishable or extremely bulkyproducts), most private services, and nearlyall public services.

Non Performi ng Asset s (NPA):

In simple words, the assets of the Banks whichdon’t perform (means don’t bring any return) arecalled Non Performing Assets. In more generalsense they are “bad Loans”. Any asset, includinga leased asset, becomes non performing when itceases to generate income for the bank. However,there is a prescribed definition by the RBI whichdefines the NPAs as: Terms Loans on which interestand / or installment of principal remain overduefor a particular quarter for a period of more than90 days from the end of that particular quarter.The Bills those remain overdue for a period of Morethan 90 Days from the end of a quarter. Anyamount to be received remains overdue for a periodof more than 90 days. The Cash Credit accountremains out of order for a period of more than 90

days. Out of order means over the sanctioned limit.This period of 90 Days for the above categorieswas 180 days prior to 2004. So 90 Days is thethumb rule in the deciding the NPAs. However,there is an exception to this.

Promissory Not e

PN means a paper with a writing which has apromise. But it does not mean that we write “Iowe You” and it becomes a PN. PN is always inwriting PN has an unconditional undertaking called

promise The promise is to pay money The moneyhas to be paid to the certain person. Please notethat when a person issues a promissory note, he/she would have to stamp it as per the Indian StampAct and normally a revenue stamp is affixed onthe PN signed by the promissory. The PN can beDemand Promissory Note or Usance PromissoryNote. Demand Promissory Note has to be paidimmediately on demand and Usance PromissoryNote has to be paid after certain time period. Thereare two parties in the PN. The maker is whopromises to pay and the payee is who is promisedto pay.

• Paradox of Thrift: An individual household, business, or government may attempt to savemoney by reducing their currentexpenditures. However, those attempts tosave, once amalgamated at the level of theoverall economy, may reduce aggregatespending levels and hence output and

employment, thus undermining overallgrowth or even causing a recession. If thisoccurs, the revenue of households,

businesses, and governments will decline,and overall saving may end up no higher(and potentially be even lower) than beforethe effort to boost savings. Because of thisparadox, it is not usually possible to improveeconomic performance by boosting saving.

• Payroll Tax: A tax levied on currentemployment or payrolls (collected either as

a fixed amount per employee, or as apercentage of total wages and salaries paid).Payroll taxes are most commonly used tofinance employment-related social programs,such as pension or unemployment insuranceprograms.

• Pensions: Pension benefits are paid toindividuals who have retired from activeemployment, in order to support themselvesin the last years of their lives. Pension

programs can be sponsored by governmentsor by individual employers; they can be based on pre-retirement years of service andwage levels, or paid on a universal per-person basis.

• Post-Keynesian Economics: A modernheterodox school of economic thought whichemphasizes the more non-neoclassical orradical aspects of John Maynard Keynes’theories. Post-Keynesians pay primaryattention to the monetary system, and the

impact of monetary behaviour and policieson employment, output, and othereconomic indicators.

• Poverty: A state of having inadequateincome or other resources to support ahousehold or group of households at a basicstandard of living. Poverty can be measuredin absolute or relative terms.

• Poverty Rate: The proportion of individualsor households in a jurisdiction which are

defined as poor, according to either absoluteor relative definitions of poverty.

• Price Level: The overall average level of


10/12


C H

R O

N I C L E

I A S

A C A

D E M Y

nominal prices in the economy can becalculated, most often as a weighted averageof the prices of individual goods and services(with weightings reflecting the importanceof each product in overall spending oroutput). Price levels can be calculated forconsumer spending, for wholesale trade, for

producer inputs, or for any other categoryof production. The most common measuresof the overall price level are the consumer price index and the gross domestic productdeflator.

• Primary Products: Products which areharvested directly from the naturalenvironment, with minimal subsequentprocessing, are considered primary products.These typically include agricultural, fishing,forestry, mineral, and energy products.

• Private Equity: A form of business in whichthe company’s entire equity base is owned

by one or a small group of individualinvestors. Under the private equity model,the company does not issue shares onto thestock market, and hence is not usuallyrequired to release public financialstatements or comply with other securitiesregulations. Private equity firms aregenerally considered to be more ruthlessly

focused on generating shorter-term cashprofits from their operations than joint stock companies.

• Product Markets: The markets whereproduced goods and services are bought andsold (distinguished from markets for factorsof production).

• Progressive Tax: A tax is consideredprogressive if a larger proportionate shareof its total burden falls on individuals withhigher average incomes

• Public Goods: True public goods are thosewhich cannot be provided to one group of consumers, without being provided to anyother consumers who desire them. Thusthey are “non-excludable.” Examples includeradio and television broadcasts, the servicesof a lighthouse, national security, and aclean environment. Private markets typicallyunderinvest in the provision of public goods,since it’s very difficult to collect revenue from

their consumers. More broadly, public goodscan refer to any goods or services provided by government as a result of an inability of the private sector to supply those products

in acceptable quantity, quality, oraccessibility.

• Public Investment: Real investmentspending by government or publicinstitutions on structures, infrastructure,machinery and equipment, and other realcapital.

• Public-Private Partnerships (PPPs): A formof financing public investment, andsometimes the direct provision of publicservices, in which finance is provided byprivate investors (in return for interest), andprivate firms are involved in themanagement of the construction oroperation of the publicly-owned facility.PPPs have been heavily criticized forincreasing the cost of public projects andgenerating undue profits for private

investors.• Real GDP: The value of total gross domestic

product (that is, all the goods and servicesproduced for money in the economy)adjusted for the effects of inflation. In theory,real GDP represents the physical quantityof output.

• Real Interest Rate: The interest rate on aloan, adjusted for the rate of inflation. Thereal interest rate represents the real burdenof an interest payment. Real interest ratesmust be positive for the lender to attain anyreal income from the loan.

• Recession: A condition in which the totalreal GDP of an economy shrinks (usually,for at least two consecutive quarters).

• Recovery: A condition in which real GDP begins to grow again, following a recession.

• Regressive Tax: A tax in which lower-income individuals or households bear aproportionately greater burden of the tax.

Sales taxes are generally consideredregressive (since lower-income householdsdo not generally save, and hence must paythe sales tax on a larger proportion of theirtotal income).

• Relative Poverty: A measure of poverty based on an individual or family’s relativeincome compared to the overall average levelof income in the economy as a whole.Relative poverty thresholds change over timewith growth in overall income levels.

Distinct from absolute measures of poverty,which are defined according to a specifiedlevel of real consumption.


11/12


C H

R O

N I C L E

I A S

A C A

D E M Y

• Sales Tax: A tax imposed as a proportionof consumer spending on specified goods orservices. Also known as a “value-added”tax.

• Securitization: A process in which financialrelationships (such as loans) are convertedinto financial securities or assets (such as

bonds) which can be bought and re-sold insecurities markets.

• Services: A form of output which consistsof a function performed for one person byanother – such as cooking and serving ameal, teaching a lecture, completing atelephone call, or delivering a package.Distinct from goods.

• Shares: Financial assets which represent theownership of a small proportion of the total

equity (or net wealth) of a corporation.Shares can be bought and sold on a stock market.

• Speculation: The purchase of an asset (suchas a financial asset or real estate) purely inthe hope that its market price will increase,allowing a profit (known as a capital gain)to be made on its subsequent resale.

• Stock Market: A place where shares of jointstock corporations are bought and sold. Mostmodern stock markets no longer have a

physical presence, but rather consist of connected computer networks.

• Structuralist Economics: A form of heterodox economics which emphasizes therelationships between effective demand,income distribution, and political andeconomic power.

• Structures: A form of fixed capital consistingof buildings and other large constructedassets (including bridges, pipelines, mines,

highways, etc.).• Tariff: A tariff is a tax imposed on the

purchase of imports. It is usually imposedin order to stimulate more domesticproduction of the product in question(instead of meeting domestic demandthrough imports).

• Taxes: Compulsory government leviescollected to pay for public spending. Thereare many different types of taxes (income,

corporate, sales, wealth, payroll, andenvironmental taxes); each has a differentimpact on the economy, and on differentgroups within the economy.

• Terms of Trade: The ratio of the averageprice of a country’s exports, to the averageprice of its imports, is its terms of trade. Intheory, an improvement in a country’sterms of trade raises its real income (since itcan “convert” a given amount of its ownoutput into a larger amount of consumable

products through trade) – although inpractice it depends on how those terms of trade gains are distributed.

• Transfer Payments: Governments typicallyredistribute a share of tax revenues back tospecified groups of individuals in the formof various social programs (such as welfare

benefits, unemployment insurance, publicpensions, or child benefits). These transferpayments supplement the market income of the households which receive them

• Underdevelopment: Poor countries can beprevented from progressing through thestages of economic development by barrierssuch as specialization in natural resources,an overdependence on foreign investment,and an inability to stimulate higher-valuemanufacturing and services industries.

• Unemployment: Individuals who would liketo be employed, and are actively seekingwork, but cannot find a job, are considered“officially” unemployed. Individuals whoare not working, but not actively lookingfor work, are considered to be outside of the labour force, and hence don’t count as“officially” unemployed.

• Unemployment Rate: The number of unemployed people measured as a proportionof the labour force.

• Value Added: The value added in aparticular stage of production equals thevalue of total output, less the value of

intermediate products (including capitalequipment, raw materials, and othersupplies). By definition, value added isascribed to the various factors of production(including the wages paid to workers, theprofit paid to a company’s owners, andinterest paid to lenders). Value added in thetotal economy equals its gross domestic product (GDP).

• Wage Labour: A form of work in whichemployees perform labour for others, under

their direction, in return for wages orsalaries. The employer owns and controlsthe product of the labour


12/12


C H

R O

N I C L E

I A S

A C A

D E M Y

• ‘Wholesale Price Index - WPI’: measure of changes in the prices charged bymanufacturers and wholesalers. Wholesaleprice indexes measure the changes incommodity prices at a selected stage orstages before goods reach the retail level;the prices may be those charged by

manufacturers to wholesalers or bywholesalers to retailers or by somecombination of these and other distributors.

• Wealth Tax: A tax in which owners of particular forms of wealth (such as financialwealth, real estate, or inheritances) mustpay a specified proportion of that wealth tothe government, usually on an annual basis

• Working Capital: A business requires acertain revolving fund of finance to pay forregular purchases of raw materials, initiallabour, and other inputs to production.Working capital may refer to the actualphysical inventory of raw materials andgoods-in-production, or it may refer to thefinancial resources required on a normal

basis to pay for those things.

• World Bank: An international financialorganization formed after World War II and

based in Washington D.C. Its supposed goalis to promote the economic development of poor regions of the world throughsubsidized loans, economic advice, and otherforms of assistance, but in practice it has

played an important role in reinforcingneoliberal economic policies in developingcountries, including through the aggressiveuse of conditionality strategies.

• World Trade Organization: Aninternational economic organization formedin 1995 and based in Geneva, Switzerland,which is dedicated to promoting greatertrade and investment among its members.Most countries in the world now belong tothe WTO, and hence have committed to

reducing tariffs on imports, reducing non-tariff barriers to trade, reducing restrictionson foreign investment, and generallyfollowing a pro-market vision of economicdevelopment.

Documents

ECONOMIC TERMS GLOSSARY.pdf