Glossary
Barter – The trade in which merchandise is exchanged directly for other merchandise. No money is used. Barter is important in countries using currency not readily convertible to another form of currency. Budget - a plan for the use of money based on goals and expected income and expenditures. Bank, commercial - A financial
institution accepts checking deposits, holds savings, sells traveler's checks and performs
other financial services. Capital formation - The use of money and other resources to increase inventories, to produce new plants, tools and equipment, which will improve productive capacity. Comparative advantage - The principle of comparative advantage states that a country will specialize in the production of goods in which it has a lower opportunity cost than other countries. Competition - The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. Consumers - People whose wants are satisfied by consuming a good or a service. Consumption - The total spending made on consumer goods & services by individuals or a nation during a given period. Strictly speaking, consumption should apply only to those goods totally used, enjoyed, or "eaten up" within that period. In practice, consumption expenditures include all consumer goods bought, many of which last well beyond the period in question --e.g., furniture, clothing, and automobiles. Consumer spending
- The purchase of consumer goods and services. Capitalism - An economic system, in which the means of production are privately owned, controlled and which is characterized by competition and the profit motive Cost push inflation - Price increases stemming from production cost increases rather than increased demand Cartel: a group of firms acting together to coordinate output decisions and control prices as if they were a monopoly firm Ceteris paribus: a Latin phrase meaning "other things being equal." It is used to remind the reader that all variables other than the ones being studied are assumed to be constant. Consumer price index (CPI): the price index most commonly used to measure the impact of changes in prices on households. The index is based on a standard market basket of goods and services purchased by a typical urban family. Capital Markets - The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded. Central Bank - The principal monetary authority of a nation, a central bank performs several key functions, including issuing currency and regulating the supply of credit in the economy. The RBI is the Central Bank of India. Central Bank Intervention – The buying or selling of currency, foreign or domestic, by central banks, in order to influence market conditions or exchange rate movements. Crowding out - The claim that an increase in government borrowing or expenditure leads to a reduction in private investment through higher interest rates. Currency appreciation - An increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency. Currency revaluation - A deliberate upward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold. Currency Depreciation - A decline in the value of one currency relative to another currency. Depreciation occurs when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency. Currency devaluation - A deliberate downward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold. Current account
balance - The difference between the nation's total exports of goods, services, and
transfers and its total imports of them. Current account balance calculations exclude
transactions in financial assets and liabilities. Dirty Float - A type of floating exchange rate that is not completely freely floating because central banks intervene from time to time to alter the rate from its free-market level. It is still a floating rate because it has not been pegged at a predetermined par value. Deficit Financing - A situation in which government spending exceeds government income, with the difference covered by borrowing. Depression - A severe decline in business activity frequently accompanied by high unemployment, low production, curtailed consumer buying restricted credit, etc. Dumping - Exporting products to a country for sale-- at below actual market price to break down competition Deflation - A
sustained and continuous decrease in the general price level. Demand - the various quantities of product consumers are willing able to purchase across a range of prices during a specified period of time. A table (demand schedule) or a graph (demand curve) may represent demand. Demand curve -
a curve (set of points on a graph) which shows the various amounts of a product consumers
are willing and able to purchase across a range of prices during a specified period of
time. Economic growth - An increase in the total output of a nation over a period of time is called economic growth. Economic growth is usually measured as the annual rate of increase in a nation's real GDP. Economic system - The
collection of institutions, laws, activities, controlling values, and human motivations
that collectively provide a framework for economic decision making. Economies of scale - An increase in the factors of production, as in market production resulting in a proportionate greater increase in productivity output per unit of production. Eurodollars - U.S. dollars placed on deposit in banks outside the United States Economic shocks - Events that impact the economy, come from outside it, are unexpected and unpredictable (e.g., Hurricane Andrew in 1991, the rise in oil prices by OPEC). Fiscal policy - The federal government's decisions about the amount of money it spends and collects in taxes to achieve a full employment and non-inflationary economy. It is of two types -
Fixed exchange rates system - Exchange rates between currencies, that is set at predetermined levels and doesn’t move in response to changes in supply and demand.
Foreign currency operations - Purchase or sale of the currencies of other nations by a central bank for the purpose of influencing foreign exchange rates or maintaining orderly foreign exchange markets. Also called foreign-exchange market intervention. Forwards - A type of foreign exchange transaction whereby a contract is made to exchange one currency for another at a fixed date in the future at a specified exchange rate. By buying or selling forward exchange, businesses protect themselves against a decrease in the value of a currency they plan to sell at a future date. Futures - Contracts that require delivery of a underlying asset of specified quality and quantity, at a specified price, on a specified future date. Futures are traded on an exchange and are used for both speculation and hedging. Fiat money: anything that serves as a means of payment by government declaration Free trade - Absence of tariffs and regulations designed to curtail or prevent trade among nations, an atmosphere in which impediments to trade among nations are removed. Functions of money - The roles played by money in an economy. These roles include medium of exchange, standard of value, and store of value. Full employment - A term that is used in many senses. Historically, it was taken to be that level of employment at which no (or minimal) involuntary unemployment exists. Today economists rely upon the concept of the natural rate of unemployment to indicate the highest sustainable level of employment over the long run. Factors of production – are the resources that are used for producing goods & services. Following are the factors of production in an economy:
Goods
- Objects that can satisfy people's wants. Gross domestic product (GDP), real - GDP adjusted for inflation. Gold standard - A monetary system in which currencies are defined in terms of a given weight of gold. Gresham's law: the tendency of the inferior of two forms of currency to circulate more freely than the superior form of money because people hoard the superior form. Gross fiscal deficit – is the difference between total receipts (excluding government borrowing) & the total expenditure of the government. Hyperinflation: inflation at a very high rate. Usually reserved for annual inflation rates exceeding 200 percent. Households - Individuals and family units which as consumers, buy goods and services from firms and, as resource owners, sell or rent productive resources to business firms. Imports
- Goods or services bought from sellers in another nation.
Income effect: The change in consumption or leisure that results from a change in an individual's purchasing power after a change in relative prices or income. Also called the wealth effect. International monetary fund - The IMF is an international organization established in 1946 to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries under adequate safeguards to help ease balance of payments adjustment. Law of demand - All else being constant, as price rises, quantity demanded falls; as price falls, quantity demanded rises. In other words, there is an inverse relationship between price and quantity demanded. Law of diminishing marginal utility - as more of a good or service is consumed within a given period of time, after some point, the additional satisfaction derived from each additional unit will begin to decline. Law of supply - The principle
that price and quantity supplied are directly related. Monetized deficit – is that part of fiscal deficit that is financed by the RBI. In other words, the increase in net RBI credit to the Government is called Monetized deficit. Marginal benefit: the rupee value placed on the satisfaction obtained from another unit of an item Marginal cost: the sacrifice made to obtain an additional unit of an item; the cost of producing an additional unit of an item. Marginal product (of an input): the increase in output that results from using one more unit of an input when the quantity of all other inputs is unchanged. Marginal propensity to consume: the additional consumption that results from an increase in disposable income. The MPC is equal to the change in consumption spending divided by the change in disposable income. Often times, it is advantageous to think of an income change as either permanent or transitory. In this framework, the MPC from a change in permanent income is much larger than the MPC from a change in transitory income. Marginal propensity to save: the additional saving that results from an increase in disposable income. The MPS is equal to the change in saving divided by the change in disposable income. Often times, it is advantageous to think of an income change as either permanent or transitory. In this framework, the MPS from transitory income changes is much larger than the MPS from permanent income changes. Marginal revenue: the extra revenue obtained from selling an additional unit of a good Multiplier: The two types of multipliers that most frequently appear in economics are the money multiplier and the expenditure multiplier.
Market - A
setting where buyers and sellers establish prices for identical or very similar products,
and exchange goods and/or services. Mixed economy - The dominant form of economic organization in noncommunist countries. Mixed economies rely primarily on the price system for their economic organization but use a variety of government interventions (such as taxes, spending, and regulation) to handle macroeconomic instability and market failures. Monetary
policy - The objectives of the central bank in exercising its control over money,
interest rates, and credit conditions. The instruments of monetary policy are primarily
open-market operations, reserve requirements, and the discount rate. Money supply – is the amount of money available in the economy at any given point of time. It includes currency notes & coins with the public, time & deposits of the bank & money in the post office savings account. Money market - A term denoting the set of institutions that handle the purchase or sale of short-term credit instruments like Treasury bills and commercial paper. National
income - The amount of aggregate income earned by suppliers of resources employed to
produce GNP, net national product plus government subsidies minus indirect business taxes.
Opportunity cost - The benefit from next best alternative that must be given up when a choice is made. Price - the quantity of money (or other goods and services) paid by the consumer and received by the producer for a unit of a good or service. Price elasticity of demand - the ratio of the percentage change in quantity demanded of a product to the percentage change in its price; the responsiveness or sensitivity of the quantity of a product consumers demand to a change in the price of that product. Public goods - A commodity whose benefits are indivisibly spread among the entire community, whether or not particular individuals desire to consume the public good. For example, a public-health measure that eradicates smallpox protects all, not just those paying for the vaccinations. The government often provides these goods. Protectionism - A policy by which governments impose trade barriers ( tariffs and quotas) on foreign products (imports) to protect domestic producers and their workers from being undersold. Protectionism means higher prices on imported goods but lower unemployment and better wages. Revenue deficit – is the difference between Government’s revenue expenditure & revenue receipts. Substitute goods and services - goods or services such that there is a direct relationship between the price of one and the demand for the other; when the price of one rises (falls) the demand for the other increases (decreases). Standard of
living - A minimum of necessities, comforts, or luxuries held essential to maintaining
a person or group in customary or proper status or circumstances. Say's law: the idea that total spending will always be sufficient to purchase the total output produced. That is, supply creates its own demand. Transfer payments: payments for which no good or service is currently received in return and that therefore do not represent expenditures for the purchase of final products. E.g. – Pensions, grants from abroad etc. Trade-off - Giving up some of one thing to get some of another thing. Unemployment - The situation, in which people are willing and able to work at current wage rates, but do not have jobs. Wages
- The payment resource earners receive for their labor. |