Economics > Glossary

From Citizendium, the Citizens' Compendium

(more specialised glossaries are available on the Related Articles subpages of other economics articles)

A

• Adverse selection [r]: a partial market failure that occurs when there are traders who take advantage of asymmetric information, raising uncertainty and leading to a reduction in the value of its products. [e]
• Applied statistics [r]: the practice of collecting and interpreting numerical observations for the purpose of generating information. [e]
• Arbitrage [r]: transactions to take advantage of a price differences of a product in different markets by buying where it is cheap and selling where it is dear. The possibility of arbitrage often prevents the occurrence of price differences. [e]
• Asymmetric information [r]: a situation in which a seller has information that is not available to potential buyers - or vice-versa. [e]
• Automatic stabilisers [r]: the tendency in times of falling economic activity for the government spending to rise, and for tax receipts to fall - and the reverse tendency in times of rising economic activity [e]

B

• "Bad bank" [r]: A subsidiary, or separate corporation, created to hold and manage non-performing assets transferred to it by a rescued bank. [e]
• Banking panic [r]: A widespread fear of insolvency because of uncertainty concerning the true value of banking assets. [e]
•  Base money - see Monetary base
• Basis point [r]: (bp) one hundredth of a percentage point . [e]
• Beta [r]: A measure of the degree to which the rate of return of a share tracks that of the equity market as a whole (defined as the covariance between the share's rate of return and the average market rate, divided by the variance of the market rate). If beta = 1 the share's rate of return moves in line with the market rate; if it is negative, it falls when the market rate rises. [e]
• Bill (finance) [r]: a document providing evidence of the indebtedness of one person to another (see also Treasury bill). [e]
• Bill of Exchange [r]: A written order to pay the holder a stated sum of money at a stated date (otherwise known as a "draft", the person who is paid being termed the "drawer"). [e]
• Bond (finance) [r]: a fixed-interest security issued by governments, companies, banks and others. [e]
• Broad money [r]: cash, current account deposits in banks and other financial institutions, savings deposits and time-restricted deposits (see also high-powered money). [e]
• Broker [r]: an individual or firm that acts as an intermediary between a buyer and seller in return for a commission. [e]
• Bubble (economics) [r]: A surge in prices that raises irrational expectations of further increases, so generating further increases, and so on: a process that continues until confidence falters, the bubble "bursts" and prices suddenly revert to a rationally-based level. [e]
• Budget balance [r]: the difference between a central government's revenue and its expenditure in a given financial year. Conventions differ concerning the items that are included, and differing adjustments are made to identify its discretionary element (eg: see cyclically-adjusted deficit). [e]
• Budget deficit [r]: the excess of a goverment's expenditures over its receipts. See also cyclically-adjusted budget deficit [e]

C

• Capital (banking) [r]: A bank's assets minus its liabilities. [e]
• Carry trading [r]: the practice of borrowing at a low interest rate in order to invest at a higher interest rate, or of selling the currency of a country that has low interest rates and buying the currency of a country that has high interest rates. [e]
•  CDS - see Credit Default Swap
• CDS spread [r]: the annual percentage charge for a credit default swap (unlike a yield spread, not the excess over a risk-free rate - unless so stated) [e]
• Central Bank [r]: A government agency that is responsible for monetary policy and the support of the banking system (for example the Federal Reserve Bank and the Bank of England). Usually responsible for controlling a country's monetary policy and preserving the value of its currency. [e]
• Commercial bank [r]: a bank that accepts deposits and makes loans to individuals and businesses (also known as a "retail bank"). [e]
• Commercial paper [r]: unsecured debt instruments that are issued by corporations to meet short term financing needs (usually repayable after 3 months). [e]
• Complex interactive system [r]: a system that is both interactive in the sense that an event in one of its components can have significant repercussions in many other components; and complex in the sense of being able to exist in more states than can be enumerated. [e]
• Contagion (banking) [r]: the spread of a run, loss or insolvency from one bank to another (also the spread of a banking crisis from one country to another) see also Panic (banking). [e]
• Consumer surplus [r]: The excess of what a consumer is willing to pay for a product over what he has to pay for it. [e]
• Corporation [r]: A commercial organisation that is jointly owned by shareholders who participate in its profits but are not personally liable for its debts. A corporation is legally distinct from its owners and may employ people, own assets and lend or borrow money. [e]
• Cost_of_capital [r]: The weighted average of the interest rates paid by a company on its equity (share issue) and on its debt (bonds and commercial borrowing). [e]
• Covariance [r]: The degree to which two variables move together (defined as the average value of the products of the deviations of the corresponding values of the two variables from their respective means, and expressed mathematically as Cov(x,y).) If their covariance is positive, both move in the same direction; if it is negative, then when one increases the other decreases. [e]
• Covered bond [r]: A bond that is secured by other assets so that the investor can lay claim to those assets should the issuer of the bond become insolvent. [e]
• Credit crunch [r]: the failure of the banking system to satisfy the economy's need for credit. [e]
• Credit default swap [r]: an insurance agreement that guarantees protection against a bond default in return for a fee. [e]
• Credit easing [r]: A shift in the composition of the assets of the central bank towards less liquid and riskier assets (in order to reduce credit spreads and improve the functioning of private credit markets) - also known as qualitative easing. [e]
• Credit risk [r]: the risk that the value of a loan-based security will fall as a result of defaults on the part of borrowers. [e]
• Crowding out [r]: the fall in private sector investment resulting from an increase in government borrowing. [e]
• Currency board [r]: a government agency that maintains a fixed exchange rate between a country's currency and another currency - usually the United States dollar. [e]
• Cyclically-adjusted budget deficit [r]: the budget deficit, excluding the effects upon expenditures and receipts of departures from the trend growth of output (see automatic stabilisers). [e]

D

• Debt_instrument [r]: a formal obligation assumed by a borrower to replay the lender in accordance with the terms of an agreement. Debt instruments include bonds, debentures, promissory notes, leases and mortgages. [e]
• Debt trap [r]: the situation in which national debt continues to grow faster than national income so that more and more of the government’s budget has to be devoted to interest payments. [e]
• Deflation [r]: a persistent sequence of reductions in the general level of prices. [e]
• Deleveraging [r]: a reduction of the proportion of debt in a company's capital structure - such as the action of banks during the 2008 banking panic. [e]
• Derivative [r]: In finance, an asset whose agreed value depends upon the expected value of another asset. A typical example is a futures contract which is an undertaking to buy a stipulated asset at a stipulated price at a stipulated future time. Other examples are options and futures contracts. Some derivatives can be used for hedging against risk. [e]
• Direct investment [r]: investment in a company's foreign operations. [e]
• Discount window [r]: A facility provided by central banks that enables a bank to make secured short-term loans at its central bank's discount rate". [e]
• Discount_rate [r]: (i) The percentage by which the current value of an asset (to a person or to a commercial organisation) exceeds its value in a year's time. For a person, it is equal to that person’s marginal rate of substitution between consumption in the two successive years. For a financial asset it is the ruling risk-free interest rate. For a commercial organisation, it is equal to that organisation’s cost of capital. (ii) The rate at which banks may borrow at their central bank's discount window. [e]

E

• Economic rent [r]: The difference between the payment received by a factor of production and the payment that would be necessary to keep that factor in use: a measure of that factor's market power. [e]
• Efficient market hypothesis [r]: the hypothesis that all of the information that is relevant to the value of a quoted financial asset is already embodied in its stock exchange price. [e]
• Exchange rate protectionism [r]: the policy of reducing the currency exchange rate to below its market value in order to promote the country's exports. [e]
• Externality [r]: A cost of production that is not borne by the producer, or a benefit that the producer does not receive. [e]

F

• Fallacy of composition (economics) [r]: the assumption that the behaviour of the economy as a whole is similar to the behaviour of one of its components - such as a household or a firm. [e]
• Fiat money [r]: money whose value is determined solely by government order, or "fiat" (as distinct from commodity money that has value because of its scarcity or cost of production). [e]
• Financial asset [r]: An asset that derives it value from a legal claim - including stocks, bonds and loans. [e]
• Financial_Intermediary [r]: A go-between organisation that obtains finance from investors (or savers) and lends it to corporations (or other borrowers). Financial intermediaries include banks, building societies (or savings and loans associations) , life insurance companies and credit unions. [e]
• Financial_regulator [r]: The United States Securities and Exchange Commission gives as its mission "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation". Financial regulators in other countries have similar responsibilities. [e]
• Fiscal [r]: relating to taxation and government expenditure. [e]
• Fiscal policy [r]: The use of taxation and public expenditure to influence economic activity or the distribution of income and wealth. [e]
• Fiscal gap [r]: the size of the primary budget surplus (expressed as a percent of GDP) that is required to achieve fiscal sustainability by immediate compliance with the requirement that the national debt be maintained at or below its existing percentage of GDP. [e]
• Fiscal stimulus [r]: a reduction in taxation for the purpose of raising economic output, or an increase in government spending for that purpose. [e]
• Fiscal sustainability [r]: the objective of avoiding the persistent growth of the national debt. [e]
• Fractional reserve banking [r]: the practice of lending out a large proportion of the money deposited in a commercial bank. [e]
• Freddie Mac [r]: (Federal Home Loan Mortgage Corporation) Fannie Mae clone created to provide competition to Fannie Mae. [e]
• Full employment deficit [r]: the budget deficit after adjustments to exclude recession-induced increases in expenditure and reductions in revenues - in other words, the deficit that would have existed if the economy had been at full employment (see also "cyclically-adjusted budget ). [e]

G

• Generational accounts [r]: accounts that are constructed by extrapolating current policies through the lifetimes of all people currently alive, and by calculating the net taxes they would pay under those policies. The results are sensitive to the method of extrapolation. [e]
• Great moderation [r]: the period between 1980 and 2007 during which the volatility of US output was less than half that of the preceding post-war period. [e]

H

• Hedging [r]: Protecting against price changes by simultaneously buying(/selling) an asset and making a futures contract to sell(/buy) it. [e]
• Hedge fund [r]: a limited-membership, agressively-managed investment fund, often escaping regulation. [e]
• Herding (banking) [r]: A tendency to base decisions upon the actions of others - on the part of bankers, depositors or investors see also Panic (banking). [e]
• Hicks-Hansen model [r]: a model of simultaneous equilibrium in the product and money markets - shown graphically as two intersecting interest rate/spending graphs, one depicting the investment/savings (I/S) relation and the other the liquidity/money (L/M) supply relation (also known as the IS-LM model). [e]
• High-powered money [r]: currency held by the public plus bank vault cash plus bank deposits at Federal Reserve banks (see also broad money). [e]

I

• Impossibility theorem [r]: The proof that it is impossible to devise a rational democratic voting system that is guaranteed to produce a consistent set of preferences for a group from the preferences of the people in the group. [e]
• Insolvency [r]: Inability to meet a debt - or other financial - obligation. [e]
• Interbank market [r]: a market in which a group of banks lend to each other (for example, see LIBOR). [e]
• Interest rate risk [r]: The risk that the value of a fixed-rate security or loan will fall as a result of a rise in interest rates. [e]
• Internal rate of return [r]: the discount rate which, if applied to a sequence of cash flows, makes the net net present value of those cash flows equal to zero. [e]
• Investment bank [r]: a bank that raises finance for businesses by marketing new issues of equity and bonds. [e]
• IS-LM model [r]: a model of simultaneous equilibrium in the product and money markets - shown graphically as two intersecting interest rate/spending graphs, one depicting the investment/savings (I/S) relation and the other the liquidity/money (L/M) supply relation (also known as the Hicks-Hansen model). [e]

J,K,L

• Kaldor-Hicks criterion [r]: The criterion for the assessment of the economic efficiency of a proposal that requires that those who gain from it should be able to compensate those who lose from it. [e]
• Kurtosis [r]: a mathematical expression defining the shape of a symmetrical probability distribution curve - sometimes referred to as "peakiness". It is sometimes adjusted to put the kurtosis of a normal distribution at zero (although some mathematicians then call it "excess kurtosis"). Positive kurtosis then means that more of the variance is due to infrequent extreme deviations, rather than to frequent modestly-sized deviations. [e]
• Learning curve [r]: A mathematical relationship between the cost of performing an action and the number of times it has been performed. [e]
• Lender of last resort [r]: An institution, that is prepared to lend money to any solvent bank that encounters a serious liquidity risk, or a threatened bank run. (The term is not applicable to financial assistance to avert insolvency). [e]
• Leverage [r]: The use of debt to make investments. The ratio of a company's debt to its capital assets. (the same as British "gearing") [e]
• LIBOR [r]: (London Interbank Offer Rate) the rate of interest at which a group of banks (16 banks from seven countries, including the United States, Switzerland and Germany) are willing to lend to each other for periods ranging from a day to a year . [e]
• Liquidity [r]: The quantity of available assets in its possession that an organisation could rapidly exchange for cash (assets that cannot be exchanged for cash at a particular time are considered to be "illiquid" at that time). [e]
• Liquidity trap [r]: a state of the economy in which an expansionary monetary policy has no effect upon output. [e]

M

• Margin account [r]: an arrangement that enables customers to buy securities with money borrowed from a broker, subject to a minimum maintenance level related to the market values of the securities. [e]
• Margin call [r]: a demand for the additional securities required to maintain the minimum maintenance level of a margin account when security prices fall. [e]
• Market power [r]: The ability of a supplier to exercise a degree of choice concerning the pricing of a product by restricting its supply: a measure of departure from the ideal of perfect competition in which every supplier is a price-taker [e]
• Market risk [r]: The risk that the value of an investment in a financial product will fall as a result of a fall in the market for thae product. [e]
• Means test [r]: The restriction of benefit payments to those whose income or savings are below prescribed limits. [e]
• Monetary base [r]: currency in circulation plus bank vault cash plus deposits held by banks at the central bank (termed "high-powered money" in the US, and referred to as M0 in the UK). [e]
• Monetisation (of public debt) [r]: a government's sale of its own securities to the country's central bank in order to obtain funds that are used to redeem its public debt - resulting in an expansion of the bank's monetary base, and consequently of the country's money supply. [e]
• Money market [r]: a market for short-term debt instruments (generally of maturity after less than one year) such as certificates of deposit, commercial paper, and Treasury bills. [e]
• Money supply [r]: the economy's stock of those assets that can be quickly exchanged for goods and services. [e]
• Moral hazard [r]: Motivation to take an otherwise unwarranted risk because the cost of an unfavourable outcome would be borne by someone other than the risk-taker. [e]

N

• National debt [r]: the external obligations of the government and public sector agencies - with content and valuation method according to national or international definitions (otherwise known as public debt or government debt). [e]
• National Debt - Maastricht definition [r]: general government gross debt according to the convergence criteria set out in the Maastricht Treaty, comprising currency, bills and short- term bonds, other short- term loans and other medium- and long- term loans and bonds (defined according to the European System of Accounts, standard ESA 95[1]). [e]
• Net present value [r]: the sum of the discounted values of a sequence of cash flows (see also discount rate) [e]
• Normal distribution [r]: a symmetrical bell-shaped probability distribution representing the frequency of random variations of a quantity from its mean. [e]

O

• Option [r]: A right, but not an obligation, to buy (or to sell) an asset, usually at a stipulated price (termed the "exercise price") and at a stipulated time. An option to buy is called a "call option" and an option to sell is called a "put option". [e]
• Output gap [r]: the difference between the current value of the output of an economy, and that economy's normal output trend. [e]

P,Q

• Pareto efficiency [r]: A Pareto-efficient situation is defined as one from which no change could benefit anyone without harming someone else, and the Pareto criterion for the assessment of a change requires that someone must gain from it and no-one most lose. [e]
• Portfolio (finance) [r]: a collection of securities. [e]
• Portfolio insurance [r]: A way of protecting a portfolio against market risk by selling short on the share index futures exchange, or by buying put options on the share index. [e]
• Poverty trap [r]: The situation in which an increase in earnings would be significantly reduced by a loss of those state benefits that are subject to a means test. [e]
• Price flexiblity [r]: The extent to which prices change to bring supply into equality with demand, and the speed with which they do so. [e]
• Primary budget deficit [r]: the budget deficit excluding payments of interest on the national debt. [e]
• Prime rate [r]: The interest rate that commercial banks charge for loans involving the lowest risk of default - such as loans to large companies. [e]
• Protection [r]: In international economics, a restriction upon trade by the imposition of quotas or tariffs. [e]
• Public choice theory [r]: A theory of government decision-making that takes account of rent-seeking by decision-makers. [e]
• Public expenditure [r]: Spending by the public sector [e]
• Public sector [r]: Organisations and activities that are under the control of central, provincial and local government, including public services and public corporations[2]. [e]
• Quantitative easing [r]: An increase in the central bank's monetary liabilities as a result of its purchases of corporate or government securities. [e]
• Qualitative easing [r]: A shift in the composition of the assets of the central bank towards less liquid and riskier assets (in order to reduce credit spreads and improve the functioning of private credit markets) - also known as credit easing. [e]

R

• Random_walk [r]: The movement of the price of an asset over time that is entirely unpredictable. [e]
• Recession (economics) [r]: Conventionally defined as two consecutive quarters of negative growth of Gross domestic product. See Recession (economics) for further information and the definition used by the US authorities. [e]
• Redemption yield [r]: the yield provided by a fixed-interest security taking account of the difference between its purchase price and the amount payable when it matures (also known as yield to maturity). Calculated as the internal rate of return of the security. [e]
• Rent-seeking [r]: Behaviour that increases the welfare of a person or group at the expense of the welfare of others. [e]
• Repurchase agreement [r]: A contract giving the seller of an security the right or obligation to buy it back at a specified price on a given date. Used as a way of borrowing or lending using the security as collateral. (The interest rate charged is known as the "repo rate"). [e]
• Reserve ratio [r]: The ratio of a bank's reserves to its deposits. [e]
• Ricardian equivalence [r]: the argument that government spending will not increase demand because it will prompt taxpayers to save an equivalent amount in anticipation of a resulting tax increase. [e]
• Risk premium [r]: The ratio of the rate of return from an asset to the rate of return available from a risk-free investment. [e]
• Run (banking) [r]: An attempt by a large number of investors to withdraw their deposits. [e]

S

• Securitisation [r]: the conversion of a cash flow into a marketable security (usually the offer for sale of claims upon debt repayments, and often categorised according to the expected risk of default. Examples include colateralised debt obligations (CDOs) and structured investment vehicles (SIVs).) [e]
• Selling short [r]: Selling borrowed stock in the expectation that its price will fall, and with the intention of subsequently buying it back and returning it. [e]
• Shadow banking system [r]: a collective term often used to denote institutions other than commercial banks that lend money. [e]
• Sharpe ratio [r]: a measure of the rate of return per unit of variability of an investment portfolio, obtained by subtracting the the current risk-free rate of return from the portfolio's current rate of return and dividing the result by the standard deviation of its rate of return. [e]
• Skewness [r]: a measure of the "lobsideness" of a probability distribution. Positive skewness indicates that the tail of the distribution is more stretched on the side above the mean - indicating that there are more positive than negative deviations from the mean. [e]
• Social choice theory [r]: The study of systems of collective decision-making. [e]
• Sovereign default [r]: a government's repudiation of its interest payment or debt repayment obligations. [e]
• Sovereign spread [r]: the CDS spread on a government's bonds. [e]
•  Spread - see Yield spread
• Standard deviation [r]: A statistical measure for the fluctuation of a random variable about its mean value (the square root of the variance). [e]
• Standardised budget deficit [r]: the cyclically adjusted budget deficit, after further adjustments to exclude transitory influences. [e]
• Structured investment vehicle [r]: (SIV) a fund that borrows money - usually at LIBOR rates - by the issue of asset-backed commercial paper and uses it to finance longer term loans at higher interest rates. [e]
• Supply-side measures [r]: measures taken with the purpose of increasing a country's economic efficiency, eg by removing barriers to competition or counter market failures. [e]
• Swap contract [r]: An agreement to exchange financial obligations between two organisations with complementary needs, for example an agreement to swap fixed interest obligations for variable interest obligations. [e]
• Systemic failure (finance) [r]: The inability of a large proportion of a country's financial institutions to act as financial intermediaries. [e]

T,U,V,W,X,Y,Z

• Tax wedge [r]: the difference between the cost of labour to employers and the take-home pay of employees. [e]
• Terms of trade [r]: The ratio of the index of a country's export prices to the index of its import prices. [e]
• Unemployment trap [r]: The situation in which the after-tax income from employment is less than the the state benefits that are receivable when unemployed. [e]
• Value at risk [r]: The maximum possible loss in the value of an asset within a given time span and at a given confidence level. [e]
• Variance [r]: A statistical measure of the variability of a random quantity (defined as the mean squared deviation from the mean value). [e]
• Warrant [r]: A right, but not an obligation, to buy (or to sell) an asset, at a stipulated price and time. (Similar to an option but of longer duration.) [e]
• Yield spread [r]: the difference between the annual percentage yield on an asset and a notionally risk-free rate such as the rate on US Treasury bonds (but see CDS spread). [e]