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Common Terms used in FinanceInvestmentNowadays, almost everybody is completely dependent upon the plastic money(Credit Card) for their everyday expenses. Credit cards are referred to as a form ofpersonal loans issued from bank to the potential users.Forex Trading
Forex is referred to as exchange of one countrys currencies with others and itstrading include investing money in the foreign currencies in order to obtain profitthrough selling at higher price. Forex exchange brokers offer 24/7 online services inorder to ensure secure trading experience online by substituting a percentage orsubscription of the commission. There are a huge range of online directories presenton the World Wide Web, providing information on foreign exchange professionalsand brokers along with their services.LeasingIt is a property owners act which allows other people to use the property for limitedtime period in exchange of a fixed amount of money. This is rather applicable onmovable properties and land. Leasing is generally of two kinds the first one permitthe property usage until a fixed period of time completes and other one allows
property authorization after the contract is over along with the money paid to anowner timely.Insurance
The word Insurance is commonly used in terms of finance. It is an undertaking bythe company to assure an individual in exchange of premium that is paid againstdefinite eventuality. One should properly consider all the factors like risk involvedand the age of a property before investing. With a lot of insurance providingcompanies offering oodles of coverage and plans you should invest in the mostbeneficial deals on low rates.financial terms and ratiosacid testA stern measure of a company's ability to pay its short term debts, in that stock is
excluded from asset value. (liquid assets/current liabilities) Also referred to as theQuick Ratio.assetsAnything owned by the company having a monetary value; eg, 'fixed' assets likebuildings, plant and machinery, vehicles (these are not assets if rentedand notowned) and potentially including intangibles like trade marks and brand names, and'current' assets, such as stock, debtors and cash.asset turnoverMeasure of operational efficiency - shows how much revenue is produced per ofassets available to the business. (sales revenue/total assets less current liabilities)balance sheet
The Balance Sheet is one of the three essential measurement reports for theperformance and health of a company along with the Profit and Loss Account andthe Cashflow Statement. The Balance Sheet is a 'snapshot' in time of who ownswhat in the company, and what assets and debts represent the value of thecompany. (It can only ever nbe a snapshot because the picture is always changing.Capital + Liabilities = AssetsbudgetIn a financial planning context the word 'budget' (as a noun) strictly speakingmeans an amount of money that is planned to spend on a particularly activity or
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resource, usually over a trading year, although budgets apply to shorter and longerperiods. capital employed
The value of all resources available to the company, typically comprising sharecapital, retained profits and reserves, long-term loans and deferred taxation.Viewed from the other side of the balance sheet, capital employed comprises fixedassets, investments and the net investment in working capital (current assets less
current liabilities). In other words: the total long-term funds invested in or lent tothe business and used by it in carrying out its operations.cashflow
The movement of cash in and out of a business from day-to-day direct trading andother non-trading or indirect effects, such as capital expenditure, tax and dividendpayments.cashflow statementOne of the three essential reporting and measurement systems for any company.
The cashflow statement provides a third perspective alongside the Profit and Lossaccount and Balance Sheet. The Cashflow statement shows the movement andavailability of cash through and to the business over a given period, certainly for atrading year, and often also monthly and cumulatively. The availability of cash in a
company that is necessary to meet payments to suppliers, staff and other creditorsis essential for any business to survive, and so the reliable forecasting and reportingof cash movement and availability is crucial.cost of debt ratio (average cost of debt ratio)Despite the different variations used for this term (cost of debt, cost of debt ratio,average cost of debt ratio, etc) the term normally and simply refers to the interestexpense over a given period as a percentage of the average outstanding debt overthe same period, ie., cost of interest divided by average outstanding debt.cost of goods sold (COGS)
The directly attributable costs of products or services sold, (usually materials,labour, and direct production costs). Sales less COGS = gross profit. Effetively thesame as cost of sales (COS) see below for fuller explanation.
cost of sales (COS)Commonly arrived at via the formula: opening stock + stock purchased - closingstock.Cost of sales is the value, at cost, of the goods or services sold during the period inquestion, usually the financial year, as shown in a Profit and Loss Account (P&L).current assetsCash and anything that is expected to be converted into cash within twelve monthsof the balance sheet date.current ratio
The relationship between current assets and current liabilities, indicating theliquidity of a business, ie its ability to meet its short-term obligations. Also referredto as the Liquidity Ratio.current liabilitiesMoney owed by the business that is generally due for payment within 12 months ofbalance sheet date. Examples: creditors, bank overdraft, taxation.depreciation
The apportionment of cost of a (usually large) capital item over an agreed period,(based on life expectancy or obsolescence.dividend
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A dividend is a payment made per share, to a company's shareholders by acompany, based on the profits of the year, but not necessarily all of the profits,arrived at by the directors and voted at the company's annual general meeting.earnings before..
There are several 'Earnings Before..' ratios and acronyms: EBT = Earnings BeforeTaxes; EBIT = Earnings Before Interest and Taxes; EBIAT = Earnings Before Interest
after Taxes; EBITD = Earnings Before Interest, Taxes and Depreciation; and EBITDA= Earnings Before Interest, Taxes, Depreciation, and Amortization.fixed assetsAssets held for use by the business rather than for sale or conversion into cash, eg,fixtures and fittings, equipment, buildings.fixed costA cost which does not vary with changing sales or production volumes, eg, buildinglease costs, permanent staff wages, rates, depreciation of capital items.FOB - 'free on board'
The FOB (Free On Board) abbreviation is an import/export term relating to the pointat which responsibility for goods passes from seller (exporter) to buyer (importer).FOB meant originally (and depending on the context stills generally means) that the
seller is liable for the goods and is responsible for all costs of transport, insurance,etc., until and including the goods being loaded at the (nominated FOB) port.gearing
The ratio of debt to equity, usually the relationship between long-term borrowingsand shareholders' funds.goodwillAny surplus money paid to acquire a company that exceeds its net tangible assetsvalue.gross profitSales less cost of goods or services sold. Also referred to as gross profit margin, orgross profit, and often abbreviated to simply 'margin'. See also 'net profit'.initial public offering (ipo)
An Initial Public Offering (IPO being the Stock Exchange and corporate acronym) isthe first sale of privately owned equity (stock or shares) in a company via the issueof shares to the public and other investing institutions.letters of credit
These mechanisms are used by exporters and importers, and usually provided bythe importing company's bank to the exporter to safeguard the contractualexpectations and particularly financial exposure of the exporter of the goods orservices. (Also called 'export letters of credit, and 'import letters of credit'.)letters of guarantee
There are many types of letters of guarantee. These types of letters of guaranteeare concerned with providing safeguards to buyers that suppliers will meet theirobligations or vice-versa, and are issued by the supplier's or customer's bankdepending on which party seeks the guarantee. While a letter of credit essentiallyguarantees payment to the exporter, a letter of guarantee provides safeguard thatother aspects of the supplier's or customer's obligations will be met.liabilitiesGeneral term for what the business owes. Liabilities are long-term loans of the typeused to finance the business and short-term debts or money owing as a result oftrading activities to date . Long term liabilities, along with Share Capital andReserves make up one side of the balance sheet equation showing where the
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money came from. The other side of the balance sheet will show Current Liabilitiesalong with various Assets, showing where the money is now.liquidity ratioIndicates the company's ability to pay its short term debts, by measuring therelationship between current assets (ie those which can be turned into cash) againstthe short-term debt value. (current assets/current liabilities) Also referred to as the
Current Ratio.net assets (also called total net assets)
Total assets (fixed and current) less current liabilities and long-term liabilities thathave not been capitalised (eg, short-term loans).net current assetsCurrent Assets less Current Liabilities.net present value (npv)NPV is a significant measurement in business investment decisions. NPV isessentially a measurement of all future cashflow (revenues minus costs, alsoreferred to as net benefits) that will be derived from a particular investment(whether in the form of a project, a new product line, a proposition, or an entirebusiness), minus the cost of the investment. Logically if a proposition has a positive
NPV then it is profitable and is worthy of consideration. If negative then it'sunprofitable and should not be pursued. While there are many other factors besidesa positive NPV which influence investment decisions; NPV provides a consistentmethod of comparing propositions and investment opportunities from a simplecapital/investment/profit perspective. There are different and complex ways toconstruct NPV formulae, largely due to the interpretation of the 'discount rate' usedin the calculations to enable future values to be shown as a present value.Corporations generally develop their own rules for NPV calculations, includingdiscount rate. NPV is not easy to understand for non-financial people - wikipediaseems to provide a good detailed explanation if you need one.net profitNet profit can mean different things so it always needs clarifying. Net strictly means
'after all deductions' (as opposed to just certain deductions used to arrive at a grossprofit or margin). Net profit normally refers to profit after deduction of all operatingexpenses, notably after deduction of fixed costs or fixed overheads. This contrastswith the term 'gross profit' which normally refers to the difference between salesand direct cost of product or service sold (also referred to as gross margin or grossprofit margin) and certainly before the deduction of operating costs or overheads.Net profit normally refers to the profit figure before deduction of corporation tax, inwhich case the term is often extended to 'net profit before tax' or PBT.opening/closing stockSee explanation under Cost of Sales.p/e ratio (price per earnings)
The P/E ratio is an important indicator as to how the investing market views thehealth, performance, prospects and investment risk of a public company listed on astock exchange (a listed company).profit and loss account (P&L)One of the three principal business reporting and measuring tools (along with thebalance sheet and cashflow statement). The P&L is essentially a trading account fora period, usually a year, but also can be monthly and cumulative. It shows profitperformance, which often has little to do with cash, stocks and assets (which mustbe viewed from a separate perspective using balance sheet and cashflow
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statement). The P&L typically shows sales revenues, cost of sales/cost of goodssold, generally a gross profit margin (sometimes called 'contribution'), fixedoverheads and or operating expenses, and then a profit before tax figure (PBT). Afully detailed P&L can be highly complex, but only because of all the weird andwonderful policies and conventions that the company employs. Basically the P&Lshows how well the company has performed in its trading activities.
overheadAn expense that cannot be attributed to any one single part of the company'sactivities.quick ratioSame as the Acid Test. The relationship between current assets readily convertibleinto cash (usually current assets less stock) and current liabilities. A sterner test ofliquidity.reserves
The accumulated and retained difference between profits and losses year on yearsince the company's formation.return on capital employed (ROCE)A fundamental financial performance measure. A percentage figure representing
profit before interest against the money that is invested in the business. (profitbefore interest and tax/capital employed x 100)return on investmentAnother fundamental financial and business performance measure. This termmeans different things to different people (often depending on perspective andwhat is actually being judged) so it's important to clarify understanding ifinterpretation has serious implications. Many business managers and owners usethe term in a general sense as a means of assessing the merit of an investment orbusiness decision.In simple terms this the profit made from an investment. The 'investment' could bethe value of a whole business (in which case the value is generally regarded as thecompany's total assets minus intangible assets, such as goodwill, trademarks, etc
and liabilities, such as debt. N.B. A company's book value might be higher or lowerthan its market value); or the investment could relate to a part of a business, a newproduct, a new factory, a new piece of plant, or any activity or asset with a costattached to it.
The main point is that the term seeks to define the profit made from a businessinvestment or business decision. Bear in mind that costs and profits can be ongoingand accumulating for several years, which needs to be taken into account whenarriving at the correct figures.share capital
The balance sheet nominal value paid into the company by shareholders at thetime(s) shares were issued.shareholders' fundsA measure of the shareholders' total interest in the company represented by thetotal share capital plus reserves.t/t (telegraphic transfer)Interntional banking payment method: a telegraphic transfer payment, commonlyused/required for import/export trade, between a bank and an overseas partyenabling transfer of local or foreign currency by telegraph, cable or telex. Alsocalled a cable transfer. The terminology dates from times when suchcommunications were literally 'wired' - before wireless communications technology.
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variable costA cost which varies with sales or operational volumes, eg materials, fuel,commission payments.working capitalCurrent assets less current liabilities, representing the required investment,continually circulating, to finance stock, debtors, and work in progress.
GLOSSARY FOR A COURSE IN BASIC ECONOMICSAbsolute advantage. In international trade theory a country which has an absolute advantage in
producing a good is able to produce that good more efficiently (more output per unit of input) than any
other country. Also see "comparative advantage."
Accelerator principle. In macroeconomic models the accelerator principle relates changes in the rate of
real output growth to the level of desired investment spending (investment demand) in the economy. A
decline in the rate of real GDP growth, for example, will cause the amount of investment demand to
decrease (the investment demand curve will shift to the left).
Aggregate demand curve. In macroeconomic theory the aggregate demand curve relates the level of real
national income (GDP) demanded (the total quantity of goods and services demanded) to the price level
(as measured by the GDP deflator).
Aggregate expenditure. In macroeconomic theory aggregate expenditure is the total amount of desired
spending by consumers, governments, private investors and foreign buyers (net of spending on imports)
at each level of real national income (GDP).
Aggregate supply curve. In macroeconomic theory the short run aggregate supply curve relates the total
quantity of goods and services supplied and the price level (as measured by the GDP deflator) ceteris
paribus. The long run aggregate supply curve is a vertical line at the full employment (capacity output)level of real national income (GDP).
Automatic stabilizer. Government spending programs which respond to changes in the level of nationalincome in such a way as to offset those changes. For example, unemployment insurance benefits typically
rise when the economy enters a recession, and decline when prosperity returns.
Average fixed costs. In the theory of the firm fixed costs are costs of production which are constant
whatever the level of output. Average fixed costs are total fixed costs divided by the number of units of
output, that is, fixed cost per unit of output.
Average revenue product. In the theory of factor pricing, average revenue product is total revenuedivided by the number of units of the factor employed.
Average variable costs. In the theory of the firm, total variable cost divided by the number of units of
output.
Axes. The fixed lines on a graph which carry the scales against which the coordinates are plotted.
Balance of payments accounts. A record of all transactions involving a country's exports and imports of
goods and services, borrowing and lending.
Balance of trade. A record of a country's exports and imports of goods and services.
Base year. In calculating price indexes, values in the current year are compared to values in some
arbitrarily chosen earlier or base year.
Capital. Usually used in the "real" sense in economics to refer to machinery and equipment, structures
and inventories, that is, produced goods for use in further production. Distinguished from "financial
capital", meaning funds which are available to finance the production or acquisition of real capital.Capital account. That part of the balance of payments accounts which records a country's lending and
borrowing transactions.
Capital consumption allowance. In national income accounting the capital consumption allowance
records the amount by which the capital stock has been used up or depreciated during the accounting
period. May also be called simply "depreciation."
Capital consumption. The using up of real capital by not maintaining or replacing it as it wears out.
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Capital goods. Unlike goods intended to be consumed, capital goods are used to produce other goods.
Machinery in a factory would be an example of capital goods.
Capitalism. A system of economic organization characterized by the private ownership of the means of
production, private property, and largely market-based control over the production and distribution of
goods and services.
Capitalist class. Those members of society who own the capital stock, often used in a pejorative sense by
Marxists and other socialist critics of capitalism.Central bank. An agency empowered by a government to manage a country's monetary and financial
institutions, issue and maintain the domestic currency, and handle the official reserves of foreign
exchange. Primarily a "bank for banks."
Ceteris paribus. The Latin for "other things being equal.
Change in demand. An increase or decrease in the quantity demanded over a range of prices. Shown by
a shift of the demand curve.
Choice. Because wants are unlimited and resources are limited, all economies must choose which goods
and services should be produced and in what quantities.
Circular flow. A stylized depiction of the circulation of spending in the economy and the corresponding
flows of productive factors and output of produced goods and services.
Classical economics. The economics of Adam Smith, David Ricardo, Thomas Malthus, and later
followers such as John Stuart Mill. The theory concentrated on the functioning of a market economy,spelling out a rudimentary explanation of consumer and producer behaviour in particular markets and
postulating that in the long term the economy would tend to operate at full employment because increases
in supply would create corresponding increases in demand.
Comparative advantage. The ability to produce a tradable good or service at a lower opportunity costthan it could be produced at in another country.
Competition. In the general sense, a contest among sellers or buyers for control over the use of
productive resources. Sometimes used as a shorthand way of referring to perfect competition, a market
condition in which no individual buyer or seller has any significant influence over price.
Competitive firm. A firm operating under conditions of perfect competition, a market condition in which
no individual buyer or seller has any significant influence over price. A competitive firm is a price taker,
responding to whatever price is established in the market for its output.
Constant dollars. Sometimes called "real dollars," to refer to price data which have been adjusted toremove the effect of changes in the general level of prices.
Consumer surplus. The net benefit realized by consumers when they are able to buy a good at the
prevailing market price. It is equivalent to the difference between the maximum amount consumers would
be willing to pay and the amount they actually do pay for the units of the good purchased. Graphically it
is the triangle above the market price and below the demand curve.
Consumption function. Generally, the relationship between consumer expenditures and all the
influences that determine them. More specifically, the relationship between consumers' disposable
incomes (personal income less taxes) and the amount they wish to spend on consumer goods and services.
Consumption spending. Spending on consumer goods and services.
Consumption. Spending to acquire consumer goods and services, or using up those goods and services tosatisfy wants.
Coordinates. Intersections of vertical and horizontal values plotted on a graph.Corporation. A legal entity formed to conduct business and possessing certain privileges not available to
single proprietorships or partnerships, notably limited liability which confines the shareholder's possible
losses to the amount paid to purchase shares in the business.
Cross-elasticity of demand. The (percentage) change in the quantity demanded of a good consequent
upon a (one percent) change in the price of an associated good.
Crowding out. The possible tendency for government spending on goods and services to put upward
pressure on interest rates, thereby discouraging private investment spending.
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Current account. That part of a country's balance of payments accounts which records the value of
goods and services exported minus the value of goods and services imported.
Current dollar. Values which have not been adjusted to remove the influence of changes in the general
price level. See "constant dollar."
Cyclical fluctuations. Short term variations in the level of national income such as those which occurfrom year to year. Contrasted with "secular" changes which occur over longer periods of time.
Deflation. A fall in the general level of all prices. The opposite of inflation.Depreciation. The using up or wearing out of capital goods.
Deregulation. Reducing or eliminating government intervention to control particular market activities,
especially of private firms. For example, removing price controls or monopoly privileges.
Development economics. A sub-discipline within economics specializing in the processes of long term
growth and change, especially in the case of the less developed economies.
Diminishing returns. The tendency for additional units of a productive factor to add less and less to total
output when combined with other inputs which are to some degree fixed in quantity. Combining more of
a variable input, such as labour, with a given amount of some other input, such as capital in the form of a
machine, will eventually result in the marginal product for labour declining.
Disposable income. The income a person or household has left to dispose of after income tax has been
deducted from personal income. Disposable income may either be spent on consumption or saved.
Dissaving. If individuals or households spend more than their current income they are said to bedissaving.
Economic rent. Any return a factor of production receives in excess of its opportunity cost (what it
would have received in its next best use).
Economies of scale. Ifallthe inputs in a production process are increased and the output increases byproportionately more than the inputs were increased, economies of scale are being realized. There may
also be diseconomies of scale which occur when an increase in all inputs brings about a less than
proportionate increase in output.
Elasticity of supply. The (price) elasticity of supply is the percentage change in the quantity supplied of a
good or service divided by the percentage change in its (own) price.
Elasticity. When used without a modifier (such as "cross", or "income"), elasticity usually refers to price
elasticity which is the percentage change in quantity demanded of a good or service divided by the
percentage change in its (own) price.Entrepreneurship. The ability and willingness to undertake the organization and management of
production. As well as making the usual business decisions, entrepreneurship is often associated with the
functions of innovating and bearing risks.
Envelope curve. A curve enclosing, by just touching, a number of other curves
Equilibrium condition. A condition which must be satisfied for equilibrium to exist, equilibrium being
defined as a situation in which there is no tendency for change. For example, in the Keynesian
expenditure model, the equilibrium condition is that planned spending just equal the current level of
national income. Once that condition is satisfied, there is no tendency for the level of national income to
change.
Equilibrium price. A price at which the quantity supplied equals the quantity demanded. At this pricethere is no excess of quantity demanded or supplied, nor is their any deficiency of either and consequently
the price will remain at this level.Equilibrium quantity. The quantity of a good demanded and supplied at the equilibrium price.
Equity. May be used in either of two unrelated senses. In the context of income distribution theory, refers
to an objective, goal or principle implying "fairness". In a financial context may refer to a share or portion
of ownership.
Excess reserves. The difference between the amount of cash a bank wishes or is required to hold in
relation to its deposit liabilities and the amount it actually holds.
Exchange rate. The price of one country's currency in terms of another's.
Explicit cost. The amount spent to obtain or produce something.
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Externalities. A benefit or cost associated with an economic transaction which is not taken into account
by those directly involved in making it. A beneficial or adverse side effect of production or consumption.
Fiat money. A type of money which has little or no intrinsic value in itself, but which is decreed to be
money by the government and is generally accepted in exchange. Modern paper currencies are all fiat
money, as are most coins in active circulation.Firms. Economic entities which buy or employ factors of production and organize them to create goods
and services for sale.Fiscal policy. The use by a government of its expenditures on goods and services and/or tax collections to
influence the level of national income.
Fixed capital formation. Investment, the creation of capital goods such as structures, machinery and
equipment.
Free rider problem. The undersupplying of a public good caused by the fact that individuals can consume
or benefit from the good without paying for it.
Frictional unemployment. Unemployment caused by the loss of jobs due to technological change, the
entry of new participants into a labour market, or other normal labour market adjustments.
Friedman, Milton (1912- ). Born New York City in 1912. Degrees from Rutgers, Chicago, and Columbia.
Associated with the University of Chicago since 1946. Best known for his advocacy of monetary
explanations of the course of economic events and fierce opposition to Keynesian economics, Friedman is
usually credited with (or blamed for) establishing the "monetarist school" of economics which gainedgreat influence on government policy in both the US and the UK in the 1970s.
Functional distribution of income. The division of total income in an economy into shares according to
the kind of service provided-usually labour or property (land and capital).
General equilibrium. The condition reached when all markets (for products and productive factors) havecleared, that is, established equilibrium prices and quantities.
Gini coefficient. The ratio of the area between the 45 degree line depicting complete equality and a
Lorenz curve to the entire area of the triangle below the 45 degree line.
Government spending. The total outlays by government on goods and services during some accounting
period, usually a year. Government outlays such as welfare benefits to households, for example, are
normally excluded from this amount on the grounds that they are merely transfers of income from
taxpayers to the beneficiaries of such programs.
Graph. A visual representation of a relationship between two variables, usually drawn to some specifiedscale.
Gross Domestic Product (GDP). The value of all the goods and services produced in an economy during
some accounting period, usually a year.
Gross Domestic Product (GDP) deflator. Nominal GDP divided by real (constant dollar GDP) multiplied
by 100. Nominal GDP is the value of output measured in terms of the prices prevailing in the accounting
period in question. Real GDP is that output measured in terms of the prices prevailing in some base
period. The value of the deflator in the base period is always 100.
Gross investment. Total investment during the accounting period. It includes both additions to the capital
stock (net investment) and investment to replace worn out capital (to make up for depreciation).
Gross National Expenditure (GNE). The sum of all spending on consumption and investment plusgovernment spending on goods and services and net exports (total exports minus imports). It is equivalent
in value to GDP.Harrod, Sir Roy F. (1900-78). Born in Norfolk, England. An influential British economist, educated at
Oxford, who was an early proponent of Keynesian economics, a prominent adviser to the British
government during the years of World War II, and subsequently Keyne's official biographer. Harrod
wrote extensively on a number of topics such as business cycles, monetary problems, international trade,
and the theory of economic growth. In the latter field, he pointed out as early as 1939 that in the
Keynesian model investment played the role of an offset to saving-a way of getting spending withdrawn
from the income stream by savers back into it. But investment also increases the productive capacity of
the economy. Could the rate of growth in income be sufficient to ensure that an ever growing stock of
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capital would be kept fully utilized? If not, the implication was that some continuous external stimulation
of the economy would be needed to maintain long-term growth on a steady path.
Hicks, John R. (1904-1989). One of the leading British economic theorists of the 20th century, Hicks was
educated at Oxford to which he returned to teach after holding positions at the London School of
Economics, Cambridge, and Manchester. Hicks made important contributions on a variety of topics, butis best known for his work on consumer behaviour as published in his major work, Value and Capital. In
it Hicks utilized the indifference curve concept first developed by Vilfredo Pareto to construct a theory ofdemand which was independent of any cardinal measure of utility such as was implicit in the traditional
approach perpetuated by Alfred Marshall in his famousPrinciples. Hicks also provided a way ofincorporating the interest rate in the Keynesian model which has become a standard feature of
intermediate level text-book treatments of the Keynesian model. He was joint winner (with the American
economist Kenneth Arrow) of the Nobel prize in economics in 1972.
High-powered money. The monetary base, or the total of currency in circulation and commercial bank
deposits with the central bank.
Hirsch, Fred (1931-1978). Born in Vienna, Fred Hirsch graduated from the London School of Economics
in 1952. After working as an economic journalist and with the International Monetary Fund he became a
professor of economics at the University of Warwick in 1975. He published a large amount of work on
international monetary issues and the subject of inflation, but he became more widely known only at the
end of his tragically short life when he published his book,The Social Limits to Growth. Its broad theme,as he put it in an interview reported in theNew York Times, was that material growth can "no longerdeliver what has long been promised for it-to make everyone middle-class."
Human capital. The stock of knowledge and acquired skills embodied in individuals.
Imperfect competition. A market situation in which one or more buyers or sellers are important enough tohave an influence on price.
Income effect. The effect of a change in income on the quantity of a good or service consumed.
Income elasticity of demand. The percentage change in quantity demanded divided by the percentage
change in income.
Indifference curve. A curve showing all possible combinations of two goods among which the consumer
is indifferent.
Indifference theory. The analysis of consumer demand using indifference curves and an income constraint
to demonstrate the reason for the inverse relationship between price and quantity demand. An alternativeto the older marginal utility explanation of this phenomenon.
Indirect taxes. Taxes levied on a producer which the producer then passes on to the consumer as part of
the price of a good. Distinguished from direct taxes, such as sales taxes which are visible to the person
who pays them.
Industry. A group of firms producing similar products. Hence, the auto industry or the steel industry.
Inferior good. A good for which the demand decreases when income increases. When a household's
income goes up, it will buy a smaller quantity of such a good.
Inflation. A general rise in the average level ofallprices.Interest rate. The percentage rate which must be paid for the use of investable funds.
Interest. The payment made for the use of funds to create capital goods with.Inventories. Stocks of goods in the hands of producers. These stocks are included in the definition of
capital and an increase in inventories is considered to be investment.Investing. Creating capital goods. Acquiring or producing structures, machinery and equipment or
inventories.
Investment spending. The total amount of spending during some period of time on capital goods.
Involuntary unemployment. Unemployment caused by a deficiency in aggregate demand.
Jevons, William Stanley (1835-1882). An English philosopher and scientist instrumental in developing
the marginal utility theory of consumer choice. He demonstrated that consumers will purchase increasing
quantities of goods until the marginal utility derived from the last penny's worth of one good is equal to
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the marginal worth of every other good. His major work was The Theory of Political Economy publishedin 1871.
Keynes, John Maynard (1883-1946). The most important economist of the 20th century. Keynes first
came to prominence with his attack on the 1919 treaty with Germany (The Economic Consequences ofthe Peace, 1919). During the 1920s he became dissatisfied with the mainstream economics based on thetradition established by Alfred Marshall. The conventional analysis of individual markets appeared
inadequate to explain the economic problems then being experienced in England. Keynes becameconvinced that deflationary policies were the cause of the difficulties and published several works on
money, notably a two volume work,The Treatise on Money. From this he went on to develop the analysissubsequently elaborated in The General Theory of Employment, Interest and Money, 1936. Within ten
years of its publication, Keynes had, as he expected to do, brought about a revolution in the discipline of
economics. Keynes' lifetime achievements went beyond his theoretical work. He played a prominent role
in the intellectual and cultural life of his time and was a very influential adviser to the British government
up to the time of his death.
Keynesian growth models. Models in which a long run growth path for an economy is traced out by the
relations between saving, investing and the level of output.
Keynesian macroeconomics. The theory that shows how a market-based capitalist economy may reach
equilibrium with large scale unemployment and how government spending may be used to raise it out of
this to a new equilibrium at the full-employment level of output.Labour. The economically productive capabilities of humans, their physical and mental talents as applied
to the production of goods and services.
Laissez-faire. A doctrine advocating a minimum role for government in the economy, such as providing
for defence against external enemies, a system of law to protect individuals and their property, andproduction of such goods and services which for some reason are needed, but would not be produced by
private firms.
Land. All natural resources. The "gifts of nature" which are economically useful.
Law of demand. The inverse relationship between price and quantity of a good or service demanded.
Leibenstein, Harvey (1922- ). An American economist, born in 1922. Leibenstein taught at the University
of California Berkeley in the 1950s and 60s, and subsequently at Harvard. He has published widely in
area of economic growth and development, but remains best known for his theory of X-efficiency, which
postulates that individuals are non-maximizers when there is little pressure on them and that conventionplays a large part in determining the amount of effort they put into their work. See his General X-efficiency Theory and Economic Development, 1978 andInflation, Income Distribution and X-efficiencyTheory, 1980.Lender of last resort. The function whereby central banks stand ready to make cash advances to
commercial banks in the event they misjudge their cash reserve requirements.
Lenin (Vladimir Il'ich Ul'ianov) (1870-1924). A Russian-born intellectual who masterminded the
formation of the Russian Communist Party and successfully seized power with the revolutionary uprising
of November 7, 1917. Although he produced a considerable volume of writing, ranging from polemical
tracts to serious scholarly works (notably a history of capitalism in Russia), Lenin (the name he began
using while living in exile in Germany) was above all else a master politician who succeeded in weldingthe disputatious radical factions in Russia together to create a well-disciplined political machine. His
adaptation of the principles of Karl Marx to the situation in Russia was built on the idea of using the Partyas the instrument for forging a revolutionary working class.
Lerner, Abba P. (1903-1982). An American academic economist, born in Russia, and educated largely in
England, Lerner was one of the first and most enthusiastic converts to Keynesian economics. He
subsequently taught at a number of different universities in the US including Michigan State and UCLA
Berkeley. His major publication was The Economics of Control(1944) which combined Keynesianprinciples with welfare economics to produce a complete system of economic management equally
applicable to capitalist or socialist economies.
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Liabilities. In general, debts owed by individuals or firms. In the case of commercial banks, their
liabilities are largely in the form of what they owe their customers, that is, the total amount of deposits
held.
Long run average costs. Total costs divided by the number of units of output. The long run average cost
curve plots the relationship between output and the lowest possible average total cost when all inputs canbe varied.
Long run costs. Production costs when the firm is using its economically most efficient size of plant.Long run. In the context of the theory of the firm, the long run is a period of time long enough for the firm
to vary the quantities of all the inputs it is using, including its physical plant.
Lorenz curve. A curve showing the cumulative percentage of income plotted against the cumulative
percentage of population.
Macroeconomics. The branch of economic theory concerned with the economy as a whole. It deals with
large aggregates such as total output, rather than with the behaviour of individual consumers and firms.
Majority goods. Goods which are generally available to consumers because they can be mass produced in
whatever quantities there is a demand for. Fast food and consumer electronics are good examples.
Malthus, Thomas (1766-1834). Born the son of an eccentric country gentleman-scholar, Malthus was
educated at Cambridge, studying mainly social studies and mathematics in preparation for his intended
career as a cleric. He wrote widely on economic issues of his day, maintaining a close correspondence
with David Ricardo. His most famous work, however, was on the subject of population. His recognitionof what subsequently came to be called the "principle of diminishing returns" underlay his famous
proposition that production of the means of subsistence increases as an arithmetic progression (1,2,3,4,
etc.) whereas human population has a tendency to increase geometrically (2,4,16, etc.). Malthus argued
that it was useless to try to solve this problem by producing more food. The only cure could be to preventpopulation from increasing at its biological potential. Unless people learned to control their rate of
increase (by postponing marriage until children could be adequately supported), nature would control
population through the instruments of what Malthus referred to as "misery" and "vice" (which as far as he
was concerned included the use of contraceptive measures).The success of his writings enabled Malthus
to escape the life of a country cleric and led him to an appointment in 1805 as professor of history and
political economy at a small college operated by the East India Company, Haileybury College, in the
south of England. Malthus is often called the first professional economist. He spent the rest of his life
teaching and writing. He published a general treatise on economic principles,Political Economy, in 1820,although it attracted less attention than his first book,An Essay on the Principle of Population as itAffects the Future Improvement of Society.Marginal analysis. An analytical technique which focuses attention on incremental changes in total
values, such as the lastunit of a good consumed, or the increasein total cost.Marginal benefit. The increase in total benefit consequent upon a one unit increase in the production of a
good.
Marginal cost. The increase in total cost consequent upon a one unit increase in the production of a good.
Marginal physical product. The change in total product measured in physical terms caused by a one unit
increase in a variable input.
Marginal propensity to consume. The part of the last dollar of disposable income that would be spent onadditional consumption.
Marginal propensity to save. The part of the last dollar of disposable income that would be saved.Marginal revenue. The addition to total revenue resulting from the sale of one additional unit of output.
Marginal revenue product. The change in total revenue that results from employing one more unit of a
factor.
Market demand. The relationship between the total quantity of a good demanded and its price.
Market failure. Instances of a free market being unable to achieve an optimum allocation of resources.
Markets. Any coming together of buyers and sellers of produced goods and services or the services of
productive factors.
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Marshall, Alfred (1842-1924). One of the great synthesizers of economic theory who also developed and
refined many of the most useful analytical tools of the discipline. His famous student at Cambridge, John
Maynard Keynes, called him the greatest economist of the 19th century. His influential
textbook,Principles of Economics, first published in 1890, served for more than a quarter of a century as
the standard reference on the subject. In it he set out clearly such basic concepts as price elasticity ofdemand, competitive short-run and long-run equilibrium of the firm, consumer surplus, increasing and
decreasing cost industries, and economies of scale. Trained in mathematics, Marshall relegated themathematical expression of his principles to footnotes.
Marx, Karl (1818-83). One of the most influential social philosophers in history, Marx lived a life of
almost constant conflict and adversity. Despite a Ph.D. in philosophy from the University of Jena he was
unable to secure a university teaching position and his involvement in revolutionary political activity led
to his expulsion from Germany. He was also subsequently forced to leave Belgium and France before
finally settling in London where he made a meager living by journalism (serving as a correspondent for
theNew York Herald-Tribune). While continuing to involve himself in radical political affairs he devoted
as much time as he could to an extraordinary scholarly undertaking, which was nothing less than an
attempt to synthesize all human knowledge since the time of Aristotle. The fruits of this labour, much of
it pursued in the Reading Room of the British Museum, was eventually published in his massive
work,Das Kapitalwhich established the intellectual foundation of the Marxist interpretation of history
and which posited the coming of a new world order following the inevitable collapse of capitalism. Keyelements of his analysis were embodied in an easily-understood pamphlet written with his benefactor
Frederick Engels, The Communist Manifesto,published in London in 1848.Median voter theorem. The proposition that political parties will tend to adopt moderate policies to appeal
to voters near the middle of the political spectrum.Mercantilism. A body of policy recommendations designed to promote the development of the early
nation states of western Europe in the 17th and 18th centuries. The emphasis was on utilizing trade to
increase national wealth at the expense of the countries being traded with through fostering a "favourable
balance of trade", by which was meant an excess of exports over imports.
Minority goods. Goods which have a very low elasticity of supply. That is, even large increases in their
price can call forth little, if any, additional supply, which means that only the very wealthy can afford
them. Large, secluded waterfront properties might be an example.
Mishan, Ezra Joshua (1917- ). Born in Manchester England, Mishan taught at the London School ofEconomics from 1956 to 1977. He published a large number of articles in professional journals and
several books, the best known of which is The Costs of Economic Growth, 1967. In later years he hasbeen a frequent contributor to more popular journals writing on variety of issues, including what he has
refereed to as "the pretensions of economists."
Monetarism. A view that market economies are inherently self-stabilizing and that variations in the
quantity of money are the main cause of fluctuations in the level of aggregate demand.
Monetary base. The same as "high-powered money": cash in commercial banks, plus cash in circulation
and deposits of the commercial bank at the central bank.
Monetary policy. The use of the central bank's power to control the domestic money supply to influence
the supply of credit, interest rates and ultimately the level of real economic activity.Money. Anything generally acceptable in exchange. Money serves a number of functions: it is a medium
of exchange, it is used as a unit of account, and it can be used as a store of value. In its latter use, it is analternative to holding value in the form of goods or other types of financial assets such as stocks or bonds.
Monopolistic competition. Essentially the same as imperfect competition: a market situation in which one
or more firms may be capable of influencing the price of the product. It is characterized by product
differentiation, often established through advertising.
Monopoly. Strictly defined as a market situation in which there is a single supplier of a good or service,
but often used to suggest any situation in which a firm has considerable power over market price.
Monopsonistic firm. A firm which is the sole buyer of a good or service, most likely of labour in a
particular market.
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Multiplier effect. The tendency for a change in aggregate spending to cause a more than proportionate
change in the level of real national income.
Mun, Thomas. A British mercantilist writer of the 17th Century.
National income (GDP) deflator. A general way of referring to the price index which measures the
average level of the prices of all the goods and services comprising the national income or GDP.National income. The general term used to refer to the total value of a country's output of goods and
services in some accounting period without specifying the formal accounting concept such as GrossDomestic Product.
Natural increase. Growth of the population due to an excess of births over deaths.
Natural monopoly. A market situation in which economies of scale are such that a single firm of efficient
size is able to supply the entire market demand.
Natural rate of unemployment. The rate of unemployment that would exist when the economy is
operating at full capacity. It would be equal to the amount of frictional unemployment in the system.
Net exports. The total value of goods and services exported during the accounting period minus the total
value of goods and services imported.
Net immigration. The total number of people leaving the country to take up permanent residence abroad
minus the number of people entering the country for the purpose of taking up permanent residence.
Net investment. Total investment during some accounting period minus the amount of depreciation
during the same period.Niskanen, William Arthur (1933- ). An American economist born in Oregon who studied economics at
both Harvard and Chicago. Niskanen has held various posts in government (US Department of Defense)
and business (Ford Motor Co.) He was a pioneer in the economic theory of bureaucracy. His best-known
book isBureaucracy and Representative Government, 1971.Normal good. Any good for which the demand increases as incomes increase.
Official settlements account. A record of the net increase or decrease in a country's official foreign
exchange reserves.
Open market operations. Central bank purchases or sales of securities in the securities market.
Opportunity cost. The best alternative sacrificed to have or to do something else.
Pareto, Vilfredo (1848-1923). Born in Paris of French and Italian parents, Pareto was educated in Italy
where he was trained in mathematics and engineering. After working as an engineer for some years, he
inherited a fortune and devoted himself to his broad-ranging interests in mathematics, sociology andreligion. He was active in the turbulent politics of turn-of-the-century Europe. He also held an academic
appointment at Lausanne where he lectured in economics and sociology. In 1906 he retired to his estate
near Celigny on Lake Geneva and occupied himself developing a rather peculiar system of sociology.
When the fascists came to power in Italy Mussolini appointed him a Senator, presumably because of his
professed hatred of democrats. His major contributions to economics were the indifference curve analysis
which he had adapted from the work of Francis Edgeworth, a British economist, and which was in turn
picked up and developed by J.R. Hicks; various elements of general equilibrium theory, most notably the
concept of what has come to be known as "Pareto optimality" and a theory of income distribution which
held that the pattern of income distribution was essentially the same in all economies and at all times.
Pareto optimality. The condition which exists when it is impossible to make any individual better offwithout making any other individual worse off.
Partnership. An unincorporated business owned by two or more people.Per capita income. Total income divided by the size of the population.
Perfect competition. A market situation in which there are so many sellers (and buyers) that no one seller
(or buyer) can exert any influence on the price. All participants in such markets are "price takers".
Personal distribution. The distribution of income on the basis of income groups. For example, by dividing
all income recipients into ten groups (deciles) and showing the share each of these groups had of the total
income.
Planning curve. The long run average cost curve.
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Portfolio theory. The analysis of how an investor can maximize the expected return from a "portfolio" of
various kinds of financial assets having given degrees of risk and uncertainty associated with them (or
minimize the risk involved in realizing some given expected return).
Positional goods. Goods which are at least in part demanded because their possession or consumption
implies social or other status of those acquiring them.Posner, Richard A. (1939- ). An American lawyer, economist and jurist, educated at Yale and Harvard.
Posner lectured at the University of Chicago Law School in the 1980s, and was appointed to the US Courtof Appeals during the Reagan administration. His major work in economics has been concerned with the
economic analysis of law. He has published several important articles and three major books,EconomicAnalysis of Law, 1973;Antitrust Law: An Economic Perspective, 1976; and The Economics of Justice,
1981.
Price discrimination. The selling of a good or service at different prices to different buyers or classes of
buyers in the absence of any differences in the costs of supplying it.
Price elasticity of demand. The percentage change in the quantity of a good demanded by the percentage
change in its own price.
Price. What must be paid to acquire the right to possess and use a good or service.
Principle of diminishing marginal utility. The proposition that the satisfaction derived from consuming an
additional unit of a good or service declines as additional units are acquired.
Principle of Diminishing Returns. The proposition that the marginal product of the last unit of labouremployed declines as additional units of labour are employed.
Private goods. A good which cannot be consumed without paying for it and the supply of which is
reduced when it is consumed by a particular user of it.
Privatization. The selling-off of publicly owned enterprises to private owners.Product differentiation. Causing buyers to believe that a particular version of a product is superior to that
being offered by competitors.
Production possibilities. Levels of output which are within the range of possibilities for a particular
economy.
Production possibility curve. A graphical representation of the boundary between possible and
unattainable levels of production in a particular economy.
Profit. When a firm's revenues exceed its costs, profit is the difference between the two.
Public goods. A good which can only be supplied to all if it is supplied to one and the availability ofwhich is not diminished by any one consumer's use of it.
Public interest. The notion that there is some kind of general interest of the community as a whole which
can be affected by the actions of governments or private agents.
Quantity theory of money. The idea that there is a direct link between the quantity of money in the
economy and the price level.
Quota. A limitation on the amount of a good that can be produced or offered for sale domestically or
internationally.
Rational behaviour. Behaviour that is consistent with the attainment of an individual's perception of his or
her own best interest.
Real balance effect. The influence a change the quantity of real money has on the quantity of real nationalincome demanded.
Redistribution policy. Measures taken by government to transfer income from some individuals to others.Relative prices. The relationship between the prices of different goods and services. May be thought of in
terms of the amount of one good which can be had for a certain expenditure compared to the amount of
another good which can be had for the same expenditure.
Rent-seeking. The activities of individuals or firms to obtain special privileges, such as monopoly power,
which will enable them to increase their incomes. Using up resources to win such privileges from
governments or their agencies.
Resources. All those things which can be used to produce economic satisfaction.
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Ricardo, David (1772-1823). Born in London, Ricardo had a successful financial career in the City. He
developed a strong interest in the work of Adam Smith and other early contributors to economics such as
Jeremy Bentham and Thomas Malthus. He had a life-long friendship with the latter, although their ideas
were usually sharply conflicting. Ricardo wrote several influential pamphlets on economic issues of his
day, particularly on taxation and commercial policy. In 1817 he published his major work,Principles ofPolitical Economy and Taxation. Smith, Malthus and Ricardo are generally regarded as the main
members of the classical school of economics.Risk. Those undertaking investments or the production of goods and services for sale cannot know with
certainty whether they will recover the outlays needed to conduct these activities. Although some risks
can be insured against (the risk of fire losses for example) there is no way of insuring against the
possibility of business losses due to the uncertainty of the market place.
Robinson, Joan (1903-83). Born in Surrey, England. A prominent Cambridge economist, Joan Robinson
first attracted attention with her work on imperfect competition which became the basis of standard
expositions in university textbooks on economic theory, but which she subsequently repudiated. She was
a powerful advocate of Keynesian economics in the 1930s and 40s. After World War II she sought to
develop a dynamic version of the Keynesian model and her work was the basis for what is sometimes
called "neo-Keynesianism", a radical form of Keynesianism associated with a small group of economists
at Cambridge. She was one of the few mainstream academic economists to take Marxian economics
seriously and incorporated elements of it into her own work. In the 1960s and 1970s she engaged in avigorous intellectual controversy with Paul Samuelson and other dominant American theorists (based at
the Massachusetts Institute of Technology) over the theory of capital and the marginal productivity theory
of income distribution.
Saving function. The relationship between saving and national income.Saving. The act of abstaining from consumption. In terms of the national accounts, the difference between
personal income less taxes and total consumption spending.
Scarcity. The fact that human wants exceed the means of satisfying them.
Schedule. A table or list of values.
Schumpeter, Joseph (1883-1950). An Austrian-born economist who had a broadly-based career as a
lawyer, banker, teacher and senior civil servant in Austria before migrating to the US where he became a
professor economics at Harvard in 1932. His scholarly writing ranges over topics as diverse as business
cycles and the historical evolution of capitalism. He is perhaps best known today for his defence ofmonopoly, which he developed in conjunction with his view that the success of capitalism was largely
attributable to the freedom it allowed for innovation and entrepreneurial activity.
Seasonal unemployment. Unemployment which occurs regularly because of seasonal changes in the
demand for certain kinds of labour.
Secular change. Change over a long period of time, such as a decade or more. Distinguished from cyclical
change which occurs in shorter time periods such as a year.
Shareholder. Owner of some fraction of the stock issued by a corporation.
Short run. In the theory of the firm, a period of time which is too short for changes to be made in all
inputs. For example, a period not long enough to permit the size of the physical plant to be altered.
Simple money multiplier. The amount by which a change in the monetary base is multiplied to bringabout the eventual change in the total money supply. It is called the simple money multiplier because it
does not take into account possible offsets to the process, such as a rise in the amount of moneyindividuals or households may choose to hold as cash when the money supply increases.
Single proprietorship. A form of unincorporated business in which there is only one owner.
Size distribution of income. The distribution of income among groups of income recipients defined on the
basis of the size of their incomes.
Smith, Adam (1723-90). Generally regarded as the founder of modern economics, Adam Smith was born
in 1723 in Kirkaldy, Scotland. Educated at Glasgow College and at Oxford, he eventually gained the chair
of moral philosophy at the University of Edinburgh. He published his Theory of Moral Sentiments in 1759
and his great work,An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The latter
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was an immediate success and its influence is still felt today. Perhaps its most famous passage is that in
which Smith elaborated on his notion that individuals are motivated not by altruism, but by self-interest.
In pursing their own interests, however, they inadvertently advance the interest of society as a whole, led
as it were by "an invisible hand."
Social cost. The real cost to society of having a good or service produced, which may be greater than theprivate costs incorporated by the producer in its market price.
Social Darwinists. A disparate group of turn-of-the-century commentators on social issues who sought toutilize the Darwinian law of natural selection ("survival of the fittest") as a basis for social policy. The
best-known of the social Darwinists was Herbert Spencer.
Spencer, Herbert (1820-1903). A British philosopher and early sociologist. Spencer was trained mainly in
engineering, but he developed an early interest in social science. He became involved with several radical
social movements and tried to develop an ambitious, but never fully coherent philosophical system he
called "Synthetic Philosophy." He published three major books: Social Statics, 1850; The Man versus theState, 1884; and The Principles of Ethics, 1892-3. His social theories were founded on the conviction that
the evolution of society from a state of brutal barbarism to modern industrial civilization had depended on
the subordination of the less capable members of society to their superiors. Any interventions which
alleviated the circumstances of the less fit, Spencer contended, disrupted the operation of the benign
natural processes which ensured progress by eliminating the idle, incompetent and unproductive members
of society.Stalin, Joseph Vissarianovich (born J.V. Dzhugashvili) (1879-1953). Lenin's disciple and successor as
leader of the Soviet Union. Stalin reinforced the system of centralized state control after gaining power
when Lenin died in 1924. Through systematic purging of dissenters from the Party apparatus, Stalin
achieved supreme control and drove forward a massive program of industrial development and forcedcollectivization of agriculture. As he once put it, "We lag behind the advanced countries by 50 to 100
years. We must make good this distance in ten years." Despite enormous losses due to famine in the
1930s and the devastation of World War II, by the time of his death Stalin had made the Soviet Union
into a modern, industrial state capable of challenging the United States for international economic,
political and technological leadership.
Stationary state. The economic condition envisioned by the classical writers once the growth of
population had reached the point where output per capita was reduced to the subsistence level and the
accumulation of capital had reduced the return to investment to zero. The economy would remain inequilibrium with no possibility of future increases in population or per capita incomes.
Stigler, George (1911- ). Stigler was born and grew up in the western US and studied at the University of
Washington, at Northwestern, and Chicago. He subsequently taught at several universities in the
American mid-west and at Columbia before settling down at the University of Chicago where he
remained from 1958 until retirement in 1981. His published work covers a variety of topics in economic
theory, including oligopoly, economies of scale and other aspects of industrial organization. Some of his
most original contributions have to do with the economics of information, which he treated as a standard
commodity subject to the usual influences of demand and supply, and the economic theory of regulation.
Substitute goods. Goods which may be used in place of other goods.
Substitution effect. The change in the quantity of a good demanded resulting from a change in its relativeprice, leaving aside any change in quantity demanded that can be attributable to the associated change in
the consumer's real income. It may also be thought of as a a change in the quantity demanded as a resultof a movement along a single indifference curve.
Tariff. A tax imposed on an imported good.
Tastes. The preferences of consumers.
Technology. Knowledge which permits or facilitates the transformation of resources into goods and
services.
Tort. In law, a private or civil wrong.
Total factor productivity. The growth of real output beyond what can be attributed to increases in the
quantities of labour and capital employed.
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Transfer payments. Social benefits paid to individuals or households by government.
Unemployment. The non-utilization of labour resources; the condition in which members of the labour
force are without jobs. Sometimes used more broadly to refer to the waste of resources when the economy
is operating at less than its full potential.
Utilitarian. Refers to a school of philosophy based on the ideas of Jeremy Bentham (1748-1832). Themain principle involved was that private morality and government policy should be based on the concept
of "general utility,"-the greatest good for the greatest number.Voluntary export restraint. A restriction placed by an exporting country on the volume of exports it sends
to a particular country.
Wages. The general term applied to the earnings of the factor of production, labour.
Wants. The apparently limitless desires or wishes people have for particular goods or services.
X-inefficiency. The failure to minimize costs or maximize returns. (Sometimes referred to as X-
efficiency, but carrying the same meaning.)
Glossary of Investment Terms - AB C D EF GHIJKL M N OP QRS T UV WX YZAApplication. The application is a form that comes with a fund's prospectus. Investors openaccounts with mutual funds by completing the application, which asks for basic information from
the investor, including name, type of account, tax identification number, and service optionchoices. When completed, the application, along with a check made payable to the fund, ismailed to the fund company.
Assets. As an accounting or investment term, assets refer to owned items, such as cash, stock,equipment, and real estate.
Return to Alphabet
BBond. A bond is a contract representing the terms of borrowing and repayment for a debt. Seealso Security.
Broker. A broker, also called a Registered Representative or account executive, is a licensedperson authorized to receive commissions. Brokers are always affiliated with a brokeragecompany, or broker-dealer. The broker-dealer is responsible for oversight of their affiliatedbrokers. Brokers generally work for commissions, while Registered Investment Advisors workfor fees.
Return to Alphabet
CNo entries for this letterReturn to Alphabet
DDistribution. A distribution is a dividend payable to investors. As mentioned elsewhere, adividend can be of three types: income, short-term capital gain or long-term capital gain. Whilewe're on the subject, be aware that a mutual fund dividend, or distribution, may be physicallypaid to the investor, or it may be reinvested in the fund, giving the investor more shares.
Diversification. Diversification refers to the numbers of securities held, and their types. Forexample, ten stocks would constitute a more diversified portfolio than two stocks. In addition,
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the concept of diversification extends beyond the confines of a single type of investment. Forexample, there is more diversification in a stock and bond portfolio than in a portfolioconstructed entirely of stocks, alone.
Dividends. Dividends are payments made by corporations on earnings. In other words, part ofthe profits and income are shared with investors. This applies not only to mutual funds, but to
shares of companies, as well. Dividends from mutual funds may be of three types: incomedividends, short-term capital gains dividends and long-term capital gains.
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EEconomies of Scale. An economic term, economies of scale refers to the savings thatcompanies may experience when they grow. For example, it may be cheaper, on a per-employee basis, to produce payroll for ten employees than for one, since it is being doneanyway.
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FNo entries for this letter
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GGrowth. Growth refers to capital appreciation. The underlying value of the investment isexpected to grow. Unlike income, which is somewhat regular and consistent in most cases,growth is much less certain. However, growth investments usually outpace the returns onincome-type investments over the long term (five to ten years, or longer). Growth investmentsusually pay little in current income.
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IIncome. Income refers to the generation of regular earnings, whether from interest on bonds orfrom corporate dividends. Growth and income are somewhat mutually exclusive. For example, afast-growing technology company may choose to reinvest earnings for further, rapid growth,
leaving little cash for dividend distributions to shareholders.
Index. Indexes are numerical calculations, based on groups of similar investments, meant toconvey the overall price level of a given market. For example, there are indexes for blue chipstocks, small stocks, foreign stocks, Treasury Bonds, and so on. Examples of indexes you mayhave heard of are the Dow Jones 30 Industrials, the Standard and Poor's 500 Index, the Russell2000 index, and the MSCI EAFE (Europe, Australia, Far East) index.
Industry. Mutual funds generally are well-diversified. A stock fund, for example, normally will be
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invested not only in a wide variety of individual stocks, but also a variety of industries, such asutilities, technology, consumer durable goods, health care, retail, and so on. Funds that focus onparticular industries lack a degree of diversification, and thus are subject to increased risk.
Investment Company. Investment company is another term for mutual fund. As we know, it is acompany designed for investment; it is organized as a corporation, distributes shares, and pays
dividends.
Issue. A security made available to the public may be called an issue. On this basis, mutualfunds issue shares to investors in return for cash.
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JNo entries for this letter
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KNo entries for this letter
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LLiability. What a person or company owes to others. The opposite of an asset.
Load. Another word for sales charge. A load, or sales charge, is added to the net asset value ofmany mutual funds to come up with a public selling price. For example, if a fund's shares areworth $10, and the load is 5%, then the offering price to the public would be $10.50 ($10.00 plus5%, or $0.50). The load, or sales charge, is paid to the selling brokerage firm, which in turn pays
out much of it to the individual broker, as a commission. Thus, in our example, above, only$10.00 actually goes into the fund; the other $0.50 goes to the brokerage firm.
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MManagement. Management, or manager, is a general term that, in the mutual fund world, refersto the people who select the actual investments of a mutual fund.
Marking-to-Market. A process (required of mutual funds, by law) of adjusting the price of sharesto a current market value, based on the value of the underlying holdings.
Money Market. Money market has come to mean a certain type of bank account (as a result ofheavy marketing by bankers, of course). However, the term actually refers to debt instruments(bonds) that mature within one year. A money market mutual fund invests in money marketinstruments. By the way, bonds maturing at dates greater than one year out are part of thecapital market. In both cases, the terms refer to the uses to which the proceeds of the bondissues are used: as money (liquid) or for capital investment (machinery, longer-terminvestments).
Morningstar. Morningstar, Inc., is an investment research and information company based in
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Chicago, Illinois. Morningstar pioneered in-depth, timely mutual fund information service calledMorningstar Mutual Funds, which has become the standard in mutual fund research in just afew years.
Mutual Fund. An broad term meaning an investment company, or trust, which is owned byinvestors and is subject to regulations as described in the Investment Company Act of 1940.
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NNet Assets. When you add up the value of assets, and deduct liabilities, you arrive at the netvalue of assets over liabilities, or net assets.
Net Asset Value. In mutual fund parlance, this is the value per share. It is arrived at by takingthe company's net assets, and dividing by the number of shares outstanding.
No-Load. A general term applied to mutual funds that have no sales charges or commissions.
No-Load Fund Analyst. The No-Load Fund Analyst is a mutual fund newsletter published byLitman/Gregory in the San Francisco Bay Area. This newsletter has some unique strengths,including regular in-depth interviews with top fund managers, their backgrounds, and theirtechniques and investment philosophy. In addition to fund reviews, the No-Load FundAnalyst discusses economic trends and the relative values of various asset classes at variouspoints in time.
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OObjective. The objective of a mutual fund briefly (often in 25 words or less) tells what the chiefgoal of the fund is. For example, a fund's primary investment may be "growth with income as a
secondary consideration," or "the highest level of income consistent with preservation ofcapital." As in food labels, the first items mentioned are usually the most important!
Offering Price. The offering price is the price an investor pays per share of a mutual fund. It isthe total cost per share, and may include a sales charge.
Open-End Mutual Fund. A type of mutual fund that is designed to issue and redeem sharesfrom investors, directly, rather than through the secondary (stock) market.
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P
Portfolio. A term denoting the overall collection of securities, or investments, owned by a personor company.
Prospectus. The prospectus is a mutual fund's offering memorandum. It is a small booklet,generally about thirty pages long, that gives basic information designed to disclose relevantfacts that investors need to make an informed decision about investing in a given fund. Federalregulations require prospectuses to cover certain basic important information, such as the fund'sinvestment objective, expenses, management agreements, risks, and how to do business with
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the fund.
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QNo entries for this letter
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RNo entries for this letter
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SSales Charge. A commission, or extra cost, added on top of the price of a mutual fund when youbuy it. The amount is calculated as a percentage of the underlying value per share. The salescharge is paid to a brokerage company, and is not invested in the fund. In other words, it is
simply a cost to the investor, off the top, and is lost to the investor at the start.
Sector. Sector is another word for industry. Sector funds usually focus on a single industry, suchas health care, technology, or utilities. These funds are probably best avoided until investorsgain a fair amount of investment expertise at a minimum. In any event, investors shouldendeavor to build a properly diversified portfolio before venturing into these specialty funds.
Security. A document representing participation in an investment. Stocks are securitiesrepresenting ownership shares. Bonds are securities representing a contractual debt obligationof the issuer to repay the holder, with interest.Shares. Shares are units of ownership in a corporation. For shares in a mutual fund, theownership value of each share may be determined by dividing the net assets by the number of
shares. The value of shares in a publicly-traded stock is determined by supply-and-demandonly, and may or not bear any discernible correlation with the value of the company's assets.
Shareholder. A mutual fund shareholder is, simply put, an investor in a fund. He or she ownsshares in the fund as a result of the investment being made. Generally, shares may bepurchased or redeemed for cash at any time.
Statements. Statements are periodic reports to investors regarding their investment accounts.Statements usually contain the name and address of the account holder, the date of thestatement, the current number of shares, the current value per share, recent transactions thathave occurred, such as purchases and dividends, and the total account value. Year-end mutualfund summaries, showing all transactions for the preceding year, should be kept by investors as
long as the account is open, for tax calculation purposes, and then for a period of at least threeyears.
Stock. A type of investment security, denominated in shares, that represents ownership in acompany.
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