Adverse selection
A risk associated with insurance, and linked to asymmetric information. People who are worried about their health will be more inclined to pay for health insurance than those who are fighting fit. One way to avoid the problem is to make insurance compulsory for all, as happens with car ownership.
Alpha
That part of an investment return that is due to the skill of the fund manager. This can be very hard to measure.
Amortisation
The gradual reduction in the value of an asset (or a debt) over time. A debt (such as a mortgage) is amortised via regular repayments. Companies use amortisation to steadily reduce the value of intangible assets on their balance-sheets.
Antitrust
Term used to describe laws or regulations designed to stop firms from exploiting their monopoly positions in markets at the expense of consumers or rival businesses.
Asset stripping
The practice of buying a company and rapidly selling off the component parts with the aim of making a profit. This often leads to great disruption in the business and a loss of jobs.
Austerity
A term used to describe efforts to reduce the share of public spending in GDP, particularly in the 2010s. When the economy is already weak, Keynesian economists view austerity programmes as a mistake, because they reduce demand. But free-market economists worry that, without austerity, the government’s role in the economy inexorably expands over time.
Authoritarian capitalism
Usually applied especially to China and Russia and to certain extent in India these days, this describes economies in which big business co-exists with an authoritarian government. Businesses are allowed to make money but if they dare to criticise the government, or appear too independent, they may face criminal or financial sanctions.
Backwardation
A term used in the commodity market for when the price for delivering a product today (the spot price) is higher than for delivery in future. Normally, the future price is higher, a situation known as contango. Backwardation is normally the sign of a supply shortage, causing traders to compete to get the product immediately.
Bank run
In a crisis, bank depositors may start to doubt they will get their money back. So, they may demand to withdraw it. Since banks have lent out this money, it is impossible for them to repay all depositors instantly. The bank may fail. To avoid this, most countries have schemes of deposit insurance.
Basis point
One hundredth of a percentage point. The term is often used to describe interest rate changes. A quarter-percentage-point rise or fall in rates is described as 25 basis points. Example, when the Repo rate is changed 0.25%, it is said to have changed 25 basis points.
Beta
This ratio measures the sensitivity of an individual asset’s price to that of the overall market. A stock that tends to go up even more rapidly than the market when it is rising, and drop more precipitously when it is falling, is described as “high beta”; one that moves less violently than the market is “low beta”.
Bill of exchange
A short-term financial instrument, originally used to finance international trade. The buyer of goods would give the seller a signed bill, equal to the value of the purchase, which the seller could then cash with a banker. In modern finance, bills are a catch-all term for short-term debt such as Treasury bills and commercial bills.
Bretton Woods
Location in New Hampshire of a conference in 1944 which decided the post-war economic order. It led to the establishment of the International Monetary Fund and the World Bank. And it agreed on a currency system that linked all currencies at fixed exchange rates to the dollar, which was convertible into gold at $35 an ounce.
Business cluster
When companies in an industrial sector gather in a specific area, such as technology companies in Silicon Valley. When a cluster forms, companies will find it easier to attract high-skilled staff, workers have a wider choice of employers, innovations can circulate more quickly and start-up companies may find it easier to get finance.
Capital flight
What happens when investors try to avoid high taxes, or the prospect of currency devaluation, by sending their money abroad. Governments try to prevent such flight by imposing capital controls but they need to act quickly. Investors will anticipate the introduction of capital controls by indulging in capital flight.
Cartel
Agreement where a group of producers collaborate to fix the price, or restrict the supply, of a good or service. Perhaps the best-known example is the Organisation of the Petroleum Exporting Countries, or OPEC. Cartels among companies are often outlawed by government antitrust regulations because they restrict competition.
Coase theorem
A concept, developed by Ronald Coase that deals with externalities. Coase thinks of the problem in terms of conflicting property rights such as the right of a factory to operate noisy machinery and the right of its neighbours to enjoy peace and quiet. If property rights are clearly delineated then, in the absence of transaction costs, bargaining should lead to an efficient outcome, such as the factory compensating its neighbours for the noise. Coase’s work on externalities, along with that on the theory of the firm, won him a Nobel prize in 1991.
Collateral
An item pledged as security against a loan. An obvious example is a house or flat, which homeowners used as collateral when taking out a mortgage. In financial markets, safe securities such as Treasury bonds are often used as collateral by traders and investors.
Commodity cycle
A pattern of rising and falling commodity prices and production. Rising commodity prices cause consumers to cut back their use and producers to expand output. In the ensuing glut, prices fall and output falls until commodities are so cheap that their use rises again.
Comparative advantage
This idea has been called one of the most profound insights in economics. If country A can make cars more cheaply than country B, and B can produce shirts more cheaply than A, it clearly makes sense to trade. Each has an absolute advantage in one area. But what if A is more efficient at producing everything than B? It still makes sense for them to trade, with B producing the goods where it is more competitive; if for example it is 90% as efficient as A in making shirts, and only 60% in car manufacturing, then it should specialise in making shirts and trade them for cars. Both countries will gain.
Conglomerate
A large company that has diversified across a range of countries and business areas, normally through making acquisitions. Eg. Reliance
Consumer confidence
A measure, taken from a survey, of the public’s attitude towards the economic outlook. If people are worried about their jobs, or political unrest, or a pandemic, they will be less likely to spend money.
Contango
When the futures price of a commodity is higher than the spot price.
Crawling peg
An exchange-rate system in which a currency is tied to another, but can fluctuate within a range, or band, depending on certain conditions.
Creative destruction
A concept, developed by Joseph Schumpeter, to explain economic innovation. Old inefficient companies must go out of business to release capital and workers so they can be used in new, more innovative ways.
Credit default swap
A derivative contract between two parties in which one insures the other against the default of a bond or loan. One of the products at the heart of the 2007-09 financial crisis.
Crowding out
The notion that actions by the state might restrict the options of the private sector. It usually applies to credit. If the government borrows a lot, and pushes up interest rates, then investors may not have enough capital to supply the investment needs of businesses.
Dependency ratio
The proportion of the population that is not of working age, compared with that which could work, if it chose to. Conventionally, dependants are defined as those aged up to 14 or over 65. Sometimes the figures are separated into youth dependency and old-age dependency. The higher the ratio, the greater the tax burden that is likely to fall on the working population; this is a problem for many developed economies, given the numbers now surviving into old age.
Deposit insurance
A scheme whereby a government agrees to compensate depositors if a bank goes bust. This can help prevent bank runs, when depositors panic.
Deregulation
It is a staple of conservative thought that there are too many regulations which hold back economic growth. So, every few years, governments announce a policy of deregulation to cut back the red tape. It turns out, however, that public opinion often demands that governments act to ban things that are bad, or that are disliked. And so more regulations are introduced.
Disintermediation
Cutting out the middleman, or connecting customers directly with producers. In theory, this should reduce costs. In practice, middlemen emerge in a new form; high-street travel agents may have declined in importance but many people use online versions such as Expedia or makemytrip.com.
Dumping
Selling something for less than the cost of producing it. This practice may be adopted by a dominant supplier in an industry in the hope of driving competitors out of business. More commonly, countries argue that producers in other nations are “dumping” goods and gaining market share; this can be used as an excuse to adopt protectionist measures such as tariffs.
To be continued…
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