Small Simple Dictionary of Economics (Part 2 of 8)

Economics, like other sciences and arts, has its own language. Without knowledge of this language, it is very difficult to understand economics. This has stopped many from following local, national and international economic developments. When I mention that economics is my field of interest, it often creates a sense of uneasiness since, unlike politics and sports, where almost everyone has an opinion, no one has much to say, and the conversation quickly changes to other things. This is unfortunate because economics is everywhere and is one of the most important factors in our lives. It touches almost every activity we undertake. But also, it isn’t easy to have an economics dictionary handy, so I explain about 200 common economic terminologies in a simple way. For some, it may be overly simplified; if that is the case, they can always refer to the Oxford Dictionary of Economics.

Capital: Adam Smith defines capital as “That part of a man’s stock which he expects to afford him revenue.”

Capital gains: a profit that results from a disposition of a capital asset, such as stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price.

Capital market: financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

Carbon tax: a tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel (coal, petroleum, and natural gas) and is released as carbon dioxide when they are burnt.

Cartel: an agreement between competing firms to control prices or exclude entry of a new competitor in a market. It is a formal organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce production using a variety of tactics.

Cash flow: the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time.

Cash ratio: the ratio of a company’s total cash and cash equivalents to its current liabilities.

The central bank, also a reserve bank or monetary authority, manages a state’s currency, money supply, and interest rates. Central banks also oversee the commercial banking system of their respective countries.

Classical economics asserts that markets function best without government interference. It was developed in the late 18th and early 19th century by Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus, and John Stuart Mill.

Closed economy: an economy where no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything they need within the economy’s borders.

Commercial banks: a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products.

Commodity: a marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.

Commodity exchange: an exchange where various commodities and derivative products are traded. Most commodity markets worldwide trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them.

Consumer good: any commodity produced and subsequently consumed by the consumer to satisfy its current wants or needs.

Consumer price index: a consumer price index (CPI) measures changes in the price level of a basket of consumer goods and services purchased by households.

Convertibility: the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is important in international trade, where instruments valued in different currencies must be exchanged.

Cost control refers to the efforts business restrictions managers make to monitor, evaluate, and trim expenditures.

Credit: the trust allowing one party to provide money or resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt) but instead arranges either to repay or return those resources later.

Credit union: a member-owned financial cooperative democratically controlled by its members and operated to promote thrift, provide credit at competitive rates, and provide other financial services to its members.

Currency refers to money in any form when in actual use or circulation as a medium of exchange, especially circulating banknotes and coins.

Currency depreciation: the loss of value of a country’s currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system.

Debt refers to money owed by one party, the borrower or debtor, to a second party, the lender or creditor. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.

Deficit: an excess of expenditures over revenue in a given time period.

Deflation: a decrease in the general price level of goods and services.

Demand: a buyer’s willingness and ability to pay a price for a specific quantity of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices.

Depreciation: allocating the cost of a tangible asset over its useful life.

Depression: a sustained, long-term downturn in economic activity in one or more economies.

Devaluation: a reduction in the value of a currency for those goods, services or other monetary units with which that currency can be exchanged.

Direct costs refer to materials, labour and expenses related to the production of a product (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead.

Disequilibrium: the opposite of equilibrium, which is the condition of a system in which all competing influences are balanced.

Diversification means reducing risk by investing in a variety of assets.

Dividend: a payment made by a corporation to its shareholders, usually as a distribution of profits.

Division of labour: the specialization of cooperating individuals who perform specific tasks and roles.

Dow-Jones Industrial Average: a stock market index and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow.

Dumping: the act of charging a lower price for the same goods in a foreign market than one charge for the same goods in a domestic market for consumption in the exporter’s home market.

Durable goods are goods that do not quickly wear out, or more specifically, ones that yield utility over time rather than being completely consumed in one use. Items like bricks could be considered perfectly durable because, theoretically, they should never wear out.