2000/3
14 March 2000
A layperson’s guide to economic jargon Technical economic words are becoming more frequently used, not only in economic analyses and policy documents, but also in the general news media. This note takes a selection of this economic jargon and gives short simple explanations of what it means. The words are listed in alphabetical order. Where a definition contains a word which is defined elsewhere in the paper, that word is printed in italics. A wide range of economics dictionaries and text has been used to find the most useful definitions. Aggregate demand:
the value of the total demand for goods and services in the economy.
Appreciation:
an increase in the value of an asset. This often refers to the currency of a country with a floating exchange rate; when the currency appreciates, it can “buy” more of a foreign currency. (Cf depreciation)
Asset:
anything owned by a company, individual or other entity, that has a monetary value. (Cf liability)
Average tax rate:
total tax as a percentage of total taxable income.
Balance of payments accounts:
the systematic record of the receipts and payments between a country’s residents and the rest of the world, over a given period. They are traditionally divided into a current account and a capital account. A “balance of payments deficit” refers to a deficit on the current account.
c.i.f.:
“cost, insurance, freight”. This is one way of measuring the value of imports, where their value includes insurance and freight costs as well as the cost of the goods themselves. The other measure is v.f.d.
Capital account:
that part of a country’s balance of payments which embraces the following: its financial assets and liabilities (such as loans, portfolio investment, and direct investment), reserve assets (such as gold), capital transfers (which mostly consist of the funds that migrants bring with them), and the acquisition/disposal of non-produced, nonfinancial assets (such as patents).
Capital goods:
goods used to produce other goods rather than being sold to consumers (e.g. plant and equipment).
Cartel:
Businesses, organisations or countries which have grouped together to influence the price or supply of goods and services.
Closed economy:
an economy closed to international trade, with no exports, imports or capital movements. (Cf open economy)
Consumption goods:
goods which are consumed for personal satisfaction.
Consumption:
the total expenditure in an economy on goods and services which are used up within a short period of time. “Final consumption” is the expenditure on goods and services for the direct satisfaction of individual and collective needs. “Intermediate consumption” is the expenditure on goods and services to be used in the production process.
CPI:
“Consumers Price Index”: an index which measures the average level of the prices that households pay for goods and services.
Crowding out:
a fall in private sector consumption and investment as a result of increasing government expenditure.
Current account:
that part of a country’s balance of payments which embraces its transactions of goods, services, international investment income, and current transfers (e.g. foreign aid).
Cycle (economic / business cycle):
the alternative acceleration and deceleration of overall economic and business activity. A full cycle usually lasts several years.
Cyclical unemployment:
unemployment which results from the downswing of an economic cycle and can be eliminated by the upswing.
Deficit:
the short-fall of revenue over expenditure. A “budget deficit” occurs when Government’s revenue is insufficient to cover its expenditure. A “current account deficit” occurs when a country earns less than it pays overseas. A deficit also refers to the case where the value of assets is less than the value of liabilities. (Cf surplus)
Deflation:
a fall in the general level of prices. The rate of inflation is negative.
Demand:
the willingness and ability to pay a sum of money for a particular good or service.
Depreciation:
a fall in the value of an asset. This often refers to the currency of a country with a floating exchange rate; when a currency depreciates, it “buys” less of a foreign currency. (See appreciation)
Depression:
a severe recession.
Devaluation:
a reduction in the value of a country’s currency where the country has a fixed exchange rate system.
2
Direct investment:
investment made to acquire a lasting interest in an enterprise, where the investor’s purpose is to have a significant influence in the management of the enterprise.
Direct tax:
taxation on the income or wealth of individuals and companies. (Cf indirect tax)
Disinflation:
a reducing rate of inflation.
Dumping:
selling goods abroad at a price lower than that charged for the same good in the domestic market.
Economies of scale:
a reduction in the average cost of producing a product that results when a greater amount of the product is produced.
Elasticity:
the percentage change of one variable with respect to a percentage change of another. For example, the “price elasticity of demand” measures the percentage change of the demand for a particular product in response to a particular percentage change in its price.
Equity:
1. fairness; 2. the net assets of a business (calculated by subtracting its liabilities from its assets), that is, the stake the owner has in the business. In the case of a mortgaged property, equity is the value of the property after subtracting the amount owed to the lender.
Excise duty:
a tax levied on goods produced for the domestic market, as distinct from import tariffs; for example, excise duties on fuel, tobacco, or alcohol.
Externalities:
goods and services whose costs and benefits are not properly accounted for by the price. The total costs or benefits to society as a whole may be greater or smaller than the private costs and benefits to those directly involved in the transaction. One example of this is pollution-causing activity.
f.o.b.:
“free on board”. Exports are usually measured this way, which is their value at port before they are exported; that is, it does not include the value of shipping and insuring the products beyond the port.
Fiscal policy:
Government’s taxation and expenditure policy.
Fixed exchange rate system:
an exchange rate system whereby the government attempts to keep the value of the currency fixed in relation to the value of another currency or basket of currencies.
Flat tax:
the same rate of income tax is applied to all levels of income.
Floating exchange rate system:
an exchange rate system where the value of the currency is determined by market supply and demand.
Free trade:
a policy of non-intervention by the government in trade between countries.
3
Frictional unemployment:
unemployment resulting from the time involved in workers changing jobs.
Full employment:
the level of employment at which everyone able and willing to work is employed, and the only unemployment is frictional unemployment.
GDP:
“gross domestic product”: a measure of the total value of goods and services produced by an economy over a specified time period.
GNP:
“gross national product”: GDP plus income accruing to domestic residents arising from investment abroad less income earned in the domestic market accruing to foreigners abroad.
Goods:
physical objects that people are prepared to pay for.
Gross:
with no deductions; for example, “gross profit” is profits before the payment of interest and depreciation. (Cf net)
Incomes policy:
a policy of directly restraining incomes, usually as a means of keeping inflation low.
Index number:
a single number which gives the average value of a set of related items, expressed as a percentage of their average value at some base period.
Indirect tax:
tax which is levied on transactions involving goods and services; for example, GST and tariffs. (Cf direct tax)
Inflation:
persistent upward movement in the general level of prices, together with the related drop in purchasing power.
Intermediate goods:
goods which are used up in the production of other goods. example, sheet steel in the production of car bodies.
Investment:
1. in economic theory: the production of capital goods such as roads, factories and machinery;
For
2. in common usage: expenditure on the acquisition of real or financial assets. Invisibles:
the current account components of the balance of payments accounts which are not physical goods.
Labour force:
the number of people employed plus the number unemployed (see unemployment rate).
Liability:
any form of debt. (Cf asset)
Loose policy:
this applies to fiscal and monetary policy, and describes policy when it is set at a level to stimulate further acceleration of economic activity (in the short-run). (Cf tight policy)
Macro-economics:
the study of human activities in large groups as indicated by economic aggregates such as total employment, national income, and prices. (Cf micro-economics)
4
Marginal tax rate:
the rate of tax paid on an additional unit of income.
MCI:
“monetary conditions index”: an index number designed by the Reserve Bank to measure monetary conditions. Its two components are 90 day bank bill rates and the TWI exchange rate. If these rise, the MCI will rise. An increase in the MCI signifies a tightening of monetary conditions.
Merchandise trade:
exports and imports of goods.
Micro-economics:
the study of the economic actions of individual firms and well-defined small groups of individuals and sectors. (Cf macro-economics)
Mixed economy:
a system which combines competitive private enterprise with some degree of central control.
Monetary conditions:
this refers to the overall level of interest rates, exchange rates and money supply in an economy. Conditions can be either loose, tight or neutral.
Monetary policy:
the actions the Reserve Bank takes to affect interest rates, the exchange rate and the money supply in order to influence the pace of spending.
Money supply:
the total stock of money in the economy. “Money” can be defined narrowly as notes and coins, or widely to include bank deposits.
Monopoly:
an industry where there is only one seller and many buyers.
Monopsony:
an industry where there is only one buyer but many sellers.
Multiplier:
the number by which the amount of a specific capital investment (or change in some other element in aggregate demand, such as Government spending) is multiplied to give the resulting total amount by which national income or employment is increased.
National accounts:
the presentation of a country’s income and expenditure accounts in a form indicating transactions that have taken place during a given period between different sectors of the economy.
Net:
what is remaining after all deductions; for example after taking expenses and taxes off. (Cf gross)
Nominal value:
the money value of any economic variable (without adjustment to net out inflation changes). (Cf real value)
OCR:
“official cash rate”: the interest rate which applies to overnight borrowing and lending between banks and the Reserve Bank. It is currently a key operational feature of monetary policy in New Zealand.
Oligopoly:
an industry in which there are only a few sellers but many buyers.
Open economy:
an economy in which there are no restrictions on imports and exports, nor on the movement of labour or capital across the border. (Cf closed economy)
5
Opportunity cost:
where expenditure on a particular item or activity is valued in terms of the most profitable alternative use of the money. That is, it is valued in terms of the items/activities foregone.
Participation rate (labour force):
the number of people in the labour force as a percentage of the total working age population.
Portfolio investment:
investment in equity securities (shares) and debt securities (bills and bonds). Unlike direct investment, the investment is not for the purpose of gaining a significant influence on any enterprise.
Productivity:
output produced per unit of input. Labour productivity measures output per unit of labour; capital productivity measures output per unit of capital; and total factor productivity measures output per unit of labour and capital.
Progressive tax:
a tax where people on higher incomes spend a greater proportion of their income on the tax than do people on lower incomes. (Cf regressive tax)
Protectionism:
a policy that favours the use of tariffs, quotas, or other import restrictions to make domestic products competitive with foreign imports.
Public goods:
goods and services which, because they cannot be withheld from one individual without withholding them from all, tend to be supplied communally. Examples include street lighting and national defence.
Real value:
this is usually quoted in terms of the dollars of a specific base period (for example, real GDP is currently quoted in 1991/92 dollars). The real value of an economic variable in a particular period is its money value after adjustment to exclude any price level changes between that period and the base period. (Cf nominal value)
Recession:
a decline in overall economic activity, usually defined as two consecutive quarterly falls in real GDP.
Regressive tax:
a tax where people on higher incomes spend a smaller proportion of their income on the tax than do people on lower incomes. (Cf progressive tax)
Savings rate:
the proportion of income which is saved. In the case of an individual, savings is usually measured against the proportion of income after tax.
Services:
intangible products that people are prepared to pay for and which are usually consumed at the same time as they are produced. Examples include transportation, catering, and hairdressing.
Structural unemployment:
long-term unemployment caused by changes in the industrial, occupational, or demographic structure of the economy.
Supply:
The quantity of a good or service available for sale at a specified price.
6
Surplus:
the extent that revenue is greater than expenditure, or that the value of assets is greater than the value of liabilities. (Cf deficit)
Tariff:
a tax applied to imports.
Terms of trade:
a ratio of an index of export prices to an index of import prices. A rise in the terms of trade indicates that a country is able to “buy” a greater volume of imports for a given volume of exports.
Tight policy:
this applies to fiscal and monetary policy, and describes policy when it is set at a level to reduce the rate of growth of economic activity (in the short-run). (Cf loose policy)
Tradeables:
goods and services which can be imported or exported.
TWI:
“trade weighted index”: an index of the New Zealand dollar’s value against a basket of five overseas currencies (currently the Euro and the currencies of Australia, Japan, the United States, and the United Kingdom), where each country’s currency is weighted by a combination of the size of (1) its trade with New Zealand and (2) its GDP.
Underemployment:
the employment of workers in jobs which either do not offer sufficient hours of work or do not fully utilise their abilities and skills.
Unemployment rate:
the number of people unemployed, as a percentage of the total labour force. For the purpose of this calculation, an unemployed person is someone who is without a paid job, is available for work, and is actively searching for work.
v.f.d.:
“value for duty”. This is one way of measuring the value of imports, where the value excludes insurance and freight costs. The other measure is c.i.f.
Volume index:
this measures the real value of, for example, goods and services imported or exported.
Andrew Morrison, Economist Parliamentary Library For further information, contact Andrew (ext.9202)
Copyright NZ Parliamentary Library. Except for educational purposes permitted under the Copyright Act 1994, no part of this document may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, other than by Members of Parliament in the course of their official duties, without the consent of the Parliamentary Librarian, Parliament Buildings, Wellington, New Zealand.
7
