Economics Glossary

Accounts payable: money owed to suppliers

Accounts receivable: money owed by customers

Annual report: yearly record of a publicly held company's financial condition, including a description of the firm's operations as well as balance sheet, income statement, and cash flow statement information, distributed according to the Securities and Exchange Commission (SEC) rules to all shareholders

Annual Percentage Rate (APR) A measure of the cost of credit on a yearly basis, expressed as a percentage rate; includes interest, transaction fees and service fees

Annuity: a regular periodic payment made by an insurance company to a policyholder for a specified period of time

Appreciation: increase in the value of an asset

Arbitrage: the simultaneous buying and selling of a security at two different prices in two different markets, supposedly resulting in profits without risk; perfectly efficient markets present no arbitrage opportunities; perfectly efficient markets seldom exist, but, arbitrage opportunities are often precluded because of transactions costs

Arbitrageur: one who profits from the differences in price when the same, or extremely similar, security, currency, or commodity is traded on two or more markets; the arbitrageur profits by simultaneously purchasing and selling these securities to take advantage of pricing differentials (spreads) created by market conditions

Asset: any possession that has value in an exchange

Asset stripper: a corporate raider (company A) that takes over a target company (company B) in order to sell large assets of company B to repay debt; company A calculates that the net selling of the assets and paying off the debt, will leave the raider with assets that are worth more than what it paid for company B

Balance of payments: an accounting statement of the money value of international transactions between one nation and the rest of the world over a specific time period; the statement shows the sum of transactions of individuals, businesses and government agencies located in one nation, against those of all other nations

Balance of trade: that part of a nation's balance of payments dealing with imports and exports, that is trade in goods and services, over a given period; if exports of goods exceed imports, the trade balance is said to be 'favorable'; if imports exceed exports, the trade balance if said to be 'unfavorable.'

Balloon payment: a large extra payment that may be charged at the end of a loan or lease

Bank: A for-profit financial institution that accepts checking and savings deposits, and grants loans

Bank run (bank panic): a series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. many depositors withdraw cash almost simultaneously; since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business

Barter: Direct trading of goods and services between people without using artificially issued money

Benefit: A satisfaction obtained

Bond: An IOU issued by a corporation or government, requiring regular interest payments and repayment of the IOU at a later date

Borrowing: Contracting to receive money that must be paid back with interest

Budget: A plan which organizes spending and saving

Capital resources: Machines, tools, factories that are used to produce goods and services

Central bank: the principal monetary authority of a nation, a central bank performs several key functions, including issuing currency and regulating the supply of credit in the economy; the Federal Reserve is the central bank of the United States

Central bank intervention: in order to influence market conditions or exchange rate movements, central banks buy or sell their currency or the currency of other countries; recently the Federal Reserve System has used tax money to save hedge funds and banks from bankruptcy

Certificate of Deposit (CD): A savings account in which an individual agrees to leave money on deposit for a specific period of time in return for a specific amount of interest

Choice: A selection from a set of alternatives

Collateral: property that is offered to secure a loan or other credit and that becomes subject to seizure on default; (also called security)

Commodity: An object that can be used as money but also can have value of its own

Competition: The rivalry among sellers and rivalry among buyers in a market

Compound interest: Interest earned on savings and past interest

Consumer: A person who buys and uses goods and services

Consumer price index (CPI): An index that measures the average level of prices of goods and services typically consumed by an urban American family

Corporation: A business with multiple owners, whose director and officers are individually liable, but all owners (shareholders and stockholders) are not

Cost: Anything given up when a choice is made

Credit: The act of borrowing money or purchasing goods over time; a loan which enables you to buy what you will have to pay more for later (the price plus the interest)

Credit card: any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit

Credit history: a record of how a person has borrowed and repaid debt

Currency: any commodity that is in circulation as a means of exchange

Currency appreciation: an increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency

Currency depreciation: a decline in the value of one currency relative to another currency; depreciation occurs when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency

Currency devaluation: a deliberate downward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold

Currency revaluation: a deliberate upward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold

Default: failure to meet the terms of a credit agreement

Deflation: A decrease in the supply of money usually resulting in a decrease in prices

Demand: Consumer desire for goods or service Friday, August 31, 2001

Discount rate: the interest rate at which eligible depository institutions may borrow funds, usually for short periods, directly from the Federal Reserve Banks; the law requires the board of directors of each Reserve Bank to establish the discount rate every 14 days subject to the approval of the Board of Governors

Economics: The description and analysis of the production, distribution, and consumption of goods and services; the social science which studies the choices people make to satisfy their wants and needs

Economy: A social order in which people exchange goods and services

Eurodollars: deposits denominated in U.S. dollars at banks and other financial institutions outside the United States; although this name originated because of the large amounts of such deposits held at banks in Western Europe, similar deposits in other parts of the world are also called Eurodollars

Exchange rate: The value of one country's currency in terms of another country's currency

Export: Good or service produced domestically and sold abroad

Federal Deposit Insurance Corporation (FDIC): agency of the federal government that insures accounts at most commercial banks and mutual savings banks; the FDIC also has primary federal supervisory authority over insured state banks that are not members of the Federal Reserve System

Federal Open Market Committee (FOMC): a 12-member committee consisting of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents; the president of the Federal Reserve Bank of New York is a permanent member while the other Federal Reserve presidents serve on a rotating basis; the Committee sets objectives for the growth of money and credit that are implemented through purchases and sales of U.S. government securities in the open market; the FOMC also establishes policy relating to System operations in the foreign exchange markets

Federal Reserve Bank: one of the twelve operating arms of the Federal Reserve System, located throughout the nation, that together with their twenty-five Branches carry out various System functions

Federal Reserve notes: Nearly all of the nation's circulating paper currency consists of Federal Reserve notes printed by the Bureau of Engraving and Printing and issued to the Federal Reserve Banks which put them into circulation through commercial banks and other depository institutions. Federal Reserve notes are obligations of the U.S. government

Federal Reserve System: The central bank of the United States created by Congress, consisting of a seven-member Board of Governors in Washington, D.C., 12 regional Reserve Banks, and depository institutions that are subject to reserve requirements; all national banks are members and state chartered banks may elect to become members; state member banks are supervised by the Board of Governors and the Reserve Banks; reserve requirements established by the Federal Reserve Board apply to nonmember depository institutions as well as member banks. Both classes of institutions have access to Federal Reserve discount borrowing privileges and Federal Reserve services on an equal basis

Fiat money: Money that has little or no intrinsic value as a commodity; it is costless to produce, usually taking the form of tokens or pieces of paper; and is not redeemable for any commodity

Financial institution: An institution that uses its funds chiefly to purchase financial assets (loans, securities) as opposed to tangible property; financial institutions can be classified according to the nature of the principal claims they issue nondeposit intermediaries include, among others, life and property/casualty insurance companies and pension funds, whose claims are the policies they sell, or the promise to provide income after retirement; depository intermediaries obtain funds mainly by accepting deposits from the public.

The major depository institutions are listed below. Although historically they have specialized in certain types of credit, the powers of nonbank depository institutions have been broadened in recent years. For example, NOW accounts, credit union share drafts, and other services similar to checking accounts may be offered by thrift institutions.
  • Commercial banks are allowed to engage in more varied lending activities and to offer more financial services than are the other depository institutions. Commercial banks are owned by stockholders and operated for profit.
  • savings and loan associations (sometimes called building and loan associations, cooperative banks, or homestead associations) accept deposits primarily from individuals, and channel their funds primarily into residential mortgage loans. Most savings and loan associations are technically owned by the depositors who receive shares in the association for their deposits.
  • credit unions are financial cooperative organizations of individuals with a common affiliation (such as employment, labor union membership, or place of residence). Credit unions accept deposits of members, pay interest (dividends) on them out of earnings, and primarily provide consumer installment credit to members. thrift institutions is a general term often used for savings and loan associations and credit union

Fiscal policy: Federal government actions related to government spending and/or taxation and the issue of currency

Futures: Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date. Commodity futures are traded on a commodity exchange and are used for both speculation and hedging

Gold exchange standard: A variant form of the gold standard under which a country pegged the value of its currency to the value of the currency of a "major" country, e.g. sterling or dollars, which was itself on a gold standard. The international monetary regime in force between 1958 and 1970 is frequently described as a "gold exchange standard" system because of the wide use of the dollar, itself pegged to gold, as a reserve currency and as an accepted medium of exchange internationally.

Good: An object people want, such as a loaf of bread

Gross Domestic Product/Gross National Product: The value of the total output of an economy for a year

Human resources: Mental and physical skills of workers

Import: Good or service produced abroad and sold domestically

Incentive: A reward that encourages or a penalty that discourages

Income: Wages paid for work or money received from investment

Inflation: An increase in the money supply usually resulting in an increase in the level of prices of the overall economy

Insurance: A contract that you purchase from a company which compensates you:

  • for loss due to unexpected events
  • according to a payment schedule after a period of time has elapsed (e.g. annuity, medical insurance or retirement insurance)

Interest: Money earned by depositors on savings accounts; money charged borrowers by lenders; money charged by banks for securing a depositor's money

International Monetary Fund (IMF): An international organization with 146 members, including the United States. The main functions of the International Monetary Fund are to lend funds to member nations to finance temporary balance of payments problems, to facilitate the expansion and balanced growth of international trade, and to promote international monetary cooperation among nations. The IMF also creates special drawing rights (SDR's), which provide member nations with a source of additional reserves. Member nations are required to subscribe to a Fund quota, paid mainly in their own currency. The IMF grew out of the Bretton Woods Conference of 1944.

Investment: An expenditure or activity that is intended to increase the productive capacity of a specific venture

Margin: With regard to securities, this term refers to a fractional amount of full value, or the equity outlay (down payment) required for an investment in securities purchased on credit

Marginal Analysis: A method of decision-making which weighs the additional benefits against the additional costs of one more unit of something

Market: Any place where buyers and sellers exchange goods and services

Monetary policy: Federal Reserve actions to influence the availability and cost of money and credit, as a means of helping to promote high employment, economic growth, price stability, and a sustainable pattern of international transactions. Tools of monetary policy include open market operations, discount policy, and reserve requirements.

Money: A commodity used in the exchange of goods and services; anything that serves as a generally accepted medium of exchange, a standard of value, and a means to save or store purchasing power

Money stock:

  • Ml - The sum of currency held by the public, plus travelers' checks, plus demand deposits, plus other checkable deposits (i.e., negotiable order of withdrawal [NOW] accounts, and automatic transfer service [ATS] accounts, and credit union share drafts.)
  • M2 - Ml plus savings accounts and small denomination time deposits, plus shares in money market mutual funds (other than those restricted to institutional investors), plus overnight Eurodollars and repurchase agreements
  • M3 - M2 plus large-denomination time deposits at all depository institutions, large denomination term repurchase agreements, and shares in money market mutual funds restricted to institutional investors

Natural Resources: Gifts of nature that we harvest, including land, timber, water, crops and mineral deposits

Opportunity Cost: What is given up when an economic choice is made

Over-The-Counter (OTC) stocks: Stocks not traded on a national securities exchange

Par value: The full face value of a security

Passbook Savings Account: Money saved in an account that is insured up to $100,000 by the government

Points: Finance charges paid by the borrower at the beginning of a loan in addition to monthly interest; each point equals one percent of the loan amount.

Premium: The amount by which the auction price of a bill, note, or bond is higher than its face value

Price: The amount of money people pay for a good or service

Productivity: The amount of physical output for each unit of productive input

Profit: Income minus expenses

Property: Something owned or possessed

Property rights: The right to exclude others from using a good or service and the right to transfer ownership of a resource

Public Goods/Services: Goods and services provided by governments using tax dollars, such as bridges, roads, parks, schools and police protection

Recession: A period of time during which the real GDP of the economy is decreasing; an extreme recession is a depression

Reserve requirements: Reserves that must be held against customer deposits of banks and other depository institutions. The reserve requirement ratio affects the expansion of deposits that can be supported by each additional dollar of reserves. The Board of Governors sets reserve requirements within limits specified by law for all depository institutions (including commercial banks, savings banks, savings and loan associations, credit unions, some industrial loan banks, and U.S. agencies and branches of foreign banks) that have transaction accounts or nonpersonal time deposits. A lower reserve requirement allows more deposit and loan expansion and a higher reserve ratio permits less expansion.

Risk: The chance of loss

Scarcity: The condition that results from the imbalance between unlimited wants and limited resources

Securities: Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

Securities and Exchange Commission (SEC): An independent agency of the U.S. government consisting of five members appointed by the President that administers comprehensive legislation governing the securities industry.

Service: Something someone does for someone else that satisfies a want, such as baby-sitting, mowing a lawn or cutting hair

Shareholder/Stockholder: Individuals who have invested funds in a corporation and who thus own shares of stock

Sole proprietorship: A business that has a single owner who is individually liable

Specialization: Concentration by an individual on producing one good or service while depending upon others for products the individual does not produce

Stock: A certificate representing a share of ownership in a company

Supply: Quantities of a good or service that sellers are willing to offer for sale at various prices

Tariff: A tax or duty imposed on imported goods

Taxes: Mandatory payments to the government

Treasury bill: Short-term U.S. Treasury security issued in minimum denominations of $10,000 and usually having original maturities of 3, 6, or 12 months. Investors purchase bills at prices lower than the face value of the bills; the return to the investors is the difference between the price paid for the bills and the amount received when the bills are sold or when they mature. Treasury bills are the type of security used most frequently in open market operations.

Treasury bond: Long-term U.S. Treasury security usually having initial maturities of more than 10 years and issued in denominations of $1,000 or more, depending on the specific issue. Bonds pay interest semiannually, with principal payable at maturity.

Treasury note: Intermediate-term coupon-bearing U.S. Treasury security having initial maturities from 1 to 10 years and issued in denominations of $1,000 or more, depending on the maturity of the issue. Notes pay interest semiannually, and the principal is payable at maturity.

Treasury securities: Interest-bearing obligations of the U.S. government issued by the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. Marketable Treasury securities fall into three categories - bills, notes, and bonds. Marketable Treasury obligations are currently issued in book entry form only; that is, the purchaser receives a statement, rather than an engraved certificate.

Unemployment Rate: The total number of people, 16 years old or older, who are not working or are looking for work

Variable rate: A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.

Wages: Money paid for labor

Want: Something an individual desires that can be satisfied by consuming a good or service

Wraparound: A financing device that permits an existing loan to be refinanced and new money to be advanced at an interest rate between the rate charged on the old loan and the current market interest rate. The creditor combines or "wraps" the remainder of the old loan with the new loan at the intermediate rate.