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Glossary

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A

Activist investors   We use this term in finance to cover groups of shareholders that range from private investors with small stakes in the business right up to the large financial institutions that often own a significant percentage of the equity of a business. It is normally among these larger shareholders that we find the activist shareholders. These are the shareholders who believe that the managers are not doing a good job and as a result they will attempt to alter company policy and even possibly seek to replace existing senior managers with new people who they think will do a better job.

Appreciation (of the currency)   This is simply where we see an increase in the value of one currency relative to another currency.

Association of British Insurers   The ABI (Association of British Insurers) was formed in 1985 and it has the task of giving the view of the UK’s insurance industry on a number of issues. The work of the ABI is split into four main departments: General Insurance, Life and Pensions, Financial Regulation and Tax and Investment. The ABI has a membership of around 400 companies and is located in the City of London.

Average cost   This can be defined as the cost per unit of production.

Average earnings   This is the average amount of pay in a particular economy. There is strong interest in this figure as it is seen as a very important factor in determining the level of inflation.

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B

Bank of England   This is the UK’s central bank. It was made independent from the UK government in 1997. Since then it has been in charge of setting short-term interest rates in the UK money markets. The key part of the Bank of England is the Monetary Policy Committee which meets monthly to set the level of short-term interest rates.

Bank of Japan’s Governor   This is the head of the Bank of Japan.

Bear market (bottom)   This refers to a sustained period in which the prices of financial securities (especially shares) have been falling. This creates a very pessimistic financial market mood with most investors unable to see when there will be a recovery in prices. This situation is normally associated with an economic recession. The period in the 1930s in the US is a perfect example of a prolonged bear market.

Binary   The technical definition for this term is a two-digit system of numbering. In this context it is used to suggest that there had only been two possible outcomes.

Biofuels   These are types of fuel made from crops like sugar cane, corn or rapeseed. One of the main factors driving their development was the view that they were more environmentally friendly than traditional fossil fuels.

Bond insurers   These are financial institutions (called ‘monolines’) that use their high credit ratings to provide insurance on debt issues by relatively risky borrowers. As a result a borrower rated at just a single A might be able to issue some bonds rated at triple A. The advantage to the borrower is that they will save an enormous amount of interest on their bond issues.

Bond markets   Many of the borrowers need to obtain funding for much more than one year. This will include governments, companies and banks that can all access the bond markets to issue longer-term securities.

Book value   Put simply, this is what a company would be worth if it went out of business immediately. It is normally calculated as total assets minus any liabilities and intangible assets such as goodwill.

British Chambers of Commerce   From their website: ‘The British Chambers of Commerce is a non-political, non-profit making organisation, owned and directed by its members, democratically accountable to individual businesses of all sizes and sectors throughout the UK.’

Budget (forecast)   This is an annual event where the Chancellor sets out the government’s spending and tax plans for the next few years.

Budget deficit   A budget deficit is where the government spends more than it receives in tax revenue. The reverse is a budget surplus where tax receipts exceed government spending.

Building societies   These days it is increasingly difficult to differentiate between the roles of banks and building societies. In the past the main difference was that building societies were mutual organisations owned by their members who held savings accounts with them. In addition, the main role of a building society used to be the provision of mortgages to enable people to buy their homes. In recent years we have seen many building societies turn themselves into public companies through share issues. Also, building societies have now diversified the range of their activities to include many new services.

Bullish (sign)   This refers to the opposite of a bear market. It is a sustained period in which the prices of financial securities (especially shares) have been rising. This creates a very optimistic financial market mood with most investors unable to see when there will be any downturn in prices. This situation is normally associated with an economic boom. The period in the mid to late 1990s in the US is a perfect example of a bull market.

Bundesbank   The Bundesbank is the central bank of the Federal Republic of Germany. Due to its sheer size and economic strength the Bundesbank is the most important member of the European System of Central Banks. Both the ECB and the Bundesbank are located in Frankfurt.

Business plan   This is a document that is written by a company’s senior managers to give details of the future course of the business. It is frequently prepared by a company in preparation for a new or a first issue of capital. It will usually include a detailed financial forecast showing plans for several years in the future.

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C

Capital adequacy   This is a very important measure of risk for any bank. It is normally measured as a ratio of a bank’s capital to its assets. The Bank for International Settlements (based in Basel) stipulates that banks must operate with a capital adequacy ratio no lower than 8%.

Capital inflows   These are the inflows of capital that are recorded in a country’s balance of payments. These can be borrowing from overseas, sales of overseas assets or foreign investment into the country.

Capital investment   This term is used to cover any money that is invested in a business to buy new fixed assets like machinery, technology or industrial buildings. The aim of this expenditure is to enable the company to increase production of goods or services and generate higher income in future years. Economists see this type of investment as being vital in terms of securing higher rates of economic growth in the future.

Capital markets   This refers to the financial markets where companies can access additional finance to fund new investment projects.

Capital spending   There is a very important distinction made between two types of government spending. The first is current spending which covers spending on items that will have a short life. For example, this could be the purchase of stationery items for a school. In contrast capital expenditure is going on assets that will have a long life. This could include new school buildings, transport systems or hospitals.

Carry trade   This was a very popular foreign exchange trading technique which is possible due to the existence of significant interest rate differentials between different countries. In this strategy an investor will sell a currency from the low-interest-rate zone and then invest the funds to buy another currency in a high-interest-rate zone. The investor is using this technique to exploit the difference between interest rates in these two zones. This strategy is far from risk-free as there is a chance that an adverse movement in the currency markets can more than offset any income gains.

Cash flow   This refers to the amount of cash that a company generates and spends in a set time period. The cash flow available to a business is a crucial measure of liquidity for a company.

Central bank   Just about all countries now have a national central bank and it is normally their most important financial institution. They have two primary functions. The first is to oversee the workings of the financial system and ensure that all other financial institutions are operating securely. The second key role of the central banks in most countries is to determine the correct stance of monetary policy. In practice this means that they set the level of short-term interest rates in the economy.

Central Bank of Iceland   This is an independent central bank which has the task of operating monetary policy with the aim of maintaining price stability. Like most central banks it is required to support the other economic objectives (reasonable economic growth and high employment) as long as they do not conflict with its primary target.

Central government spending   This covers all the spending made by central as opposed to local government. It will cover areas like defence, health and education.

Chairman   In most companies the role of chairman is separated from that of chief executive officer. This is to ensure effective corporate governance with the non-executive chairman ensuring that the interests of the shareholders are fully protected. (a) Non-executive chairman, This is supposed to be a person who is independent of the core management team. They will normally be employed on a part-time basis and will chair the main board of directors. In addition the CEO can look to them for advice and guidance. You will also see the term NED, which stands for non-executive director. Most public companies will employ a number of part-time NEDs to give independent advice on the running of the company’s operations. (b) Executive chairman. This refers to a situation where a company has a full-time chairman who also takes the role of chief executive of the business.

Chief executive (officer)   This is the top person in the company who will have the main responsibility for implementing the policies of the board of directors on a daily basis. Put simply, they are running the business.

Civil Aviation Authority (CAA)   The CAA is the UK’s independent regulator of the aviation sector. According to its website its activities include economic regulation, airspace policy, and safety regulation and consumer protection.

Claimant count   This is the key official measure of unemployment used in the UK. It is based on the number of people who are out of work and actually claiming the state benefit currently called ‘job seekers allowance’. During the 1980s the Labour Party used to criticise this figure, claiming that the then government (Conservative) had manipulated the definition of unemployment many times to massage the official unemployment rate. When Labour came to power in 1997 it said it would put a greater emphasis on a broader measure of unemployment which is based on all those people who are looking for work rather than just those claiming benefits. This measure, based on a survey of the labour force, tends to show a much higher level of unemployment than the claimant count.

Collaterised debt obligations (CDOs)   These are complex financial market securities which are backed by a pool of bonds, loans or some other assets.

Commercial banks   These are the ‘high-street’ banks that have ordinary people as their customers. They will take deposits from the general public and use these funds to offer loans to both ordinary customers and small companies.

Competition   In economics we use this term to refer to the battle between companies to win market share. For this to be the case there have to be enough buyers and sellers in a market to ensure that no single player has so much power that they can influence the price of the good or service. Economists define perfect competition as existing where many companies operate, there are no barriers to entry into the sector, the product or service is identical and the companies must all be price-takers. In contrast to this we sometimes have a monopoly.

Competition Commission   This is an official UK body that investigates whether a monopoly or possible monopoly acts against the public interest. It replaced the Monopolies and Mergers Commission in 1999. It can only make investigations following referrals by the Office for Fair Trade or the Secretary of State for Trade and Industry.

Confederation of British Industry (CBI)   The Confederation of British Industry (CBI) is widely described as the employers’ organisation. It is a voluntary group made up of around 1500 UK-based manufacturing companies. It carries out a wide range of surveys to gauge its members’ views on the current state of economy activity. It provides a useful overview of the state of manufacturing industry.

Conglomerate   This refers to a company that is made up of several different businesses. The attraction of this type of set-up is that it provides a diversification of risk. This means that if one part of the company hits any financial problems this might be offset by the performance of the others. In addition, a multinational conglomerate has the advantage of having markets in a range of countries. This can again allow the company to diversify its risk.

Consumer price inflation   Until 2003 the UK government’s target for inflation was set in terms of the percentage annual increase in the average prices of goods and services as measured by the retail price index (RPI). There was some controversy in 2003 when the relevant inflation measure was changed to the consumer price index (CPI) which excludes certain important costs such as council tax and mortgage interest payments.

Consumer service companies   Put simply these are businesses that make their living by supplying services to their customers. In this article good examples include hairdressers and gym instructors.

Consumption   Put simply, this is something most of us enjoy doing – spending money. Economists make a distinction between consumption by the private sector (you and me) and the public sector (the government).

Consumption good   Economists use this term to define the purchase of certain goods or services that give pleasure in their own right. The consumer does not purchase these items in order to derive any future gains. For example, I might spend £20 on a ticket to go and see my favourite football team. In contrast, I could use this money to buy a new textbook that promises to increase my knowledge of economics and improve my chances of securing a well-paid job in the future.

Core inflation   This simply refers to the annual rate of CPI excluding certain especially volatile prices including seasonal food and energy. It is also sometimes called the ‘underlying’ rate of inflation.

Corporate bond market (widening spreads)   The corporate bond market refers to the issue of debt securities by companies. These bonds represent a debt that must be repaid normally at a set date in the future. Most corporate bonds pay a set interest rate each year, called the ‘coupon’. The other key characteristic of a bond is its maturity. This is the date that the bond will be redeemed.

Corporate debt (investment grade)   The corporate bond market refers to the issue of debt securities by companies. These bonds represent a debt that must be repaid normally at a set date in the future. Most corporate bonds pay a set interest rate each year, called ‘the coupon’. The other key characteristic of a bond is its maturity. This is the date on which the bond will be redeemed.

Corporate finance firm (boutique)   This term is normally used to describe a small investment bank that acts as an adviser but does not trade in financial market securities on its own behalf. The advantage of such a firm is that its advice can be seen to be completely impartial.

Corporate governance (code)   This is a general term used to describe the relationship between the owners of a business (the shareholders) and the managers of the business. It covers the various mechanisms by which the shareholders can try to make sure that the managers act in their interest. This should ensure that the managers are open, fair and fully accountable for all their actions.

Corporation tax   A direct tax charged on the profits made by limited companies. In the UK this is split into a main corporation tax rate (charged at 28%) and a small company’s corporation tax rate (charged at 21%).

Correlation (tight)   This is defined as a measure of the strength of the relationship between two economic variables.

Cost inflation   This simply refers to the higher charges being faced by the oil exploration companies. This would include labour (wages) as well as materials and transport costs.

Cost of capital   This is simply the cost of finance for a company looking to make a new investment. It is normal to break this down into the cost of equity finance and the cost of debt finance.

Credit crisis   This refers to the cost and availability of credit. It might be a government borrowing (in the government bond market), a company borrowing (in the corporate bond market), a house owner (with a mortgage) or a consumer (with a credit card). We have a ‘credit crunch’ when the cost of borrowing is considered to be prohibitively expensive by historic standards or it is simply very difficult for more risky borrowers to obtain finance at all. During 2008 the credit crunch hit home when the banks stopped lending and instead spent all their time sourcing liquidity.

Credit crunch   This refers to the crisis that first affected financial markets in the summer of 2007. This was caused by the sub-prime crisis that started in the US. As a result banks became very reluctant to lend to each other and the interbank markets saw their liquidity dry up.

Credit indices   We need to start with the idea of a credit default swap. This is a financial market instrument that is designed to offer a bond investor complete protection against the risk of default. Essentially, the seller of the swap takes over the risk of default on the bond issuer for a one-off payment. So, in the event of any default the seller of the swap will be fully liable to pay the par value of the bond and any due interest payments to the credit swap buyer. A credit index is created to allow investors to trade credit market risk without having to buy and sell individual credits. Instead they trade one of the credit default indices based in the US, Europe or one of the emerging markets.

Credit markets   This refers to the financial markets where debt securities are first issued (the primary market) and then traded (the secondary market). The issuers of these debt instruments will be mainly companies and governments and the investors will be pension funds and insurance companies.

Credit spreads   This is a measure of the relative cost of issuing more risky bonds. It is best seen with an example. Let us assume that the United States government has close to zero risk of default. As a result a 10-year US Treasury bond might have a yield of 4.5%. In contrast a 10-year issue from Ford Motor Company which has significantly more risk of default might have a yield of 6.5%. This gives us a credit yield spread of 6.5% minus 4.5% which is 200 basis points difference. In this case investors were selling lots of the higher-yielding (more risky) bonds which caused ‘credit spreads to balloon’ as the relative cost of these bonds rose.

Credit-rating agencies   There are a number of large international companies that are used to assess the risk of various bond issuers. They produce a formal rating measure for each of them.  For example, they can assign the following ratings:

Currency intervention   This is where a government, or more often its central bank, engages in foreign exchange trading in order to influence the value of its currency on the international currency markets. In simple terms, they will sell their currency and buy some foreign currency in order to bring about a fall in the value of the domestic currency. In contrast, they will buy their currency and sell some foreign currency in order to bring about a rise in the value of their currency.

Current account deficit   The current account records trade in goods (the visible balance) and the other side made up of services, transfers and interest, profits and dividends (the invisible balance). If it is in deficit a country is earning less income from its exports than it is spending on its imports.

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D

Default   This is where a borrower takes out a loan but fails to keep to the original agreed schedule of interest payments and final capital repayments. A bond issued by the United States or United Kingdom government is generally regarded to be free of default risk. In contrast a bond issued by a company might well have significant risk of default. For example, a company might not be able to keep up with the interest payments on the loan as a result of a downturn in its profitability.

Demand and supply   In economics we define demand as the quantity of a good or service that a consumer wishes to buy at a particular price. In the same way the supply is defined as the quantity of a good or service that a producer wishes to make available at a particular price.

Depreciation   This represents the reduction in the value of long-term assets due to wear and tear etc.

Deposit ratios   These measure the amount of the banks’ loans compared to their deposits. For example, one bank might have loans amounting to £100m compared to total deposits of £800m. This gives them a deposit ratio of 12.5%. If they increase their loans to £150m with the same amount of deposits the ratio increases to 18.75%.

Derivative markets   These are the financial instruments which have been developed to allow investors to manage and exploit risk. The name ‘derivative’ is used because they derive from the fundamental financial products. The most common examples are futures, options and swaps.

Diminishing returns (law of)   If we start with the production process being made up of fixed and variable units. For example, for a particular company the factory might be the fixed factor and the supply of labour might be the variable factor. If the company adds extra labour (more staff or existing staff working overtime) this will result in an increase in the amount being produced. However, in the end the company will reach a certain production level where as they add an additional unit of the variable input this starts to result in less and less extra output being produced. Put simply, their level of total output is still increasing but now it is at a reduced rate. This is the impact of the law of diminishing returns in action.

Discount window   This is a special emergency lending facility made available by the Federal Reserve to US commercial banks. Under this arrangement banks can borrow funds from the Fed to help them through short-term financial difficulties. This can cover an unexpected increase in loan activity, technology failure or a period when a bank is in trouble.

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E

Earnings premium   In simple terms this is the wage differential enjoyed by one person compared to another. It is used to calculate the value of different stages of educational attainment. For example, you can calculate the earnings premium enjoyed by graduates compared to non-graduates.

Economic downturn   This is simply any slowdown in economic activity. In an extreme case this can result in a recession (defined as two or more successive quarters of negative economic growth) or even a depression (a severe economic downturn that lasts several years).

Economic growth   This can be defined as an increase in the general level of production of goods and services in a country. We normally measure this each quarter, although most attention will be focused on the annual data because the quarterly data are too volatile.

Economic regulation   This refers to some form of government intervention that is intended to impact on the behaviour of firms and individuals in the private sector.

Economic uncertainty   This is when there the future course of economic activity cannot be predicted with any degree of confidence. There might be a strong chance of a severe downturn but there is a doubt about the timing and the severity of this outcome.

Economies of scale   This is the reduction in unit costs that comes about from an increase in production.

Emerging economies   This term is used to denote the generally fast-growing economies of the newer nations around the world. They tend to be characterised by high growth but much greater political and social risk.

Engineering and Manufacturing Support and Employment Advice for Business (the EEF manufacturers’ organisation)   This is an organisation that offers a range of business services to over 6000 manufacturing, engineering and technology companies. These cover things like advice on health and safety, legal advice, environmental services and current data on pay levels. In addition it represents the interests of this sector at a national and European level. To this end it has offices in London and Brussels

Equity markets   These allow the lenders to contribute risk capital to a range of different businesses. They lend their money to these companies without a guarantee of any capital repayment or dividend income in the future. This makes it a risky form of investment but with the possibility of securing very high rates of return at some stage in the future.

Euro and sterling term money markets   This is where the banks that have too much money lend cash to the banks which lack funds. The main financial market product traded in the money markets is the London Inter-bank offered rate (Libor) which is the rate used for loans made to low-risk banks in the London money markets. You can get a Libor rate for a wide range of money market maturities. It starts with overnight money and then goes to one month, three months, six months and one year.

European Central Bank   This is the Eurozone’s central bank. It sets the level of short-term interest rates for all the countries that have adopted the euro. The main policy objective of the ECB is to maintain price stability in the medium term. This is defined as a 0–2% target range for consumer price inflation. The key part of the ECB is the Governing Council which meets every fortnight on a Thursday.

Eurozone inflation   This is simply a weighted average inflation rate for the whole Eurozone. The ECB is charged with keeping this figure at an annual rate ‘of below but close to 2%’.

Excess profits   Economists measure these as any profits earned by a company that are above the normal level of profits. This normal level offers a fair return on capital employed. It is accepted that a major cost for companies is the opportunity cost of not using their time and money in doing something else. They are taking far more risk than they would be if they simply left their money in a bank. So economists allow for this cost when they decide on a reasonable rate of return for them to earn. The normal profit will be made up of the riskless return plus some extra amount to offset this risk they take. Any level of profit above this normal level is termed excess in the sense that it is more than can be justified by the costs incurred by the business.

Executive Board (ECB)   This is a key part of the European Central Bank. It consists of the President of the ECB and five other members. The Executive Board is responsible for the ECB’s day-to-day activities. For example, it implements the monetary policy directive of the Governing Council and it determines the daily money market operations.

Externalities   These occur when the actions of either consumers or producers have an impact on people other than themselves. These consequences for others are sometimes referred to as ‘third-party or spin-off effects’.

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F

Fed Funds Rate   This is the most important short-term interest rate in the United States. It refers to the overnight inter-bank lending that takes places in the United States money markets. The money that one bank lends to another comes from any excess reserves held at the Fed. A target level for the official Fed Funds Rate is set by the Federal Open Market Committee.

Federal Reserve Bank   The Federal Reserve is the central bank of the United States. The key part of the Fed is the Federal Open Market Committee (FOMC) which decides on changes in US monetary policy. It is made up of twelve individuals. The core seven come from the Central Federal Reserve Bank (based in Washington) and the other five represent the various Federal District Reserve Banks. One of these, New York, has a permanent place on the FOMC. The other eleven banks share the remainder of the votes on a complex rotation system. The FOMC reviews the outlook for the economy before deciding on the next move in interest rates.

Federation of Small Businesses   The FSB is a body that represents the interests of small businesses in the UK.

Financial distress   In corporate finance we use the term ‘financial distress’ to describe a position where a company is failing to meet its commitments to its creditors. This means that it is not making timely interest or redemption payments. More often than not financial distress will result in the bankruptcy of a business.

Financial liabilities   This is where one party (the debtor) is required to make some kind of financial payments to another party (the creditor).

Fiscal deficit   This is where a government is spending more than it is receiving in tax revenue. We normally measure this as a percentage of a country’s total income.

Fixed costs   Economists use the term ‘fixed costs’ to denote those that must be paid by a company no matter what their level of production. For example, a company might employ a member of staff to deal with all health and safety issues in all their factories. Her salary must be paid no matter what the production levels might be. Indeed even if the factory’s production ceases all together she will continue to be paid until the company decides that this position can be terminated

Floating currencies   This describes the process of allowing a currency to float freely on the foreign exchange markets without any official foreign exchange intervention.

Floating rate (bank loans)   With these loans the interest rate that is charged will not be fixed in advance. It will instead be set in terms of some benchmark market or official interest rate with a fixed additional spread. The benchmark might be an official central bank interest rate (like the Fed funds rate) or a money market rate (like Libor).  For example, the floating-rate bank loan might have an interest rate set at Libor plus 25 basis points. So, if Libor is 6.75% when the interest rate is next set, the interest rate for the loan will be set at 6.75% plus 25 basis points, that is 7%.

Foreign exchange markets   These allow people to convert one currency into another. For example, a Japanese investor can exchange their yen for US dollars and use the proceeds to buy some government bonds issued by the United States Treasury. You will see this discussed in detail in Topic 12 which covers international economics.

Foreign reserves (intervention)   These are the reserves of foreign currency that are normally held by a country’s central bank. It sometimes uses these reserves to intervene in the foreign exchange markets in order to have an impact on currency values. It can sell these reserves of foreign currency and buy domestic currency to try to strengthen its own currency. Or it can buy more reserves of foreign currency by selling its own currency to try to cause depreciation in its domestic currency.

FTSE-100   The FTSE-100 is the most widely quoted UK stock market index. It is based on the value of the 100 largest UK companies in terms of their market capitalisation. It started with a base level of 1000 in January 1984. This index is now quoted in real time on the various news information systems that serve the City traders.

FTSE Eurofirst 300   This is one of the FT’s more recently created stock market indices. It attempts to track the performance of the leading European stock markets. It is shown on the front of the FT each day in the World Market’s Data section.

Futures market   In the money markets there is a well-established futures market that allows banks to deal at a set interest rate for a transaction on a specified future date. For example, a bank could arrange to lend £10m to another bank at a set interest rate on a specific date in the future. The attraction of this deal is that both parties know now what the interest rate is going to be. There is no uncertainty as this transaction will not be affected by any subsequent rise or fall in money market interest rates.

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G

Global acquisitions   An acquisition is where one company buys a controlling interest in another company. When it is global it simply means that the acquiring company is buying a business in another country. It becomes a cross-border deal.

Global financial conditions   This refers to the current state of financial markets. If they are relatively stable they might be deemed to be ‘favourable’. In contrast, financial markets can be said to be ‘in turmoil’ when financial institutions are themselves facing funding difficulties. This was the case with Northern Rock (in the UK) in late 2007 and Bear Stearns (in the US) in March 2008.

Government bonds   The United States has the world’s largest government bond market. The Treasury market is backed by the US government and as a result is seen as having no default risk. It sets the standard for all other dollar-denominated bonds. As a result other dollar issues will see their yields set in relation to the equivalent US Treasury issue. The market can be split into three divisions: (a) Treasury bills: This covers three months to one year maturity issues.  (b) Treasury notes: This covers 2–10-year maturity and coupon bonds. (c) Treasury bonds: This covers bonds with a maturity of 10 years plus.

Green budget   Economists use the term ‘green budget’ to refer to any measures that are designed to have a beneficial impact on the environment. This could include policies to discourage the frequent use of air travel or to encourage greater use of recycling.

Gross domestic product   This is a measure of the total level of income earned within a country’s national boundaries.

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H

Hard economic landing   This is where economic activity comes to an abrupt halt. The result is severe economic disruption with many companies failing and widespread unemployment.

Hedge   This term is widely used in financial markets to indicate that an investment in a financial market product is being made to minimise the risk of any unfavourable movement in the price of a particular financial asset. In the context of this article it seems that some investors have been specifically investing in commodities (like oil) to protect themselves against a rise in inflation.

Hedge fund   This refers to a particular type of investment management where the fund manager will employ a range of different investment tools in an attempt to maximise the returns or try to make gains even in a falling market. The fund will rely on large amounts of borrowing and will use derivative markets and short selling to achieve these aims.

House depreciation   The term ‘depreciation’ is used to measure the declining value of an asset over time. For example, a company can claim the annual reduction in value of a piece of industrial machinery as a legitimate business expense. For most periods in the UK housing market we have tended to think more of appreciation rather than depreciation. However, if there is no annual capital growth in house prices then depreciation in house values become a more relevant concept. It measures the decline in the value of a house as certain fittings become outdated or wear out.

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I

ICEX Benchmark stock market index   This is the main measure of the performance of the stock market in Iceland. It is based on the performance of 15 leading companies.

Incremental revenue   This refers to the extra revenue that a company generates by going ahead with a new investment project.

Industrialisation (emerging economies)   This refers to an economy that has a very well-developed industrial sector. At this time we were seeing many former emerging economies go through this process and as a result become large users of oil as well as other commodities.

Inelastic and elastic demand   In economics these terms are used to provide a measure of how responsive demand is to any given change in the price level. Certain goods are expected to have a high elasticity of demand, which means that demand for them will fall sharply as their price rises. This might include items like expensive cars and other luxury products. In contrast other goods will have an inelastic demand, which means that their demand will be relatively insensitive to any price change. This could include basic food items and essential heating and light.

Inflation   This is normally defined as any sustained increase in the general level of prices for goods and services. It is normally measured by a consumer price index that records the monthly changes in a basket of goods and services reflecting typical spending patterns across different time periods and in different countries.

Inflation (German consumer price index)   This is the monthly data for the consumer price index (CPI) which shows the change in the price of a basket of goods and services for the German economy. The provisional figure is normally published on the 25th of each month and then this is finalised around ten days later. Financial markets focus on the first estimate as any later revision tends to be very small.

Inflation expectations   This refers to the situation where people within a country start to take account of inflation in their decisions. For example, wage negotiators will start to build in a certain level of price inflation before agreeing to a new wage settlement.

Inflation target (Bank of England’s)   When the government made the Bank of England independent (free to set interest rates without any political interference) in May 1997 it also gave it a target for controlling inflation. This target is currently 2% and is set in terms of the CPI. It is argued that maintaining low inflation is essential in order to achieve sustainable long-term economic growth.

Inflationary expectations   This is a key concept in economics; it attempts to measure what people believe will happen to inflation in the foreseeable future. The significance of inflationary expectations is that they will influence everybody’s decisions. This might include the level of wage demands or any investment decisions.

Initial public offer (IPO)   An IPO refers to the situation where a company first sells its shares by listing on the stock exchange. This gives it a much wider access to increase its shareholder base. In addition it provides much greater liquidity in terms of the trading of the shares in the company. Companies considering a new IPO will appoint an investment bank to manage the process. The bank will meet the company and be heavily involved in valuing the shares, preparing a prospectus and getting investors interested in the new issue. The investment bank will be very well rewarded for this work with substantial fees often being paid to ensure a successful IPO.

Institute for Public Policy Research   This is a UK-based think tank founded in the late 1980s which has strong links with the UK Labour Party. On its website it describes itself as ‘The UK’s leading progressive think tank, producing cutting edge research and innovative policy ideas for a just, democratic and sustainable world’. 

Institutional investors   These are the large pension funds and insurance companies that are the key investors in financial markets. They look to invest in long-term assets to match their long-term liabilities (paying out pensions). These investors have flourished in recent years due to the greater wealth of the private sector. In contrast the private clients refer to the individuals who invest on their own behalf.

Integrated suppliers   In terms of the energy market this refers to vertical integration. This is where a firm owns its upstream suppliers and its downstream buyers. So you have Centrica that both owns production platforms in the North Sea (upstream) and supplies its retail gas customers. This is very common in other markets. For example, BP is involved in oil exploration and supply while at the same time owning petrol stations supplying retail customers.

Interest rates   When an individual or a company borrows money there is a cost that they have to pay in order to obtain the funds. If it is a short-term loan (up to one year) this is normally referred to as an ‘interest rate’. So we might take out a one-month bank loan with an annual interest rate of say 8.5%. This is the interest rate, or the cost of obtaining the funds.

Interest rates (Iceland)   All central banks have one major interest rate that is used to signal changes in their monetary policy. In Iceland this rate is called the ‘policy rate’. This was raised to 15% in response to the economic crisis experienced in March 2008.

International Energy Agency (IEA)   The IEA has the role of providing independent advice to its twenty-seven member countries. It was founded as a result of the 1973 oil crisis in an attempt to co-ordinate the supply of oil in emergencies.

International Monetary Fund (IMF)   This international body was set up in the 1940s with the aim of running the new fixed exchange rate system. These days it has a membership that runs to over 180 countries. The IMF plays an important role in terms of working with these economies and advising them on their fiscal and monetary policies.

Investment (growth)   This is where a business spends money now in the expectation that it will result in an increase in output or income at some stage in the future.

Investment banks   This is a classic example of a financial intermediary that acts between the issuers of capital (governments and companies) and the investors in capital (pension funds and insurance companies). Most investment banks are split into two main divisions. The first helps companies with the issue of new equity market securities. The second offers companies the chance to issue new bond market securities.

Investment good   Economists use this term to define the purchase of certain goods or services that they hope will result in a significant future financial gain. It can be compared to similar investments in physical capital (a new machine) or some kind of financial assets (some shares).

Investment-grade status   Any rating that is at BBB or above is considered to be of investment grade. This means that the credit-rating agencies regard their issuer as having sufficient quality to be able to meet the obligations to the bond holders. If you buy a bond with a below-investment-grade rating you must accept that it is a speculative investment.

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Japan’s Finance Minister   This is the head of the Japanese Ministry of Finance and a key member of the Cabinet.

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Krona   Iceland uses the term ‘krona’ (meaning ‘crown’) for its national currency. This is also true in most of the other Nordic states (including Sweden, Denmark and Norway).

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Leveraged takeover   This term is used in the context of management buyouts and it suggests that the new company will be financed largely with debt capital.

Liquid (trading market)   A liquid trading market refers to the level of trading that takes place in this market. The more trading there is, the more liquid the market.

Liquidity (banking system)   In financial markets this normally refers to how easily an asset can be converted into cash. Therefore notes and coins are the most liquid financial asset. In general the more liquid an asset the lower is its return.

Liquidity (extra)   In economics this normally refers to how much money is flowing around in the economy. The more liquidity that is in existence the more the risk of rising inflation as excess demand forces prices up.

Liquidity position   In terms of banks this normally refers to the proportion of their assets that can easily be converted into cash. In times of uncertainty there will be a significant premium on banks holding large amounts of cash.

Liquidity valuation   There are a number of financial techniques that are used by economists to correctly value a company’s share price. One of the most common is the dividend valuation model. With this we take the future cash flows which will be earned by a company and multiply them by an appropriate discount factor to get their present value.

Long-run costs   Economists define the long run as being the time period when all the factors of production can be changed. So, in the long run a company can look to expand its warehouse or factory capacity without any problems.

Low-ball offer   This is a US term for any situation where an offer is made for a product or service that is recognised to be extremely low. I associate the term with baseball where a low-ball pitch to a hitter/batter can be seen as an attempt to entice the hitter to go for a poor choice of pitches in the hope that the hitter will swing and miss or hit a ground ball that can be easily fielded and the hitter would be put out.

Low pay commission   From their website: ‘The Low Pay Commission (LPC) is an independent statutory non departmental public body set up under the National Minimum Wage Act 1998 to advise the Government about the National Minimum Wage. Our permanent status was confirmed by Government in 2001 and we were given a Terms of Reference for a programme of longer-term research.’

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Macroeconomics   This takes a look at the economy as a whole. For example, it covers important economic themes including the total number of people unemployed or the general level of price inflation in a particular country. In essence it is concerned with the bigger picture.

Main ECB interest rate   This is the weekly refinancing operation carried out by the national central banks on behalf of the ECB.

Margin calls (at hedge funds)   A margin call refers to the request, normally from a brokerage house, that a particular investor must supply additional cash to their account. In this case this is where the bank has lent large amounts of cash to the hedge funds. This particularly extreme form of fund manager will employ a range of different investment tools in an attempt to maximise the returns or try to make gains even in a falling market. The funds are highly dependent on large amounts of borrowing from the banks. If the banks now start to ‘call’ this money back the hedge funds will be in financial trouble and they will be forced to make immediate sales of financial assets, often incurring serious losses as a result.

Marginal cost   This can be defined as the additional cost of producing one extra unit of production.

Market failure   This occurs when the allocation of goods and services that is achieved through market forces is not efficient.

Maturity transformation   In the banking system lenders and borrowers have very different requirements in terms of the length of time that they want the funds for. On the one hand the lenders are often reluctant to tie up their money for long periods of time while on the other the borrowers might be looking for very long-term funding for new investment projects. The banks can manage this process relatively easily. They are quite willing to lend to borrowers for long time periods while taking their customers’ money for potentially much shorter periods. We call this process ‘maturity transformation’.

Mercantilism   An economic policy that dates back to the time of the famous economist Adam Smith (1770s) that argues for a more interventionist policy from governments as they try to increase the level of exports and minimise the level of imports. This viewpoint sees any one country only making gains at another’s expense. In other words, to have a winner you must have as loser.

Merger agreement   This is where two companies decide that it would be to their joint benefit to come together to form a new business entity. With a merger the process is normally friendly with the full consent of both sets of shareholders.

Merit (and demerit goods)   Merit goods can be defined as any that are more highly valued by society than they are by individual consumers. As a result the government would like people to consume them in much larger quantities than they would if they were left to their own devices. A good example of a merit good might be art and culture. In contrast demerit goods are those items that we tend to consume without taking full account of their negative impacts. Examples of demerit goods include smoking or drinking to excess.

Microeconomics    This covers all the aspects that deal with the behaviour of individuals and companies as economists try to explain how markets operate. For example, it shows us how the supply and demand for a particular good or service determines its price.

Minimum wage   This is legally the lowest wage that an employer is allowed to pay an employee. It is normally stated as a rate per hour with different bands according to the age of the employee.

Minority shareholder   This is where a shareholder has less than fifty per cent of the company.

Monetary policy   When you see the term ‘monetary policy’ in the context of central banks it refers to interest rate policy. A central bank tightens monetary policy when it raises interest rates. A central bank eases monetary policy when it cuts interest rates.

Monetary Policy Committee   The Bank of England’s Monetary Policy Committee (MPC) is in charge of setting UK interest rates. It is made up of nine members: the Governor of the Bank of England, two Deputy-Governors, two Bank of England and two non-executive Directors and four independent members. The MPC is required by the government to ensure that the UK economy enjoys price stability. This is defined by the government’s set inflation target of 2%.

Money market   This allows the banks with surplus cash to lend these funds to the banks with a financial deficit. The key characteristic of this market is its short-term nature. Money market securities are defined to have a maturity of anything up to one year. The key interest rate that is traded in this market is called the London Inter-bank Offered Rate (Libor). This is the rate used for loans made to low-risk banks in the London money markets. You can get a Libor rate for a wide range of money market maturities. It starts with overnight money and then goes to one month, three months, six months and one year. This is the market that saw a sharp reduction in liquidity in the wake of the credit crunch.

Money market interest rates   This is the financial market where short-term borrowing takes place mainly between banks. The key financial market instrument trade here is the London interbank offered rate (Libor). You can get a Libor rate for a wide range of money market maturities as well as currencies. The main money market interest rate in the Eurozone is called Euro 3m (3 months).

Money supply definitions   There are many different measures of money supply that are used by most countries. In the UK we start with a narrow definition such as M0 which includes only cash deposits held at the central bank plus all the liquid cash circulating in the economy. This measure is often referred to as ‘narrow money’. M2 is a broader definition of money. It includes M0 plus all retail sight deposits held at banks and building societies. Sight deposits can be withdrawn with no notice (current accounts).  M4 is wider still as it equals M0 plus all sterling deposits held with the banks and building societies. This will include various time deposits that are tied up for a fixed period.

Money supply growth    This is defined as the total amount of money that is in circulation in a particular country’s economy at a set time. In practice there is no single definition of money supply. Instead we have various measures depending on how widely we define the concept of money.

Monolines (often known by their full name, ‘monoline insurance companies’)    These are financial institutions that use their high credit ratings to provide insurance on debt issues by relatively risky borrowers. As a result, a borrower rated at just a single A might be able to issue some bonds rated at triple A. The advantage to the borrower is that they will save an enormous amount of interest on their bond issues.

Monopoly   In economics a pure monopoly exists where only one single supplier exists in the marketplace. This gives them considerable control over the price that is being charged. It should not be confused with the monopsony, where there is only one buyer of a particular good or service.

Moral hazard   This is an economic term used to cover the risk that an insured person might take less care over their goods.

Mortgage interest payments (MIPs)   These are the monthly payments made by house owners to service their outstanding mortgage debt. The amount of the MIPs will depend on the size of the mortgage and the level of mortgage interest rates.

Mortgage principal   This is the total amount of mortgage debt that is owed by an individual. The mortgage interest payments service this debt.

Mortgage-backed securities   A mortgage-backed security is created where a large pool of mortgages are collected together and traded between various largeinvestors.

Municipal bonds   These are debt securities issued in the US by states or municipal authorities to fund the difference between local taxes and expenditure; they will help to fund transport or education services.

Mutual fund (tracker money)   This term is used mainly in the United States for some form of collective investment fund. It can invest a range of assets including shares, bonds and money market securities. When it is organised as a tracker fund this simply means that the fund will attempt to match the performance of some particular financial market index. This could be a stock market index like the FT-SE 100. In this case it would have to make sure that its holdings perfectly matched the index. So, if Tesco plc made up 10% of the FTSE100 the fund would have to hold the same percentage in the fund.

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Net investment   This can be defined as investment net of any depreciation.

Net national product   This is GDP minus Capital Consumption.

NETA (pronounced ‘neater’) (New electricity trading arrangements)   This was a new market mechanism that replaced the ‘Electricity pool of England and Wales’. Under this older system all electricity generators had to put all their electricity into a central pool. The retail suppliers would then place bids to obtain the amount that they wanted at this price. A ‘system marginal price’ was arrived at. This was the highest price that you needed to go to in order to obtain all the electricity that was needed. All the electricity generators then received this higher price for all the electricity that they supplied. This system was felt to be inflexible and uncompetitive and was replaced by NETA in 2001.

New York Fed   This is the most important of the Federal Reserve District Banks. It has a permanent place on the Federal Open Market Committee which determines the level of short-term interest rates in the US.

Nikkei 225    This is the most-closely followed index of Japanese share prices. The index is quite broad as it is based on Japan’s top 225 blue-chip companies quoted on the Tokyo Stock Exchange.

Nominal and real investment   The term ‘nominal’ means before we allow for inflation. The term ‘real’ means after allowing for inflation.  For example, a company might spend £500m more on new investment this year compared to last year. However, if the costs of investment have increased by £400m over this time period, the real increase in investment is only £100m.

Non-bank financial institutions   This covers any financial institutions that are not officially defined as banks. It will include building societies, most insurance companies and investment banks.

Non-domiciles   These are people who are granted ‘non-domiciled’ status by the UK tax authorities. They will normally be from abroad but be living and working in the UK. They must pay tax on any UK earnings but not on any money earned overseas. It is estimated that there are as many as 110,000 such people in the UK.

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Office for National Statistics (ONS)   The Office for National Statistics (ONS) is a department of the government that has the function of producing official data on the UK as a country and as an economy. The remit of the ONS is wide-ranging as it publishes statistics on so many areas, from births to deaths and everything in between, including marriages, divorces and travel to the UK as well as the standard economic data like inflation and unemployment.

OFGEM    This is the body that regulates the UK’s gas and electricity companies. It is supposed to protect the interests of consumers, ensuring that the supply of energy remains competitive.

Oil futures   Like most other commodity markets there is a very liquid futures market for oil trading. In these markets the buyer agrees to take delivery and the seller agrees to supply a fixed amount of oil for some set dates in the future and at a set location. The most commonly traded futures contract in the oil market would be for delivery in the next month. The minimum size of contract is 1000 barrels.

OPEC and non-OPEC (oil production)   OPEC is the most important example of a cartel operating in practice. This is where a group of suppliers come together to create a formal agreement to control the volume delivered into the market. The members of OPEC have been meeting in Vienna since the mid-1960s to set the level of their output and to influence the level of world oil prices. Each OPEC member is allocated a specific quota that they are allowed to produce. The members include Algeria, Indonesia, Iran, Iraq, Saudi Arabia and Venezuela. Non-OPEC producers include Mexico, Russia and Norway.

Open economy   This term is used to describe an economy that is largely free of any barriers to free trade. As a result it is an economy that is highly dependent on foreign trade in terms of its economic growth prospects.

Opportunity costs   This is simply the cost of doing something measured in terms of what must be sacrificed in order to do this activity. For example, if you decided to undertake some paid bar-work this evening you would make a financial gain; however, there would be an opportunity cost because you would be forgoing the chance to have some leisure or possibly study time.

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Pension funds and insurance companies   These are the large financial institutions that are the key investors in financial markets. They look to invest in long-term assets to match their long-term liabilities (paying out pensions). These investors have flourished in recent years due to the greater wealth of the private sector.

People’s Bank of China (PBOC)   This is the central bank of China which was created in 1948. The PBOC is in charge of monetary policy within China as it has the responsibility of maintaining financial stability.

Pre-emption rights   This refers to one of the longest-standing principles of corporate law. It gives all shareholders the first right to buy any additional shares being sold by companies. The new shares would be offered to existing holders in direct proportion to their existing holdings. So, if you owned 10% of the existing shares in a company you would be given the right to buy 10% of the new shares being sold via a rights issue. These additional shares are normally sold at a significant discount to the existing market share price to ensure a successful completion of the transaction.  The shareholders involved face three choices: (a) They can exercise their right which means that they agree to buy the additional shares. (b) ‑They can formally renounce the right, which will result in the company selling their rights on their behalf. (c) ‑Finally, they can do nothing. In this case the company will still normally sell the rights on behalf of the shareholder anyway.

Price-cap   The main tool used to regulate former publicly owned utilities now operating in the private sector. It is effectively a price ceiling placed with a limit imposed on the highest price rise allowed to be made by these companies. The aim of this type of regulation is to encourage these companies to seek efficiency savings as they can take advantage of any additional gains to their shareholders.

Price–earnings ratio   The P/E ratio is calculated by taking the market share price and dividing it by company’s earnings per share. This ratio is often used to compare the current stock market value of a company.

Price-insensitive   The elasticity of demand is an important concept for economists. This measures how sensitive demand is to a given price change. There are some products where demand is highly inelastic. For example, a consumer will be reluctant to stop buying basic food or heating for their home no matter how high these prices become. In contrast the demand for more luxury products will generally be more price-sensitive.

Principal–agent situation   This exists in large companies where there is a clear split between the owners and the managers of the business. The shareholders are the owners and we refer to them as the ‘principals’. In contrast, the managers of the company are the ‘agents’ employed to work on behalf of the owners.

Private and state schools   In the UK we use the term ‘private’ to cover schools that are not funded by the government. As a result they generally require the parents to pay fees before their children can be educated in these schools. In contrast state schools are fully funded by the government so that their pupils can be educated free of charge.

Privatisation (state companies)   This term is generally used where a whole business has its ownership transferred from the government to the private sector. However, it can also cover the introduction of the private sector into some parts of a publicly provided service. For example, the National Health Service might use a private company to undertake services like catering or cleaning.

Public goods   These are products where one person’s consumption does not result in less being available for others. In addition, it is impossible to exclude certain individuals from the consumption of these goods.

Public-sector net borrowing (PSNB)   This is one way of measuring the difference between the government’s spending and revenue. It is the difference between the revenue the government receives each month and its spending on schools, prisons, defence, etc.

Purchasing power   Economists normally use this term to define the value of money in terms of the quantity and quality of goods it can be used to purchase. In this article it is being used to refer to the shift in national wealth from the rich industrialised countries of the 1970s (like the United States) to the oil producers (like Saudi Arabia).

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Randomness   This is where the outcome of some event lacks any predictability or pattern. In this context many local authorities introduced a lottery to determine which pupils would be accepted into a particularly popular school. This meant that the schools could no longer use set entry criteria such as religious affiliation, academic ability or location to influence their selection decisions.

Rating agencies   There are a number of large international companies that are used to assess the risk of various bond issuers. They produce a formal rating measure for each of them.

Rationalisation   In a business context this refers to a major reorganisation of a company. This will normally aim to improve the efficiency and profitability of a business. In this case it is likely to result in job cuts in the UK as the new owners look to find cheaper costs of production elsewhere.

Real exchange rate   This is the nominal exchange rate adjusted for relative price change between countries involved.

Recession   A severe economic slowdown normally defined as two or more successive quarters of negative economic growth.

Reserve requirements   This is where the commercial banks are forced to hold deposits with the central bank. The amount that they are required to hold is normally a percentage of eligible liabilities. What are the eligible liabilities? These are simply the value of the deposits held in their accounts in a certain period. The larger a bank’s deposits, the more reserves it will have to hold.

Retail banks   These are the well-known high-street banks like HSBC, Nat West and Barclays. They take deposits from their retail clients and then lend this money out to their individual and commercial customers. The banks also offer a range of other services including foreign exchange facilities, investment advice and secure deposit facilities.

Retail-price index (RPI)   This was the main measure of UK inflation used in the UK until 2003. The RPI measures inflation by looking at the prices of a wide group of goods and services. Unlike the consumer price index (CPI) it includes certain important costs such as council tax and mortgage interest payments.

Retailers’ margins   This is simply the difference between the price that a retailer pays for a product and the price that is charged to the customer in the shop. When the economy is very active retailers will try to increase these margins to enhance their profitability.

Risk aversion   This is the natural desire for an investor to avoid taking any unnecessary risks unless the amount of return that is on offer fully compensates for the additional risk. So, in times of financial market uncertainty it is normal to see a ‘flight to quality’ with investors in bonds preferring to buy high-quality issues.

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Savings   All the income we do not consume we save. We often measure the level of savings in an economy by looking at the country’s savings ratio. For example, the UK savings ratio is defined as the proportion of gross disposable income households save rather than spend. It was around 6% at the time of the article.

Shareholder   In most companies the shareholders provide the bulk of the long-term finance. This makes them the key stakeholders in the business. They are the owners of the business and the managers must always remember that they are merely acting as agents working on behalf of the shareholders who are the principals. The shareholders range from private investors with small stakes in the business right up to the large financial institutions that often own a significant percentage of the equity of a business.

Short-run costs   Economists define the short run as being the time period when at least one of the factors of production is completely fixed. For example, for a particular company this might mean that they have reached full capacity in a warehouse or at a factory site.

Short-term bank finance   Normally in economics we define this as any bank loans that must be repaid within a year. In practice many of these loans will be even shorter-term. The banks can withdraw the finance at very short notice.

Six-month money injection (new ECB facility)   This was a new money market facility being used to add liquidity to the Eurozone money markets. It was a response to the prolonged credit crisis that started in the summer of 2007.

Small and medium enterprises (SMEs)   In most cases the key criterion used to define SMEs is the number of staff that they employ, with other supplementary factors including the firm’s turnover and the size of its balance sheet. For example, the UK’s Department for Business, Enterprise and Regulatory Reform (BERR) defines a small enterprise as one with less than 50 employees, and a medium enterprise as one with at least 50 but less than 250 employees. Finally, large enterprises have more than 250 employees.

Sole proprietorship   This is in many ways the simplest form of business organisation. In this the individual and their company are one single business identity. The big advantage of such a business is that it is easy to set up and is accountable only to the sole proprietor and no one else. The downside is that it does not enjoy limited liability.

Stagflation   This is the nightmare combination for macroeconomists. An economy goes through a period of very weak economic growth combined with high unemployment. This is accompanied by a continued significantly high level of price inflation.

Standard and Poor’s (S&P) 500   The S&P 500 composite index is based on the market movements of 500 companies that are listed on the New York Stock Exchange. This index is one of the most widely used measures of US equity performance.

Standard of living   A key economic goal for most countries is to raise the standard of living of their population. This equates to the average spending per person. It is usually measured by looking at total gross domestic income per person. One drawback of this measure is that it does not show how the total income is actually distributed. It is widely thought that the UK economy is becoming more and more financially divided with the rise of the super-rich taking an increasing share of national income at the expense of the poor.

Start-up   This is a brand new business venture that is at the first stage of development. Such business ventures have a notoriously bad chance of success with very few surviving beyond a year or two.

Stock market bubble   This term is used to describe any situation where the price of financial assets rises to a level far above any realistic value based on fundamental values like dividends or a company’s earnings.

Stock market listing   This is the process of a company selling its shares on a recognised stock market. The company in question will be required to sign a listing agreement which commits its directors to certain standards of behaviour especially in relation to reporting to their shareholders.

Strong yen   This is the reverse of a weak yen. It occurs when the yen can be exchanged for larger amounts of foreign currency. As a result it will require less yen to purchase goods or services from overseas. At the same time it will be more expensive for other countries to import Japanese goods and services.

Structured credit markets   This term is used in financial markets to cover a whole raft of new and highly innovative financial market products. Their common characteristic are: a) ‑The combining of various financial assets – for example, in the mortgage-backed securities a whole group of mortgages will be combined to make a large package that can be traded.  b) ‑The creation of various tranches supported by the group of financial assets. Each tranche will be allocated into a different risk category.  c) ‑There will be a clear divide between the credit-risk of the original issuer and the credit-risk of this particular group of financial assets. This will be done through the creation of a short-lived special-purpose vehicle (SPV).

Sub-prime   The sub-prime market refers to the lending of money to much higher risk individuals at a higher rate of interest. When US house prices were rising sharply a number of people were encouraged to take out very large loans (at a very high multiple of their salary) which meant that they had little prospect of ever being able to meet the interest payments let alone any eventual repayment of the outstanding debt. As a result they were forced to default in large numbers.

Sub-prime mortgage crisis   The prime lending rate is the rate of interest charged to credit-worthy companies and individuals in the US. The sub-prime market refers to the lending of money to much-higher-risk individuals at a higher rate of interest. When US house prices were rising sharply a number of people were encouraged to take out very large loans (at a very high multiple of their salary) which meant that they had little prospect of ever being able to meet the interest payments let alone any eventual repayment of the outstanding debt. As a result many were forced to default.

Subsidies   This is a financial inducement that governments can offer to encourage the consumption of particular goods or services. They can also be used for a number of other purposes: (a) To keep the prices of some basic food items as low as possible.  (b) ‑To maintain the production of a particular good or service. For example, in agriculture or certain industries. (c) ‑To encourage the employment of a particular group of individuals. For example, the long-term unemployed.

Supply factors   In economics, supply and demand are the fundamental factors that are important in determining price changes. If there is a fall in supply of a particular good or service economists would predict that the resulting scarcity would result in a price rise. In this case there has been a sharp fall in the supply of mainly food products such as pork caused by factors like ‘blue-ear disease’. This has caused a 63% increase in pork prices.

Systematic risk (also called ‘market risk’)   This refers to the type of risk that applies to an entire group of financial assets. For example, if interest rates are increased this might impact negatively on the entire stock market. In contrast, unsystematic (or specific) risk applies to only one particular financial asset. For example, if a company loses a particular contract with a customer its share price only will be affected.

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Tariffs (gas and electricity)   In economics the term ‘tariff’ is normally associated with some form of government tax or duty imposed on imported products. In recent years the move towards free trade has seen the elimination of most tariffs. However, this term can also refer to certain system of prices. In this context ‘gas and electricity tariff’ simply means the charges for these products from the various energy supply companies in the UK.

Term Auction Facility   This was an emergency facility used by the Federal Reserve to inject large amounts of liquidity (cash) into the US money markets during the period of the credit crunch.

Tightening (monetary policy)    When you see the term ‘monetary policy’ in the context of central banks it refers to interest rate policy. Central banks tighten monetary policy when they raise interest rates.

Total cost   This can be defined as the sum of total fixed costs and total variable costs.

Trades Union Congress (TUC)   This is the trade union umbrella group representing over six and a half million union members based in the UK. They campaign for better working conditions as well as the broader aim of social justice.

Trading platform    In finance we use the term ‘trading platform’ to describe the market where buyers and sellers can operate. It might be an official market place like the official list (London Stock Exchange) or a less structured market.

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Unemployment and non-farm payroll employment release   This economic release is made up of three parts. The first figure is the percentage rate of unemployment which is based on a random survey of people. The second part tells us the change in thousands each month in the number of people on companies’ payrolls. It excludes various special categories such as farm workers (hence the ‘non-farm’), the self-employed, unpaid family workers and the armed forces. The final measure looks at the current trends in employee wage costs. It can provide early evidence of any rising cost-push inflation.

US sub-prime mortgage (tempest)   The prime lending rate is the rate of interest charged to credit-worthy companies and individuals in the US. The sub-prime market refers to the lending of money to much higher-risk individuals at a higher rate of interest.

US Treasury Secretary   This is the Head of the US Department of Treasury. It is the part of the US Administration that deals with financial and economic policy making.

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Variable costs   In contrast to fixed costs, these are the costs that are entirely dependent on the level of production. For example, for a company manufacturing curtains and other textile products these costs will come mainly from the factory’s inputs like material and cotton. If the company receives a new large order from a customer the resulting increase in production will see a sharp rise in the variable costs.

Vehicle-Excise tax   An annual charge levied by the UK tax authorities on car drivers. There are now thirteen different tax bands with the annual charge varying from £0 to £950 per year.

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Weak yen   This is where the yen can only be exchanged for smaller amounts of foreign currency. As a result it will require larger amounts of yen to purchase goods or services from overseas. At the same time it will be cheaper for other countries to import Japanese goods and services.

Weaker pound   This refers to a fall in the value of the pound sterling. For example, as measured in pounds per dollar, the exchange rate might fall from $2.10/£1 to $1.90/£1 which means customers will get fewer dollars for their pound.

West Texas Intermediate (WTI)   There are many different types of crude oil. They are differentiated in terms of their specific gravity and sulphur content which is largely determined by the origin of the oil. WTI is a light crude oil and it is the standard benchmark for oil trading and pricing in the US.

Wholesale market (energy)   We use the term ‘wholesale’ to refer to the supply of energy to the retail energy companies. These companies purchase gas and electricity from the wholesale markets.

Winning bid   When a company is put up for sale or is the subject of a takeover approach the winning bid is the one that secures the company. It should be noted that sometimes the bidder can end up paying more than the business is worth. Economists call this phenomenon ‘the winner’s curse’.

Working Tax Credits   These credits are part of a complex system of welfare reforms introduced in 2003. Under the credits scheme those people who are in low income work receive extra payments from the state. It is a means-tested benefit designed to provide such individuals or families with an incentive to work rather than just rely on government aid.

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