Glossary of Business Economics

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GLOSSARY OF BUSINESS ECONOMICSS 102

FOR IBDLPINSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN

A market It is any place where the sellers of a particular good or service can meet with the buyers of that goods and service where there is a potential for a transaction to take place. The buyers

must have something they can offer in exchange for there to be a potential transaction.

Abnormal returnsUsed in the context of stock returns; abnormal returns mean the return to a portfolio in

excess of the return to a market portfolio. In contrast, excess returns which means

something else. Note that abnormal returns can be negative.

Aggregate demand

It is the sum of all demand in an economy. This can be computed by adding the expenditure

on consumer goods and services, investment, and not exports (total exports minus totalimports).

Aggregate supply

It is the total value of the goods and services produced in a country, plus the value of imported goods less the value of exports.

Average total cost

It is the sum of all the production costs divided by the number of units produced.

A barter economy

It is an economy that lacks a commonly accepted currency, so all exchanges must be madewith goods and services because money does not exist in these economies.

A bear market

It occurs when almost all stock prices are falling. The term bear market comes from the

image of a bear pawing something to the ground.

A Bertrand competition

It is a bidding war in which the bidders end up at a zero-profit price.

A bill of exchange

It is a contract entitling an exporter to receive immediate payment in the local currency forgoods that would be shipped elsewhere. Time would elapse between payment in one

currency and repayment in another, so the interest rate would also be brought into thetransaction.

A basket

It is a known set of fixed quantities of known goods, needed for defining a price index.

A bull market



It occurs when almost all stock prices are on the rise. The term bull market comes from the

image of a bull flinging things into the air with his horns.

A buyer's market It is a market for a good (stocks, housing, etc.) where prices are falling and there are moreparties interested in selling than in buying.

A central bank

It is a government bank; a bank for banks.

A commodity

It is good that is generally a primary good used in manufacturing such as timber, cotton,wool and copper.

A conglomerate

It is a firm operating in several industries.

A depression It is a severe downturn in economic activity. These are considerably worse than recessions.

A dividend tax

It is simply a tax the government levies on shareholders of a corporation when thatcorporation distributes a dividend. Normally a dividend tax is a percentage of the total

dividend issued. If there is a 20% dividend tax, and a corporation distributes a dividend of

Rs. 1.00 per share, then an investor who holds stock in the company is forced to pay 20paisa for each share he owns in the company.

An econometric model

It is an economic model formulated so that its parameters can be estimated if one makesthe assumption that the model is correct.

An economic good

It is a physical object or service that has value to people and can be sold for a non-negativeprice in the marketplace.

A free market economy

It is an economy in which the allocation for resources is determined only by their supply and

the demand for them. This is mainly a theoretical concept as every country, even capitalistones, places some restrictions on the ownership and exchange of commodities.

An indifference curve It is represented for example on a graph whose horizontal and vertical axes are quantities

of goods an individual might consume, an indifference curve represents a contour alongwhich utility for that individual is constant. The indifference curve represents a set of possible consumption bundles between which the individual is indifferent. Normally, with

desirable goods on both axes (say, income today and income tomorrow) the curve has a

certain shape, further from the origin when both quantities are positive than when one iszero.



An inferior good

It is a good that has the property that when a person's income rises the demand for theinferior good falls.

A production function

It describes a mapping from quantities of inputs to quantities of an output as generated by

a production process.

An inverse demand function

It is a function p(q) that maps from a quantity of output to a price in the market; one mightmodel the demand a firm faces by positing an inverse demand function and imagining thatthe firm chooses a quantity of output.

A utility curve

It is a synonym for indifference curve.

A wage curve

It is a graph of the relation between the local rate of unemployment, on the horizontal axis,and the local wage rate, on the vertical axis. Blanch flower and Oswald, two European

economists, show that this relation is downward sloping. That is, locally high wages and

locally low unemployment are correlated.

A yellow-dog contract

It is a requirement by a firm that the worker agree not to engage in collective labor action.

A zero-sum game

It is a game in which total winnings and total losing sum to zero for each possible outcome.

A balanced budget

It occurs when the total sum of money a government collects in a year is equal to theamount it spends on goods, services, and debt interest.

Base pointing pricing

It is the practice of firms setting prices as if their transportation costs to all locations were

the same, even if all the vendors are distant from one another and have substantiallydifferent costs of transportation to each location. One might interpret this as a form of

monitored collusion between the vendor firms.

Billon

It is a mixture of silver and copper, from which small coins were made in medieval Europe.

Larger coins were made of silver or gold.

Blue chip

It usually refers to a stock, but could in theory apply to any financial asset with potentialrisk. A blue chip stock is one that entails unusually small risk (risk being a subjective

judgment). Stocks that are considered "blue chip" are issued by large stable corporationslike OGDC, Nestle etc.

Bond



It is a fixed interest financial asset issued by governments, companies, banks, publicutilities and other large entities. Bonds pay the bearer a fixed amount a specified end date.

A discount bond pays the bearer only at the ending date, while a coupon bond pays the

bearer a fixed amount over a specified interval (month, year, etc.) as well as paying a fixedamount at the end date.

Balance of paymentsA country's balance of payments is the quantity of its own currency flowing out of the

country (for purchases, for example, but also for gifts and intra firm transfers) minus the

amount flowing in.

Capital It is something owned, which provides ongoing services. In the national accounts, or tofirms, capital is made up of durable investment goods, normally summed in units of money.

Capital consumption

In national accounts, capital consumption is the amount by which gross investment

exceeds net investment. It is the same as replacement investment.

Cartels

They are agreements between most or all of the major producers of a good to either limittheir production and/or fix prices.

Cost

It is the value that must be given up to acquire a good or service.

Cyclical unemployment

It occurs when the unemployment rate moves in the opposite direction as the GDP growthrate. So when GDP growth is small (or negative) unemployment is high.

Deflation

It occurs when prices are declining over time. This is the opposite of inflation; when the

inflation rate (by some measure) is negative, the economy is in a deflationary period.

Demand

It is the want or desire to possess a good or service with the necessary goods, services, or

financial instruments necessary to make a legal transaction for those goods or services.

Delta

It is used with respect to options: The rate of change of a financial derivative's price with

respect to changes in the price of the underlying asset. Formally this is a partial derivative.

A derivative is perfectly delta-hedged if it is in a portfolio with a delta of zero. Financialfirms make some effort to construct delta-hedged portfolios.

Depreciation

It is the decline in price of an asset over time attributable to deterioration, obsolescence,and impending retirement. It applies particularly to physical assets like equipment and

structures.

Derivatives



They are securities whose value is derived from the some other time-varying quantity.Usually that other quantity is the price of some other asset such as bonds, stocks,

currencies, or commodities. It could also be an index, or the temperature. Derivatives were

created to support an insurance market against fluctuations.

Diseconomies

Diseconomies of scale are like economies of scale but with the implication that they arenegative, so larger scale would increase cost per unit.

Disinflation It occurs when the inflation rate is declining over time. Deflation occurs when the inflation

rate becomes negative.

Economic discrimination

It is used in studying labor markets: it is the presence of different pay for workers of the

same ability but who are in different groups, e.g. black, white; male, female.

Effective LaborIn the context of a Solow model, if labor time is denoted with L and labor's effectiveness, or

knowledge, is A, then by effective labor we mean AL. In general, it means 'efficiency units'

of labor or 'productive effort' as opposed to time spent.

ElasticityIt is a measure of responsiveness. The responsiveness of behavior measured by variable Z

to a change in environment variable Y is the change in Z observed in response to a changein Y. Specifically, this approximation is common:

elasticity = (percentage change in Z) / (percentage change in Y)

Efficiency units

They are usually interpretable as "output per worker per hour." More generally: An abstractmeasure of the amount produced for a constant production technology by a worker in some

time period. Often the context is theoretical and the time period and production technologydo not have to be specified.

EQUILIBRIUM

It is some balance that can occur in a model, which can represent a prediction if the model

has a real-world analogue. The standard case is the price-quantity balance found in a supplyand demand model. If the term is not otherwise qualified it often refers to the supply anddemand balance.

F.O.B. It indicates which services come with a price. It stands for "free on board," and describes a

price which includes goods plus the services of loading those goods onto some vehicle orvessel at a named location, sometimes put in parentheses after the f.o.b.

FDI

It stands for Foreign Direct Investment, a component of a country's national financial

accounts. Foreign direct investment is investment of foreign assets into domestic structures,equipment, and organizations. It does not include foreign investment into the stock



markets. Foreign direct investment is thought to be more useful to a country thaninvestments in the equity of its companies because equity investments are potentially "hot

money" which can leave at the first sign of trouble, whereas FDI is durable and generally

useful whether things go well or badly.

Fixed CostsIn production, fixed costs are the costs that do not vary with the number of goodsproduced. In the short-run factors like land and rent are fixed costs, whereas raw materials

used in production are not.

Full employment

This occurs when everyone in the economy who is willing to work at the current market ratefor someone of his skills have jobs. Full employment does not imply that all adults have

jobs.

GDP

It is Gross domestic product. For a region, the GDP is "the market value of all the goods andservices produced by labor and property located in" the region, usually a country. It equals

GNP minus the net inflow of labor and property incomes from abroad.

Human capital It is the attributes of a person that are productive in some economic context. Often refers to

formal educational attainment, with the implication that education is investment whosereturns are in the form of wage, salary, or other compensation. These are normally

measured and conceived of as private returns to the individual but can also be social

returns.

IMF

It stands for the International Monetary Fund -- an international organization with liquidity

services to maintain financial stability.

Imports

They are goods or services that were produced abroad.

Income ElasticityWhen used without another referent, income elasticity appears to mean 'of consumption'.

That is for income I and consumption C:income elasticity = (I/C)*(dC/dI).

Inflation

It is an increase in the price of a basket of goods and services that is representative of the

economy as a whole.

Investment

It is defined as any use of resources intended to increase future production output orincome.

Keynes Effect



As prices fall, a given nominal amount of money will be a larger real amount. Consequentlythe interest rate would fall and investment demanded rise. This Keynes effect disappears in

the liquidity trap. Contrast the Keynes effect with the Pigou effect.

Another phrasing: The Keynes effect is that a change in interest rates affects expenditurespending more than it affects savings.

Labor Market OutcomesIt is shorthand for worker (never employer) variables that are often considered endogenous

in a labor market regression. Such variables, which often appear on the right side of suchregressions: wage rates, employment dummies or employment rates.

Liquidity

It refers to how quickly and cheaply an asset can be converted into cash. Money (in the

form of cash) is the most liquid asset. Assets that generally can only be sold after a long

exhaustive search for a buyer are known as illiquid.

Liquidity trap

It is a Keynesian idea. When expected returns from investments in securities or real plant

and equipment are low, investment falls; a recession begins, and cash holdings in banksrise. People and businesses then continue to hold cash because they expect spending and

investment to be low. This is a self-fulfilling trap.

markup

It is the ratio of price to marginal cost. It can be used as a measure of market power across

firms, industries, or economies.

Money

It is a good that acts as a medium of exchange in transactions. Classically it is said thatmoney acts as a unit of account , a store of value, and a medium of exchange.

MonopolyIf a certain firm is the only one that can produce a certain good, it has a monopoly in themarket for that good.

Monopsony

It is a state in which demand comes from one source. If there is only one customer for acertain good, that customer has a monopsony in the market for that good.

Marginal costs

They are the costs a company incurs in producing one additional unit of a good.

Marginal revenue It is the revenue a company gains in producing one additional unit of a good.

Mutatis MutandisThe necessary changes having been made; substituting new terms.

OligopolyA market for a good where a few major suppliers account for a large majority of sales.



Open EconomyAn economy is said to be open if it has trade with other economies. (Implicitly these areusually assumed to be countries.)

PPP It stands for purchasing power parity, a criterion for an appropriate exchange rate between

currencies. It is a rate such that a representative basket of goods in country A costs thesame as in country B if the currencies are exchanged at that rate.

Actual exchange rates vary from the PPP levels for various reasons, such as the demand forimports or investments between countries.

Price elasticity

It is a measure of responsiveness of some other variable to a change in price.

Price Elasticity of Supply

It measures the rate of response of quantity demand due to a price change. If you've

already read The Price Elasticity of Demand and understand it, you may want to just skimthis section, as the calculations are similar. (Your course may use the more complicated ArcPrice Elasticity of Supply formula. If so you'll need to see the article on Arc Elasticity) We

calculate the Price Elasticity of Supply by the formula:PEoS = (% Change in Quantity Supplied)/(% Change in Price)

Quasi rents

They are returns in excess of the short-run opportunity cost of the resources devoted to theactivity.

RecessionA not very well defined term that indicates a slowdown in economic activity. A particularly

long-lasting and painful recession is known as a depression.

Rents

They are returns in excess of the opportunity cost of the resources devoted to the activity.

RiskIf outcomes will occur with known or estimable probability the decision maker faces a risk.Certainty is a special case of risk in which this probability is equal to zero or one.

Sales TaxA tax levied on the sale of a good or service, which is usually proportional to the price of the

good or services sold.

Significance level Significance level of a test is the probability that the test statistic will reject the nullhypothesis when the [hypothesis] is true. Significance is a property of the distribution of a

test statistic, not of any particular draw of the statistic.



Spot Market

A market in which goods, services, or financial assets are traded for immediate delivery.This differs from a futures market, where the delivery will be made at a future date.

SupplyThe total quantity of a good or service that is available for purchase at a given price.

Supply CurveFor a given good, the supply curve is a relation between each possible price of the good andthe quantity that would be supplied for market sale at that price.

Sunk CostsCosts that are irrevocable and should not be used to influence current decisions.

The accelerator principle

It is the growth of output that induces continuing net investment. That is, net investment is

a function of the change in output not its level.

The average propensity to consume

It is the proportion of income the average family spends on goods and services.

The average propensity to save

It is the proportion of income the average family saves (does not spend on consumption).

The Bretton Woods system

It was an international monetary framework of fixed exchange rates after World War II. Itwas drawn up by the U.S. and Britain in 1944. Keynes was one of the architects. The

Bretton Woods system ended on August 15, 1971, when President Richard Nixon of USAended trading of gold at the fixed price of $35/ounce. At that point for the first time in

history, formal links between the major world currencies and real commodities weresevered.

The business cycle frequency

It is considered to be three to five years. Called the business cycle frequency by Burns and

Mitchell (1946), and this became standard language.

The Chicago School It refers to a perspective on economics of the University of Chicago circa 1970. Variously

interpreted to imply:

i) A preference for models in which information is perfect, and an associated search forempirical evidence that choices, not institutional limitations, are what result in outcomes for

people. (E.g., that committing crime is a career choice; that smoking represents aninformed tradeoff between health risk and immediate gratification.)

ii) That antitrust law is rarely necessary, because potential competition will limit monopolistabuses.

The consumer price index or CPI



It is a measure of the level of inflation. CPI measures how much the price of a basket of consumer goods has changed over a given time period.

The cost curve

It is a graph of total costs of production as a function of total quantity produced.

The cost function

It is a function of input prices and output quantity. Its value is the cost of making thatoutput given those input prices.

The current account balance

It is the difference between a country's savings and its investment. "[If the current accountbalance is] positive, it measures the portion of a country's saving invested abroad; if

negative, the portion of domestic investment financed by foreigners' savings."The current account balance is defined by the sum of the value of imports of goods and

services plus net returns on investments abroad, minus the value of exports of goods and

services, where all these elements are measured in the domestic currency.

The dividend

A corporation pays is the amount of money, normally a portion of the profits, a board of

directors distributes to the ordinary shareholders of the corporation.

The Gross National Product (GNP)

It is the value of all the goods and services produced in an economy, plus the value of the

goods and services imported, less the goods and services exported.

The interest rate

It is the yearly price charged by a lender to a borrower in order for the borrower to obtain aloan. This is usually expressed as a percentage of the total amount loaned.

The null hypothesis

It is the hypothesis being tested. "The hypothesis that the restriction or set of restrictions to

be tested does in fact hold." Often denoted by H0.

The Phillips curve

It is a relation between inflation and unemployment. It follows from William Phillips' 1958"The relation between unemployment and the rate of change of money wage rates in theUnited Kingdom, 1861-1957" in Economica.

In the subsequent discussion the relation was thought to be a negative one -- highunemployment would correlate with low inflation. That stylized fact lost empirical supportwith the stagflation of the U.S. in the 1970s, in which high inflation and high unemployment

occurred together. More recent evidence suggests that over the long term, across countries,

there is a POSITIVE correlation between inflation and unemployment. Discussion continues on which of these is more 'causal to' the other and less 'caused by' the other.

Terms of trade

They are an index of the price of a country's exports in terms of its imports. The terms of

trade are said to improve if that index rises.



An analogous use is when comparing relative prices. If the cost of agricultural goods interms of industrial goods goes up, one might say the "terms of trade ... shifted in favor of

agricultural products."

Time deposits

They are the money stored in the form of savings accounts at banks.

Time series

It is a stochastic process where the time index takes on a finite or count ably infinite set of

values. Denoted, e.g. {Xt | for all integers t}

Transaction costsThey are made up of three types as per North and Thomas (1973)

search costs (the costs of locating information about opportunities for exchange)

negotiation costs (costs of negotiating the terms of the exchange)

enforcement costs (costs of enforcing the contract)

Treasury Bills They short-term bonds issued by the government used to pay to cover governmentspending.

Type I ErrorA type I error (type one error) is the error in testing a hypothesis of rejecting a hypothesiswhen it is true.

Type II ErrorA type II error (type two error) is the error in testing a hypothesis of failing to reject a

hypothesis when it is false.

The unemployment rate

It is the percentage of the population who is willing to work for the current market wage forsomeone of his or her skill level but cannot find employment.

The variance

The variance of a distribution is the average of squares of the distances from the values

drawn from the mean of the distribution:var(x) = E[(x-Ex)2].It is also called 'centered second moment.'

The World Bank

It is a collection of international organizations to aid countries in their process of economicdevelopment with loans, advice, and research. It was founded in the 1940s to aid WesternEuropean countries after World War II with capital.

UnbiasedAn estimator b of a distribution's parameter B is unbiased if the mean of b's sampling

distribution is B. formally, if: E = B.



UncorrelatedTwo random variables X and Y are uncorrelated if E (XY) =E(X) E(y). Note that this does notguarantee they are independent.

Unemployment It is the state of an individual looking for a paying job but not having one.

Unity

It is a synonym for the number 'one'.

Value added

It is a measure of output. Value added by an organization or industry is, in principle:Revenue - non-labor costs of inputs

Where revenue can be imagined to be price x quantity, and costs are usually described by

capital (structures, equipment, land), materials, energy, and purchased services.Treatment of taxes and subsidies can be nontrivial. Value-added is a measure of outputwhich is potentially comparable across countries and economic structures.

Weighted least squares

It is a way of choosing an estimator. It makes a weighted tradeoff between the error in an

estimator due to bias and that due to variance. Putting equal weights on the two is themean square error criterion.

Glossary of Business Economics

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