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Bized - Glossary of finance
Category: Economy and Finance
Date & country: 14/09/2007, UK
Words: 1332


Differentiation
A strategy which offers the same goods at different prices for different sectors of the market.

Diminishing returns
When the addition of a variable factor of production results in a fall in marginal product. Diminishing returns refers to a situation where a firm is trying to expand by using more of its variable factors, but finds that the extra output they get each time they add one gets progressively less and less. This usually arises because their capacity is limited in the short-run and the combination of the fixed and variable factors becomes less than optimal. Diminishing returns is the main reason why the short-run aggregate supply curve is upward sloping.

Developed countries
Countries with high levels of real national income per head and relatively large tertiary sectors.

Developing countries
Countries with low levels of real national income per head and relatively large primary sectors.

Development
Increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living.

Devaluation of sterling
Occurs when the UK government lowers the value of the £ from one fixed rate to another

Derived demand
The amount of demand for good A depends in turn on the amount of demand for good B, e.g. an increase in the demand for houses creates a direct demand for bricklayers.

Deposit accounts
Money held in banks or building societies which earn interest but which are subject to a period of notice before withdrawal.

Depreciation of sterling
When market forces lower the value of the £ from one fixed rate to another. In other words when the value of one currency, expressed in terms of anther currency, falls. This could be caused by a decrease in the demand for the currency and/or an increase in the level of supply.

Deregulation
The removal of controls on a particular market aimed at improving the economic efficiency of that market and therefore the performance of the economy at the microeconomic level. Deregulation is generally considered a supply side policy. An example would be the abandonment of a licensing system for taxis.

Dependent
One of the four stages of the consumer life cycle. These are people under 24 who live at home or are full time students.

Dependent populations
People who do not work e.g. children and the retired and who rely on others for the goods and services they consume.

Demographics
The study of trends in population.

Demography
The study of population.

Dependency ratio
The ratio of dependent population (the young and the elderly) to the working age population.

Demographic transition
Changes in population growth rates over time due to changes in birth and death rates.

Demerit goods
A product, such as alcohol, which consumers may overvalue but which the government believes may be harmful for consumers.

Demerger
A demerger is when a firm either: (i) divides into two or more firms. (ii) sells off some of its subsidiaries.

Demand-pull inflation
This occurs when the excess of aggregate demand over aggregate supply causes an increase in the general level of prices.

Demand-deficient unemployment
May also be referred to as cyclical unemployment, it arises when people are out of work because of a lack of aggregate demand. It will tend to happen mainly in recessions or downturns in the trade cycle. Keynesians argue that this shortage of demand is one of the key causes of unemployment. In other words this type of unemployment is involuntary.

Demand pull inflation
Occurs when aggregate demand exceeds aggregate supply. If there is an excess level of demand in the economy, this will tend to cause prices to rise. This type of inflation is called demand-pull inflation and is argued by Keynesians to be one of the main causes of inflation. Demand-pull inflation is essentially "too much money chasing too few goods."

Demand based pricing
Where an organisation decides the price to charge based on what consumers are prepared to pay.

Demand curve
The demand curve is a graph which shows the amount of a good that consumers are willing and able to buy at various prices. A normal demand curve is downward sloping due to the law of demand which states that as the price rises the demand for the product will fall, assuming consumers have a fixed income.

Demand Curve - movements along
A change in price results in a movement along a demand curve, resulting in a change in quantity demanded. A change in price results in a movement along a demand curve, resulting in a change in quantity demanded.

Demand for money
The demand to hold wealth in the form of notes, coins and sight deposits rather than in the form of e.g. government bonds, shares, antiques etc

Demand management policies
These are policies that Keynesians argued should be used to control the level of demand in the economy. If there was a shortage of demand governments should aim to boost demand (reflationary or expansionary policies), and when there was excess demand they should do the opposite (deflationary or contractionary policies). In other words the government should be aiming to do the opposite to the trade cycle. For this reason these policies were often called 'counter-cyclical demand management policies'.

Demand and supply analysis
The study of consumer and producer behaviour with regard to price, involving the application of changes to the demand and supply conditions.

Demand
Demand is the want or need or desire for a product that is backed by an ability to pay. Demand is measured over a given time period. It is determined by a number of factors including income, tastes and the price of complementary and substitute goods.

Delors Report
This report (from 1988) was named after the then President of the EC - Jacques Delors. The report set out the steps towards economic and monetary union and the creation of a single currency. It was fundamental in paving the way for the Maastricht Treaty.

Deindustrialisation
A continuing reduction in the share of manufacturing in national output

Delegation
Authority passed down from superior to subordinate.

Deindustrialisation
A sustained decline in the manufacturing sector of the economy.

Deforestation
The clearing of forested land. This process often takes place in developing countries to establish more agricultural land for cultivation. Significant environmental problems including soil erosion can result from this.

Deflationary policies
Policies designed to reduce aggregate demand.

Deflator
See GDP deflator

Deflation
A reduction in national income and output.

Deflationary gap
A deflationary gap exists when there is insufficient demand available in the economy to generate a full-employment equilibrium. In other words there is not enough being bought to provide jobs for everyone who wants them.

Deflate
To deflate the economy means to set out to deliberately reduce the level of economic activity. This is most likely to be necessary because there is an excess level of demand and this is leading to demand-pull inflation. Deflating means using deflationary policies. These could include cutting government expenditure, increasing taxes or raising interest rates. This will shift aggregate demand to the left and reduce the level of economic activity.

S-squared
The mathematical symbol for variance.

X-axis
The horizontal axis in a chart. It displays the range of values possible for the independent variable to take. In time series data, the x-axis represents time.

X inefficiency
When a firm fails to produce on the lowest possible average and marginal cost curves. X-inefficiency is perhaps most likely in a situation where there is not enough competition, like monopoly. In these circumstances forms may not be stretched as there is no competition and so some 'organisational slack' may creep in. This means that resources are not being used as efficiently as possible. X-inefficiency will increase costs because of a lack of competitive pressure.

Deficiency of aggregate demand
The potential level of output exceeds total planned expenditure, at the full employment level of national income. More generally, people are not spending enough to keep everyone in work.

Deed of Partnership
A deed of partnership is a legal contract which is drawn up by business partners, stating their rights. It is used to refer to when changes occur to the partnership, or in the event of a dispute between the partners.

Debtor nation
A country with a balance of payments deficit.

Declining industries
Sunset industries.

Declining markets
Markets in which demand is decreasing.

Decreasing returns
When the addition of a variable factor of production results in a fall in marginal product. Diminishing returns refers to a situation where a firm is trying to expand by using more of its variable factors, but finds that the extra output they get each time they add one gets progressively less and less. This usually arises because their capacity is limited in the short-run and the combination of the fixed and variable factors becomes less than optimal. Diminishing returns is the main reason why the short-run aggregate supply curve is upward sloping.

Debt service
The total amount of interest payments and repayments of principal on external public debt.

Debt service ratio
The ratio of interest and principle payments as a proportion of exports for a given year.

Debt servicing
The repayment of interest and principle to external creditors.

Data set
Any set of data which has a common theme or similar attributes

De-merging
One company splits up to form two new firms. These new firms are frequently companies which used to be separate prior to the initial merger.

Death rate
The number of deaths per thousand of the population in a year

Debentures
Long term fixed interest loans to companies.

Debt for equity swap
A mechanism where indebted LDCs swap shares in domestic firms for private foreign debt.

Debt for nature swap
A mechanism where foreign debt is exchanged for domestic debt enabling resources to be released to finance environmental conservation.

Data
Facts or figures from which conclusions can be drawn.

Customs union
A group of countries which removes tariff barriers between member countries and also imposes common external tariffs on non-members.

Cycles
Fluctuations in economic activity which impact across many sectors. The length of the business cycle, from the top of one peak to the next, varies from 5 to 10 years.

Cyclical component
One of the main features of a time series data set is the cyclical component. In weekly or monthly data, the cyclical component describes any regular fluctuations.

Cyclical unemployment
Sometimes called mass or demand deficient unemployment. Workers are without a job because of a lack of aggregate demand due to a down turn in economic activity.

Customary Law
A land tenure arrangement where there is communal ownership of land. Often used in developing countries as a form of land tenure.

Current account surplus
When a country receives more in revenue from the sale of visible and invisible items than it spends on visible and invisible items from abroad.

Current balance
See current account balance.

Current prices
Values that are expressed in the prices that exist at present.

Current ratio
The current ratio is a general indicator of the business's ability to meet its short-term financial commitments. This ratio assumes that all current assets, if required, can be converted to cash immediately in order to meet all current liabilities immediately. Many texts recommend that the current ratio should be at least 2:1, that is current assets should be at least twice the value of current liabilities. Presumably, this is to allow a safety margin, as current assets do not usually achieve their full value if they have to be converted to cash in a hurry. Nowadays, it is very difficult to prescribe a desirable current ratio. Technological advances in stock and inventory management have reduced the value of stocks on many balance sheets. Aggressive financial management strategies by large companies have resulted in higher levels of trade creditors, and a tightening grip on trade debtors. It is therefore important to look at the trend for an individual business, and to compare businesses within the same industry segment. The Current Ratio is calculated by Current Assets divided by Current Liabilities.

Current account balance
A record of a country's earnings from the sale of visible and invisible items minus its expenditure on visible and invisible items from abroad.

Current account deficit
When a country spends more on visible and invisible items from abroad than it earns from the sale of visible and invisible items.

Current account equilibrium
When a country's earnings from visible and invisible items match its expenditure on visible and invisible items from abroad..

Cumulative frequency
Used to determine the number of observations that lie below a particular value. It is found from a frequency distribution table, by adding each frequency to the sum of the preceding observation.

Cumulative percentage
Calculated by dividing the cumulative frequency by the number of observations and multiplying by 100. The last value will always be equal to 100%.

Current account
Usually taken to mean the current account of the balance of payments. It is the account where all of one country's international transactions in goods and services are recorded.

Cumulative distribution function
All random variables (discrete and continuous) have a cumulative distribution function. It is a function giving the probability that the random variable X is less than or equal to x, for every value x.

Crowding out
A decline in private sector spending resulting from a rise in public sector expenditure.

Cross elasticity of demand
Measures the responsiveness of demand for good A to a given change in the price of good B. It is an important piece of information to a firm as it helps them to predict how much the demand for their product will change as the price of other goods change. We calculate the cross price elasticity from the following formula: Cross price elasticity of demand = % change in demand for good A / % change in the price of good B

Credit squeeze
A government policy which seeks to lower demand by reducing bank lending.

Creditor nation
Those nations that have a balance of payments surplus.

Critical value(s)
The critical value(s) for a hypothesis test is a threshold to which the value of the test statistic in a sample is compared to determine whether or not the null hypothesis is rejected. The critical value for any hypothesis test depends on the significance level at which the test is carried out, and whether the test is one-sided or two-sided.

Credit creation multiplier
Shows by how much total liabilities can increase as a result of a rise in liquid assets

Council of Ministers
The Council of Ministers is a European Institution and is responsible for co-ordinating the general economic policies of the European Union. It has legislative and decision making powers. It is based in Brussels.

Counter-trade
The international exchange of goods and services based on barter.

Crawling peg
Form of adjustable peg where the central parity can be changed regularly on the basis of the previous trend in the exchange rate.

Credit creation
The ability of the banking sector to create money by giving advances.

Cost-plus pricing
When a firm adds a given percentage mark-up to average cost.

Costs of production
Total costs. Costs are made up of fixed costs and variable costs. The total of the fixed and variable costs is the total cost. Total costs can also be split into direct and indirect costs.

Council of Europe
The European Council defines the general economic and political objectives of the European Union. It is made up of the Heads of State of the member countries with Foreign ministers participating. It meets 3 times a year and has a headquarters in Strasbourg.

Cost push inflation
When a cost of production (e.g. wages) increases and firms put up prices to maintain profits. Cost increases may happen because wages have gone up or because raw material prices have increased. It is important not to muddle cost-push with demand-pull inflation. Cost-push inflation happens when costs have risen independently of demand.

Cost-benefit analysis
A method of assessing the social costs and benefits of an investment project with a view to assessing its worth.

Cost-benefit analysis (CBA)
A method of assessing the social costs and benefits of an investment project

Cost plus pricing
Setting prices by adding a profit margin to average cost.

Cost effectiveness principle
This concerns itself with finding the least cost method of achieving a given economic aim.

Cost of living
The general level of prices in the economy usually measured by the retail price index.

Cost benefit analysis
A method of assessing investment projects which takes into account social costs and benefits.

Cost curve
A cost curve is a curve that plots costs against output. Total costs, average or marginal costs may be plotted.

Cost based pricing
When an organisation adds a percentage mark-up on its products.

Corset
This is an item of ladies clothing designed to make them look slimmer by squeezing them tightly. It is also the name that the Supplementary Special Deposit Scheme (SSD) was more popularly known by. The reason for the name was that the SSD tried to squeeze the amount of credit in the economy. However, as with ladies corsets, if you try to squeeze something in, it will often pop out elsewhere and that is just what happened with the SSD!

Correlation coefficient
A correlation coefficient is a number between -1 and 1 which measures the degree to which two variables are linearly related. If there is perfect linear relationship with positive slope between the two variables, we have a correlation coefficient of 1; if there is positive correlation, whenever one variable has a high (low) value, so does the other. If there is a perfect linear relationship with negative slope between the two variables, we have a correlation coefficient of -1; if there is negative correlation, whenever one variable has a high (low) value, the other has a low (high) value. A correlation coefficient of 0 means that there is no linear relationship between the variables.

Corporation tax
A tax on firms' profits. It is charged as a percentage of firm's profits.

Copyright
The sole legal right to sell a good, usually literary, musical or artistic work.

Corporate hospitality
Free entertainment and gifts offered by a firm to its consumers or to persons in a position to influence its prospects.