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

Conversion rate
The rate at which one currency is converted to another. In a European context it refers to the irrevocable rates between all the currencies taking part in the Euro and the Euro itself. These were set on Jan.1st 1999.

This is the rate at which one currency is transformed into another. To convert from a national currency to the Euro, then you need to divide by the conversion rate and from the Euro to a national currency, multiply by the conversion rate.

Convergence criteria
The convergence criteria were the five conditions set that countries had to meet if they wanted to take part in full economic and monetary union. They were: 1. Inflation - no more than 1.5% above the average inflation rate of the lowest 3 inflation countries in the EU 2. Interest rates - the long-term rate should be no more than 2% above the average of the three countries with the lowest inflation rates 3. Budget deficit - no more than 3% of GDP 4. National debt - no more than 60% of GDP 5. Exchange rates - currency within the normal bands of the ERM with no re-alignments for at least 2 years

Contribution pricing
A system where the price charged is based on the variable costs of production. A price is set that is greater than the variable costs, so that a contribution is made towards fixed costs.

Continuous random variable
A continuous random variable is one which takes an infinite number of possible values. Continuous random variables are usually measurements. Examples include height, weight, the amount of sugar in an orange, the time required to run a mile.

Contract of employment
A legal document setting out legally enforceable terms of employment between an employee and an employer.

The difference between the price charged and the variable costs involved in producing a good.

Contestable markets
Markets in which costs of entry and exit are low.

Continuous data
A set of data is said to be continuous if the values / observations belonging to it may take on any value within a finite or infinite interval. You can count, order and measure continuous data. For example, height; weight; temperature; the amount of sugar in an orange; the time required to run a mile.

Capable of being competed for. A contestable market is one in which there are no barriers to entry and in which exit is cost free.

Contestable market
Any entry costs can be recovered on exit i.e. there are no sunk costs.

Consumption function
A graph showing how much will be spent by households at different income levels.

Expenditure by households on goods and services which satisfy current wants.

The probability value (p-value) of a statistical hypothesis test is the probability of getting a value of the test statistic as extreme as or more extreme than that observed by chance alone, if the null hypothesis H0, is true.

Consumer surplus
This occurs when people are able to buy a good for less than they would be willing to pay. They enjoy more utility than they had to pay for.

Consumer taste
People's preferences for particular goods and services.

Consumer expenditure
Spending by households on goods and services.

Consumer goods
Items used by households.

Consumer loyalty
Attachment by consumers to particular goods and services.

Consumer sovereignty
The power of consumers to determine what goods and services are produced.

Consumer equilibrium
When a consumer is maximising satisfaction from his/her purchases. This maximisation will happen where the marginal utility / price ratios are equal for all goods the consumer is consuming.

Consumer adjustment
Changes in consumer expenditure undertaken to increase total satisfaction.

Constant prices
Values that are expressed in such a way as to enable comparisons to be made across a period of years. To measure real national income, economists value total production in each year at a constant set of prices that applied in a chosen base year.

Confidence interval
An interval which has a specified probability of containing a given parameter or characteristic.

Confidence interval for a mean
A confidence interval for a mean specifies a range of values within which the unknown population parameter, in this case the mean , may lie. These intervals may be calculated by, for example, a producer who wishes to estimate his mean daily output; a medical researcher who wishes to estimate the mean response by patients to a new drug etc.

Conditions of supply
Those factors held constant when considering supply. They include costs and the objectives of the firm.

Concessional terms
A loan that is made at more favourable terms that could be obtained commercially. A considerable amount of overseas loan aid to developing countries is given at concessional terms.

Conditions of demand
Those factors held constant when considering demand. They include income and tastes.

Complementary products
Two goods used together by consumers e.g. bread and butter

Composite demand
When a good is demanded for two or more uses. For instance, milk can be used to make yoghurt and cheese. The concept is often used in the issue of the interrelationship between markets.

Concentration ratios
Measure the proportion of an industry's output or employment accounted for by, say, the five largest firms. A 5 firm concentration ratio of 75% would indicate that the five largest firms had a total market share of 75%.

Complementary demand
Two goods jointly bought by consumers, e.g. cars and petrol.

Complementary goods
Complementary goods are consumed at the same time e.g. cars and petrol. Therefore an increase in the demand for one will cause an increase in the demand for the other. An indication of the goods being complementary is the cross price elasticity of demand. If the CPED is negative then the two goods are complements. If the value is greater than one, then they are close substitutes.

Competitive conditions
The ability of firms to enter or leave a market.

Competitive demand
Government policy which seeks to promote competition and efficiency.

Competitive markets
Markets where firms are generally free to enter or leave a market

Competitive process
The interaction of firms supplying goods in competition with other firms.

Competitive supply
Alternative products which the firm could make

Comparative advantage
This exists when a country produces a good or service at a lower opportunity cost than its trading partners.

Comparative Costs
See comparative advantage.

Competition and Credit Control
This was an important paper published by the Bank of England in 1971. It set out new monetary control arrangements. A system of reserve requirements was implemented and there was an end to collusion by banks on setting interest rates. The aim was to create greater competition in financial markets and use interest rates more to control the level of credit.

Competition based pricing
When prices are determined by what your competitors are doing or plan to do.

Competition Policy
Government policy which seeks to promote competition and efficiency.

Competitive advantage
A firm has a lower cost structure than a rival, and so can sell at a lower price or make a bigger profit at the same price.

Common external tariff
The CET is the tariff that is charged at the same level by all members of the European Union customs union.This occurred in 1968 when all members of the community became a single customs union.

Common market
A customs union which permits the free movement of capital and labour between member states.

Common Agricultural Policy (CAP)
The policy whereby the European community stabilise market prices for farm goods through intervention e.g. buying up wheat if the price falls below the minimum allowed. The aim of the scheme is to increase agricultural productivity and ensure a fair standard of living for those in agriculture.

Commodity markets
Commodity markets are markets where commodities are traded. Though some are still based in a particular location, many have become increasingly global markets. Commodities can now be traded all over the world, often 24 hours a day. Rapidly increasing commodity prices could be a source of cost-push inflation. Commodities include such things as coal, oil, metals, precious metals and so on.

Committee of the regions
A European institution that aims to ensure that the interests of local government in each of the member countries are heard by the EC. The EC will usually consult the committee on any matters that have a local dimension like transport, eduaction and public health.

Commercial bank
A commercial organisation that provides a variety of banking services such as loans and savings schemes.

Agreements between firms to restrict competition.

Collusive oligopoly
When several large firms in an industry act to restrict price or output.

The process of a country being taken over and becoming a colony of another.

Command economy
The state allocates resources, and sets production targets and growth rates according to its own view of people's wants. The state allocates resources, and sets production targets and growth rates according to its own view of people's wants.

Cobweb Theory
The view that prices of agricultural products fluctuate around the equilibrium because of time lags.

Coefficient of variation
The coefficient of variation measures the spread of a set of data as a proportion of its mean. It is often expressed as a percentage.

Collective bargaining
Negotiations between trade unions and employers on wages and working conditions.

Coase's theory
The belief that externalities can be accounted for in a production process by the consumer of an externality agreeing a price with the producer first.

Closed economy
An economy which does not engage in international trade.

Closed shop
A firm in which anyone employed has to belong to a union.

Cluster sampling
Cluster sampling is a sampling technique where the entire population is divided into groups, or clusters, and a random sample of these clusters are selected. All observations in the selected clusters are included in the sample.

A business whose members buy shares and have equal say in the running of the business, no matter how many shares each member has. A co-operative is run in the interests of its members. Any surplus is distributed to its members. This non-traditional type of business organisation is usually either a retail or worker co-operative.

Classical economics
Classical theories revolved mainly around the role of markets in the economy. If markets worked freely and nothing prevented their rapid clearing then the economy would prosper. Any imperfections in the market that prevented this process should be dealt with by government. The main roles of government are therefore to ensure the free workings of markets using 'supply-side policies' and to ensure a balanced budget.

Class intervals
When a variable takes a large number of values it is easier to present and handle the data by grouping the values into class intervals (i.e. age of the population presented as age groups, for example 0-4, 5-9, 10-14, 15-19, etc.)

Circular flow
This shows the flow of income and payments between consumers and producers.

Circular flow of income
The flow of income and payments between economic agents in an economy. The key agents are households and firms and the circular flow shows how money moves between them. There may also be leakages from the circular flow and injections into it.

Child Benefit
Child benefit is a transfer payments to households - irrespective of household income or savings - for people who have children. The benefit is paid for each child who is under 16 years (or 19 if enrolled at a college). For more information on the current level of child benefit see the linked web site (url)

A form of slash and burn shifting cultivation often used in developing countries to clear land for agricultural development. It is a technique that contributes to soil erosion and can cause significant environmental problems.

Chain of distribution
The link between raw material suppliers, manufacturers, wholesalers and retailers.

Chain of production
Shows the different stages of making, distributing and selling a good or service.

Ceteris paribus
All other influencing factors are held constant. Generally used to refer to supply and demand functions to show that demand and supply curves are drawn with all other determinants held constant.

Chain of Command
The way power is passed down through a business organisation.

Certificates of deposit
Transferable, interest bearing securities issued by financial institutions. A certificate of deposit is a certificate confirming that a deposit has been made with an institution. They are used as a way of trading money between financial institutions.

Central planning
When a state allocates resources and sets production targets and growth rates according to its own view of what is required.

The collection of information about all units in a population, sometimes also called a 100% sample survey. (When capitalized, 'Census' usually refers to the national Census of Population.)

Central banks
Banks which act as bankers to the government and the banking sector.

A narrow measure of money which consists of notes, coins and retail banks' balances at the Bank of England

Cash ratio deposits
All financial institutions who take deposits from customers are required to keep a proportion of their liabilities as a cash ratio deposit. These deposits help to fund the Bank of England's work.

Causal unemployment
Those out of work in between short periods of employment.

A group of producers who act together to fix price, output or conditions of sale.

Cash cows
Products that produce a large amount of revenue because they have a large share of an existing market which is only expanding slowly.

Cash crops
Crops that are produced only for the market.

Cash flow
A record of an organisation's money income and money payments in a given period of time.

Cash flow forecast
A projection of what a company expects its cash income and cash payments to be in a given period of time.

Capital flight
The movement of financial assets out of a country in response to an unfavourable domestic circumstances.

Capital gains
The difference between the sale and purchase price of an asset. Increases of over a certain threshold will be subject to Capital Gains Tax.

Capital goods
Goods used in the production of other goods and services.

Capital inflows
The movement of money into the UK in the form of e.g. the purchase of shares, the purchase of companies and loans by overseas companies.

Capital intensive
A production technique which uses a high proportion of capital to labour.

Capital markets
Markets dealing in long term loans.

Capital Output Ratio
The ratio that shows the amount of units of capital that are needed to produce a certain level of output. The ratio is an key part of the accelerator theory. A high capital output ratio will mean a large amount of capital is needed for production as economic growth increases, and will therefore exaggerate the trade cycle.

Capital Employed
Capital Employed may be defined in a variety of ways, the most common being Fixed Assets plus Working Capital, i.e. Current Assets less Current Liabilities. This definition reflects the investment required to enable a business to function.

Capital expenditure
Capital expenditure is spending by firms on capital equipment. This includes spending on machinery, equipment and buildings. Capital expenditure is also termed investment.

Capital accumulation
An increase in the stock of capital goods.

Capital consumption
A reduction in the stock of capital goods resulting from capital goods becoming obsolete. It may also be referred to as depreciation.

The degree of use of factors of production. Full capacity means full use of the factors of production.

Man made resources e.g. machines, factories, offices. Capital is one of the factors of production.

Capital account
That part of the balance of payments accounts that measures the flows of capital in and out of the country.

Canons of taxation
A set of criteria developed by Adam Smith that could be used to judge whether or not a tax was a 'good' tax. They were: 1. The cost of collection must be low relative to the yield 2. The timing and amount to be paid must be certain to the payer 3. The means and timing of payment must be convenient to the payer 4. Taxes should be levied according to ability to pay

Buyer's market
The quantity of goods for sale exceeds the amount consumers are willing and able to buy at the current market price. Characterised by low prices.