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

Purchasing Power Parity Theory
Suggests that the prices of goods in countries will tend to equate under floating exchange rates so that people would be able to purchase the same quantity of goods in any country for a given sum of money.

Pure economic rent
The reward to any factor that is in completely inelastic supply

Pure monopoly
Only one producer who can therefore determine the market price on its own.

Qualitative controls
These are controls that aim to limit the nature or variety of a variable. They are not limiting the quantity supplied of the variable, but just the amount of each type of the variable available. For example, a qualitative control would not limit the amount of lending available just the type of loans.

Public sector investment decisions
The amount the government decides to spend on capital goods.

Public sector debt repayment (PSDR)
The amount by which in any one year government income from taxation, receipts from privatisation, etc exceed government expenditure. A PSDR is effectively a negative PSBR. The PSBR and PSDR are now known as the Public Sector Net Cash Requirement which is either a positive or negative amount.

Public sector
That part of the economy under state control.

Public interest
The common good.

Public limited company
A company with a separate legal existence from its shareholders who enjoy limited liability. A public limited company's shares are listed and can be bought and sold on the stock market by members of the public

Public expenditure
Spending by the government - see government expenditure.

Public goods
Items which can be jointly consumed by many consumers simultaneously without any loss in quantity or quality of provision e.g. a lighthouse. Public goods are therefore goods that would not be provided in a pure free-market system. This is because they display two particular characteristics: 1. Non-rivalry - consumption by one person does not reduce the amount available for others. 2. Non-excludability - once the good is provided it is impossible to stop people consuming it even if they haven't paid. An example of this is defence. It is impossible to charge people for defence as they consume it as the whole country is being defended at once. Also one person being defended does not stop others being defended.

Prudential ratios
Liquidity ratios kept by banks which are considered to be safe.

Public corporations
State owned industries.

Promotion campaigns
Ways of encouraging people to purchase a product e.g. by giving free gifts.

Property rights
The rights that accrue to the owner of something by virtue of owning it. These are the rights to ownership of an asset such as land

The practice of taking steps to protect what one sees as one's own interests. Most commonly used to describe steps taken by countries to protect their domestic industries from foreign competition.

The reward for bearing uninsurable risks associated with production

Progressive income tax
A tax which takes a higher percentage of the income of the rich than the poor.

Progressive tax
A progressive tax is a tax that takes an increasing proportion of income as income rises. Income tax is an example of a progressive tax, as the rate increases as a person earns more.

Profitability ratios
Profitability ratios are a type of ratio to assess how profitable the company is. They include the Return on Total Assets, Return on Capital Employed, Net Profit Margin and Net Asset Turnover and are used to assess how profitable the company is.

Profit margin
The profit margin is the profit as a percentage of turnover (or sales). It shows how profitable the firm is. The higher the margin the better for the firm.

Profit maximisation
Firms seeking to make the largest surplus of revenue over cost, possible. The profit maximizing rule is, profit is maximized when marginal revenue equals marginal costs.

Profit and loss account
The profit and loss account differs significantly from the balance sheet in that it is a record of the firm's trading activities over a period of time whereas the balance sheet is the financial position at a moment in time. The profit and loss account looks at how well the firm has traded over the time period concerned (usually the last 6 months or year). It basically shows how much the firm has earned from selling its product or service, and how much it has paid out in costs (production costs, salaries and so on). The net of these two is the amount of profit they've earned. It is made up of three parts; the trading account, the profit and loss account and the appropriation account.

Productive efficiency
When a firm produces at the lowest unit cost i.e. where MC = AC.

Total output divided by the number of factors of production.

Production targets
Goals set for output levels.

Productive capacity
The amount that a firm or plant could produce if all the resources available to it were to be employed 'flat out'.

Production quota
A limit on the amount of a good produced.

Production possibility boundary
The combination of two goods a country can make in a given time period with resource fully employed

The output of goods and services.

Product markets
The markets for factors of production, land, labour and capital.

Product curves
Curves showing total, average and marginal product.

Product life cycle
The product life cycle shows the different stages that a product passes through during its lifetime. The standard product life cycle tends to have five or six phases: 1.Development 2.Introduction 3.Growth 4.Maturity 5.Decline

Product market
The market for factors of production, land labour and capital.

Producer price index (PPI)
A statistical measurement of a typical set of raw materials and other inputs purchased by firms.

Producer surpluses
The difference between the minimum price a producer would accept to supply a given quantity of a good and the price actually received.

Producer goods
Capital items such as machinery

Process innovation
Process innovation involves the use of new technologies in a production process. It's an important part of the satisfaction of consumer demand in the most efficient way possible.

Problem children
A product that has a low market share within an expanding market. A term used to categorise one of the four types of goods shown by the Boston Matrix.

Probability Sampling
See Random Sampling.

Probability distribution
The probability distribution of a discrete random variable is a list of probabilities associated with each of its possible values. It is also sometimes called the probability function or the probability mass function.

Probability density function
The probability density function of a continuous random variable is a function which can be integrated to obtain the probability that the random variable takes a value in a given interval.

A probability provides a quantitative description of the likely occurrence of a particular event. Probability is conventionally expressed on a scale from 0 to 1; a rare event has a probability close to 0, a very common event has a probability close to 1.

Private sector investment
Spending on capital goods undertaken by non government companies.

Sale of government-owned shared in private sector companies

Private sector
That part of the economy in the control of individuals and companies.

Private good
A private good is one which is both rival and excludable. One person's consumption will mean that the good is not available for another person to consume it.

Private limited company
A Private Limited Company is an incorporated business which is owned by a few shareholders. Its shares cannot be made available for sale to the general public. Its shareholders enjoy limited liability.

Private benefits
The advantages of an economic activity to an individual.

Private costs
The disadvantages of an economic activity to an individual.

Private finance initiative (PFI)
Private sector financing and management of public services (e.g. school buildings) in order to transfer associated risks to the private sector and achieve better value for money.

Primary sector
That part of the economy concerned with agriculture and the extraction of raw materials

Principle of multiples
The ability of large firms to combine machines in proportions which ensure they operate at their optimum level.

Primary data
Information that is original and has been gathered first hand.

Primary products
Commodities produced by the extractive industries such as farming, fishing, forestry, and mining.

Primary banking system
Includes financial institutions whose main function is to provide a money transmission service.

Pricing policies
Ways and directions in which firms, the government and other agencies seek to influence the prices of goods and services.

Prices and incomes policies
A government freeze on price and income increases, usually used to curb inflation.

Price taker
Firms whose output does not influence price. Particularly apparent in perfectly competitive markets.

The amount of money for which goods and services are bought and sold.

Price stability
Price stability is where prices change by a small and consistent amount. One of the 3 core purposes of the Bank of England is to maintain price stability. In other words they are required to maintain low and stable inflation. To do this they use interest rates, and these are set by the Monetary Policy Committee.

Price signals
Price signals are a vital component of a market system. Changes in price act as a signal about the way resources should be allocated. Say, for example, there is an increase in demand for a particular product. This will push the price up and indicate to firms that more resources should be used in the production of this good. Price signals will only work effectively if there is low inflation. If inflation is high and unpredictable, then relative price changes may get muddled with general price increases.

Price mechanism
Prices act as a signal to firms and consumers to adjust their economic behaviour. For example a rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product.

Price makers
Firms whose output influences price.

Price instability
Fluctuations in price arising from unstable demand and supply conditions.

Price effect
The effect of a price change on demand for a product. It is made up of the income effect and the substitution effect.

Price floor
A minimum limit for a price below which it is prevented from moving.

Price index
Often called the Retail Price Index, a statistical measurement of a typical basket of goods typically purchased by people.

Price differentiation
When a business charges more than one price for identical products or services, e.g. off-peak electricity.

Price discrimination
When the same product is sold in different markets for different prices. A firm will only be able to price disciminate where there is separation between the markets. If there is any significant leakage between the markets the price discrimination will break down.

Price deflator
An index used to eliminate the effect of inflation

Price competition
Attempts by firms to attract customers away from their rivals by lowering their prices.

Price band
A range within which a price is able to move. This will result from intervention in a market that sets minimum and maximum prices.

Price ceiling
A maximum limit for a price above which it is prevented from moving.

Poverty trap
A situation in which a rise in income results in the recipient being worse off once tax has been paid and benefits withdrawn.

Consumers, aged 15-35, who have no children.

Precautionary demand
The desire to hold assets in the form of cash or near-cash as a precaution against unforeseen eventualities. Popularly known as 'just in case' money.

Precautionary motives
The desire to hold money to meet unexpected expenses and take advantage of bargains.

Predatory pricing
When a firm reduces price in the short run so as to force competitors out of the industry.

Present value
Future value expressed in present terms by means of discounting.

Pressure groups
Any group who come together to present a particular cause.

Prestige pricing
When a business is able to set a high price because of the image associated with its product.

Potential output
The output that could be achieved if all resources were to be fully deployed. This concept may be applied to whole economies or to sectors of an economy. Potential output tends to grow each year as technology and productivity improve each year.

Population pyramid
Graph showing the age structure of the population.

Population size
The number of people living in a country.

Positive Economics
Statements of fact, which can be proved or disproved, and which concern how an economy works.

Positive externalities
Impacts on 'outsiders' that are advantageous to them and for which they do not have to pay. Externalities occur where the actions of firms and individuals have an effect on people other than themselves. In the case of positive externalities the external effects are benefits on other people. These are also known as external benefits. There may be external benefits from both production and consumption. If these are added to the private benefits we get the total social benefits. An example of positive externalities would be the side effects of production processes e.g. the benefits to some local people that stem from the growth of a major industry causing trade to increase for other local firms who benefit from the extra demand caused by the increased growth.

Population pyramid
Diagram showing the age and sex distribution of a country at a particular moment in time.

Population growth
Increases in the number of people living in a country.

A population is any entire collection of people, animals, plants or things from which we may collect data. It is the entire group we are interested in, which we wish to describe or draw conclusions about.

Policy problems
Difficulties which arise in designing and implementing policies.

Policy variables
What policies seek to influence.

Polluter pays principle (PPP)
The principle that firms which cause pollution should bear the cost of eradicating it, ameliorating it, or compensating those who have to put up with it.

The number of people living in a country.

A means of achieving an objective.

Policy instruments
Policy tools used to achieve an objective.

Planning restrictions
Controls placed on the building and extension of houses, factories and offices.

Point of sale
This is the location of the final transaction that takes place between a customer and a supplier. This may be a physical location such as a till point in a shop, or it could take place on the Web or over the phone.

Planned saving
The amount economic agents intend to save out of their incomes.

Planned withdrawals
Income not passed on in the circular flow of income i.e. saving, taxation and imports.