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

Marginal revenue product (MRP)
The addition to total revenue following the employment of an extra unit of a variable factor, e.g. labour

Marginal rate of tax
The proportion of each extra pound of income taken by the government. The marginal rate of tax is therefore the rate of tax paid on the next pound earned. In the case of income tax this will increase as a person moves from one band to the next. High marginal tax rates can act as a disincentive to effort.

Marginal propensity to withdraw
The proportion of each extra pound of disposable income not spent by households

Marginal propensity to import
The proportion of each extra pound of income spent on imports. An MPI of 0.4 would mean that 4 pounds more was spent on imports when 10 pounds extra was earned.

Marginal propensity to save
The proportion of each extra pound of disposable income not spent by households

Marginal Propensity to Tax
The proportion of each extra pound of income taken by the government

Marginal product
The addition to total product following the employment of an extra unit of a variable factor, e.g. labour.

Marginal product of labour
The addition to output made by each extra worker

Marginal propensity to consume
The proportion of each extra pound of disposable income spent by households. For example, if a person earns £1 more and consumes 60p of it, then the MPC is 0.6.

Marginal private cost
The cost incurred by just the firm in producing each extra unit of a good.

Marginal external cost
The change in negative externalities resulting from the production of one more unit.

Marginal private benefit
The increase in private benefit resulting from the consumption of one more unit or the production of one more unit.

Marginal private cost
The increase in private cost resulting from the consumption or production of one more unit.

Marginal costs
The amount spent on producing one extra unit. The marginal cost is the increase in total cost when one more unit is produced.

Marginal efficiency of capital
The expected rate of return on investment.

Marginal external benefit
The change in positive externalities resulting from the consumption of one more unit.

Marginal cost pricing
Setting price equal to marginal cost.

The study of the whole economy.

The process of organising resources.

The difference between the cost of a product to a business organisation and the revenue gained from selling it to a customer.

Marginal cost curve
A curve showing the addition to total cost resulting from producing one more unit.

Macroeconomic stabilisation
Government policy to stabilise inflation, budget deficits, trade deficits and money supply.

Macroeconomic policies
Policies designed to influence the level of employment, the price level, economic growth and the balance of payments.

Macroeconomic aims
The aims of macroeconomic policy i.e. high employment, price stability, economic growth and balance of payments equilibrium.

Louvre Accord
This was an agreement between the G6 countries in 1987 to co-operate closely to keep exchange rates stable. They wanted to maintain them at roughly the levels they were at that time.

Maastricht Treaty
In December 1991 the leaders of the 12 EC countries met at Maastricht in the Netherlands to negotiate a treaty on the European Union. The treaty was finally signed in February 1992. The treaty moved significantly towards economic, political and social union and set out the detailed timetable for economic and monetary union (EMU). It also set out the convergence criteria for economies who wanted to join in EMU.

Loss leader strategy
The practice of selling a product or products at a low price in order to attract customers who will buy other products.

Lorenz curve
A curve showing the proportion of income earned by a cumulative percentage of the population. The Lorenz curve is a way of illustrating the income distribution of a country. The horizontal axis measures the percentages of the population while the vertical axis shows the percentage of the national income that they receive. The Lorenz Curve will look like this: The further the Lorenz Curve is from the line of perfect equality, the more unequal the distribution of income in that country.

Long-run Phillips curve
The long term relationship between unemployment and inflation.

Long term liquidity ratios
Long term liquidity ratios assess the performance of the funds that are invested in the company for a longer period of time. They include the Gearing and Interest Cover ratios and measure the extent to which the capital employed in the business has been financed either by shareholders or by borrowing and long term finance.

Long run
Period of time when all factor inputs, including capital, can be changed.

Long run average cost curve
Shows the minimum unit cost of producing each level of output, allowing the size of plant to vary.

Local multiplier
A rise in an injection such as investment causes a multiple rise in national income. This is the multiplier effect. When an increase in injections occurs in a specific area of a country, there is a multiple rise in local incomes.

Location of firm
The geographical siting of a firm.

London Foreign Exchange Market
The market dealing in the sale and purchase of foreign currencies based in London.

Local authorities
Official bodies responsible for running areas of the country.

Liquidity trap
When the rate of interest is so low (and the price of bonds is so high) that everyone anticipates a future fall in the price of bonds

Living standards
The quality of peoples lives.

Loan principal
The sum of money that a country borrows. The original amount of the loan.

Loanable Funds (Classical) Theory
The rate of interest is determined by the demand for loanable funds and the supply of loanable funds

Loanable Funds Theory
The view that the rate of interest is determined by the supply of savings and the demand for funds for investment.

When organisations try to persuade decision makers, usually politicians, that their product or organisation should be supported.

Liquidity preference
The desire to hold money in a variety of forms, e.g. as cash, stocks or bonds.

Liquidity preference curve
The liquidity preference curve is the demand for money curve. It is thought by Keynesians to be made up of three different types of demand for money - transactions demand, precautionary demand and speculative demand.

Liquidity ratio
The proportion of a commercial bank's assets which can be converted into cash quickly.

Liquidity refers to the ease with which an asset such as bank deposits or property can be turned into money. Liquid assets are ones that can quickly be converted to cash.

Linked processes
Combining different but related stages of production.

Liquid asset ratio
The amount of liabilities a retail bank can have from a given volume of liquid assets.

Liquid assets
Assets which can be turned into cash quickly and easily.

Line Graph
A graph in which successive points representing the value of a variable at selected values of the dependent variable are connected by straight lines. (e.g. unemployment rates among youth over the last ten years).

Limited liability
The restriction of a shareholders' loss to the amount of capital they have invested in a company.

Life expectancy
The average length of time that people in a country are expected to live. This will tend to be higher in developed than developing countries and can be used as an indicator of the quality of a country's health system.

Limit pricing
When a firm sets price just low enough to discourage possible new entrants.

Limited companies
Incorporated business organisations which have limited liability.

Limited company
A firm owned by shareholders who enjoy limited liability, that is the restriction of a shareholder's loss to the amount of capital invested by them in a company.

Life cycle
A method of analysing the consumer market. Each household is divided into one of four types: pre family, late, family and dependent.

Life Cycle hypothesis
The view that consumption is based on anticipated lifetime income.

The opening up of markets to the free market forces of supply and demand.

Those who believe in minimal government interference in the market system, and in the maximum freedom of the individual.

Liabilities are items which are potentially owed to someone. In the case of the banks, their main liabilities are the deposits of their customers. If a customer comes in asking for money from their account the bank must honour it. Money in accounts at the bank is therefore a liability to the bank. Liabilities can be summarised as 'money owed'.

Less Developed Countries (LDCs)
Countries who are generally characterised by low levels of GDP and income per head. LDCs usually have a heavy dependence on the primary sector of the economy. In the case of many developed countries this is true with dependence on agriculture and primary products.

Lender of last resort
The central bank will always lend to the banking sector and thereby ensures sufficient liquidity in the monetary sector to maintain confidence

Leasehold land
Land which is owned by the government or a landowner and then leased to a tenant for a fixed period of time.

Least Developed Countries
The very poorest of the Less Developed Countries.

Least squares
The method of least squares is a criterion for fitting a specified model to observed data. For example, it is the most commonly used method of defining a straight line through a set of points on a scatterplot.

Free time. Consumers have to choose between work and leisure and how much time will be dedicated to each.

Natural resources including e.g. farm land and fishing grounds.

Land tenure
The system of land ownership.

Consumers whose children have left home or adults over the age of 35 with no children.

Law of diminishing marginal utility
The more a consumer has of a given commodity the smaller the satisfaction gained from consuming each extra unit.

Income not passed on by consumers in the circular flow e.g. savings, taxation or money spent on imports. Leakages are sometimes called withdrawals.

Lean production
Lean production is a range of management techniques that aim to make business more efficient in its use of resources. This minimises waste, reduces costs, increases productivity and should expand margins.

Laissez faire
The term "laissez-faire" is used to describe an economic system where the government intervene as little as possible and leave the private sector to organise most economic activity through markets. Classical economists were great advocates of a laissez-faire system with minimal government intervention. They believed free markets were the best organisers of economic activity.

Laffer Curve
The Laffer curve is named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue received by the government would also increase. However, there would come a point as tax rates where people would not regard it as worth working so hard. This lack of incentives would lead to a fall in income and therefore a fall in tax revenue. The logical end point is with tax rates at 100% where no-one would bother to work (understandably!) and so tax revenue would become zero. Drawn on a diagram this gives the Laffer curve: T* represents the optimum tax rate where the maximum amount of tax revenue can be collected.

Labour market failure
When labour markets fail to clear at the going wage rates

Labour market
This is made up of firms willing to employ workers and labour seeking employment. The demand for labour by firms is downward sloping with respect to wage (price of labour), while the supply of labour by households is upward sloping with respect to wage. The labour market is in equilibrium where the demand for labour equals the supply of labour.

Those who favour the analysis of the economist, John Maynard Keynes.

Known price item
When a good whose price is widely known by members of the public is priced to attract customers.

Labour force
Those who are employed or are available for work.

Labour force survey
A survey of the work force undertaken by the government. The Labour Force Survey has been used since 1997 as the basis for the calculation of the unemployment figures.

Economic theories which owe their origin to the work of John Maynard Keynes. A group of economists who believe that changes in government income and expenditure are the most effective instrument of government economic policy. Keynesians would argue for active intervention by the government to manage the level of aggregate demand to achieve full employment. They would argue that the economy can remain at equilibrium significantly below the level of full employment for some time.

Kaldor-Hicks test
A change in production or distribution is desirable only if those who gain can compensate those who lose, and still be better off.

Joint stock company
A firm owned by investors who contribute varying amounts of capital by buying shares. Profits are divided between shareholders in proportion to the number of shares they own.

Joint supply
By products from manufacture.

Just in time production
Just in time is a system of production in which materials, parts and finished products are delivered at the precise time they are needed. This encourages lower stock holdings, shorter lead times, quicker

Joint demand
Goods which are used together i.e. complements are in joint demand.

Joint stock bank
A joint stock bank is one operated by a joint stock or limited company. It is therefore a bank with limited liability. This is in contrast to a private bank which may be owned by a family or individual. All the commercial banks in the UK are joint stock banks.

A model of income determination that integrates the goods market (represented by investment and saving) and the money market (demand and supply of money).

Issue Department
That part of the Bank of England which has responsibility for the issue of bank notes.

Involuntary unemployment
Workers without a job who are willing and able to work at current wage rates.

Inward oriented development
Government policy that attempts to achieve development by stimulating domestic industry and import substitution behind trade barriers.

Invisible hand
A term coined by Adam Smith who believed that although individuals followed their own interest the greatest benefit to society as a whole is achieved by their being free to do so. Adam Smith argued that the 'invisible hand' would organise markets and ensure that they arrived at the optimum outcome. This would all happen by individuals and firms pursuing their self-interest, yet despite this apparent selfishness, the invisible hand of markets still ensured the best outcome for all concerned.

Invisible balance
The difference between a country's income and expenditure on services such as tourism and banking together with profits earned and interest payments received from overseas.

Investment appraisal
Investment appraisal is a series of techniques designed to help business judge which of a set of projects is likely to be the most profitable. There are a variety of techniques available including looking at the payback period of the investment, the average rate of return of the investment or looking at the discounted cash flow arising from the investment.

Investment is the purchase of capital equipment. i.e. the purchase of machines, equipment, factories etc. that firms need to enable them to produce. It is usually split into two parts: 1. Replacement investment - this is where companies buy new machinery and equipment that simply replaces something they had already that was worn out or inefficient. Depreciation is often used as an approximation for this. 2. Net investment - this is where companies buy new machinery or equipment. It is this type of investment that actually adds to the capital stock of the economy. Investment can also refer to changes in the level of stocks.

Intervention price
The price at which a government or the authorities managing a commodity agreement agree to purchase or sell stocks to maintain a particular price.

Any form of government interference with market mechanisms. Intervention is the act of intervening in a market to try to influence the market outcome. An example of intervention is that the Bank of England intervenes daily in the money markets to ensure that interest rates are maintained at the level set by the Monetary Policy Committee. They could also intervene in the foreign exchange market to try to influence the exchange rate, though this has not been done for a number of years.

International trade
The exchange of goods and services between countries

Two variables are linked.

An association between two economic variables.