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

A set of numbers which consists of those numbers that are greater than one fixed number and less than another and may also include one or both end numbers. For example, the interval [1.5, 3) consists of all numbers that are greater than or equal to 1.5 and smaller than 3. Note that the number 3 is excluded from this interval.

International Monetary Fund (IMF)
An organisation established to encourage international co-operation in the monetary field, the stabilisation of exchange rates and the removal of foreign exchange restrictions.

Internal rate of return
The rate used to discount future income into present value.

The monetary effects of economic activity are absorbed by the consumer, firm or themselves.

Internal growth
When a firm gets larger by increasing its own output

Internal constraints
Limits placed on the behaviour of firms by a company's rules, regulations and practices.

Intermediate expenditures
Spending on raw materials and components.

Intermediate outputs
Output of raw materials and components.

Intermediate targets
An intermediate target is a target that is set to help achieve a final outcome. For example a target could be set for the exchange rate to help reduce inflation. The exchange rate target would be an intermediate target.

Interest rates
Interest is the reward for giving up use of money and is an amount paid to a lender over and above the original sum borrowed. The rate is expressed as a % per annum. The rate of interest can be thought of as the price of money. It is the extra proportion that has to be paid when borrowing money or the extra that a saver receives when putting their money aside for the future (unless they keep it under the mattress). The level of the rate of interest is determined by the Monetary Policy Committee of the Bank of England that meets each month.

Interest cover
While the gearing ratio measures the relative level of debt and long term finance, the interest cover ratio measures the cost of long term debt relative to earnings. In this way the interest cover ratio attempts to measure whether or not the company can afford the level of gearing it has committed to. The Interest Cover ratio is calculated by Net Profit before Interest & Taxes divided by Interest paid which gives a figure of x times.The interest cover ratio measures how many times over the company can pay their interest from the profit they are earning. The higher the figure the easier it is for them to pay their interest from profits.

Inter-quartile range (IQR)
The inter-quartile range is a measure of the spread of or dispersion within a data set. It is calculated by taking the difference between the upper and the lower quartiles.

When the actions of one firm has an effect on its competitors.

The reward for forgoing liquidity, and is an amount paid to a lender over and above the original sum borrowed.

Integration occurs when two firms combine

A way of providing for the financial consequences of e.g. theft or fire by paying a regular sum (premium)

Policy tools over which the government has control and which are implemented to influence target variables

Institute of Fiscal Studies
The Institute of Fiscal Studies is a research institute which exists to provide top quality economic analysis which is independent of government, political party or any other vested interest. IFS exerts substantial influence through publications, the media, close contacts with civil servants and regular meetings with cabinet and Shadow Cabinet members.

This occurs when a business organisation is unable to generate sufficient cashflow to enable it to meet its debt obligations.

These resources are sometimes called the factors of production i.e. land, labour, capital and entrepreneurs. More generally, anything which that makes a contribution to a production process.

Inheritance tax
A tax on assets left on death.

An addition to the income of firms which does not normally arise from the expenditure of households e.g. changes in investment, government spending or exports.

Inorganic growth
When a company grows, the growth may be either organic or inorganic. Organic growth means that the company itself has grown from its own business activity, while inorganic growth means that the company has grown by merger or take-over. Organic growth is also sometimes known as internal growth and inorganic as external growth.

Data which has been recorded, classified, organized, related or interpreted within a framework so that meaning emerges.

Informative advert
Any advert which emphasises facts about a product.

The underlying amount of physical and financial capital that is embodied in the transport, communication, energy and public services e.g. roads, railways, powerstations, schools, bridges, sewers and hospitals.

Informal sector
The sector of the economy, often comprising of small businesses and individuals, which is unregistered with the tax authorities.

Inflationary gap
This occurs when there is too much demand in the economy. This excess level of demand will tend to lead to demand-pull inflation.

Industrial inertia
When a firm remains in its original location even after its initial advantage has disappeared.

Industrial location
The geographical distribution of industries.

Industrial relations
The relations between employers and employees.

Industrial sectors
The groupings of industries into major categories.

The development of the manufacturing sector. In other words the process of expanding the country's capacity to produce secondary goods and services.

One variable is unresponsive to changes in another.

Infant industries
Sunrise industries - that is industries that are at an early stage of their development.

Infant mortality rate
The rate at which children being born in a country are dying. Infant mortality is often used as a measure of how well developed the health system of a country is.

Inferior goods
Items for which an increase in income results in a fall in the amount bought e.g. bread, linoleum and coal. These products will have a negative income elasticity of demand. In other words a positive increase in income leads to a negative change in demand.

The rise in general prices and the reduction in value of money. Inflation is a sustained increase in the general price level. In other words it is the rate at which prices are increasing. It can be measured either monthly, quarterly or annually. It is usually measured by the Retail Price Index.

Inflation target
On leaving the ERM in 1992, the government set an inflation target of 1-4% and since then we have had inflation targets. Since giving the Bank of England operational independence in 1997 the government have set an inflation target that the Bank of England have to meet. Interest rates are set by the Monetary Policy Committee to achieve the target which is currently 2.5%.The Governor of the Bank is required to write an open letter to the Chancellor if inflation deviates more than 1% on either side of the target value.

Minimum size at which inputs, particularly capital can be used.

Induced consumption
Expenditure by households on goods and services which varies with income

Indirect taxation
A surcharge on price imposed on the sale of goods and services by the government. Indirect taxes are therefore taxes on expenditure. Examples of indirect taxes in the UK include VAT and taxes on alcohol, tobacco and petrol.

Indifference map
A graph that shows a whole set of indifference curves. The further away a particular curve is from the origin then the higher the level of satisfaction it represents.

Index numbers
Numbers expressed in terms of a base year value of 100. For instance a value of 105 means the variable measured by the index has risen by 5% compared with the base year. Each of the variables can be weighted to reflect its importance. One of the most common indices is the Retail Price Index. This measures changes in prices, and therefore the rate of inflation. An index number starts from 100 and all changes are expressed as a % change from that base.

Variables such as the level of unemployment the rate of interest or retail sales which reflect the performance of an economy.

Indifference curves
A curve which shows all the different combination of two goods where a consumer is indifferent. In other words, the combination of two goods that give the same level of utility.

Independent goods
Two goods not consumed together e.g. pins and olives

Increasing returns
When an addition to a variable factor of production causes marginal product to rise.

Income-related benefit
A benefit or payment that is available in whole or part according to the level of someone's income. Often, as the amount of money a consumer earns rises, so a range of government services provided may be lost, e.g. rent allowance.

Income-leisure trade-off
The choice labour makes between working more hours or taking more leisure when the rate of income tax changes.

Income tax
Tax levied by the government on wages, rent, interest and dividends. It is collected through a set of marginal rates Using bands. For the most upto date information on the rates and levels then see the linked web site (url)

Income inequality
The extent to which income is shared out unevenly.

Income Method
Adding up all the money earned by people and firms in producing this year's output

Income Support
Income support is a type of transfer payment from central government to the household. The welfare payment is for those who are currently without work but who are actively seeking work or on low income. The welfare payment is designed to increase the household income of the recipient.

Income elasticity of demand
This measures the responsiveness of demand to a given change in income. It is an important piece of information to a firm as it helps them to predict how much the demand for their product will grow as the economy grows. We calculate the income elasticity from the following formula:

Income effects
The income effect occurs when the price of a good falls and the consumer can maintain current consumption for less expenditure

Income effect
The effect on a person's overall purchasing power resulting from a change in the price of something they normally buy. For instance, if the price falls then this will increase a person's relative income, hence, their demand for all normal goods will increase.

Incentive effect
An encouragement to work harder resulting from a change in the rate of income tax.

How the final burden of taxation is shared out.

A flow of earnings

Income determination
How the level of economic activity is determined.

Income distribution
See distribution of income.

Goods, services and capital assets purchased from overseas countries.

Imputed income
Estimated income based on opportunity cost.

Import prices
The prices of imported goods.

Import restrictions
Limitations placed on the purchase of imports by e.g. quotas and tariffs.

Import substitution
A government policy when the government attempts to replace imports with domestically produced goods.

Hypothesis test
Setting up and testing hypotheses is an essential part of statistical inference. In order to formulate such a test, usually some theory has been put forward, either because it is believed to be true or because it is to be used as a basis for argument, but has not been proved, for example, claiming that a new drug is better than the current drug for treatment of the same symptoms.

Illiquid asset
An asset which takes time to convert into cash

The movement of people into a country.

Immobility of labour
Barriers to the movement of workers

Imperfect competition
Covers market structures between perfect competition and monopoly, i.e. an industry with barriers to entry and differentiated products.

Import controls
Government imposed limits on the entry of goods into a country

Import penetration
The proportion of domestic consumption accounted for by imports.

A prediction is constructed about economic or business behaviour which may be right or wrong.

Human Poverty Index
A composite index that measures human deprivation.

Very high rates of inflation which can cause major economic problems and political instability.

Human capital
The accumulated skill, knowledge and expertise of workers

Human Development Index
Introduced by the UN in 1990, the index take into account not only the goods and services produced but also the ability of a population to use these and the time they have to enjoy them. It is a composite index based on real GDP per capita (PPP), life expectancy at birth and educational achievement that measures socio-economic development.

Horizontal merger
When two firms at the same stage of production join together.

Household income
The total level of income earned by all the households in the economy. This will be a significant part of the overall level of National Income.

Housing Benefit
Housing Benefit is a type of transfer payment from local government to the household. The welfare payment is for those who are on low income or renting and need help towards paying their rent. The money is paid by local councils and the recipient does not need to be claiming any other type of benefit.

Horizontal integration
Two companies merge in the same industry and at the same stage of production;

Holding company
A company that controls other companies.

Horizontal equity
Fairness in relation to equal treatment of different people who are in the same circumstances.

A graph that consists of a series of columns, each having a class interval as its base and frequency of occurrence as its height

HM Treasury
The Treasury is the government department responsible for economic management. The Chancellor of the Exchequer is the government minister in charge of the Treasury. The Bank of England work closely with the Treasury; the Bank set monetary policy, while the Treasury set fiscal policy. Monetary Policy Committee meetings have a Treasury observer present.

The levels of management within a business organisation, from the lowest to the highest.

The harmonised index of consumer prices is a weighted price index used in the European Union.

Hard loan
A loan where commercial rates of interest are changed and no concessions made to the debtor.

Harrod-Domar growth model
An economic model which maintains that the growth rate of GDP depends upon the level of savings and the capital output ratio.

Headline rate of inflation
The rate of inflation unadjusted for one-off, abnormal or distorting factors.

Hedging is the process of protecting oneself against risk. For example, a company who owes money to an overseas company may want to hedge against the risk that the exchange rate moves against them. They could do this by taking out a future contract for foreign exchange. In other words they agree to buy now at a fixed price in the future.

Gross weekly income
Total weekly income before the deduction of direct taxes and additions of state benefits.

Increases in total output (GDP)

Hard currency
A currency of an industrialised country that has general convertibility.

Gross national product (GNP)
A measure of UK citizens activities all over the world. The difference between GNP and GDP is the value of any net property income from abroad.

Gross investment
Total investment without taking account of depreciation

Gross domestic product per head
Total domestic output divided by population.

Gross domestic product (GDP)
A measure of economic activity within the UK. Gross Domestic Product (GDP) is a measure of National Income. It is the total value of all goods and services produced over a given time period (usually a year) excluding net property income from abroad. It can be measured either as the total of income, expenditure or output.