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

What consumers and producers anticipate will happen to key economic variables e.g. inflation.

Exit-voice theory
A theory which distinguishes between different ways in which consumers may desert a market. One way is to stop buying e.g. sales of ivory.

Exchange rate mechanism (ERM)
An adjustable peg system which involved EU countries maintaining the value of their currencies within limited margins but being allowed to float their currencies against non member currencies. The ERM was the forerunner to the implementation of the Euro.

Exchange rate parities
Exchange rates expressed in terms of gold or dollars.

Exchange rate target
An exchange rate target is an intermediate target. If the governments targets the exchange rate with a low inflation country, then any increase in inflation will show as a depreciation of the currency. Interest rates can then be changed accordingly. Governments would normally look at a number of other variables as well.

Exchange equalisation account
A Treasury account operated by the Bank of England to buy and sell sterling to influence the exchange rate.

Exchange rate
The price of one currency in terms of another currency. For example, the exchange rate between the £ and the $ may be £1=$1.65. This means that you need to pay a price of £1 to get every $1.65. Exchange rates can be fixed or floating. Fixed means that they stay at the same value as set by the government. Floating means that they fluctuate day to day according to the market. More generally the term can also refer to the price at which any good is being traded for another good.

Excess demand
Consumers want to buy more than producers are prepared to sell.

Excess supply
Producers are prepared to sell more than consumers are willing to buy.

Exchange control
A government policy where the amount of foreign currency available to domestic firms and citizens is controlled.

The eurozone came into operation in January 1999. It currently has 12 members who adopted the euro in place of their old currencies in January 2002.

European Single Act
This has been in force since 1987 and revised the Treaties of Rome. It opened the way for economic and monetary union between the countries who took part in the EMS.

The statistics office of the EC which is based in Luxembourg. It receives data from the National Statistical Offices of the member countries and then unifies and publishes it.

European Parliament
The European Parliament has sessions each month in Strasbourg and also six annual two day sessions in Brussels. There is also a thrid location in Luxembourg. It is made up of 626 members who are elected every five years by the people of the member countries.

European Police Office (EUROPOL)
The European Police Office was established by the Maastricht Treaty and aims to make cooperation between national police forces more efficient in the way they fight international crime. Not to be confused with INTERPOL which is the International Criminal Police Organisation - a worldwide organisation of the police forces of 177 countries.

European Monetary System (EMS)
EMS seeks to stabilise exchange rates between member countries.

European Monetary Institute (EMI)
A fledgling European central bank which co-ordinated monetary policy in the European Union. The EMI came into existence in 1994 and was responsible for managing the changeover to the Euro. It is now replaced by the European Central Bank. The EMI looked after the workings of the European Monetary System (EMS) to help pave the way for the Euro, but it is now the European Central Bank who operate monetary policy for all countries in Europe who are a part of the Euro.

European Investment Bank (EIB)
The European Investment Bank is the largest financial institution in the world. It gives loans for regional development particularly in the less developed areas of Europe.

European Currency Unit (ECU)
The ECU was a currency unit that was used as a unit to value all the other European currencies against. It was less exposed to speculation and fluctuations because it was made up of a number of different currency values. It disappeared on Jan. 1st 1999 with the introduction of the Euro.

European Court of Justice
The European Court is based in Luxembourg and is made up of 15 judges. It aim to ensure that European law is upheld and tries to resolve any conflicts between member states or between institutions and individuals in the EC. It also passes rulings on conflicts coming from national courts and gives its opinion where necessary on international agreements as they relate to the EC.

Any currency deposited in a financial institution outside its country of origin.

European Central Bank (ECB)
The ECB is the bank that sets monetary policy for the eurozone. Each of the countries taking part in the single currency has representation on the Euro Governing Council. They meet twice a month to set monetary policy. The ECB is in Frankfurt.

The euro is the single European currency which has been adopted by 12 countries in the European Union. The euro replaced the old currencies of the 12 countries in January 2002.

EU enlargement
The EU expanded its membership from 15 to 25 in May 2004. Two further countries, Bulgaria and Romania, are negotiating to join by 2007. The enlargement countries consist of many of the former Soviet Bloc countries of central and Eastern Europe as well as Cyprus and Malta.

Equity principle
The idea or concept of fairness.

Equity (fairness) criteria
The 'desirability' of a particular resource allocation

Equities is another word for shares. It refers to the ordinary shares of a company. Having an ordinary share means that you own a proportion of that company, and that you have a vote at their annual general meeting. The number of votes depends on the number of shares you own.

Equilibrium unemployment
When the aggregate demand for and supply of labour at the current real wage rate are equal.

Equilibrium price
The price where the quantity supplied by firms equals the quantity demanded by households. In other words, there is no shortage or surplus within the market.

Equilibrium rate of interest
Rate at which the amount of money people want to borrow equals the amount of money others are prepared to lend.

Environmental economics
The study of environmental issues including the depletion of non renewable resources

A state of balance - i.e. a situation where there is no tendency for change.

The physical surroundings in which people live.

Environmental audit
A process which measures the impact of a firm or organisation's actions on the environment.

People who undertake the risks of production in order to make a profit.

An entrepreneur is an individual who takes risks and organises the factors of production to generate a product and therefore hopefully profit. Entrepreneurship is the skill of achieving this. It is often thought of as one of the factors of production. Another term for it is enterprise.

A term used to refer to entrepreneurial skill. It is often used to describe the factor of production - entrepreneurship. It is the skills and ability to take risk and create profit.

Engel curve
A curve showing the relationship between income and consumption.

Employers' organisations
A group of representative of firms' owners or managers, either within one industry or across several industries.

The effect of passing authority from superior to subordinate.

When a ban is placed on the export or import of a certain good or on trade with a particular country or countries.

Real world evidence. Empirical studies are undertaken to try to prove theories and assertions.

Elasticity of demand
The elasticity of demand indicates the responsiveness of demand to a change in a determinate, for instance, price, price of other goods and income.

Elasticity of supply
The responsiveness of supply to a given change in price.

Elasticity indicates how one variable responds to a change in another variable. The main types of elasticity are elasticity of demand (price, cross price, income, advertising), and the elasticity of supply (price). The value can be either elastic or inelastic. An elastic value implies that the there will be a significant change in the quantity due to a change in the other variable, hence, it is very sensitive. While an inelastic value implies that the variable is not very sensitive to the change in the other variable.


The belief that all individuals are equal, and deserve to be identically treated.

Efficiency criteria
Rules first developed by Pareto for assessing a given allocation of resources

The European Coal and Steel Community was created in 1951 and had 6 members; France, Italy, Germany, Luxembourg, Belgium and Holland. It was brought into the EEC in 1967.

Training and investment in human capital.

Effective exchange rate
The effective exchange rate is also often called the trade-weighted exchange rate. It is based on a 'basket' of currencies, and so is in effect an average exchange rate for a number of currencies. The currencies in the basket are weighted to reflect the importance of each currency to the UK. It is expressed as an index number.

Economies of scale
A reduction in long run unit costs which arise from an increase in production. Economies of scale occur when larger firms are able to lower their unit costs. This may happen for a variety of reasons. A larger firm may be able to buy in bulk, it may be able to organise production more efficiently, it may be able to raise capital cheaper and more efficiently. All of these represent economies of scale.

Economic systems
The network of organisations used by a society to resolve the economic problem.

Economic union
A common market whose members follow common economic policies.

Economic welfare
The study of how an economy can maximise the utility of its inhabitants.

The vertical axis in a chart. It displays the range of values possible for the dependent variable to take.

Economic growth
Typically refers to an increase in a country's output of goods and services. It is usually measured by changes in real GDP

Economic methodology
The methods used in the study of economics.

Economic problem
While our resources are finite, our wants and needs are infinite

Economic rent
A surplus paid to any factor of production over its supply price. Economic rent is the difference between what a factor of production is earning (its return) and what it would need to be earning to keep it in its present use. It is in other words the amount a factor is earning over and above what it could be earning in its next best alternative use (its transfer earnings).

Economic goods
An item which can be bought or sold

Economic efficiency principle
The principle of seeking to provide what consumers most require or the principle of producing every product at the least possible cost.

Economic and Monetary Union (EMU)
This is the process which enabled the introduction of the EU's single currency, the euro. Economic and Monetary Union (EMU) developed in 3 stages starting in 1990.

Any market that is dominated by two organisations.

A European institution. A council made up of the Ministers of Finance of member countries that looks at economic and monetary policy in the European Union.

The sale of goods in a foreign country at a price below that charged in the home market. This will often be done at below cost price to dispose of surpluses of goods, or to establish markets.

Double counting
Including transfer payments, intermediate expenditures or outputs and stock appreciation in national accounts

Dual exchange rate
A system where there is a fixed official exchange rate and an illegal market determined parallel exchange rate. Often occurs in developing countries where the value of the exchange rate is pegged.

Any product that has a low or declining share of its market.

Division of labour
The allocation of tasks or jobs to particular people. For instance, instead of one worker undertaking all aspects of the production of a good, the task is broken down into small, separate operations each performed by just one operator.

The amount of satisfaction obtained by consuming extra units of a good falls

A firm increasing the range of products it produces.

Spending more than income by drawing on savings.

Distribution of income
How income is shared out between households and between factors of production.

Disposable income
The amount of income left after such deductions as income tax, pension contributions and national insurance. More generally known as 'take home pay'.

Dispersed industries
Industries which have plants spread throughout the country.

The data values in a sample are not all the same. This variation between values is called dispersion

When one group of workers is treated differently from others in terms of wages paid, employment and promotion opportunities

Diseconomies of scale
Increases in long run costs which occur from an increase in the scale of production.

A state of imbalance in which there is tendency for change.

Disequilibrium unemployment
When the aggregate demand for labour is less than the aggregate supply of labour at the current real wage rate.

Discriminating monopoly
A sole producer who divides up the market and charges different prices to different groups of customers.

Unequal treatment of individuals, usually on the basis of gender, race, age, religion or disability.

Discrete variable
A variable that takes only a finite number of real values. (e.g., 1, 3, 5 and 1,000).

Discretionary policy
Deliberate changes in government expenditure and/or taxes.

Discrete random variable
A discrete random variable is one which may take on only a countable number of distinct values such as 0,1,2,3,4,........ Discrete random variables are usually (but not necessarily) counts. If a random variable can take only a finite number of distinct values, then it must be discrete. Examples of discrete random variables include the number of children in a family, the Friday night attendance at a cinema, the number of patients in a doctor's surgery, the number of defective light bulbs in a box of ten.

Discrete data
A set of data is said to be discrete if the values / observations belonging to it are distinct and separate, i.e. they can be counted (1,2,3,....). Examples might include the number of kittens in a litter; the number of patients in a doctors surgery; the number of flaws in one metre of cloth; gender (male, female); blood group (O, A, B, AB).

Future costs and benefits are difficult to measure. The present value (P) of future benefits less costs is found by discounting

Dirty floating
Government attempts to influence the value of a floating exchange rate in order to gain a competitive advantage.

The transfer of financial resources and or good and services from a donor to a recipient country.

Discount houses
Financial institutions which borrow short and lend long. They used to act as an intermediary between the Bank of England and the banking system. However, direct intervention in the money markets by the Bank of England means they are no longer required.

Discounted cash flow
A method of assessing a project which takes into account the timing of receipts and payments. This method of investment appraisal looks at the issues of interest rates and time. Returns from investment always arrive in the future, so discounted cash flow techniques take the future returns and discount them using a 'discount rate' to see what they would be worth today.

Direct mail
A means of marketing whereby consumers are sent correspondence to their home.

Direct taxation
Taxes on income and wealth.

Direct taxes
These are taxes on income. The main direct tax in the UK is income tax.

These are instructions from Europe to individual countries to meet particular objectives. Each member state chooses the most appropriate way to achieve these objectives through their own legislative system.

Direct costs
All the costs that are associated with the production of the business' service or product.

Direct controls
Direct controls were a method of monetary control used in the 1950s and 60s. Banks would be set limits on the amount they could increase their deposits by, and therefore the amount they could lend. Though some have proposed their introduction more recently, they tend to create distortions and rigidities in financial markets.

Development trap
The vicious cycles of poverty that prevent a country from developing.

Differentiated products
Goods or services which are distinguished from rival products by e.g. packaging, advertising