Economic Terms

Export credit is credit extended to the purchaser of an export. The credit may be provided by the firm that is selling the export (essentially by shipping the product before receiving payment for it) or it may be offered as a loan by a bank of a government agency in the company that is exporting the goods. By setting a low interest rate on export credit, a country can essentially subsidize an export—without providing a direct subsidy.

An expenditure tax is often also called a consumption tax; it is any tax levied on the money people spend instead of what they earn. An expenditure tax might include sales tax and tariffs.

The exchange rate defines the rate at which one nation’s currency may be exchanged for another currency. For example, if the U.S. exchange rate for the Canadian dollar is $1.11, that means that one U.S. dollar may be exchanged for 1.11 Canadian dollars.

Equity has several related meanings in economics. The basic accounting meaning of equity is the value of a property, over and above any claims, liens, or mortgages. The most familiar use of the term is in real estate. Say you buy a property worth $100,000, making a $35,000 down payment and taking a $65,000 mortgage. Before you make your first mortgage payment, your equity in that property is $35,000. With each mortgage payment, your equity increases by the amount of the mortgage you have paid off.

Equilibrium refers to a state of balance in any system. In economics, equilibrium is an important part of various economic models, notably that of supply and demand. A market is said to be at equilibrium when a price is found at which the demand for a product on the part of buyers is equal to the amount of the product supplied by producers.

Elasticity measures the degree to which one variable in an economic model is responsive to changes in another variable. This concept can be applied to analysis of many economic models, but is especially useful in analysis of supply and demand. For example, demand for gasoline can be expected to decrease in relationship to increased cost. Elasticity refers to the degree to which that change in demand is related to changes in price.

According to the efficient market hypothesis, financial markets take account of new information about traded commodities so rapidly that it is not possible to make profit by “outsmarting the market.” In other words, if a trader attempts to outperform the market by buying or selling stock based on information about the company or commodity, it is already too late. If I learn that the corn crop in Argentina is in trouble because of unfavorable weather during the growing season and so I buy U.S.

Economies of scale are those advantages a firm obtains by expanding. Becoming larger can result in savings in a number of ways. Large businesses can save money by purchasing in bulk, by sharing highly trained managers, by being able to borrow at lower interest rates and by having access to a wider range of financial tools, by saving on marketing and advertising, and in other ways. Economy of scale is determined by measuring the cost of production per unit; if the cost per unit decreases after expansion, then economies of scale are said to have been realized.

Economic sanctions are penalties inflicted by one country or group of countries on another, including embargoes, tariffs, trade barriers, and quotas on imports or exports. Economic sanctions may be protectionist in nature (as when the U.S. placed tariffs on imported steel in an effort to protect U.S. steel producers) or they may be primarily political, as when in 1998 the U.S. and Japan imposed economic sanctions on India in response to nuclear testing on that country’s part. The United Nations may impose economic sanctions in response to non-compliance with international law and U.N.

Economic policy refers to the actions a government takes to try to manage its nation’s economic health. Economic policy includes three major areas. Fiscal policy includes the government’s management of its deficit, including taxation in order to raise revenue and government spending. Monetary policy includes the issuance of currency, interest rates, and other efforts to control the amount of money in circulation and to control inflation. Trade policy includes those actions a government takes to regulate international trade, including tariffs and tax agreements.

Econometrics is the science of applying statistical and quantitative methods to the analysis and explanation of economics. Econometricians develop mathematical models that predict the behavior of economic factors and test those models against observational data to refine those models and help economists determine how those models can be applied to analysis of economic events and factors.

Just as it sounds, double taxation refers to taxing the same money twice. Specifically, though, double taxation normally refers to taxation of the same funds at two different levels. Most commonly, double taxation occurs when corporate earnings might be taxed once at the corporate level and again when paid as dividends to stockholders. The reason double taxation is possible is that corporations are considered separate legal entities from their stockholders.

Discounted cash flow (DCF) refers to a method of analyzing the potential value of an investment opportunity. Calculating requires estimating future cash flows resulting from a potential investment in order to determine whether the return on the investment will be acceptable. The reason it’s called “discounted” cash flow is that these calculations are performed while taking into consideration that time affects the value of money, so the cash flows are discounted to take into account the effect of time.

Derivatives are financial instruments whose value varies based on changes in underlying variables. Derivatives include futures and swaps, both of which are essentially contracts to purchase a commodity at some point in the future. Derivatives get their name from the fact that they are essentially secondary investments; there has to be a market in which some asset is traded before there can be a derivative. Derivatives may be based on stocks, bonds, commodities, or even interest rates or exchange rates.

Deregulation is a process by which governments reduce or simplify government-imposed restrictions on businesses and individual investors in order to encourage freer market activity. The term became popular during the late 20th century, when the activity became popular. The 1970s in the U.S. began a period of significant deregulation, notably of transportation. Toward the end of the 20th century, significant deregulation of media, including telecommunications, changed the communication environment in the U.S.

A depression is a term applied to a sustained downturn in economic activity. Unlike a recession (defined as two quarters in a row of contraction), a depression does not have a specific measurement that determines its existence. In general, to be termed a depression, a contraction must be longer and/or more severe than a recession. Depressions normally feature high levels of unemployment, restriction of credit, and numerous bankruptcies. The most notable historic depression is the Great Depression of the 1930s, which affected many countries around the world.

Supply and demand describes the relations between the production and purchase of goods and services.

The supply and demand model is one of the most central concepts in economics. According to this model,if competition is relatively free, then demand and supply will together move toward a point of equilibrium, at which producers and consumers determine the fair market price of a commodity; at this point of equilibrium, producers will supply as much as consumers demand of a good, and they will offer it at the price at which consumers are willing to purchase that quantity of goods.

Deflation is a general decline in prices. Deflation may be caused by a decrease in the supply of currency or reductions in spending at the individual, investor, or government level. Many economists recommend that measures should be taken to combat deflation when it occurs, due to the perceived risk of a deflationary spiral—that is, a situation in which falling prices lead to falling demand, which in turn lead to further falling prices and further falling demand, and so on. A side effect of a deflationary spiral may be increased unemployment.

A deficit is a shortfall in a budget; in other words, the business, individual, or government in question has spent more than it has earned in a given period of time. The opposite of a deficit is a surplus, the sum left over when a business, individual, or government earns more than it spends in a given period of time.

Debt is an amount owed by one party to another, in goods or services. Debt may be secured (meaning that some specific piece of property is offered up as collateral and may be seized by the debtor in case of nonpayment) or it may be unsecured. Debt allows individuals, businesses and governments to meet current needs with future earnings. Because debt almost always involves a contractual agreement to repay, along with provisions for the accumulation of interest on the original amount owed, excessive debt can be dangerous for individual consumers.