Day Trading___The buying and selling of various financial instruments, such as futures, options, currencies, and stocks, with the goal of making a profit from the difference between the buying price and the selling price, and in this case, over the duration of one day.
Debit Card___An increasing popular means of accessing the funds in a bank checking account. While debit cards look almost like credit cards, they are fundamentally different in how they are processed on a bank’s end of the transaction. A credit card works through a liability (a loan with the bank). A debit card works through an asset (a checkable deposit with the bank).
Debtor Nation___A nation that owes more to foreign governments, businesses, and consumers than foreigners owe to domestic governments, businesses, and consumers. The United States, having been a creditor nation for many decades, has now achieved the status of debtor nation. This sort of thing happens when exports are less than imports, creating a deficit in the current account of the balance of payments and thus a surplus in the capital account.
Deductible___The amount of loss retained by a policyholder before an insurer begins to pay. For instance, if the deductible on your automobile is $500 and a tree falls on top of it, causing $1,200 in damage, you would pay the first $500 and your insurer would pay the amount over $500 (in this case, $700).
Default Risk___The probability that a borrowing agent will not pay in full the agreed interest and/or principal. A default risk can be assigned to any bond or loan agreement. Of course, there are some instruments considered default-risk-free, that is, instruments for which the probability that a borrowing agent will not pay is zero. The most noted examples are the U.S. Treasury securities, which have virtually no default risk because the U.S. government guarantees that all the principal and interest will be repaid. When calculating the risk premium on financial instruments, investors use default-risk-free instruments for comparison.
Deficit (government)___The amount by which government revenues (money taken in by taxes, fees, etc.) is less than expenditures (wages, military costs, highway construction, etc.)
Deflation___An extended decline in the average level of prices. This is the exact opposite of inflation–in which prices are rising over an extended period, and it should be contrasted with disinflation–which is a decline in the inflation rate. Like inflation, deflation occurs when the average price level decreases over time. While some prices might decrease, other prices could increase or remain unchanged, so long as the average follows a downward trend. Deflation is a rare bird indeed in our economy and typically happens only when we’re in a prolonged period of stagnation. We might see some deflation during a fairly lengthy recession, but more than likely deflation saves itself for the occasional depression that dots our economic landscape.
Demand___The willingness and ability to buy a range of quantities of a good at a range of prices, during a given time period. Demand is one half of the market exchange process; the other is supply. This demand side of the market draws inspiration from the unlimited wants and needs dimension of the scarcity problem. People desire the goods and services that satisfy our wants and needs. This is the ultimate source of demand.
Demographic Variables___Characteristics of the aggregate population that marketers use to segment the market, including age, ethnicity, income, education, gender, and race. Other characteristics include occupation, family size, religion, and social class. These characteristics are the link to buyers’ wants and needs and affect purchasing behavior. By carefully studying population groups marketers develop marketing mixes that maximize customer activity.
Deposits___Bank accounts maintained by banks on behalf of customers. In a fractional-reserve banking system, one of the primary functions of a bank is to keep customer deposits safe. Banks offer a wide range of deposits, including checkable (or transactions) deposits, savings deposits, certificates of deposit, and money market accounts. Such deposits represent a sizable portion of the M1 money supply and as well as broader monetary aggregates — M2 and M3. They also constitute the bulk of the liabilities of a typically bank.
Depression___An extended period–a decade or so–of restructuring and institutional change in an economy that’s often marked by declining or stagnant growth. During this period, unemployment tends to be higher and inflation lower than a regular, run-of-the-mill recession. Moreover, a depression usually lasts in the range of ten years, often encompassing two or three separate shorter-run business cycles. The most noted depression in the U. S. economy was the Great Depression of the 1930’s.
Deregulation___The reduction of government regulation of business, consumers, and market activity. The most noted period of deregulation occurred during the 1970’s and 1980’s in response to criticisms that economic regulation inhibited rather than promoted competition. Key industries deregulated during this period were transportation, communications, and banking industries. Social regulations were also relaxed.
Derivative___A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
Direct Deposit___Electronic funds that are deposited directly into your bank account rather than through a paper check. Common uses of a direct deposit include income tax refunds and pay checks.
Direct Stock Purchase (DSP)___A number of companies, such as Walt Disney, offer direct stock purchase plans. These plans allow investors to buy shares of stock directly from the company. Most have a minimum initial deposit but are happy to waive it if you agree to automatic monthly withdrawals from your checking or savings account. This way, the company automatically purchases stock for you by debiting your bank account every month.
Discount Rate___The interest rate that the Federal Reserve System charges for loans to banks. To ensure that our nation’s banks retain their liquidity and remain in business, the Federal Reserve System stands ready to lend bank reserves on a moment’s notice to any bank. The discount rate is the interest rate the Federal Reserve System charges for these loans. Like any interest rate, when it goes up (or down) it discourages (or encourages) borrowing. In principle, the Fed can use the discount rate to control our nation’s money supply
Discretionary Income___After-tax income over which a person (or the entire household sector) has more or less complete discretionary control, which can be then used for either consumption or saving. Discretionary income is most commonly measured at the macroeconomic level by disposable income.
Disposable Income___The total income that can be used by the household sector for either consumption or saving during a given period of time, usually one year. This is the income left over after income taxes and social security taxes are removed and government transfer payments, like welfare, social security benefits, or unemployment compensation are added.
Diversification (to diversify)___To invest in a variety of assets to reduce risk. Risk, however, cannot be entirely eliminated when investing.
Dividend___The portion of a corporation’s after-tax accounting profit that’s paid to shareholders or owners. Corporate managers usually try to pay the shareholders some minimum dividend that’s comparable to returns from other financial markets–such as the interest on government securities or corporate bonds–to keep the owners from selling off the company’s stock. That portion of after-tax accounting profit that’s not paid out as dividends is typically invested in capital.
Dividend Reinvestment Plan (DRIP)___Instead of sending dividend checks to shareholders enrolled in a company’s DRIP, the company reinvests those dividends by purchasing additional shares (or fractional shares) in the shareholder’s name. A shareholder usually needs only one share to enroll in a company’s DRIP plan, and most of the time the company will reinvest a shareholder’s dividends without a fee or commission.
Division of Labor___A basic economic notion that labor resources are used more efficiently if work tasks are divided among different workers. This allows workers to specialize in production as each becomes highly skilled at specific tasks. Efficiency achieved through specialization and the division of labor was popularized by Adam Smith in his classic work, The Wealth of Nations. This division-of-labor notion is one of those concepts that is so fundamental to the economy that its importance is occasionally overlooked in the real world. It is, for example, essential to foreign trade. Without the division of labor the comfortable standard of living currently provided by our exceeding complex economic system would not be possible.
Dollar Cost Averaging___To invest, as in shares of stock, fixed amounts of money at regular intervals so as to buy more at lower prices and less at higher prices.
Dollar-cost averaging means that if you put the same amount in each year, you’ll buy more investments, such as mutual fund shares, when prices are down and fewer when prices are up. The end result will be that you’ll pay a lower average price than the actual average price of the investment during that period.
Dow Jones Averages___These are the most widely used and recognized indexes of stock market prices in our economy. There are actually three separate indexes, for (1) 30 industrial stocks, (2) 20 transportation stocks, and (3) 15 utility stocks. There’s also a composite index for all 65 stocks.
Durable Good___A good bought by consumers that tends to last for more than a year. Common examples are cars, furniture, and appliances. Durable goods play an important role in the business cycle. During a business cycle recession, consumers tend to put off buying durable goods, hoping that the ones they already have will last until the economy improves. This lack of durable good purchases by consumers, though, contributes to the length and severity of a recession because durable good producers are then forced to reduce output and lay off workers. An important part of a business cycle recovery is then an increase in durable goods purchases.
Earnings Per Share (EPS)___The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability. It is calculated by dividing a company’s net income by the number of the company’s outstanding shares.
Earnings Report___A statement of the revenues, expenditures, and profit for a business, household, or government entity over a given period of time. An income statement also goes by the names profit and loss statement, income statement, and operating statement. This is one of two key financial statements for an entity. The other is a balance sheet, which is a statement of assets, liabilities, and net worth at a given point in time.
Economic Indicators___Numerous economic statistics that provide valuable information about the expansions and contractions of business cycles. These economic statistics are grouped into three sets–lagging, coincident, and leading. Leading economic indicators tend to move up or down a few months BEFORE business-cycle expansions and contractions. Coincident economic indicators tend to reach their peaks and troughs at the same time as business cycles. Lagging economic indicators tend to rise or fall a few months after business-cycle expansions and contractions.
Economics___A social science that studies the allocation of limited resources to the production of goods and services used to satisfy consumer’s unlimited wants and needs. Five notable phrases contained in this definition that need further study are: (1) social science, (2) allocation, (3) limited resources, (4) production, and (5) unlimited wants and needs
Economy___The system of production, distribution, and consumption of goods and services that a society uses to address the problem of scarcity. The essential task of an economy is to transform resources into useful goods and services (the act of production), then distribute or allocate these products to useful ends (the act of consumption). Virtually all economies accomplish this task through a combination of decisions made through voluntary market exchanges and involuntary government rules and regulations.
Economic Sanctions___Economic sanctions are domestic penalties applied by one country (or group of countries) on another for a variety of reasons. Economic sanctions include, but are not limited to, tariffs, trade barriers, import duties, and import or export quotas
Efficiency___Obtaining the most possible satisfaction from a given amount of resources. Efficiency for our economy is achieved when we can not increase our satisfaction of wants and needs by producing more of one good and less of another. This is one of the five economic goals, specifically one of the two micro goals (the other being equity).
Education Savings Account (ESA)___A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA and formerly known as an Education Individual Retirement Account), is a tax-advantaged, tax-deferred investment account in the United States designed to encourage savings to cover future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc.
Elasticity___The relative response of one variable to changes in another variable. The phrase “relative response” is best interpreted as the percentage change. For example, the price elasticity of demand, one of the more important applications of this concept in economics, is the percentage change in quantity demanded measured against the percentage change in price. Other notable economic elasticities are the price elasticity of supply, income elasticity of demand, and cross elasticity of demand.
Embargo___In general, any sort of restriction on foreign trade, in practice, the restriction of exports destined for sale in another country. Unlike tariffs, import quotas, and other non-tariff barriers that protect domestic producers from competition, embargoes are intended to punish the export destination country. One of the more famous embargoes in recent decades was the oil embargo that several middle-eastern countries imposed on the United States in the 1970’s. This caused higher gasoline prices in the United States, created all sorts of havoc for our economy, and pretty much achieved the punishment objective. The United States is also prone to throw up an embargo here or there when another country acts against our political wishes.
Entrepreneurship___One of the four basic categories of resources, or factors of production (the other three are labor, capital, and land). Entrepreneurship is a special sort of human effort that takes on the risk of bringing labor, capital, and land together and organizing production.
Equity___This has two, not totally unrelated, uses in our wonderful world of economics. The first is as one of the two micro goals (the other being efficiency) of a mixed economy. This use relates to the “fairness” of our income or wealth distributions. The second use of the term equity means ownership, especially the ownership of a business or corporation
Exchange___The process of trading one item for another. Exchange is fundamental to the study of economics, markets, and market-oriented economies. Most exchanges in a modern, complex market-oriented economy involve a commodity on one side and a monetary payment (that is, price) on the other. In essence, a buyer gives up money and gets a good, while a seller gives up a good and gets money.
Exchange Rate___The price of one nation’s currency in terms of another nation’s currency. This is often called the foreign exchange rate in that it is the price determined in the foreign exchange market when people buy and sell foreign exchange. The exchange rate is specified as the amount of one currency that can be traded per unit of another
Excise Tax___A tax on a specific good. This should be compared with a general sales tax, which is a tax on all (or nearly all) goods sold. The most common excise taxes are on alcohol, tobacco, and gasoline. Excise taxes are used either to discourage consumption of socially undesirable stuff (like alcohol and tobacco) or to raise some easy revenue because the government knows buyers will keep buying regardless of the tax (like alcohol and tobacco).
Exclusion___An insurance provision designating a type of event or loss that is not covered by the insurance policy.
Expected Loss___Sometimes referred to as the “mean” or “average” loss. This value often is used to estimate future losses. It is typically calculated as: estimated loss frequency multiplied by estimated loss severity. Total expected loss would be a summation for all exposures. Typically, a measure of expected loss is used as the foundation of an insurance policy’s premium.
Export___The sale of goods to a foreign country. The United States, for example, sells a lot of the stuff produced within our boundaries to other countries, including wheat, beef, cars, furniture, and, well, almost every variety of product you care to name. In general, domestic producers (and their workers) are elated with the prospect of selling their goods to foreign countries–leading to more buyers, a higher price, and more profit. The higher price, however, is bad for domestic consumers. In that domestic consumers tend to have far less political clout than producers, very few criticisms of exports can be heard. On the positive side, though, exports do tend to add to the multiplicative, cumulatively reinforcing expansion of production and income (that is, the multiplier).
Exposure___The value or asset that can be lost and is the subject of insurance coverage. Exposures include automobiles and houses we own; income we anticipate earning; financial assets that must be paid to others because of our own negligence.
External Cost___A cost that’s not included in the market price of a good because it’s not included in the supply price. Pollution is an example of an external cost if producers aren’t the ones who suffer from pollution damages. External cost is one type of market failure that causes inefficiency.
Factors of Production___The four basic factors used to produce goods and services in the economy–labor, capital, land, and entrepreneurship. These are also called resources or scarce resources. The term “factors of production” is quite descriptive of the function these “resources” perform. Labor, capital, land, and entrepreneurship are the four “factors” or items use in the “production” of goods and services. So there you have it “factors” of “production.”
Featherbedding___A labor union practice of artificially increasing the number of workers employed even though the specific job or task can be completed with fewer workers. This can be done mandating that specific jobs be performed only by workers with specific skill levels or be mandating that a certain number of workers are needed to perform a job or task. By increasing the demand for workers, featherbedding also keeps wages higher.
Federal Deposit Insurance Corporation (FDIC)___A program established by Congress in 1933, during the worst of the Great Depression, to insure the deposits of failed banks. Abbreviated FDIC, it operates operates much like any private insurance company. It collects insurance premiums from its customers–the banks–in return for the assurance that it will stand behind, or be ready to pay off, any deposits that the banks can’t.
Federal Insurance Contributions Act (FICA)___Commonly abbreviated FICA, this act passed in 1939 established payroll deductions from wage-earning employees and the employers for the Social Security system. This is the noted Social Security tax that wage earners pay and which is then used to provide Social Security benefits to the elderly, disable, and qualified dependents.
Federal Open Market Committee (FOMC)___A part of the Federal Reserve System that’s specifically responsible for directing open market operations, and is more generally charged with guiding the nation’s monetary policy. The FOMC includes the 7 members of the Fed’s Board of Governors and 5 of the 12 presidents of Federal Reserve District Banks. The chairman of the Federal Reserve System is also the chairman of the FOMC. The FOMC meets every 45 days to evaluate monetary policy.
Federal Reserve Bank___One of 37 Banks (12 District and 25 Branch) that comprise the Federal Reserve System. These Banks are largely responsible for supervising, regulating, and interacting with commercial banks and carrying out the policies established by the Federal Reserve Board of Governors. The large number of banks, spread across the country is what helps make the Federal Reserve System a very decentralized central bank.
Federal Reserve System___The central bank of the United States. It includes a Board of Governors, 12 District Banks, 25 Branch Banks, and assorted committees. The most important of these committees is the Federal Open Market Committee, which directs monetary policy. The Fed (as many like to call it) was established in 1913 and modified significantly during the Great Depression of the 1930’s. It’s duties are to maintain the stability of the banking system, regulate banks, and oversee the nation’s money supply.
Fiduciary___Relating to confidence or trust of one person in another, especially has it applies to financial matters. For example, you might give a lawyer, broker, or agent might be given fiduciary authority to access your bank account, pay your taxes, or maintain your investments. Alternatively, corporate executive might have the fiduciary authority to enter into contracts, write checks, or otherwise operate as a financial agent for the corporation.
Fiscal___Relating to government taxation, spending, or financial matters. The term is most often using in combination with other words, such as fiscal budget, fiscal year, or fiscal policy. In each case, the addition of the term “fiscal” means a connection with government financial matters. Fiscal policy, for example, is policy that makes use of government spending and taxation. Fiscal year is then the standard 12-month period government uses for collecting taxes, appropriating spending, and otherwise tabulating its budget.
Fixed Cost___In general, cost that does not change with changes in the quantity of output produced. More specifically, fixed cost is combined with the adjectives “total” and “average” to indicate the overall level of fixed cost or the per unit fixed cost. Fixed cost is incurred whether of not any output is produced. The same fixed cost is incurred at any and all output levels. This means that total fixed cost is, in fact, FIXED. However, it also means that average fixed cost, or fixed cost per unit, declines as the output level increases. Spreading out $100 over 1,000 units gives a lower per unit fixed cost that spreading out $100 over 10 units.
Fixed Rate Mortgage___A mortgage loan first developed by the Federal Housing Administration (FHA) where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”.
Foreclosure___A legal move to acquire possession of mortgaged property when the borrower is unable to pay off the loan or make payments according to the conditions of the loan. In other words, if you can’t make your house payments, the bank (or lender) can boot you out and take your house. The house can then be sold to pay off all or part of the loan. One of the more notable things about foreclosure for members of the third estate is that the rules and procedures differ from state to state. If you anticipate foreclosure activity, it might be worth your while to find out the specifics in your locale.
Fortune 500___A list of the 500 largest (in terms of sales) publicly held corporations in the good old U. S. of A., as compiled and published by Fortune magazine. While other business-oriented magazines publish similar lists, this one has come to symbolize the largest, most powerful bastions of the second estate. For a business to achieve ranking on the Fortune 500 is a mark of success. For consumers, the Fortune 500 is often a mark of powerlessness. If you’re interested, Fortune also provides a list of the 500 largest foreign companies, and separate lists of the 50 largest banks; utilities; and retail, transportation and diversified financial companies.
Free Enterprise___A term that’s often used, erroneously, in reference to capitalism. In principle, free enterprise is an economy in which businesses and consumers are “free” to engage their resources in any desired production, consumption, or exchange without government restriction, regulation, or control.
Futures___An agreement to complete the sale of a commodity at a pre-determined price on some future date. Much of the real stuff that consumers buy is what is usually termed a spot transactions. You buy the stuff, pay the price, and take it home with you. While financial markets have a substantial number of these spot transactions they are also heavily into futures transactions.
G-7___The common abbreviation for the Group of Seven, which is seven of the most advanced and industrialized nations of the world–the United States, Britain, France, Italy, Canada, Germany, and Japan–that meet regularly to coordinate fiscal and monetary policies. Their actions are based on the proposition that our global economy and the individual countries are better off through cooperation than conflict.
G-8___The common abbreviation for the Group of Eight, which includes the seven of the most advanced and industrialized nations of the world known as the G-7–the United States, Britain, France, Italy, Canada, Germany, and Japan–plus Russia. That is, the G-8 is the G-7 plus Russia, which effectively replaced the G-7 in 1998. They meet regularly to coordinate fiscal and monetary policies. Their actions are based on the proposition that our global economy and the individual countries are better off through cooperation than conflict.
G-20___In 1999, the Finance Ministers of the Group of Seven (G-7) leading industrialized nations announced the creation of the Group of Twenty (G-20). This international forum of Finance Ministers and Central Bank Governors represents 19 countries, the European Union and the Bretton Woods Institutions (the International Monetary Fund -IMF– and the World Bank). The G-20 promotes discussion, and studies and reviews policy issues among industrialized countries and emerging markets with a view to promoting international financial stability. Member countries include: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United Kingdom, the United States and the European Union.
Generic Goods___Non-branded products that usually sell at a sizable discount compared to national or private brands.
Globalization___The generalized expansion of international economic activity which includes increased international trade, growth of international investment (foreign investment) and international migration, and increased proliferation of technology among countries. Globalization is the increasing world-wide integration of markets for goods, services, labor, and capital. It is an ongoing process that started several centuries ago. However, most people would agree that today we are in a period of rapid globalization as international economic activity has accelerated in the last 200 years or so.
Gold___A yellow precious metal valued especially for use in technology applications, jewelry, and to guarantee the value of currencies.
Good___This generically means a physical, tangible product used to satisfy people’s wants and needs. The term good should be contrasted with the term service, which captures the intangible satisfaction of wants and needs. As such, you will frequently see the plural combination of these two phrases together “goods and services” to indicate the wide assortment of economic goods produced using the economy’s scarce resources.
Golden Parachute___A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits.
Grace Period___A provision in most loan and insurance contracts which allows payment to be received for a certain period of time after the actual due date. During this period no late fees will be charged, and the late payment will not result in default or cancellation of the loan. A typical grace period is 15 days.
Graduated Tax___A type of progressive tax in which the tax rate is higher as the value of the taxed item increases. For example a graduated sales tax would be one with a 5 percent tax rate on the first $10 of sales, 10 percent tax rate on the any sales between $10 and $50, then a 15 percent rate for anything above $50. Our personal income tax system uses graduated taxes.
Great Depression___A period of time from 1929 to 1941 in which the economy experienced high rates of unemployment (averaging well over 10%), low production, and limited investment. This period of stagnation prompted radical changes in the way government viewed it’s role in the economy and lead to our modern study of macroeconomics.
Gross Domestic Product (GDP)___The total market value of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. This is the government’s official measure of how much output our economy produces
Gross National Product (GNP)___The abbreviation for gross national product, which is the total market value of all goods and services produced by the citizens of an economy during a given period of time, usually one year. Gross national product, often was once the federal government’s official measure of how much output our economy produces. In the early 1990’s, however, it was replaced by gross domestic product (GDP).
Group Insurance___Any insurance plan under which a number of individuals are covered under a single master policy with individuals receiving certificates of coverage, most typically found in employer-provided health insurance.
Growth Investing___Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term “growth investing” contrasts with the strategy known as value investing.
Hazards___Conditions that increase the probability (frequency) or size (severity) of a loss. Examples include poor maintenance in a factory, inadequate lighting in a crime-prone area, speeding or being under the influence while driving, eating poorly and/or smoking tobacco.
Health Insurance___A generic term applying to all types of insurance indemnifying or reimbursing for costs of hospital and medical care.
Health Maintenance Organization (HMO)___An organization that provides for a wide range of comprehensive health care services in exchange for a fixed periodic payment.
Hedge Fund___A hedge fund is a private, aggressively managed investment fund that utilizes sophisticated strategies in both the international and domestic markets designed to offset losses during a market downturn and/or generate returns higher than traditional stock and bond investments.
Human Capital___The stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value.