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Immigration___Migration that enters one country from another country. Immigration is usually seen as a problem for existing citizens of nation because–(1) the supply of labor increases, which tends to lower wages, (2) there’s a greater demand for public services, which causes taxes to rise, and (3) the culture of immigrants is usually different, which creates all sorts of social conflicts. However, immigration can also be beneficial because–(1) the additional labor is a source of economic growth, (2) the immigrants might be willing to do some jobs that wouldn’t be performed otherwise, and (3) some goods can produced at lower cost.
Imports___Goods and services produced by the foreign sector and purchased by the domestic economy. In other words, imports are goods purchased from other countries. The United States, for example, buys a lot of the stuff produced within the boundaries of other countries, including bananas, coffee, cars, chocolate, computers, and, well, a lot of other products. Imports, together with exports, are the essence of foreign trade–goods and services that are traded among the citizens of different nations. Imports and exports are frequently combined into a single term, net exports (exports minus imports).
Impulse Buying___An impulse purchase or impulse buy is an unplanned decision to buy a product or service, made just before a purchase.
Incentive___A cost or benefit that motivates a decision or action by consumers, businesses, or other participants in the economy. Some incentives are explicitly created by government policies to achieve a desired end or they can just be part of the wacky world we call economics. The most noted incentive in the study of economics is that provided by prices. When prices are higher buyers have the “incentive” to buy less and sellers have the “incentive” to sell more. Price incentives play a fundamental role in the . When prices are higher buyers have the “incentive” to buy less and sellers have the “incentive” to sell more. Price incentives play a fundamental role in the allocation. When prices are higher buyers have the “incentive” to buy less and sellers have the “incentive” to sell more. Price incentives play a fundamental role in the allocation system that society uses to answer the three questions of allocation.
Income___Revenue earned or received by households that can be used for consumption or saving. For the aggregate economy, earned income is termed national income, while received income is termed personal income. The key is that income for the aggregate economy is generated in the production of goods and services.
Income Tax___A tax on income, including wages, rent, interest, profit, and (usually) transfer payments. The income tax system in the United States includes both a personal income tax and corporate income tax. In general, the U. S. income tax is progressive, but through a number of deductions and other loopholes, it’s less so in practice that on paper.
Indemnification___Compensation for harm or loss. Typically indemnification should be equal in value to what was lost, however an insured can be over-indemnified (compensated more than the loss) or under-indemnified (compensated less than the loss).
Index Fund___Typically a mutual fund or exchange-traded fund, an index fund aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. Because of the lack of active management this mutual fund generally provides the advantage of lower fees and lower taxes in taxable accounts.
Individual Retirement Account (IRA)___The abbreviation for individual retirement account, a savings retirement account set up with a bank, mutual fund, brokerage firm that allows people to set aside a portion of their income each year. Like other private pension plans, income diverted to an IRA is tax deferred, that is, taxes on not paid on the income until it is withdrawn during retirement.
Industry___A group of firms producing goods or services that are close substitutes-in-consumption. The similarity of the products makes it possible to analyze the production in a market framework. An industry can be broadly defined, such as the manufacturing industry, or narrowly specified, such as the root beer industry. For most economic analysis the term industry is used interchangeably with the term market.
Inflation___A persistent increase in the average price level in the economy. Inflation occurs when the average price level (that is, prices in general) increases over time. This does not mean that all prices increase the same, nor that all prices necessarily increase. Some prices might increase a lot, others a little, and still other prices decrease or remain unchanged. Inflation results when the average of these assorted prices follows an upward trend. Inflation is the most common phenomenon associated with the price level.
Infrastructure___Capital used for transportation, communication, and energy delivery. This is often termed social overhead capital because it provides the basic capital foundation needed by an economy before business capital can adequately do its job.
Inheritance Tax___A tax on that portion of the Assets of a deceased person that’s received by another. This should be compare with an estate tax, which is a tax is paid on the value of all assets before they are distributed to heirs.
Initial Public Offering (IPO)___An initial public offering or Initial Purchase Offer (IPO), referred to simply as an “offering” or “flotation”, is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.
Insider Trading___The buying and selling of corporate stock or other financial instruments based on knowledge that is not widely available to the general public. Insider trading is most often undertaken by corporate executives or directors using information that they have acquired by working “inside” the company. Insider trading is illegal because it gives an unfair advantage to those on the inside. The president of a pharmaceutical company might be inclined to sell stock in the company using advanced information that the government is about to decline the patent application for a new drug.
Insolvency___The condition of a business when liabilities (excluding ownership equity) are greater than Assets. In other words, a business can’t pay it’s debts. This is a first step on the road to bankruptcy, but it doesn’t guarantee that legal bankruptcy proceedings will be initiated.
Insurance___A mechanism through which a group of insureds (policyholders) pool their losses. Insureds transfer risk to insurers via a contractual agreement (an insurance policy), and “pay” for losses through insurance premiums, thereby transferring a large potential loss (the insurance loss payment) in exchange for a small certain loss (the insurance premium).
Insurance industry specific careers:
Actuary: An individual, often holding a professional designation—for example, Fellow of the Casualty Actuarial Society (FCAS)—who uses historical information and mathematical models to help predict the future. Individuals with strong math and statistics skills are drawn to this profession, often ranked as one of the best jobs in the U.S.
Insurance Agent: A person or organization who/that solicits, negotiates, or instigates insurance contracts on behalf of an insurer and can be independent or an employee of the insurer. Insurance agents are the legal representatives of insurers, rather than policyholders, with the right to perform certain acts on behalf of the insurers they represent, such as to bind coverage. Agents can represent multiple insurers (an “independent” agent), or just one company (as an exclusive agent or direct writer).
Insurance Broker: An insurance intermediary who/that represents and assists the insurance buyer (the insured) rather than the insurer. Because they do not represent the insurer, brokers cannot bind the insurer to promised coverage; however, they do have the capability to identify insurance coverage opportunities from a wide array of insurers. In some instances, an insurer broker will function as a risk manager for a small to medium sized organization, assisting in the identification, evaluation, and management of risk.
Risk Manager: An individual responsible for implementing risk strategy within an organization. Traditionally, this role has focused on situations involving insurable situations. Increasingly, the role incorporates financial, strategic, and other non-insurable organizational characteristics. Within the risk manager’s realm of responsibility will be objective setting, problem identification and assessment, evaluation of available options to manage identified problems, selection of appropriate options, and implementation of the chosen strategy. The role is critical to organizational success and touches upon all aspects of an organization’s functions.
Underwriter: An individual in an insurance company, who makes the decision to accept a particular insurance policy application, determines the proper category for policy pricing and sets policy conditions.
Insurance Loss___The basis of a claim for damages under the terms of a policy.
Interest___A fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is also most commonly the price paid for the use of borrowed money, or, money earned by deposited funds. When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year), is called the interest rate.
Intermediary___The go-between that connects up buyer and sellers in a market. Stock brokers, real estate agents, and banks are common intermediaries.
Internal Revenue Service (IRS)___An agency of the U. S. Department of Treasury with the responsibility of collecting taxes. It was established during the Civil War in 1862, but underwent a major overhaul in 1913 when the 16th amendment to the U. S. Constitution gave it the power to collect income taxes.
International Monetary Fund (IMF)___An agency of the United Nations established in 1945 to monitor and stabilize foreign exchange markets. Close to 150 of the world’s nations (which is just about all of them) belong to the IMF. The IMF was set up to keep countries from manipulating their exchange rates in such a way as to gain a competitive trading advantage over others. Their strategies of control have changed over the decades, but they currently use a managed float where exchange rates are allowed to fluctuate with changing market conditions, but only within certain ranges. The IMF also plays an active role in providing the “international” currency needed to participate in foreign trade through its system of Special Drawing Rights.
Inventory___Stocks of finished products, intermediate goods, raw materials, and other inputs that businesses have on hand. One big reason to keep inventories is to maintain a continuous stream of production by avoiding any supply shortages. Another big reason is to avoid the loss of sales because finished products are unavailable when a customer is ready, willing, and able to buy.
Investment Banking___The process of wholesaling newly issued government securities, corporate stocks, bonds, and similar financial assets by purchasing large blocks and reselling them in smaller units to the public. In essence, investment banks “underwrite” stocks and bonds when they’re first issued by guaranteeing to sell them at a pre-set price.
Invisible Hand___The notion that buyers and sellers, consumers and producers, households and businesses, pursuing their own self-interests, do what’s best for the economy–automatically, without any government intervention, as if guided by an invisible hand. This invisible hand was essential to the economic analysis of markets in Adam Smith’s The Wealth of Nations. It has continued to be cornerstone in conservative economic policies that call for limits on government intervention in the economy.
Junk Bond___A bond, usually a corporate bond, that has a higher than average risk of default, but which pays a higher than average interest rate to compensate. Junk bonds were a popular method of investment during the 1970’s and 1980’s, especially to finance corporate mergers. Junk bounds held by savings and loan associations that defaulted were a major source of problems during the 1980’s.
Just In Time___A method of production in which inputs used in the production process are delivered to a firm or factory immediately before they are needed. Just in time limits the inventories of raw materials and intermediate goods kept on site. While this is credited with improving microeconomic production efficiency, it might also prevent macroeconomic business-cycle instability that is attributable to the unplanned build-up of business inventories.
Keogh Plan___A savings retirement plan for self-employed workers authorized by the Self-Employment Individuals Retirement Act (1982). A Keogh plan is similar to an IRA (individual retirement account), but is a bit more complicated to establish. Like other private pension plans, income diverted to Keogh plans are tax deferred, that is, taxes on not paid on the income until it is withdrawn during retirement.
Keynesian Economics___A school of thought developed by John Maynard Keynes built on the proposition that aggregate demand is the primary source of business cycle instability, especially recessions. The basic structure of Keynesian economics was initially presented in Keynes’ book The General Theory of Employment, Interest, and Money, published in 1936. For the next forty years, the Keynesian school dominated the economics discipline and reached a pinnacle as a guide for federal government policy in the 1960’s. It fell out of favor in the 1970’s and 1980’s, as monetarism, neoclassical economics, supply-side economics, and rational expectations became more widely accepted, but it still has a strong following in the academic and policy-making arenas.
Keynes, John Maynard___A British economist (born 1883, died 1946) who is most noted for his work The General Theory of Employment, Interest, and Money, published 1936. The The General Theory revolutionized economic theory of the day, forming the foundation of Keynesian economics and creating the modern study of macroeconomics. Keynes was a well-known and highly respected economist prior to publication of The General Theory, however, this revolutionary work guaranteed Keynes a place as one of the most influential economists of all time.
Labor___One of the four basic categories of resources, or factors of production (the other three are capital, land, and entrepreneurship). Labor is the services and efforts of humans that are used for production. While labor is commonly thought of as those who work in factories, it includes all human efforts (except entrepreneurship), such as those provided by clerical workers, technicians, professionals, managers, and even company presidents.
Lagging Economic Indicator___One of seven economic statistics that tend to move up or down a few months after the expansions and contractions of the business cycle. These statistics paint a pretty clear picture of what the economy was doing a few months back. Lagging economic indicators lag the turning points of the aggregate economy by 3-12 months. After a contraction begins, lagging indicators decline 3 to 12 months later. And 3 to 12 months after a expansion begins, lagging indicators rise.
Laissez Faire___A french term that translates into “leave us alone.” It has become the rallying cry for many business leaders of the second estate who oppose government intervention, regulation, or even taxation. It’s based on the belief that markets alone can achieve an efficient allocation of our resources. This laissez faire philosophy of should be contrasted directly with the philosophy of paternalism, which essentially says “Government needs to care for you because you can’t care for yourself.”
Land___One of four basic categories of resources, or factors of production (the other three are labor, capital, and entrepreneurship). This category includes the natural resources used to produce goods and services, including the land itself; the minerals and nutrients in the ground; the water, wildlife, and vegetation on the surface; and the air above.
Large Cap Stock___A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term “large market capitalization”. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. Examples include Wal-Mart, Exxon, Microsoft, etc.
Law of Large Numbers___A statistical theorem especially important in insurance whereby estimates become more accurate as sample sizes grow. Through application of the theorem, insurers are able to combine the experience of many policyholders for improved accuracy of estimated losses. As a result, insurers need to set aside less capital in anticipation of claim payment for all policyholders than would be the sum of capital each individual would need to set aside to pay losses.
Leverage___The use of credit or loans to enhance speculation in the financial markets. Suppose, for example, that you take the $1,000 in your bank account to your stock broker and purchase $1,000 worth of stocks, bonds, or whatever. A leveraged purchase would let you use your $1,000 to buy, let’s say, $10,000 worth of stocks or bonds. The remaining $9,000 of the purchase price comes from a loan.
Liability___The responsibility to pay for harm incurred by someone else. For example, a speeding driver who negligently hits a parked car will be legally liable to pay for the resulting damage (and for the injury incurred by anyone in the car at the time).
Liability Insurance___Insurance that financially protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. The insurer compensates the injured party and not the insured for the loss. Often the coverage includes legal defense against such liability. Types of liability insurance include protection for harms resulting from selling and manufacturing products, operating a vehicle (automobile, aircraft, watercraft, etc.), providing professional services (medical care, accounting, financial, engineering, etc.), owning property, and numerous other conditions.
Life Insurance___Provides for payment of an amount as specified in the contract to a beneficiary upon an insured’s death, or at a designated date.
Limited Liability___A condition in which owners are not personally held responsible for the debts of by a firm. Corporations are the main form of business in which owners have limited liability. The primary benefit of limited liability is that it makes it possible for a business to accumulate large amounts of productive resources that lets it take advantage of large scale production.
Limited Partnership___A partnership in which one or more of the partners/owners has/have limited liability. This differs from regular partnerships in which each partner has unlimited liability. The limited partnership legal structure was created to provide liability protection to “partners” seeking investment opportunities, who did not want to participate in the actual management of the firm. While these limited partners are very much like corporation shareholders, the difference is that at least one partner must have unlimited liability.
Limit of Coverage___The maximum amount payable under a given insurance contract. Many policies have multiple limits (a certain amount per person, another amount per accident, and sometimes an aggregate limit on all losses paid during the policy term).
Limit Order___An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Line of Credit___An arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement.
Liquidity___The ease of converting an asset into money (either checking accounts or currency) in a timely fashion with little or no loss in value. Money is the standard for liquidity because it is, well, money and no conversion is needed. Other assets, both financial and physical have varying degrees of liquidity. Savings accounts, certificates of deposit, and money market accounts are highly liquid. Stocks, bonds, and are another step down in liquidity. While they can be “cashed in,” price fluctuations, brokerage fees, and assorted transactions expenses tend to reduce their money value. Physical assets, like houses, cars, furniture, clothing, food, and the like have substantially less liquidity.
Lloyd’s of London___An insurance marketplace (an exchange) in England, initiated more than 300 years ago in response to the need to protect against loss when merchants sent shipments across the oceans. For much of its history, Lloyd’s has been a leader in insurance activity around the globe, providing innovative products and significant insurance capacity.
Load___A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund.
Loaded Fund___A mutual fund that charges a load.
Loan___In general, a transaction in which a legal claim is exchanged for money. The legal claim is typically a contract or promissory note stipulating when and how the money will be repaid. The lender gives up the money and receives the legal claim. The borrower gives up the legal claim and receives the money. A loan can be either an asset or a liability, depending on who does the borrowing and who does the lending. To the borrower, a loan is a liability, something that is owed. The borrower must pay off the loan or repurchase the legal claim. However, to the lender, a loan is an asset, something that is owned. In fact, loans represent a significant part of a bank’s assets.
Lockout___A plant or factory that is closed temporarily, because it’s owners are trying to gain a negotiating advantage over the employees’ union. A lockout is commonly used by a company’s management if they suspect the union is planning to strike. A lockout by management before the union strikes is much like a pre-emptive military attach that tries to hit the enemy hard, fast, and first.
London Interbank Offered Rate (LIBOR)___The LIBOR is the world’s most widely used benchmark for short-term interest rates. It’s important because it is the rate at which the world’s most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the United Kingdom.
Loss Sharing___The idea that loss is borne (financially) by all policyholders through premium payments rather than by the random few who experience the underlying covered event (such as an automobile accident, fire at an apartment or house, death, disability, etc.).
Macro Economics___The branch of economics that studies the entire economy, especially such topics as aggregate production, unemployment, inflation, and business cycles. It can be thought of as the study of the economic forest, as compared to microeconomics, which is study of the economic trees.
Margin Call___A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. You would receive a margin call from a broker if one or more of the securities you had bought (with borrowed money) decreased in value past a certain point.
Market___The organized exchange of commodities (goods, services, or resources) between buyers and sellers within a specific geographic area and during a given period of time. Markets are the exchange between buyers who want a good–the demand-side of the market–and the sellers who have it–the supply–side of the market. In essence, a buyer gives up money and gets a good, while a seller gives up a good and gets money. From a marketing context, in order to be a market the following conditions must exist. The target consumers must have the ability to purchase the goods or services. They must have a need or desire to purchase. The target group must be willing to exchange something of value for the product. Finally, they must have the authority to make the purchase. If all these variables are present, a market exits.
Market Failures___Conditions in which a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction. The four main market failures are–(1) public good, (2) market control, (3) externality, and (4) imperfect information. In each case, a market acting without any government imposed direction, does not direct an efficient amount of our resources into the production, distribution, or consumption of the good.
Market Maker___A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn.
Market Order___An order that an investor makes through a broker or brokerage service to buy or sell an investment at the best available, or market, price.
Market Share___The fraction of an industry’s total sales accounted for by a single business. In general, market share is a “first-guess” indicator of a firm’s market control. If, for example, a company has a market share of 100 percent (that is, a monopoly), then you can rest assured it has a substantial amount of market control. A company with a 25 percent market share has less, but still notable, market control. In fact, when you get right down to the bottom line, the phrase “market share” is only worth mentioning for oligopolistic firms with a significant degree of market control.
Medicare___A federal system of health insurance for people over 65 years of age and for certain younger people with disabilities.
Medium Cap Stock___Or mid-cap stock, a company with a market capitalization between $2 and $10 billion, which is calculated by multiplying the number of a company’s shares outstanding by its stock price.
Merchant___A person or company involved in wholesale trade, especially one dealing with foreign countries or supplying merchandise to a particular trade.
Merger___The consolidation of two separately-owned businesses under single ownership. This can be accomplished through a mutual, “friendly” agreement by both parties, or through a “hostile takeover,” in which one business gets ownership without cooperation from the other. Mergers fall into one of three classes — (1) horizontal–two competing firms in the same industry that sell the same products, (2) vertical–two firms in different stages of the production of one good, such that the output of one business is the input of the other, and (3) conglomerate–two firms that are in totally, completely separated industries.
Micro Economics___The branch of economics that studies the parts of the economy, especially such topics as markets, prices, industries, demand, and supply. It can be thought of as the study of the economic trees, as compared to macroeconomics, which is study of the entire economic forest.
Micro Cap Stock___The term is used to describe publicly traded companies which have a market capitalization of roughly $300 million or less.
Mixed Economy___An economy, or economic system, that relies on both markets and governments to allocate resources. While, in theory, we could have a pure market economy or a pure command economy, in the real world all economies are mixed, relying on both markets and governments for allocation decisions. Markets allocate resources through voluntary choices made by living, breathing people. Government forces allocation through involuntary taxes, laws, restrictions, and regulations. Both institutions play vital roles in an economy
Monetary Policy___The Federal Reserve System’s use of the money supply to stabilize the business cycle. As the nation’s central bank, the Federal Reserve System determines the total amount of money circulating around the economy. In principle, the Fed can use three different “tools”–open market operations, the discount rate, and reserve requirements–to manipulate the money supply. In practice, however, the primary tool employed is open market operations. To counter a recession, the Fed would undertake expansionary policy, also termed easy money. To reduce inflation, contractionary policy is the order of the day, and goes by the name tight money.
Money___Anything that is generally accepted in exchange as payment for goods and services. The emphasis is on “any,” because any item or asset can serve as money so long as it is generally accepted in payment throughout an economy. While the key function of money is acting as a medium of exchange, money also functions as a store of value, standard unit of account, and standard of deferred payment
Money Market___A financial market that trades U.S. Treasury bills, commercial paper and other short-term financial instruments. This market is often used by businesses when they need short-term funds to bridge the gap between paying operating costs and collecting revenue from product sales. As such, the term “money” in money market indicates that businesses are using highly liquid instruments to raise the money need for operating expenses.
Monopoly___A market structure characterized by a single seller of a unique product with no close substitutes. This is one of four basic market structures. The other three are perfect competition, oligopoly, and monopolistic competition. As the single seller of a unique good with no close substitutes, a monopoly firm essentially has no competition. The demand for a monopoly firm’s output is THE market demand. This gives the firm extensive market control–the ability to control the price and/or quantity of the good sold–making a monopoly firm a price maker. However, while a monopoly can control the market price, it can not charge more than the maximum demand price that buyers are willing to pay.
Morningstar___An independent investment research and ratings company based in Chicago, IL.
Mortgage Loan___A mortgage loan is a loan secured by real property through the use of a mortgage note.
Multinational Company___A business that operates in two or more countries. With increased foreign trade, many businesses in the United States, as well as other nations, have found it worthwhile to open offices, branch plants, distribution centers, etc., around the globe. Almost all of the “big boys,” like General Motors, Sony, IBM, British Petroleum, Mitsubishi, and Exxon, are multinational companies. As multinational companies grow bigger and extend their operations world-wide, some people feel that they lose their sense of country loyalty or national identity.
Municipal Bond___Also called local bonds or munis, these are medium or long-term financial instruments issued by municipalities to borrow the funds used to build schools, highways, parks and other public projects. An attractive feature of these financial instruments is that are exempt from federal income tax. Commercial banks, corporations, and others with large sums of funds to lend usually purchase these bonds.
Mutual Fund___A company that pools the funds of hundreds or thousands of individuals to purchase corporate stocks, bonds, or other financial assets. The objectives of pooling funds is to reduce transactions costs and provide professional management not otherwise available. The most common types of mutual funds are “open-ended,” so called because there are no limits on the number of shares issued. Others are “close-ended” because they issue a fixed number of shares that are then traded around. Mutual funds give consumers the chance to get higher interest rates or returns on the financial investment than available through banks. They also provide the opportunity to participant in financial markets that are typically closed to smaller investors.
Mutual Insurer___An insurance company owned by its policyholders.