2000/3

14 March 2000

A laypersons guide to economic jargon

Technical economic words are becoming more frequently used, not only in economic analyses and
policy documents, but also in the general news media. This note takes a selection of this
economic jargon and gives short simple explanations of what it means.
The words are listed in alphabetical order. Where a definition contains a word which is defined
elsewhere in the paper, that word is printed in italics. A wide range of economics dictionaries and
text has been used to find the most useful definitions.
Aggregate demand:

the value of the total demand for goods and services in the economy.

Appreciation:

an increase in the value of an asset. This often refers to the

currency of a country with a floating exchange rate; when the
currency appreciates, it can buy more of a foreign currency. (Cf
depreciation)

Asset:

anything owned by a company, individual or other entity, that has a

monetary value. (Cf liability)

Average tax rate:

total tax as a percentage of total taxable income.

Balance of payments
accounts:

the systematic record of the receipts and payments between a

countrys residents and the rest of the world, over a given period.
They are traditionally divided into a current account and a capital
account. A balance of payments deficit refers to a deficit on the
current account.

c.i.f.:

cost, insurance, freight. This is one way of measuring the value of

imports, where their value includes insurance and freight costs as
well as the cost of the goods themselves. The other measure is
v.f.d.

Capital account:

that part of a countrys balance of payments which embraces the

following: its financial assets and liabilities (such as loans, portfolio
investment, and direct investment), reserve assets (such as gold),
capital transfers (which mostly consist of the funds that migrants
bring with them), and the acquisition/disposal of non-produced, nonfinancial assets (such as patents).

Capital goods:

goods used to produce other goods rather than being sold to

consumers (e.g. plant and equipment).

Cartel:

Businesses, organisations or countries which have grouped together

to influence the price or supply of goods and services.

Closed economy:

an economy closed to international trade, with no exports, imports or

capital movements. (Cf open economy)

Consumption goods:

goods which are consumed for personal satisfaction.

Consumption:

the total expenditure in an economy on goods and services which

are used up within a short period of time. Final consumption is the
expenditure on goods and services for the direct satisfaction of
individual and collective needs. Intermediate consumption is the
expenditure on goods and services to be used in the production
process.

CPI:

Consumers Price Index: an index which measures the average

level of the prices that households pay for goods and services.

Crowding out:

a fall in private sector consumption and investment as a result of

increasing government expenditure.

Current account:

that part of a countrys balance of payments which embraces its

transactions of goods, services, international investment income, and
current transfers (e.g. foreign aid).

Cycle (economic /
business cycle):

the alternative acceleration and deceleration of overall economic and

business activity. A full cycle usually lasts several years.

Cyclical
unemployment:

unemployment which results from the downswing of an economic

cycle and can be eliminated by the upswing.

Deficit:

the short-fall of revenue over expenditure. A budget deficit occurs

when Governments revenue is insufficient to cover its expenditure.
A current account deficit occurs when a country earns less than it
pays overseas. A deficit also refers to the case where the value of
assets is less than the value of liabilities. (Cf surplus)

Deflation:

a fall in the general level of prices. The rate of inflation is negative.

Demand:

the willingness and ability to pay a sum of money for a particular

good or service.

Depreciation:

a fall in the value of an asset. This often refers to the currency of a

country with a floating exchange rate; when a currency depreciates,
it buys less of a foreign currency. (See appreciation)

Depression:

a severe recession.

Devaluation:

a reduction in the value of a countrys currency where the country

has a fixed exchange rate system.

Direct investment:

investment made to acquire a lasting interest in an enterprise, where

the investors purpose is to have a significant influence in the
management of the enterprise.

Direct tax:

taxation on the income or wealth of individuals and companies. (Cf

indirect tax)

Disinflation:

a reducing rate of inflation.

Dumping:

selling goods abroad at a price lower than that charged for the same
good in the domestic market.

Economies of scale:

a reduction in the average cost of producing a product that results

when a greater amount of the product is produced.

Elasticity:

the percentage change of one variable with respect to a percentage

change of another. For example, the price elasticity of demand
measures the percentage change of the demand for a particular
product in response to a particular percentage change in its price.

Equity:

1. fairness;
2. the net assets of a business (calculated by subtracting its liabilities
from its assets), that is, the stake the owner has in the business. In
the case of a mortgaged property, equity is the value of the property
after subtracting the amount owed to the lender.

Excise duty:

a tax levied on goods produced for the domestic market, as distinct

from import tariffs; for example, excise duties on fuel, tobacco, or
alcohol.

Externalities:

goods and services whose costs and benefits are not properly
accounted for by the price. The total costs or benefits to society as a
whole may be greater or smaller than the private costs and benefits
to those directly involved in the transaction. One example of this is
pollution-causing activity.

f.o.b.:

free on board. Exports are usually measured this way, which is

their value at port before they are exported; that is, it does not
include the value of shipping and insuring the products beyond the
port.

Fiscal policy:

Governments taxation and expenditure policy.

Fixed exchange rate

system:

an exchange rate system whereby the government attempts to keep

the value of the currency fixed in relation to the value of another
currency or basket of currencies.

Flat tax:

the same rate of income tax is applied to all levels of income.

Floating exchange rate

system:

an exchange rate system where the value of the currency is

determined by market supply and demand.

Free trade:

a policy of non-intervention by the government in trade between

countries.

Frictional
unemployment:

unemployment resulting from the time involved in workers changing

jobs.

Full employment:

the level of employment at which everyone able and willing to work is

employed, and the only unemployment is frictional unemployment.

GDP:

gross domestic product: a measure of the total value of goods and

services produced by an economy over a specified time period.

GNP:

gross national product: GDP plus income accruing to domestic

residents arising from investment abroad less income earned in the
domestic market accruing to foreigners abroad.

Goods:

physical objects that people are prepared to pay for.

Gross:

with no deductions; for example, gross profit is profits before the

payment of interest and depreciation. (Cf net)

Incomes policy:

a policy of directly restraining incomes, usually as a means of

keeping inflation low.

Index number:

a single number which gives the average value of a set of related

items, expressed as a percentage of their average value at some
base period.

Indirect tax:

tax which is levied on transactions involving goods and services; for

example, GST and tariffs. (Cf direct tax)

Inflation:

persistent upward movement in the general level of prices, together

with the related drop in purchasing power.

Intermediate goods:

goods which are used up in the production of other goods.

example, sheet steel in the production of car bodies.

Investment:

1. in economic theory: the production of capital goods such as roads,

factories and machinery;

For

2. in common usage: expenditure on the acquisition of real or

financial assets.
Invisibles:

the current account components of the balance of payments

accounts which are not physical goods.

Labour force:

the number of people employed plus the number unemployed (see

unemployment rate).

Liability:

any form of debt. (Cf asset)

Loose policy:

this applies to fiscal and monetary policy, and describes policy when
it is set at a level to stimulate further acceleration of economic
activity (in the short-run). (Cf tight policy)

Macro-economics:

the study of human activities in large groups as indicated by

economic aggregates such as total employment, national income,
and prices. (Cf micro-economics)

Marginal tax rate:

the rate of tax paid on an additional unit of income.

MCI:

monetary conditions index: an index number designed by the

Reserve Bank to measure monetary conditions. Its two components
are 90 day bank bill rates and the TWI exchange rate. If these rise,
the MCI will rise. An increase in the MCI signifies a tightening of
monetary conditions.

Merchandise trade:

exports and imports of goods.

Micro-economics:

the study of the economic actions of individual firms and well-defined

small groups of individuals and sectors. (Cf macro-economics)

Mixed economy:

a system which combines competitive private enterprise with some

degree of central control.

Monetary conditions:

this refers to the overall level of interest rates, exchange rates and
money supply in an economy. Conditions can be either loose, tight
or neutral.

Monetary policy:

the actions the Reserve Bank takes to affect interest rates, the
exchange rate and the money supply in order to influence the pace
of spending.

Money supply:

the total stock of money in the economy. Money can be defined

narrowly as notes and coins, or widely to include bank deposits.

Monopoly:

an industry where there is only one seller and many buyers.

Monopsony:

an industry where there is only one buyer but many sellers.

Multiplier:

the number by which the amount of a specific capital investment (or

change in some other element in aggregate demand, such as
Government spending) is multiplied to give the resulting total amount
by which national income or employment is increased.

National accounts:

the presentation of a countrys income and expenditure accounts in a

form indicating transactions that have taken place during a given
period between different sectors of the economy.

Net:

what is remaining after all deductions; for example after taking

expenses and taxes off. (Cf gross)

Nominal value:

the money value of any economic variable (without adjustment to net

out inflation changes). (Cf real value)

OCR:

official cash rate: the interest rate which applies to overnight

borrowing and lending between banks and the Reserve Bank. It is
currently a key operational feature of monetary policy in New
Zealand.

Oligopoly:

an industry in which there are only a few sellers but many buyers.

Open economy:

an economy in which there are no restrictions on imports and

exports, nor on the movement of labour or capital across the border.
(Cf closed economy)

Opportunity cost:

where expenditure on a particular item or activity is valued in terms

of the most profitable alternative use of the money. That is, it is
valued in terms of the items/activities foregone.

Participation rate
(labour force):

the number of people in the labour force as a percentage of the total

working age population.

Portfolio investment:

investment in equity securities (shares) and debt securities (bills and

bonds). Unlike direct investment, the investment is not for the
purpose of gaining a significant influence on any enterprise.

Productivity:

output produced per unit of input. Labour productivity measures

output per unit of labour; capital productivity measures output per
unit of capital; and total factor productivity measures output per unit
of labour and capital.

Progressive tax:

a tax where people on higher incomes spend a greater proportion of

their income on the tax than do people on lower incomes. (Cf
regressive tax)

Protectionism:

a policy that favours the use of tariffs, quotas, or other import

restrictions to make domestic products competitive with foreign
imports.

Public goods:

goods and services which, because they cannot be withheld from

one individual without withholding them from all, tend to be supplied
communally. Examples include street lighting and national defence.

Real value:

this is usually quoted in terms of the dollars of a specific base period

(for example, real GDP is currently quoted in 1991/92 dollars). The
real value of an economic variable in a particular period is its money
value after adjustment to exclude any price level changes between
that period and the base period. (Cf nominal value)

Recession:

a decline in overall economic activity, usually defined as two

consecutive quarterly falls in real GDP.

Regressive tax:

a tax where people on higher incomes spend a smaller proportion of

their income on the tax than do people on lower incomes. (Cf
progressive tax)

Savings rate:

the proportion of income which is saved. In the case of an individual,

savings is usually measured against the proportion of income after
tax.

Services:

intangible products that people are prepared to pay for and which are
usually consumed at the same time as they are produced. Examples
include transportation, catering, and hairdressing.

Structural
unemployment:

long-term unemployment caused by changes in the industrial,

occupational, or demographic structure of the economy.

Supply:

The quantity of a good or service available for sale at a specified

price.

Surplus:

the extent that revenue is greater than expenditure, or that the value
of assets is greater than the value of liabilities. (Cf deficit)

Tariff:

a tax applied to imports.

Terms of trade:

a ratio of an index of export prices to an index of import prices. A

rise in the terms of trade indicates that a country is able to buy a
greater volume of imports for a given volume of exports.

Tight policy:

this applies to fiscal and monetary policy, and describes policy when
it is set at a level to reduce the rate of growth of economic activity (in
the short-run). (Cf loose policy)

Tradeables:

goods and services which can be imported or exported.

TWI:

trade weighted index: an index of the New Zealand dollars value

against a basket of five overseas currencies (currently the Euro and
the currencies of Australia, Japan, the United States, and the United
Kingdom), where each countrys currency is weighted by a
combination of the size of (1) its trade with New Zealand and (2) its
GDP.

Underemployment:

the employment of workers in jobs which either do not offer sufficient

hours of work or do not fully utilise their abilities and skills.

Unemployment rate:

the number of people unemployed, as a percentage of the total

labour force. For the purpose of this calculation, an unemployed
person is someone who is without a paid job, is available for work,
and is actively searching for work.

v.f.d.:

value for duty. This is one way of measuring the value of imports,
where the value excludes insurance and freight costs. The other
measure is c.i.f.

Volume index:

this measures the real value of, for example, goods and services
imported or exported.

Andrew Morrison, Economist

Parliamentary Library
For further information, contact Andrew (ext.9202)

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