A to Z of Economic and Banking Terms

Hello readers, I have compiled a list of the most frequently used Economic and Banking Terms. This list is updated every now and then whenever I come across a new economic term. If you couldn’t find the term that you are searching for in this list then don't hesitate to contact me [Just select 'Definitions' in the section field in the contact form and send me the question]. I’ll get back to you as soon as possible with the definition. Here comes the list.

Absolute Advantage:

Country ‘A’ has an absolute advantage over country ‘B’ if the output per unit of input of A is higher than that of B.

Accelerator Principle:

The Accelerator Principle of a company is the growth in output of the company that would induce a continuation in net investment.

Ad Valorem Tax:

It is a tax based on the value of the property.

Aggregate Demand:

It is the total of all the demand in a country. It can also be expressed as

Total Exports of a country – Total imports of the country.

Aggregate Supply:

The total value of goods and services produced in an economy + {Imports-Exports}

Asset:

Any item of monetary value like bank accounts, real estate property, stocks,..etc

Barter System:

The trade which doesn't involve the exchange of money

Bretton-Woods:

It is a monetary system that existed from the year 1946-1973. In this monetary system, the value of the dollar was calculated using gold reserves and every other country held its currency at an exchange rate of US dollars.

Budget Deficit:

Budget Deficit = Government Expenditure- Government Revenues.

Call Money Market:

It is the market in which the Dealers and brokers locate and borrow money to satisfy their investment needs.

Capital Gains Tax:

Tax is paid for the profit made through the sale of an asset.

Cash Reserve Ratio{CRR}:

It is determined by the RBI and is the minimum reserves each bank must hold for customer deposits and notes.

Both CRR and Statutory Liquidity Ratio{SLR} are used to combat inflation. Higher CRR and SLR decrease the money supply thereby combating inflation.

Centrally planned economy:

An economic system where the production & pricing of goods and services are determined by the government

Classical Economics:

The theory emphasizes the fact that the free market can regulate itself. This theory was framed by Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill

Closed economy:

The economy is closed and doesn't have any contact with the rest of the world

Consumer Price Index:

It is the measure of the average price of consumer goods and services purchased by households. It is measured with 1982 as the base year.

Countervailing Duties:

These are the duties that are imposed by a country on Foreign producers in order to neutralize the negative effects of other duties.

Currency Appreciation:

An increase in the value of one currency over the other. It takes place when the market exchange rates change.

Current Account Deficit:

Current account deficit= Export-Import

Current GDP:

Current GDP is GDP expressed in the current prices of the period being measured

Customs Duty:

The duty levied on imports.

Deflation:

An economy is said to be in deflation when there is a fall in the prices of commodities.

Direct Tax:

These are the taxes that are levied on us directly. Taxes on Corporate Income, Capital Gains Tax, Personal Income tax, and Fringe benefits tax fall under this category.

Dividends:

It is the portion of the profits made by a company that is paid to the shareholders.

Exchange rate:

Also called Foreign Exchange Rates or FOREX a country specifies how much the country’s currency is worth in terms of the other currency.

Fiscal Deficit:

Fiscal Deficit= Government Expenditure in the current fiscal year- Government Revenues in the fiscal year.

Fiscal Policy:

It is the use of government revenue to influence the country’s economic situation.

Foreign Direct Investment:

It is the investment made by a company in one country on building a factory in another country.

Foreign Institutional Investor:

Investor from a foreign country.

Free Trade:

In this type of trade, there are no tariffs on the imported or exported goods between the two countries.

Fringe Benefit:

These are the benefits that are offered to employees in addition to their salaries like lunch coupons, cars, free petrol, etc.

GATT:

The General Agreement on Tariffs and Trade{GATT} was created in 1947 as a replacement for International Trade Organization (ITO). GATT was replaced by World Trade Organization in the year 1995.

GDP {Gross Domestic Product}:

Expenditure method:

GDP = consumption + gross investment + government spending + (exports – imports)

Note: GNP is similar to GDP except for the fact that GNP takes the country’s localities into account

Income method:

The formula for GDP measured using the income approach, called GDP(I), is:

GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes fewer subsidies on production and imports

GDP per capita:

GDP per capita is the contribution of every citizen of the country to the total GDP

Giffen goods:

These are the goods that people consume more as prices increase thereby violating the law of demand. {Usually, people purchase less as the prices increase}

Government Securities {G-Secs}

These are issued by the RBI on behalf of the market borrowing program. It includes State Government Securities, Central Government Securities, and Treasury Bills.

Human Development Index

Measurement-based on GDP per capita, life expectancy, and education

Inflation:

An economy is said to be in inflation when there is a rise in the price of the commodities.

Indirect Tax:

These are the taxes that we don’t pay directly. It includes Excise Duty, Customs Duty, Service tax and Securities Transaction Tax.

Insurance Regulatory & Development Authority (IRDA):

It is based in Hyderabad and the Mission of IRDA as stated in the act is “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”

Insurance Regulatory and Development Authority Act in 1999

This act allowed private companies into the insurance sector. It also increased the cap on FDI in the insurance sector to 26 percent.

International Labour Organization{ILO}

Was established in 1919 and is a specialized UN agency that deals with labour issues.

International Monetary Fund:

It is an organization of 186 countries that aims at stabilizing foreign exchange rates and assisting the reconstruction of the international payment system. It was established in 1944.

International Poverty Line:

It is the minimum money expressed in dollars that an individual needs to achieve an adequate standard of living. For some years this Internation Poverty Line has been roughly around one dollar a day.

Macro-economics:

As the word suggests, it deals with the economic behaviour and performance of an entire country.

Microcredit

It is the provision of credit, parsimony, and other financial services and products of very small amounts to the poor in semi-urban, rural and urban areas. It is to enable them to raise their income levels and improve their living standards.

Micro-economics:

This deals with studying how firms and households make decisions to allocate resources in markets. Market analysis is the main concept of Microeconomics.

Monetary Policy:

The policy through which the RBI controls the supply, availability, and cost of money {Interest rate} in order to attain economic goals.

Net Domestic Product:

NDP= GDP-depreciation of capital goods in that country.

All are measured using Purchasing Power Parity

Nominal GDP:

Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).

Parallel economy:

Alternative term for black economy, shadow economy and underground economy.

Politically Exposed Persons PEPs

Politically Exposed Persons are individuals who are or have been entrusted with prominent public functions in a foreign country.

Purchasing power parity:

Using market exchange values to equalize their purchasing power.

Quasi Money:

Also called Near Money. These are the assets that can be easily converted to money without no loss in value.

Real GDP:

Real GDP growth is GDP growth adjusted for price changes(using PPP).

Repo rate:

The rates at which banks borrow money from RBI.

Reverse repo rate:

The rates at which RBI borrows money from the Banks.

Securities:

It is an instrument that has a financial value. It can be classified as debt securites{bank notes(currency), bonds} and equity securities{Stocks}.

Statutory Liquidity Ratio

It is determined by the RBI and is the minimum amount that a bank must hold in the form of gold, cash and government securities.

Subsidy:

It is the payment given to the producers and distributors in a particular sector to prevent the downfall of that sector. For example, the government provides subsidies to small scale industry owners in order to prevent the downfall of small scale industries in the country.

The Wealth of Nations:

It is the famous book written by Adam Smith {a Renowned economist}

Treasury Bills:

These are short term borrowing instruments that are issued by RBI. They are issued at discount to face value and on attaining maturity the maturity value is paid to the holder. The minimum amount in treasury bills is 25,000 Rs and thereafter they are available in multiples of 25,000.

Wholesale Price Index:

The wholesale price index is used to measure the inflation in our country and is the price of a basket of wholesale goods with its base year as 1993-94.

World Bank:

It is an international financial institution that was established in the year 1945. It provides loans to poor countries in order to reduce poverty.

World Trade Organization:

Was established in the year 1995 in order to supervise international capital trade.