Absolute advantage: The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/ or using a more efficient process than another party producing the same product or service.
The United States produces 700 million gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine (the output) in the same amount of time (the input) as the United States.
Absolute Poverty: Poverty defined with respect to an absolute material standard of living. Someone is absolutely poor if their income does not allow them to consume enough to purchase a minimum bundle of consumer goods and services (including shelter, food and clothing). An alternative approach is to measure relative poverty. The reduction of extreme poverty and hunger was the first Millennium Development Goal, as set by 189 United Nations Member States in 2000.
Automatic Stabilizers: Government fiscal policies which have the effect of automatically moderating the cyclical ups and downs of capitalism. Examples include income taxes (which collect more or less taxes depending on the state of the economy) and unemployment insurance benefits (which automatically replace lost income for people who lose their jobs).
Automatic stabilizers act in a manner that is against the prevailing economic trend. For example, in a progressive taxation structure, the share of taxes in national income falls when the economy is booming and rises when the economy is in a slump. This has the effect of cushioning the economy from changes in the business cycle. Similarly, total net transfer payments such as unemployment insurance decline when the economy is in an expansionary phase, and rise when the economy is mired in recession.
Balanced Budget: An annual budget (such as for a government) in which revenues perfectly offset expenditures, so that there is neither a deficit nor a surplus. The phrase "balanced budget" is commonly used in reference to official government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office. It is important to understand that the phrase "balanced budget" can refer to either a situation where revenues equal expenses or where revenues exceed expenses, but not where expenses exceed revenues.
Balanced Budget Laws: Laws (usually passed by right-wing governments) which require governments to run balanced budgets regardless of the state of the overall economy. These laws have the negative effect of worsening economic downturns – since governments either must reduce spending or increase taxes during a recession, in order to offset the impact of the recession on its budget, and those fiscal actions deepen the recession. Bank for International Settlements: An international financial regulatory organization based in Berne, Switzerland, which designs international regulations regarding capital adequacy and other banking practices. The BIS is governed by government appointees from the world’s largest capitalist economies.
Essentially, the BIS is a central bank for central banks; it does not provide financial services to individuals or corporations. The BIS is located in Basel, Switzerland and has representative offices in Mexico City and Hong Kong. Member banks include the Bank of Canada, the Federal Reserve Bank and the European Central Bank.
Banking Cycle: An economic cycle which results from cyclical changes in the attitudes of banks toward lending risk. When economic times are good, bankers become optimistic that their loans will be repaid and hence they expand their lending.
More credit means even stronger economic times and so on. The opposite occurs when the economy becomes weaker. Bankers begin to fear more defaults on their loans, hence they issue fewer loans, and hence the economy weakens even further.
Banks: A company that accepts deposits and issues new loans. It makes profit by charging more interest for the loans than it pays on the deposits, as well as through various service charges. By issuing new loans (or credit), banks create new money which is essential to promoting economic growth and job creation.
Barter: A form of trade in which one good or service is exchanged directly for another, without the use of money as an intermediary. An example of a barter arrangement would be if someone built a fence for a cattle farmer in exchange for food. Rather than the farmer paying the builder, say, $1,000 for the fence, he would give the builder a similar value in beef. Virtually any good or service can be bartered. For individuals, bartering not only has an obvious financial benefit - it lets you keep more money in your pocket - it may also have a psychological benefit in that it can create a deeper personal relationship than a purchase and sale transaction.
When thinking about what you can barter to obtain a good or service you want, consider not only any possessions you might be willing to part with, but also any skills you have to offer. These skills might include what you do professionally, but they can also include any activity you’re proficient at, from cleaning to babysitting to yard work to baking. You could even offer the use of your truck to someone who needs to move furniture in exchange for their help with, say, proofreading your new marketing newsletter.
One limitation of bartering is that you can only exchange goods and services with people you know. So if you don’t know anyone who is offering what you want, you won’t be able to get it through bartering. To overcome this limitation, bartering groups and bartering websites have been created to help barterers find more people to trade with.
Bond: A financial security which represents the promise of its issuer (usually a company or a government) to repay a loan over a specified time period, at a specified rate of interest. The bond can then be bought and sold to other investors, over and over again. When the rate of interest falls, bond prices rise (and vice versa) – since when interest rates are lower, the bond’s promise to repay interest at the specified fixed rate becomes more valuable. The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds.
Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
Bills - Debt securities maturing in less than one year:
Billing cycles guide companies on when to charge customers and help businesses estimate how much revenue they will receive. They also enable internal departments, such as accounts receivable, to monitor how much revenue has yet to be collected. The recurring cycle also lets customers know when they can expect to be charged. The date at which the billing cycle begins depends on the type of service being offered and the customer’s needs. For example, an apartment complex may send a bill for rent on the first of every month, regardless of when tenants had signed their individual leases. This style of billing cycle can make accounting easier, as well as making the payment due date easier for tenants to remember. Companies may also choose to use a rolling billing cycle. A cable provider may set a customer’s billing cycle to align with when that customer began service.
Bonds - Debt securities maturing in more than 10 years
Convertible Bonds: A convertible bond may be redeemed for a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs."
Callable Bonds: Callable bonds, also known as redeemable bonds, can be redeemed by the issuer prior to maturity. Usually a premium is paid to the bond owner when the bond is called. The main cause of a call is a decline in interest rates. If interest rates have declined since a company first issued the bonds, it will likely want to refinance this debt at a lower rate. In this case, the company will call its current bonds and reissue new, lower-interest bonds to save money.
Balance of Trade: The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.
Also referred to as "trade balance" or "international trade balance."
Business Firm: A business organization, such as a corporation, limited liability company or partnership. Firms are typically associated with business organizations that practice law, but the term can be used for a wide variety or business operation units. While business activities are typically conducted under the firm's name, the legal protection to employees or owners depends on the type of organization it was created under. Some organizational types, such as corporations, provide more protection than others.
Capital: Broadly defined, capital represents the tools which people use when they work, in order to make their work more productive and efficient. Under capitalism, capital can also refer to a sum of money invested in a business in hopes of generating profit.
Capital Adequacy: Capital adequacy rules are loose regulations imposed on private banks, in hope of ensuring that they have sufficient internal resources (including the money invested by the bank’s own shareholders) to be able to withstand fluctuations in lending and profitability.
Capital Flight: A destructive process in which investors (both foreigners and domestic residents) withdraw their financial capital from a country as a result of what are perceived to be non-favourable changes in economic policies, political conditions, or other factors. The consequences of capital flight can include a contraction in real investment spending, a dramatic depreciation in the exchange rate, and a rapid tightening of credit conditions. Developing countries are most vulnerable to capital flight.
Capital Gain: A capital gain is a form of profit earned on an investment by re-selling an asset for more than it cost to buy. Assets which may be purchased for this purpose include stocks, bonds, and other financial assets; real estate; commodities; or fine art.
Capacity Utilization: A company or economy’s capacity represents the maximum amount of output it can produce. The rate of capacity utilization, therefore, represents the proportion of capacity that is actually used in production. When capacity utilization is high (so that a facility is being used fully or near-fully), pressure grows for new investment to expand that capacity. Also, high capacity utilization tends to reduce the unit cost of production (since capital assets are being used more fully and efficiently).
Capitalism: An economic system in which privately-owned companies and businesses undertake most economic activity (with the goal of generating private profit), and most work is performed by employed workers who are paid wages or salaries.
Definition of 'Capitalism'
A system of economics based on the private ownership of capital and production inputs, and on the production of goods and services for profit. The production of goods and services is based on supply and demand in the general market (market economy), rather than through central planning (planned economy). Capitalism is generally characterized by competition between producers. Other facets, such as the participation of government in production and regulation, vary across models of capitalism.
Investopedia explains 'Capitalism'
Capitalism rose to prominence with the end of feudal economies and has become the dominant economic system in developed countries. Specific tenets of capitalism, such as property rights and wage labor, can also be considered cornerstones of representative government. Capitalism is often closely associated with economic growth, as production and price are determined by the market rather than by governments. Private property rights provide individuals with the freedom to produce goods and services they can sell in the market. Capitalism has been criticized for its underlying focus on profit, and how that focus can lead to social and economic inequality. Further, it is also criticized for its emphasis on consumption, as the constant purchase of goods and services is necessary for capitalism's success.
Carbon Tax: An environmental tax which is imposed on products which utilize carbon-based materials, and hence contribute to greenhouse gas pollution (including oil, gas, coal, and other fossil fuels). The level of the tax should depend on the carbon (polluting) content of each material. Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. From an economic perspective, carbon taxes are a type of Pigovian tax. They help to address the problem of emitters of greenhouse gases not facing the full (social) costs of their actions. Carbon taxes can be a regressive tax, in that they may directly or indirectly affect low-income groups disproportionately. The regressive impact of carbon taxes could be addressed by using tax revenues to favour low-income groups. However, there are about USD $550 billion in fossil fuel subsidies annually worldwide.
A number of countries have implemented carbon taxes or energy taxes that are related to carbon content. Most environmentally related taxes with implications for greenhouse gas emissions in OECD countries are levied on energy products and motor vehicles, rather than on CO2 emissions directly.