Knowledge is power, so lets go over some of the economic terms you should know.
These terms come fromthe Federal Reserve Bank of St. Louis,CORE Econ, andThe Economist.
Or, how long it takes for the market to adjust to something new, like a labor shortage.
Provided the cost of trading is lower than the price gap, theyll profit.
This term is also used in stocks.
For instance, shares listed on both the London Stock Exchange and New York Stock Exchange can be arbitraged.
Asset
An asset is something that is owned that has value.
It will have earning power or some other value to the owner.
If you own a home, for instance, thats an asset.
When discussing bailouts, youll also hear the term capital injection, which means the same thing.
Bankruptcy
This takes place if a court decides a debtor cant make payments owed to a creditor.
In America, the bankruptcy code protects firms from their creditors and is friendly to borrowers.
Bargaining power is the extent of someones advantage in getting a larger share of profits.
Capitalism
This is the American economic system.
In capitalist economic systems, private property, markets, and firms are the primary economic institutions.
Capital
Capital refers to cash or liquid assets that are held or obtained for expenditures.
Basically, this includes all of a companys assets that have monetary value.
In budgeting terms, capital refers to cash flow.
It measures the average change over time in the prices paid.
In return, the borrower promises to make future payments toward what was loaned.
Youre probably familiar with credit cards and your credit score, so you get the idea here.
Individuals and businesses can default, but so, too, can entire countries.
Depreciation
This is the gradual loss in value of an asset.
Derivative
A derivative is a financial instrument that can be traded.
Its value is based on the performance of underlying assets like shares, bonds, or real estate.
Derivative payoffs arent derived from ownership of cash flows by any one company.
Basically, theyre impacted by outside sources, so there is some risk involved.
Essentially, after an optimal level of capacity is hit, output will diminish.
Endowment
A persons endowment are the facts about them that can affect their income.
Its self-perpetuating and does not change unless an external force alters it.
Equity
Equity refers to a person or companys investment in a project.
Basically, its a personal stake in a company or investment.
Government spending
Any expenditure by the government to buy goods and services is government spending.
Human capital
As mentioned, workers are the heart of finance.
Inflation-adjusted prices, then, are prices that take these changes into account.
Interest
Interest is the monetary charge associated with the privilege of borrowing money.
you might also earn interest on your own investments in the market.
It can refer to an asset bought with the goal of making more money in the future.
The problem is, of course, external factors will influence the marketand you may end up losing money.
It also includes those who are unemployed but are working to get a job.
Cash, then, is the most liquid asset.
Its the ratio of profit to revenue.
Market
In economics, we refer often to the market.
This is the means by which the exchange of goods and services takes place.
Buyers and sellers are in contact in the market, but the market is impersonal.
Mortgage-backed security (MBS) is a financial asset that uses mortgages as collateral.
Net
Net is used often in economics.
Net income refers to total income minus depreciation, for instance.
A Pareto improvement is a change that benefits at least one party without hurting anyone else.
(This one is closely related to arbitrage.)
This comes from the word prudent, which means using care and forethought.
Recession
A recession is a period when output is declining.
In that case, its not over until the output has grown back to normal rates.
Trade and industrial activity are reduced during a recession, meaning likely job loss as well as inflation.
Share
A share is a part of some assets that may be traded.
A companys capital can be divided into equal parts.
Holders of these shares are entitled to a portion of profits.
Stocks are divided into the shares mentioned above.
If the stock rises in value, your investment will yield more when you sell if.
If it shrinks, youll lose money.
Shares and stocks are traded along with other financial assets on a stock exchange.
Solvent
A firm or individual is considered solvent when their net worth is positive or zero.
If a bank has assets that are more than its liabilities, its solvent.
If you have assets that equal more than what you owe, youre solvent, too.
A subprime mortgage, then, is one issued to one of these higher-risk borrowers.
