The ABC’s of Economics


Absolute advantage – If an individual, firm or country produces the same amount of a good or service with a lesser amount of resources or produces a higher amount of a good or service with the same amount of resources, relative to other producers, it is said to have an absolute advantage.

Adverse selection – Choosing a wrong party to do business with.

Appreciation – A rise in the value of an asset or currency.

Arbitrage – Buying an asset in one market and simultaneously selling it in another market at a higher price.

Asset – Anything that can give earnings or any other form of value to its owner.

Assymetric information – A  case where one party has more useful information than the other party in a business transaction.

Aurtaky – The belief that a country should not participate in international trade but should be self sufficient.

Balance of payment – The difference between the total money coming into a country from abroad and the money going out of the country during the same period.

Balanced budget – When total government spending equals total government income in the same period.

Bank – An institution where money can be kept, loans can be obtained and in some cases a provider of insurance.

Bankruptcy – A case where a law court judges that  a debtor is unable to make payments owed to a creditor.

Barter – Payment of goods and services with other goods and services rather than money.

Bear – An investor who expects the price of a particular security to fall.

Bonds – A bond is an interest bearing security issued by governments, companies and some other organisations with the aim of raising capital.

Bubble – When the price of an asset rises far above what the fundamentals can explain, such as the income obtained from holding the asset.

Budget – A document detailing the amount of public spending for a specific period of time, usually a year and the combination of various sources of financing the spending.

Bull – An investor who expects the price of a particular security to rise.

Business cycle – This is also known as boom and bust. It is the long-run pattern of economic growth and recession.

Buyers market – A market where the buyer has influence over the price of the product.

Cannibalise – When a firm creates a new product or service that is more superior to its existing product or service.

Capital – Money or asset used for economic purposes.

Capital adequacy ratio – The ratio of a banks capital to its total assets, required by regulators to be above a minimum level.

Capital control – Government imposed restrictions on the ability of capital to come in or out of a country.

Capital flight – When capital rapidly flows out of a country usually because investors have lost confidence in the economy.

Capital intensive – A production process that uses comparatively large amounts of capital.

Capital market – Markets in securities such as bonds and shares used to raise long term capital by governments and companies.

Capitalism – It is a free market system where the owners of capital own property rights that enable them to earn profit as a reward for putting their capital at risk in some form of economic activity.

Cartel – An agreement between two or more firms in an industry to dictate price and output in order to earn more profit.

Comparative advantage – A country (or an individual or firm) has comparative advantage at producing a good or service relative to other countries (or individuals or firms) if it is most efficient at producing that good or service.

Closed economy – A country that restricts the free flow of people, capital, goods and services across its borders.

Complementary goods – Goods that are used together.

Contagion – The cumulative effect produced when one economic event sets off a chain of similar events.

Cost-benefit analysis – A method of reaching economic decisions by comparing the cost of doing something to its benefit.

Credit creation – The act of making loans.

Credit crunch – When banks suddenly stop lending, bonds are no longer purchased usually because creditors are more risk averse.

Creditor – One who lends out money by giving out loans, buying bonds or allowing money owed now to be payed in the future.

Crony capitalism – A form of economy where success in business depends greatly on close relationships between businessmen and government officials.

Crowding out – When a rise in a specific act of government drives down the possibility of the private sector to perform that same act.

Currency peg – When a government fixes its exchange rate of its currency against another currency or currencies.

Debtor – One who borrows money by collecting loans, sells bonds or owes money now to be payed in the future.

Debt forgiveness – Cancelling or rescheduling a borrowers debt in order to reduce the effect of the debt burden.

Default – Failure to meet the terms of a loan agreement.

Deficit – When more money goes out than it comes in.

Deflation – A continuous fall in the general price level of goods and services across the country.

Demand – The amount of a good or service that people are both willing and able to buy.

Demographics – People and the statistical study of them.

Depreciation – A fall in the value of an asset or currency.

Depression – A prolonged (more than two consecutive quarters) recession (output falls by more than 10%) in economic activity.

Deregulation – The process of reducing government regulation – restrictions on the amount of competition, the prices charged, the kind of business done – in a particular industry.

Devaluation – A sudden fall in the value of a currency against other currencies.

Diminishing returns – The more of a commodity you have, the additional benefit obtained by having an extra of that commodity reduces.

Direct taxation – Taxes levied on the income or wealth of individuals or companies.

Discount rate – The rate of interest charged by a central bank when lending to other financial institutions.

Disequilibrium – When demand and supply in a market do not meet.

Disinflation – A fall in the rate of inflation.

Diversification – Holding several different assets and shares in order to reduce risk.

Dividend – The portion of a company’s profit that is distributed to shareholders.

Dollarisation – The replacement of a country’s local currency by the US dollar.

Dumping – Selling something for less than it was produced.

Economic indicator – A statistic used to judge the health of an economy.

Economic sanctions – A method of punishing countries that have committed offenses.

Economics – The study of how society uses its scarce resources.

Economics of scale – Doing business on a larger scale is more benefecial.

Efficiency – Getting the most out of the resources used.

Elasticity – The responsiveness of one variable to changes in another variable.

Emerging markets – Developing or underdeveloped countries of the world.

Entrepreneur – A person who has an idea and the zeal to mix the other factors of production to produce something of value.

Equilibrium- When supply and demand meet.

Equities – Also known as shares.

Equity – There are two meanings in Economics. Firstly, it is the capital of a firm less its liabilities to others other than shareholders. Secondly, it is the act of being fair.

Equity risk premium – The extra reward an investor gets from holding shares, a risky asset, relative to a less risky asset such as bonds.

Euro – The main currency of the European union.

Euro zone – The economy made up of all the countries that have adopted the Euro.

European Central Bank – The central bank of the European union responsible for setting the short-term interest rate of all the countries that use the euro as their domestic currency.

European union – A club of 25 European countries.

Exchange controls – Limits on the amount of a foreign currency that can be brought into the country or of the domestic currency that can be taken out of the country.

Exchange rate – The price at which one currency can be converted into another currency.

Expected returns – What investors think they’ll earn by making an investment, at the time of an investment.

Exports – Sales of domestically produced commodities abroad.

Export credit – Loans to domestic producers or foreign buyers of domestic commodities in order to boost exports.

Externality – The cost or benefit arising from an economic activity which accrues to a party that is not part of the economic activity and which is not included in prices.

Factors of production – The ingredients of economic activity – land, labour, capital and entrepreneur.

Factory price – The price charged by producers to wholesalers and retailers.

Federal reserve system – Set up in 1913, the central bank of the US.

Financial instrument – Certificate of ownership of a financial asset.

Financial system – The firms and institutions that enable money move from one place to another.

First-mover advantage – The first to enter a market or create an innovation can be an advantage.

Fiscal drag – The tendency of the revenue obtained from taxation to increase as a share of GDP when the economy grows.

Fiscal neutrality – When the net effect of taxation and public spending, neither dampening nor stimulating demand.

Fiscal policy – One of the two macroeconomic policies, the other is monetary policy. It is comprised of taxation, public spending and any other government income or assistance to the private sector.

Fixed cost – Production costs that do not change when the quantity of output produced changes.

Flotation – When the shares of a comapany are sold to the public for the first time through an initial public offering.

Forecasting – Guesses about future happenings.

Foreign direct investment – Direct investment in production of another country by buying a company, establishing new operations of an existing business or merging or acquiring an existing business.

Free ride – Getting the benefit of a good or service without paying for it.

Free trade – The ability to partake in economic transactions with people from other countries without any form of legal restrictions by the government or any other institution.

Frictional unemployment – Being unemployed because one is in the process of changing jobs.

GDP – Gross domestic product is the total value of the annual output of goods and services produced within a country, it is a measure of economic activity in a country.

Gearing – Also known as leverage, it is a company’s debt expressed as a percentage of it’s equity.

Giffen goods – A good whose demand increases as its price rises.

Gilts – A safe security with regards to receiving interest and avoiding defaults such as government bonds.

Gini coefficient – An inequality indicator that ranges from 0 to 1.

Globalization – International integration of people, firms and governments.

GNP – Gross national product is a country’s GDP plus income earned by its residents from investment abroad less income earned by foreigners within the country but sent to their home country.

Golden rule – Over the economic cycle, the government should only borrow to finance investment not to finance current spending.

Hedging – Reducing your risks by deliberately taking on a new risk that offsets the existing one.

Hedge fund –

Herfindahl-Hirschman index – It is the sum of the squares of the market share of each firm in the industry. It tells how concentrated market power is in an industry. The higher the value is, the higher the level of concentration.

Horizontal equity – People with the same ability to pay taxes should pay the same amount.

Horizontal integration – The merging of firms at the same stage in the supply chain.

Hot money – Money held in one currency that has the tendency to be switched to another currency at a moment’s notice in search of higher returns.

Human capital – The human element put into economic activity.

Human development index – A guide that tells how well a country is faring.

Hyper-inflation – Rapid and persistent increase in the price level of goods and services.

Hypothecation – Designating taxes for specific purposes.

Hysteresis – Delayed response of an occurence.

ILO – The International Labour Organization formulates international labour standards by setting out desired minimum rights for workers.

IMF – The International Monetary Fund is the referee and if need be the salvager of the world’s financial system.

Imports – Purchases of foreign goods and services.

Income – The flow of money used to reward factors of production: rent to land, wages to labour, interest to capital, profit to entrepreneur and capital.

Income tax – A method of taxation where earnings are taxed.

Incumbent advantage – The benefits that come with already participating in a market relative to a new entrant.

Indexation – To keep up with inflation by raising the nominal value in order to maintain the real value of the amount.

Indirect taxation – Taxes on goods or services purchased rather than on income, profit or asset owned directly.

Inelastic – The unresponsiveness of one variable to changes in another variable.

Inferior goods – Products whose demand decreases as income rises.

Inflation – A persistent increase in the general price level of goods and services throughout the country.

Inflation target – A goal of monetary policy, to meet a desired target range of inflation.

Insider trading – When information that is capable of affecting the price of a tradeable asset although not yet known by the public is used to trade an asset.

Insurance – Anything used to reduce the adverse effects of risk.

Interest – The cost of borrowing which rewards the lender for the risk undertaken in giving out money to the borrower.

Interest rate – The amount of interest that would be paid annually divided by the amount of the loan is the annual rate of interest.

Intervention – When central banks try to influence an exchange rate by buying the currency they want to appreciate and selling the currency they want to depreciate.

Investments – Using money to make more money through purchase of buildings, machineries and the likes or purchase of financial securities such as stocks and bonds.

Invisible hand – Coined by Adam Smith, it is the ability of the free market to allocate factors of production, goods and services to their optimal use.

Inward investment – Investing in your home country.

Joint supply – Products or production processes that have multiple uses.

Kleptocracy – A government that is corrupt and steals public funds as politicians and bureaucrats in charge use their power to enrich themselves.

Labour – A factor of production that embodies human input into the production process.

Labour intensive – A production process that uses comparatively large amounts of labour.

Laffer curve – It shows the relationship between the average tax rate and the total tax revenue.

Laissez-faire – The belief that the economy works best when there is no interference by the government.

Land – A factor of production that is used in the production process.

Leverage – It is also known as gearing, a company’s debt expressed as a percentage of its equity.

Leveraged buy-out – A case where a company is bought with borrowed money, the debt is secured against the companys assets and the interest of the loan is paid from the company’s future cashflow.

LIBOR – The interest rate London top quality banks charge each other to borrow money.

Liquidity – How easily an asset can be exchanged for cash if so desired.

Liquidity trap – When cutting down interest rate has no effect as people are so risk averse that they would rather hold their money than offer it as loans or take up loans as well, hence monetary policy is impotent.

Lump-sum tax – Taxing everybody at the same tax rate regardless of their income or wealth.

Luxury goods – When the demand of a good is highly responsive to changes in income or price.

Macroeconomic policy – Policy given by the government or central banks to bring about growth in the economy and reduce inflation and unemployment.

Marginal – The difference an extra unit of something makes.

Market capitalization – The market value of a company’s shares – the quoted price of a share multiplied by the total number of shares the company issued.

Market failure – When a market left to itself does not allocate resources efficiently.

Market forces – The pressures from buyers and sellers in a market as opposed to market regulators.

Market power – When one buyer or seller can significantly influence the quantity of goods and services traded or the price at which they are sold.

Marshall plan – When the decisions of how an international aid is used is left to the receiver of the aid rather than the donor.

Menu cost – How much it costs the seller to change prices of  goods or services.

Mergers and acquisitions – When two businesses join together as one either by merging or by one taking over the other.

Minimum wage – A minimum rate of pay usually above the market clearing wage rate that firms are obliged to pay workers.

Mixed economy – An economy where private-owned firms and firms owned by the government partake in economic activities.

Monetary Policy – One of the macroeconomic policies, the other is fiscal policy. It aims at controlling the money supply and hence demand through open market operations, reserve requirements and the short term interest rate (discount rate).

Money market – Any market where money or other liquid assets such as treasury bills is lent or borrowed usually for a short period of time.

Money supply – The amount of money available in the economy.

Monopolistic competition – An imperfect market where there are few firms in an industry because their products are differentiated. Hence prices are higher, output is lower and excess profit is made.

Monopoly – When a single firm produces a good or service with no close substitute hence it decides on the price to sell its output for.

Monopsony – A market that has a single buyer so the buyer determines the price.

Moral hazard – One party gets involved in a risky event knowing that it is insured against the risk and the other party will incure the cost.

NAIRU – Non-accelerating inflation rate of unemployment is the lowest unemployment rate at which inlation does not accelerate.

National debt – The total of all the money ever borrowed by a government that is yet to be paid off.

National income – All that is produced, earned or spent in a country.

Nationalization – Government ownership of private-sector business.

Natural monopoly – When a monopoly occurs because it is more efficient for just one firm to serve an entire market rather than two or more firms due to the economies of scale involved.

Negative income tax – A way of redistributing income by taxing the high earners and giving it to the low earners.

Net present value – The difference of the sum of the expected benefits and the sum of the expected costs of a decision such as an investment. It is a measure used to decide whether to proceed with an investment or not.

Network effect – When the value of a good to a consumer changes because the number of those using the good changes.

Nominal value – Value of something expressed in monetary terms for a specific year.

Non-price competition – Trying to win business from your rival through other methods apart from reducing price.

Normal goods – When income increases, the demand for the good increases as well.

Normative economics – A branch of economics that involves making recommendations or prescriptions about economic issues.

Null hypothesis – A statement that is being put to the test.

OECD – Organisation for Economic Co-operation and Development is a Paris based club that has the countries with the top economies of the world as its members.

Offshore – Where the individual or firm’s home country rules do not apply.

Okun’s law – It predicts that a GDP growth rate of 3% leaves unemployment rate unchanged but a growth rate above 3% reduces the unemployment rate by half of the increment above 3% and vice versa.

Oligolopy – When a few firms dominate the market.

OPEC – Organisation of Petroleum Exporting Countries established in 1960 is a cartel that seeks to influence the price of oil by supressing the production of its member countries.

Open economy – A country that allows the free flow of people, capital, goods and services across its borders.

Open-market operations – The buying and selling of securities by the central bank on the open market in order to influence the interest rates or the growth of money supply.

Opportunity cost – The cost of the best forgone alternative  of a decision.

Optimal currency area – A geographic area within which it would be beneficial to have one currency.

Optimum – The best outcome possible given the constraints you are operating within.

Output – The product of combing the factors of production.

Output gap – How far an economy’s current output is from the output at full capacity.

Outsourcing – Shifting activities that used to be done inside a firm to another firm that is supposedly more cost efficient at handling the activity.

Outward investment – Investing abroad.

Over the counter – A security that is bought or sold through a private dealer or bank rather than on the financial exchange.

Overheating – When an economy is growing too fast and demand is exceeding its productive capacity.

Overshooting – When the price of something is set way above its fundamental value.

Pareto efficiency – A case where nobody can be made better off without making someone else worse off.

Paris club – Arrangements through which a country reschedules its debt borrowed from another government. The club has as its members the 19 founders of OECD and Russia.

Patents – A temporary monopoly given to the inventor of something in order to stop imitators from stealing the invention since they did not bear development costs and risk.

Path dependence – Where you have been in the past determines where you are now and where you are going to be in the future.

Peak pricing – A case where when capacity is fixed and demand varies during a time period, price is raised during periods of high demand.

Perfect competiton – The most competitive market where no single buyer or seller has control over the price and firms earn normal profit.

Permanent income hypothesis – It postulates that people smooth their spending throughout their lifetime regardless of sharp changes in their income.

Philips curve – A curve showing the negative relationship between unemployment and inflation.

Pigou effect – When deflation causes the purchasing power of money to increase hence people feel richer and spend more.

Positional goods – A good that shows that the buyer is affluent hence those who want to keep up with the Joneses buy them.

Positive economics – A branch of economics that describes the economic situations of things rather than give policy advice or opinions on how to better economic welfare.

Precautionary motive – Holding money just to be on the safe side.

Predatory pricing – Charging low prices now so that you can charge higher prices in the future.

Price discrimination – When a seller charges different prices to different buyers for the same commodity.

Price elasticity – A measure of the responsiveness of demand to a change in price.

Price mechanicm – The process by which markets set prices.

Price regulation – When the price of a product is regulated hence producers reduce their cost as much as possible in order to maximize profit.

Price/earnings ratio – The ratio of the market price of a company’s share to the earnings per share of the company. The higher the ratio, the more optimistic investors are.

Private equity – When a company’s shares are held privately and not traded in the public markets.

Privatisation – When government sells state-owned businesses to private investors.

Producer surplus – The difference between the price a producer sells a product and the cost of producing it.

Production function – A mathematical equation showing the relationship between the quantity of inputs used by the firm and the quantity of output produced with them.

Profit – The reward of the entrepreneur.

Profit margin – A firms profit expressed as a percentage of its sales.

Progressive taxation – A method of taxation where the proportion of income taxed away increases as the level of income increases.

Protectionism – Non-engagement in free trade.

Public good – A commodity that can be consumed by everybody or by nobody.

Public spending – Expenditure of local, state and federal governments including government-backed institutions.

Public utility –  A firm providing essential services to the public such as water, electricity.

Public-private – Using private companies to carry out aspects of the government.

Purchasing power parity – An exchange rate where the supply and demand of a currency are in equilibrium over the long term.

Quantity theory of money – It states that the quantity of money available in the economy determines the value of money. According to the theory, an increase in money supply causes inflation.

Quota – A limited quantity of a particular product which under offical controls can be produced, imported or exported.

Rate of return – Profit from an investment expressed as a percentage of the capital used to produce it.

Ratings – A guide to the riskiness of financial instruments provided by a ratings agency. An A++ rating represents a low risk of default and D rating represents an extreme risk of default.

Real terms – A measure of the value of money that deducts inflation.

Recession – A period of slow or negative economic growth usually accompanied by rising unemployment.

Redlining – Not lending to people who live in certain poor or troubled locations.

Reflation – Policies intended to pump up demand thereby increasing economic activity.

Regional policy – A policy intended to boost economic activity in a geographical area within a country.

Regressive tax – A method of taxation where the proportion of the income taxed away reduces as the taxpayer’s level of income increases.

Regulation – Rules governing the activities of private-sector enterprises imposed by the government or the management of a company.

Regulatory arbitrage – When the regulated exploits loopholes in the regulation and renders it useless.

Regulatory capture – When the regulator exploits or poaches the regulated firm.

Regulatory failure – When regulation has higher economic costs than benefit.

Regulatory risk – The adverse effects faced by the regulated due to the regulation.

Relative income hypothesis – It postulates that a household’s consumption is dependent on its income relative to neighbouring families.

Rent – There are two definitions. The first is the reward of land. The second is the difference between what a factor of production earns and what it would need to earn to remain in its current use.

Rent-seeking – Asking for a higher reward without giving a corresponding increase in productivity.

Replacement cost – How much it would cost today to replace a company’s assets.

Replacement rate – The fertility rate required to keep a country’s population steady.

Repo – Also known as repurchases agreement, an agreement where a party sells financial securities to another party and agrees to buy it back at an agreed price and an agreed date.

Required return – The least amount of expected returns from an investment to be willing to go ahead with it.

Rescheduling – Changing the payment schedule for a debt by agreement between borrower and lender.

Reservation wage – The lowest wage at which a worker will work.

Reserve currency – A foreign currency held as part of a country’s reserves by the central bank or government.

Reserve ratio – The fraction of a banks deposits held as reserves.

Reserve requirement – Regulations governing the minimum amount of reserves a bank must hold against deposits.

Reserves – Money in hand that can be used to meet planned future payment if the need arises.

Restrictive practice – Illegal methods used to inhibit competition by firms.

Returns – The rewards for doing business.

Ricardian equivalence – Changes in government deficit does not affect the level of demand in the economy.

Risk – The possibility of gaining or losing something of value.

Risk averse – Shying away from risk.

Risk management – The process of bearing the risks wanted and reducing the exposure to risks not wanted.

Risk neutral – Being insensitive to risks.

Risk premium – The extra return that investors require to hold a risky asset over a non-risky asset.

Risk seeking – Having a prefernce for riskier assets.

Risk-free rate – The rate of return earned on a risky asset.

Safe harbour – Protection from regulation.

Savings – Any income that is not spent.

Say’s law – Supply creates its own demand.

Scalability – The ease with  which supply of an economic product or process can be expanded to meet increasing demand.

Scarcity – Limited supply of factors of production.

SDR – Special drawing right is the IMF’s currency, its value is based on a portfolio of widely used currencies.

Search costs – The cost of finding what you want.

Secondary market – A second-hand market for financial instruments.

Securities – Financial contracts such as bonds and shares that grant the buyer a stake in the asset.

Securitization – Turning a future cashflow into tradeable securities.

Sellers market – A market in which sellers have an edge over buyers hence they can influence price.

Seniority – The order in which creditors are to be repaid, the senior gets paid first.

Sequencing – Implementing economic reforms in the right order.

Services – Intangible products of economic activities.

Shadow price – The economic price of a commodity, that is, the opportunity cost.

Shareholder value – Business activities should aim to maximize the value of the company’s shares, hence shareholders rather than customers or employeees are the most important in the business.

Shares – Also known as equity, they are financial securities that each grant part ownersip of a company.

Sharpe ratio – A measure of whether the rewards from an investment jutifies the risk. It is calculated by dividing the past rewards (less the risk-free rate) from the investment by its standard deviation.

Shock – An unexpected and unpredictable event that affects the economy.

Short-termism – Doing things that make you better off in the short term but worse off in the long term.

Shorting – Selling a financial security that you do not currently own in the hope that the price will fall by the time it gets to its new owner.

Signalling – When your actions show your preference.

Simple interest – A method of calculating interest where the interest is calculated on the initial amount borrowed or invested.

Social benefit/cost – The overall impact of an economic activity on the welfare of society.

Social capital – The amount of community spirit an economy has gluing it together.

Socialism – The collective ownership of the means of production together with a strong emphasis on equality.

Soft currency – A currency that is expected to drop in value relative to other currencies.

Soft loan – A loan given at below the market interest rate.

Sovereign risk – A risk that a government will default on its debt.

Speculation – Buying and selling financial assets as influenced by fluctuations in the assets value.

Spot price – How much a commodity sells for if it were to be bought immediately.

Stabilisation – Government’s attempt to smooth economic cycle, increasing demand when unemployment is high and reducing it when inflation is mounting.

Stagflation – The existence of stagnation and inflation at the same time in an economy.

Stagnation – A prolonged depression but not as bad as depression.

Stakeholders – All the parties that have an interest in a company, financial or otherwise such as, shareholders, creditors, employees, customers, the community and the government.

Standard deviation – A measure of how far a variable moves over time away from its mean.

Standard error – A measure of the possible error in a statistical estimate.

Statistical significance – It is highly likely a result or conclusion is right.

Sterilised intervention – When the government buys or sells securities in order to neutralise the effect of foreign exchange intervention on money supply.

Sticky prices – When prices are slow to adjust to changes in supply and demand.

Stochastic process – A process that exhibits random behaviour.

Stocks – Also known as shares, a financial instrument that gives part ownership of a company to the buyer. It is also referred to as inventories held by a firm to meet future demand.

Stress-testing – A process of exploring how a portfolio of assets would fare during extreme adverse conditions.

Structural adjustment – A program of policies designed to change the structure of an economy.

Structural employment – Employment caused by the stucture of an economy rather than changes in the economic cycle.

Subsidy – Money paid by the government to keep prices below the market clearing price or to ensure that a business that would otherwise shut down operates.

Substitute goods – Two goods are said to be substitutes when an increase in the demand for one causes a decrease in the demand for the other or vice versa.

Sunk costs – Costs that has already been incurred and cannot be reversed.

Supply – The amount of good or service available at any particular price.

Supply-side policies – Increasing economic growth by making markets work more efficiently.

Sustainable growth – Growth that can last even in the long term which involves non-renewable resources not been used up and tolerable pollution.

Systematic risk – Risk that cannot be reduced by diversification, it determines the return on a well-diversified portfolio of asset.

Systemic risk – The risk of collapse of the entire financial system.

Tariff – Tax imposed by a government on goods produced abroad and imported into its country.

Tax arbitrage – Creating financial instruments or transactions that allow parties involved to exploit the loopholes in their tax exposure so that they pay less tax.

Tax avoidance – Doing everything legally possible to pay less tax.

Tax base – The product or people to which the tax rate applies.

Tax burden – Total tax paid in a period as a proportion of income earned during same period.

Tax competition – Low-tax policies adopted by a country with the hope of attracting international businesses and capital.

Tax efficient – A way of undertaking an economic activity that legally results in the least amount of tax to be paid by the taxpayer.

Tax evasion – Paying less tax that one is legally obliged to.

Tax haven – A country or area with friendly or no tax system.

Tax incidence – The person who suffers the tax burden, it may not necessarily be the taxpayer as the cost of tax can be passed on.

Taxation – Collecting a proportion of the rewards of the factors of production by the government.

Terms of trade – The weighted average of a country’s export prices relative to its import prices.

Tick – The minimum price change possible in the financial marketplace.

Time series – Several measurements of a variable taken at regular time intervals such as daily, monthly and quarterly.

Time value of money – The notion that a naira today is worth more tomorrow since the money in hand today can earn interest until the future naira is received.

Trade deficit/surplus – An excess of imports over exports is a trade deficit while an excess of exports over imports is a trade surplus.

Trade-weighted exchange rate – A country’s exchange rate with the currencies of its trading partners weighted by the amount of trade done by the country in each currency.

Tragedy of commons – The idea that the use of a common good by the public will cause the good to deteriorate in value as none has property rights to the good and as such none will use it effeciently.

Transaction costs – Costs incurred during the process of buying and selling aside from the price of the product.

Transfers – Payments that are made without any good or service being received in return.

Transition economies – Economies changing from communidt regimes to capitalism.

Transmission mechanism – The process by which changes in money supply affect the level of total demand in the economy.

Treasury bills – Government bonds that are used to manage fluctuations in short-term cash needs of the government.

Trough – The transition point between economic recession and recovery.

Underground economy – Market where goods and services are traded illegally hence they are not reported in a country’s official statistics such as the GDP.

Unemployment trap – When unemployed people who receive benefits from the government or charity are reluctanct in getting a job because they will no longer enjoy the benefits.

Usury – Charging an exorbitant rate of interest or in some cases any interet at all.

Utility – A measure of satisfaction.

Value added – The difference between the value of output produced by a firm and the value of the inputs obtained from outside the firm but used by the firm. It is expressed as the profit earned plus wages.

Variable costs – Part of a firm’s production cost that varies as output changes.

Velocity of circulation – The number of times money changes hands.

Venture capital – Private equity with the aim of helping small businesses grow.

Vertical equity – The principle that people with a greater ability to pay should pay more tax relative to people with a lesser ability to pay.

Vertical integration – Merging with a firm at a different stage of a production process.

Voluntary unemployment – Unemployment due to the person choosing not to work and not because jobs are not available.

Wage rate – The difference between basic pay and total earnings, it consists of performanc-related wage, bonuses, overtime payments and others.

Wage – The reward of labour.

Wealth effect – As people get more income, they consume more.

Wealth tax – Tax levied on wealth rather than income.

Welfare to work – Policies aimed at giving transfers to the unemployed only for a while as it is designed to get the unemployed back to work.

Windfall gains – Large income that is not expected such as lottery prize.

Withholding tax – The part of tax that is collected from the source before the taxpayer has seen the income or capital to which the tax applies.

World bank – Created in 1944, it aims to promote economic growth and development in developing countries through advice and long-term lending.

World trade organisation – The governing body of international trade which sets and enforces the rules of trade and punishes offenders.

X-efficiency – Producing output at the minimum cost.

Yield – The annual income from a security expressed as a percentage of the current market price of the security.

Yield curve – A curve showing the relationship between interest rate and government bonds of different maturity.

Yield gap – It is the average yield on equities minus the average yield on bonds. It is a way of comparing the performance of bonds and shares.

Zero-sum game – When the gains made by the winners in an economic activity equals the losses incurred by the losers.