GLOSSARY

Advance Tax:

A percentage of the previous year's tax bill which is paid at the beginning of the new fiscal year and later credited back at its end.

Agribusiness:

Agricultural and livestock production on a large scale, often engaged in by large, multinational companies; also used to refer to the companies themselves.

Arrear:

Usually plural, arrears. Unpaid, overdue debt.

Bad Loan:

An unrecoverable loan; the amount cannot be reclaimed by the lender.

Balance of Payments:

The measure of all the money coming into a country and all the money leaving the country in a given period, usually a year. The balance of payments includes merchandise exports and imports, the measure of which is called the balance of trade, as well as several other factors.

Balance of Trade:

A measure of the value of exports and imports, not including services. When imports exceed exports, there is a trade deficit. When exports exceed imports, there is a trade surplus.

Bank of Issue:

The bank that is given the right to issue and circulate currency in a country.

Barter System:

An exchange of goods and/or services for other goods and/or services, rather than for money.

Bear Market:

A sustained period of negative growth in the stock market.

Bicameral:

A legislative body consisting of two houses or chambers.

Black Market:

An informal market in which buyers and sellers can negotiate and exchange prohibited or illegal goods (such as exchanging local money for foreign currency). Black markets often exist to avoid government controls. See also Informal Sector.

Budget Deficit:

A government budget deficit occurs when a government spends more money on government programs than it generates in revenues. Governments must borrow money or print currency to pay for this excess spending, thus creating potential financial difficulties. See also Budget Surplus.

Budget Surplus:

A government budget surplus occurs when a government generates more revenues than it spends on government programs. Governments can adjust to surpluses by lowering tax rates, paying down the national debt, or stockpiling the money. See also Budget Deficit.

Cadre:

A group of important and influential members of political parties who direct the actions of that party.

Capital Adequacy:

The state of a bank having enough capital to maintain its loans and operating costs.

Capital Flight; also called Capital Outflow:

Money sent abroad because investors fear that economic conditions within a country are too risky.

Capital Good:

A manufactured good used in the production of other goods. For example, factories or machinery used to produce goods are considered capital goods.

Capitalism:

An economic system based on the private ownership of the means of production and on an open system of competitive markets. It is assumed that producers in a capitalist system can use their skills and capital in the pursuit of profit.

Capital Outflow:

See Capital Flight.

Cash Crop:

An agricultural good produced for direct sale on the market.

Centrally-planned Economy:

An economy in which the government exerts a great deal of control over economic planning, including the control of production, the allocation of goods, distribution, and prices. Common in socialist countries.

c.i.f.:

Abbreviation of cost, insurance, and freight; a method of determining the value of imports or exports that includes cost, insurance, and freight in determining the total amount.

Commonwealth of Independent States (CIS):

A loose union of 12 of the former republics of the Soviet Union, excluding Estonia, Latvia, and Lithuania.

Communism:

An economic system in which the means of production and distribution are held in common by all members of the society, and in which the rewards are distributed based on need. In actual communist countries, the state usually controls all the capital and land, and the economy is centrally planned. See also Centrally-planned Economy.

Consumer Good:

A product sold directly to the end user, or consumer, such as food and clothing.

Crawling Peg:

A fixed exchange rate between two currencies which is adjusted incrementally based on the movement of an economic indicator such as inflation.

Currency Board:

An arrangement whereby a currency's value is fixed in some proportion to a strong foreign currency and such an exchange rate is guaranteed by the country's foreign exchange reserves.

Current Account Balance:

The portion of the balance of payments that includes merchandise imports and exports (known as the balance of trade) plus imports and exports of services.

Debt Relief:

Partial or full forgiveness of debts, offered to impoverished countries by lenders, usually after it becomes clear that continued payment on such debt is likely to ruin the country's economy.

Debt Service:

Payment of interest on a loan or other debt. Debt servicing can be very expensive and debilitating for developing countries.

Deflation:

Falling prices across an economy, expressed as a percentage per year. See also Inflation.

Dependency Ratio:

The ratio of pensioners to the number of people employed.

Deregulation:

A lessening of government restrictions on the economy.

Desertification:

The progressive drying of the land.

Devaluation:

An act by the government or central bank which decreases the official price of a nation's currency. When a currency is devalued, it can result in the country's exports becoming cheaper and more attractive.

Direct Tax:

A tax levied directly on individuals or companies, such as income and property taxes. See also Indirect Tax.

Disposable Income:

Those parts of a household income not needed for essentials such as food, healthcare, or housing costs. Disposable income may be saved, invested, or spent on non-essential goods.

Duty:

A tax imposed on imported goods. See also Indirect Tax.

E-commerce:

Economic activity conducted on the Internet.

Ecotourism:

Tourism to natural and cultural areas which tries to minimize environmental impacts.

Embargo:

A prohibition by a government against some or all trade with a foreign nation. See also Sanctions.

Emerging Market:

A country with still evolving economic, social, and political structures that shows evidence of moving toward an open market system.

Emigration:

To leave one's country to live elsewhere.

Enterprise Entry:

The creation of new, predominantly small and medium size enterprises.

Enterprise Exit:

The removal of businesses from an economy, either through bankruptcy or downsizing.

Equity:

The value of all the shares in a company.

Estate Tax:

A tax on inherited property and wealth.

Exchange Rate:

The rate at which one country's currency is exchanged for that of another country.

Exchange Rate Mechanism (ERM):

A mechanism set up in 1978 to handle fluctuations in the exchange rates of various European currencies. Each currency in the ERM may fluctuate only within agreed limits against any other currency.

Exchange Rate Regime:

The mode of determining the exchange rate between the national currency and other major foreign currencies. In a fixed exchange rate regime, a currency is fixed or "pegged" to the currency of another, usually very stable currency, such as that of the United States. In a floating or flexible exchange rate regime, governments allow the value of their currency to be determined by supply and demand in the foreign exchange market.

Excise Tax:

A tax on the sale or use of certain products or transactions, sometimes luxury or non-essential items.

Exclusive Economic Zone (EEZ):

The area extending from a country's coastline over which that country has exclusive control of its resources.

External Debt:

The total amount of money in a country's economy owed to enterprises and financial institutions outside the country.

Fiduciary:

Related to a trust or trusteeship.

Fiscal Policy:

The programs of a national government relating to spending on goods, services, transfer payments, and the tax system.

Fiscal Year:

Any period of 12 consecutive months for which a company or a government calculates earnings, profits, and losses.

Fixed Exchange Rate:

See Exchange Rate Regime.

Floating Exchange Rate:

See Exchange Rate Regime.

Floor Price:

The minimum price for a good or service which normally cannot be further reduced due to political, economic, or trade considerations.

f.o.b.:

Abbreviation of Free on board; a method of determining the value of exports or imports that considers the value of goods excluding the cost of insurance and freight charges.

Foreign Debt:

See External Debt.

Foreign Direct Investment (FDI):

The total value of investment by foreign entities in a country, usually expressed on an annual or cumulative basis.

Foreign Exchange Reserves:

The amount of money a country has in its treasury consisting of currency from foreign countries.

Free Market System:

An economic system based on little government intervention and the freedom of private association and control of goods. See also Capitalism.

Free Trade Zone:

Also called Free Zone. An industrial area where foreign companies may import, store, and sometimes export goods without paying taxes.

Full Employment:

The level of employment at which a minimal amount of involuntary unemployment exists. It is considered the maximum level of employment in an economy.

Fully Convertible Currency:

A currency that can be freely traded in international foreign exchanges for units of another currency.

GDP per Capita:

Gross domestic product divided by the number of people in a country. GDP per capita is a convenient way to measure comparative international wealth.

Gini Index:

An index used to measure the extent to which the distribution of income within an economy deviates from perfectly equal distribution. A score of 0 would mean perfect equality (with everyone having the same level of wealth) and 100 would signify perfect inequality (with a few extraordinarily wealthy people and the large majority living in dire poverty).

Glut:

An excess of goods in a particular market, which typically causes the price of that good to fall.

Grey Economy:

Economic activity that takes place in both the formal and informal economy, meaning that some but not all economic activity is reported to authorities such as tax collectors.

Gross Domestic Product (GDP):

The total market value of all goods and services produced inside a country in a given year, which excludes money made by citizens or companies working abroad.

Gross National Product (GNP):

The total market value of all goods and services produced in a year by a nation, including those goods produced by citizens or companies working abroad.

Guarantor:

An institution or individual that guarantees to pay the debts of another institution or individual in the case of bankruptcy.

Guest Worker:

Persons from a foreign country who are allowed to live in a host country so long as they are employed. Many guest workers send remittances to their native country.

Hard Currency:

Money that can be exchanged on the foreign market and is stable enough to purchase goods from other countries.

Hawking:

Selling wares, often pirated goods, in the informal sector.

Holding Company:

A company that owns or controls several other companies.

Immigration:

To move into a country that is not one's native country.

Import Substitution:

A policy which calls for the local production of goods that have traditionally been imported. The goal of import substitution is to lessen a country's dependence on foreign suppliers.

Income Tax:

A direct tax on an individual's earned income.

Indirect Tax:

A tax which is not paid directly, but is passed on as part of the cost of an item or service. For instance, tariffs and value-added taxes are passed on to the consumer and included in the final price of the product. See also Direct Tax.

Inflation:

A persistent increase in the average price of goods in an economy, usually accompanied by declining purchasing power of the national currency.

Inflation Rate:

The rate at which prices rise from one period to the next.

Informal Sector:

Also called Informal Economy. The part of an economy that lies outside government regulations and tax systems. It usually consists of small-scale and usually labor-intensive activities; it often includes illegal activities. See also Black Market.

Infrastructure:

The system of public facilities, services, and resources in a country, including roads, railways, airports, power generation, and communication systems.

Intermediate Good:

A good used as an ingredient or component in the production of other goods. For instance, wood pulp is used to produce paper.

Internally Displaced Person:

A person fleeing danger (such as war or persecution) who has not crossed international boundaries. Those who relocate to another country are called "refugees."

Joint Sector:

An economic sector in which private enterprise and the government invest jointly.

Joint Venture:

A special economic initiative or company formed by a foreign firm and a domestic company, usually in a developing state. The domestic partner often holds a majority interest, thus allowing the host country to control the amount and kind of foreign economic activity. Can also be a simple joint operation by two or more companies.

Labor Force:

Also called Workforce. The total number of people employed in a country plus the number of people unemployed and looking for a job.

Labor Mobility:

The ability and readiness of workers to move to regions or sectors of higher growth within a country or economy.

Levy:

A tax based on the assessed value of personal property and/or income.

Liberal Economy:

An economy in which markets operate with minimal government interference and in which individual choice and private ownership are the guiding forces.

Liberalization:

The opening of an economy to free competition and a self-regulating market, with minimal government-imposed regulations or limitations.

Liquidity:

Generally, the amount of money on hand. When related to government, it refers to the amount of money in circulation.

Macroeconomics:

Economic issues large enough to impact the nation as a whole.

Market Capitalization:

The total market value of a company, expressed by multiplying the value of a company's outstanding shares by the current price of the stock.

Marxism:

A set of economic and political theories based on the work of 19th century theorists Karl Marx and Friedrich Engels that holds that human history is a struggle between classes, especially those who own property and those who do not (the workers). Marxism provided the theoretical basis for the economic systems of modern communism and socialism.

Microcredit:

The lending of small amounts of startup capital to the very poor as a way of helping them out of poverty. The World Bank and other aid agencies often make mircrocredit loans to small-scale entrepreneurs in the developing world.

Monetary Policy:

A government policy designed to regulate the money supply and interest rates in an economy. These policies are usually determined by the central bank or treasury in order to react to or to anticipate inflationary trends and other factors that affect an economy. They are said to be "tight" when interest rates are raised and other measures are implemented in an effort to control inflation and stabilize currency values.

Monetized Economy:

An economy based on money as opposed to barter.

Money Laundering:

A method used by criminal organizations to hide income gained from illicit activities, such as drug smuggling, by manipulating banks to provide a legitimate explanation for the source of money.

Monopoly:

A company or corporation that has exclusive control over the distribution and availability of a product or service.

Multinational Corporation (MNC):

A corporation which has economic ties to or operations in two or more countries.

National Debt:

The amount of money owed to lenders by a government. The debt occurs when a government spends more each year than it has raised through taxes. Thus, to spend more than it has, the government must borrow money from banks or through the issuance of bonds.

Nationalization:

The movement of privately-owned (and usually foreign-owned) companies into government ownership. Companies have often been nationalized by the developing countries whose government argued that the foreign firms involved did not pay their fair share of the profits to the host country and unfairly exploited it in other ways.

Nomenklatura:

The elite members of the Communist Party in communist nations, who were often given privileges not extended to ordinary citizens.

Nomenklatura Privatization:

A system of privatization in communist nations that openly or covertly transferred ownership of state assets to the nomenklatura.

Non-performing Loan:

A delinquent loan or one in danger of going into default.

Offshore Banking:

Banking operations that offer financial services to people and companies from other countries, usually with associated tax benefits. Offshore banking operations are often suspected as a cover for money laundering or other illegal financial activities.

Overheated Economy:

An economy that is growing at a very high annual rate, which leads to low interest rates, a high borrowing rate, and an abundance of money in the economy—all of which can lead to inflation.

Parastatal:

A partly or wholly government-owned enterprise.

Participation Rate:

The ratio between the labor force and the total population, which indicates how many people are either working or actively seeking work.

Pensioner:

A retired person who lives off a government pension.

Price Control:

Artificial limitation on the prices of goods set by the government, usually in a centrally-planned economy.

Price Index:

An index that shows how the average price of a commodity or bundle of goods has changed over a period of time, usually by comparing their value in constant dollars.

Primary Commodity:

A commodity, such as a particular crop or mineral, which is a natural rather than manufactured resource.

Private Sector:

The part of an economy that is not directly controlled by the government, including businesses and households.

Privatization:

The transition of a company or companies from state ownership or control to private ownership. Privatization often takes place in societies that are making a transition from a socialist or mixed-socialist economy to a capitalist economy.

Procurement:

The purchase of goods or services by the government.

Progressive Taxation:

An income taxation system in which tax rates rise in accordance with income levels. Thus, a person making a large salary will be taxed at a higher rate than someone who makes less money.

Proportional Representation:

An electoral system whereby the number of legislative seats allocated to a particular political party is decided in proportion to the number of votes that party won in an election.

Protectionist Policy:

A government policy used to protect local producers from competition from imported foreign goods. Countries may erect various trade barriers such as tariffs or quotas in an effort to protect domestic firms or products.

Public Sector:

The part of the economy that is owned and operated by the government.

Purchasing Power Parity (PPP):

The purchasing power parity method attempts to determine that relative purchasing power of different currencies over equivalent goods and services. For example, if it costs someone in the United States US$300 to buy a month's worth of groceries, but it costs someone in Ghana only US$100 to buy the same amount of groceries, then the person in Ghana can purchase three times as much for the same amount of money. This means that though the average citizen of Ghana may earn less money than the average citizen of the United States, that money buys more because goods and services cost less in Ghana. The PPP calculation attempts to account for these differences in prices and is used to calculate GDP and GDP per capita figures that are comparable across nations. Note: GDP figured at purchasing power parity may be three or more times as large as GDP figured at exchange rate parity.

Pyramid Scheme:

Fraudulent investment strategy involving a series of buying and selling transactions that generate a paper profit, which, in turn, is used to buy more stocks. They were prevalent in Eastern Europe following the fall of the Soviet Union, and preyed on the average citizen's lack of understanding of free-market investment transactions.

Real GDP:

The gross domestic product of a country expressed in constant prices which are determined by a baseline year. Real GDP thus ignores the effects of inflation and deflation and allows for comparisons over time.

Real Wage:

Income measured in constant dollars, and thus corrected to account for the effects of inflation.

Recession:

A period of negative growth in an economy, usually defined as two consecutive quarters of negative GDP growth. A recession is characterized by factors such as low consumer spending, low output, and high unemployment.

Re-export:

An imported good that does not undergo any changes (e.g., not turned into a new product) before being exported.

Relative Income Poverty:

This is a measure of the overall equality in income among employed workers. Relative income poverty is high when a high percentage of the sum of total income is concentrated in the hands of a small percentage of the working population, and it is low when income is more equally spread among all workers.

Remittance:

Money that is sent back to people, usually relatives, living in the home country of a national working abroad.

Repatriation:

Taking money out of a foreign country in which it had been invested and reinvesting it in the country where it originated.

Reserve Ratio:

The percentage of a bank's assets in reserve against the possibility of customers withdrawing their deposited funds. Some governments impose a minimum percentage, usually enforced by a central bank in proportion to the total amount of currency in circulation.

Restructuring:

A catch-all phrase for turning around a company, involving cutting costs, restoring finances, and improving products.

Retail:

The sale of goods and services to individuals in small amounts.

Sanction:

A penalty, often in the form of a trade restriction, placed on one country by one or several other countries as a penalty for an action by the country under sanctions. Sanctions are designed to force the country experiencing them to change a policy, such as its human rights practices.

Shadow Economy:

Economic interactions that are invisible to standard accounting and taxing procedures. See Informal Economy.

Sharecropper:

A farmer who works someone else's land in exchange for a share of the crops they produce.

Smallholder:

A farmer who has only a very small farm or plot of land.

Social Security Tax:

A direct tax levied partly on the worker and partly on the employer in order to provide funds for a nation's social welfare system.

Social Welfare System:

A set of government programs that provides for the needs of the unemployed, aged, disabled, or other groups deemed in need of government assistance.

Socialism:

An economic system in which means of production and distribution are owned by the community, and profits are shared among the community. Countries with socialist economies put a premium on centralized control over an economy rather than allowing market forces to operate, and tend to have a relatively equal distribution of income.

Solvency:

Financial stability.

Statist Economic Policy:

A policy in capitalist or quasi-capitalist countries that favor state control or guidance of companies or sectors of the economy that are thought to be vital.

Strategic Industry:

An industry considered extremely important to the well being of a country.

Structural Adjustment Program (SAP):

A set of economic programs and policies aimed at stabilizing the overall structure of a troubled economy. Structural adjustment programs are often required by international lending agencies such as the World Bank and the International Monetary Fund. These programs often involve devaluing the currency, reducing government spending, and increasing exports.

Structural Unemployment:

Unemployment caused by a mismatch between the needs of employers and the skills and training of the labor force.

Subsidy:

A payment made by a government to an individual or company that produces a specific good or commodity. Some countries subsidize the production of certain agricultural crops, while others may subsidize mass transit or public art.

Subsistence Farming:

Farming which generates only enough produce to feed the farmer's family, with little or nothing left over to sell.

Tariff:

An indirect tax that is applied to an imported product or class of products.

Tax Haven:

A place where investors shield their money from the national taxes of their own country. See also Offshore Banking.

Tax Holiday:

A period of time in which businesses or investors enjoy exemptions from paying taxes. Tax holidays are offered as a lure to investment or business development.

Technocrat:

Government official who is expert in specialized—usually technological—areas.

Trade Deficit:

See Balance of Trade.

Trade Surplus:

See Balance of Trade.

Transfer Payment:

Cash paid directly to individuals by a government, usually as part of a social welfare system.

Transfer Pricing:

A method used by foreign firms to overprice their overseas costs and thereby reduce their local tax liabilities.

Treasury Bill:

Also called a T-bill. A guaranteed government investment bond sold to the public. They usually reach maturity after short periods, for example, three months or six months.

Trickle Down:

An economic theory that contends that tax relief and other governmental incentives should be given primarily to the highest income earners in a society, on the assumption that their increased economic investment and other activity will provide benefits that "trickle down" to the lower-and middle-income wage-earners.

Turnover:

The measure of trade activity in terms of the aggregated prices of all goods and services sold in the country during a year.

Two-tier Economy:

An economy where skilled or educated workers enjoy a high standard of living, but unskilled workers are trapped in poverty.

Underemployment:

A situation in which people are not reaching their economic potential because they are employed in low-paying or part-time jobs. For example, an engineer who is working in a fast food restaurant would be said to be experiencing underemployment.

Underground Economy:

Economic transactions that are not reported to government, and therefore not taxable. Informal sectors and black markets are examples of underground economic activity.

Unicameral:

A legislative body consisting of a single house or chamber.

United Nations Development Program (UNDP):

The United Nations' principal provider of development advice, advocacy, and grant support.

Value Added:

The increase in the value of a good at each stage in the production process. When a company adds value to its products it is able to gain a higher price for them, but it may be liable for a value-added tax.

Value-added Tax (VAT):

A tax levied on the amount of value added to a total product at each stage of its manufacture.

Vertical Integration:

Control over all stages of the production and distribution of a certain product. For example, if one company owns the mines, the steel plant, the transportation network, the factories, and the dealerships involved in making and selling automobiles, it is vertically integrated.

Voucher Privatization:

A system for selling off state-owned companies in which citizens are given "vouchers" which they may invest in such companies. This system was devised to allow all citizens the opportunity to invest in formerly state-owned businesses; however, in practice many citizens invest their vouchers in voucher funds, which are professionally managed investment groups who amass vouchers in order to exert control over the direction of companies.

Welfare State:

A government that assumes the responsibility for the well-being of its citizens by providing institutions and organizations that contribute to their care. See also Social Welfare System.

Workforce:

See Labor Force.