Economic Terms

The utility or pleasure that individuals experience by consuming a good or service.

1,000 x 1m

A secondary market where cash transactions take place "off the books" to side step price controls and excessive indirect taxes or to supply goods that are prohibited. A black market may also emerge where supply is deficient and consumers that acquire the goods are encouraged to re-sell the goods at a far higher price.

 

 

 

A bond is a contract the facilitates a large loan. It will set out the terms of the loan including the interest rate (coupon), repayment date (redemption) Corporate bonds relate to loans made to businesses while government bonds relate to loans made to governments.  

Wealthy individuals can invest in bonds to directly lend money to governments and big businesses. Individuals that have saved money will usually pool their savings in investment or pension funds that then invest in corporate or government bonds. The total value of debt in UK corporate and government bonds is enormous exceeds £2 trillion i.e. 2m x £1m.

Bonds are usually used to borrow very large amounts of money when it is more convenient and cost effective for an organisation to borrow from the market as a whole rather than from individual banks.

Also known as the principal. Is the amount of money that a bondholder will receive once a bond reaches its maturity date.

The yield on a bond is the annual coupon payment expressed as a percentage of the market price of the bond.

It illustrates the percentage of the coupon payment the investor is being rewarded with relative to the value of the bond. Higher bond yields illustrate that the investor will receive a large fraction of the value of their bond realtively early on. Bond yields have an inverse relationship with the market price of the bond as well as interest rates and can be calculated using the formula below:

 

 

A period of economic activity characterised by an increase in the rate of real output growth and increasing inflation.

As the diagram below illustrates this rise in economic activity will eventually lead to output being pushed above the full employment level, which is unsustainable. Therefore this is what causes inflationary pressures to be introduced to reign in the boom.

When the Government implements policies that fail to maintain steady growth and instead it achieves periods of rapid growth (boom) followed by decline (bust).

In normal cycles of economic activity an upturn leads to a boom followed by a downturn in which a recession leads to a trough which indicates the economy has gone bust. This description is used because low levels of economic growth will usually mean that tax revenues fall, government spending rises and the government is forced to borrow money to cover the shortfall in its finances. In extreme cases a sustained downturn may mean that a government is not able to borrow money from financial markets and will need to seek a bailout from organisations such as the IMF.

Although the real economy's economic cycle does not operate as smoothly as depicted in the graph, the general pattern seen is similar. The depth and duration of the different cycle phases will largely depend on the effectiveness of fiscal and monetary policies implemented by the government and central bank. Government's are not always prepared to pursue the fiscal and monetary policy that is necessary to control economic cycles. This is often the cause of extreme and prolonged downturns and the need to obtain bailout funding.

When supply in a particular part of the economy is insufficient and this holds back growth in other parts of the economy.

Is the idea that when individuals make decisions, their rationality is limited by the information they have, the cognitive limitations of their minds, and the time available to make the decision.