Terms From The ECONOMIST

Capital: It is one of the four essential ingredients of economic activity, the FACTORS OF PRODUCTION, along with LAND, LABOUR and ENTERPRISE. Capital takes different forms. A firm’s ASSETS are known as its capital, which may include fixed capital (machinery, buildings, and so on) and working capital (stocks of raw materials and part-finished products, as well as money, that are used up quickly in the production process). Financial capital includes money, BONDS and SHARES. HUMAN CAPITAL is the economic wealth or potential contained in a person, some of it endowed at birth, the rest the product of training and education, if only in the university of life. The invisible glue of relationships and institutions that holds an economy together is its social capital

Capital adequacy ratio: The ratio of a Bank’s Capital to its total Assets, required by regulators to be above a minimum level so that there is little risk of the bank going bust.

Capital markets: Markets in Securities such as Bonds and Shares. Governments and companies use them to raise longer-term Capital from investors.

Cartel: An agreement among two or more firms in the same industry to co-operate in fixing prices and/or carving up the market and restricting the amount of output they produce.

Central bank: A guardian of the monetary system. A central bank sets short-term interest rates and oversees the health of the financial system, including by acting as lender of last resort to commercial banks that get into financial difficulties.

Classical economics: The dominant theory of economics from the 18th century to the 20th century, when it evolved into NEO-CLASSICAL ECONOMICS. Classical economists, who included Adam Smith, David Ricardo and John Stuart Mill, believed that the pursuit of individual self-interest produced the greatest possible economic benefits for society as a whole through the power of the INVISIBLE HAND. They also believed that an economy is always in EQUILIBRIUM or moving towards it.

Collateral: An Asset pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to meet the required interest charges or repayments.

Commodity: A comparatively homogeneous product that can typically be bought in bulk. It usually refers to a raw material – oil, cotton, cocoa, silver – but can also describe a manufactured product used to make other things, for example, microchips used in personal computers. Commodities are often traded on commodity exchanges.

Complementary goods: When you buy a computer, you will also need to buy software. Computer hardware and software are therefore complementary goods.

Credit: A loan extended or taken by, for example, delayed payment of an invoice.

Credit crunch: When banks suddenly stop lending, or bond market liquidity evaporates, usually because creditors have become extremely risk averse.

Debt: An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements.