world economy glossary and definitions

Kimberly
Amadeo

Economic and Financial Glossary

1997 Asian Currency Crisis - In 1997, currency speculators panic in
Asia, leading to the collapse of the economies. This explains why
Asian countries keep high foreign reserves as a hedge against
further runs.
Asset Allocation - All the baskets that your eggs are in, and how
many of your eggs are in each basket.
Asset-backed Commercial Paper - Corporate debt that matures
within a year and is backed by assets such as mortgages, auto
loans and other commercial loans.
Asset Bubble - When the prices of assets are over-inflated due to
excess demand.
Asset Price Inflation - Rising prices in assets, such as housing and
stock prices, that aren't included in the Fed's inflation measurement
tools. Dangerous because bubbles have occurred, and the Fed
continued to lower rates and feed inflation in these sectors.
Basis Points - The percentage that the Fed raises bank rates. For
example, an increase of 25 basis points is the same as an increase
of .25 to the Fed Funds rate.
Bolivarism - A movement led by Venezuelan President Hugo Chavez
which advocates unity among South American countries in an
attempt to gain local power to resist U.S. hegemony. It is named
after Simon Bolivar, who liberated South America from the Spanish.
CAFTA-DR (Central American Free Trade Agreement - Dominican
Republic) - CAFTA is a free trade agreement between the U.S. and
Honduras, El Salvador, Nicaragua, Guatemala, Costa Rica and the
Dominican Republic.
Call Option - The right to buy stock at an agreed upon price by a
certain date. The investor hopes the price of the stock goes up by
the date, so they can buy them at the agreed upon price, and sell
them at the (higher) market price.
Carbon Emissions Trading - When a carbon producing company
buys or sells an allotment of allowable emissions. Companies may
either reduce their emissions and sell the surplus or buy them in the
marketplace.
Central Bank - Influences economic growth and inflation by
adjusting liquidity through short term interest rates or the amount of
money banks must keep on reserve.
Chiang Mai Initiative - An agreement among the ASEAN+3 countries
to support each other's current account reserves in the event of
speculative capital outflows. This is to avoid another market crash
similar to that which happened in 1997.
Commodities - Hard assets, such as gas, oil, gold,silver, platinum
and copper. Most commodities trading is done through futures
contracts so that the trader doesn’t have to actually take
possession of the commodity.
Comparative Advantage - What makes a country inherently more
competitive. For example, India has highly trained, young, yet
relatively cheap labor force which allows it to provide high end
services at a low cost.
Competitive Advantage - The inherent qualities of a company that
allows it to provide a particular benefit better than its competitors.
Covenant-lite Loans - Bank loans with few covenants, or
restrictions, that banks normally place upon the borrowers, such as
debt ceilings or repayment schedules.
Covered Option - A short call or put option position that is covered
by the sale or purchase of the underlying futures contract or other
underlying instrument. For example, in the case of options on
futures contracts, a covered call is a short call position combined
with a long futures position. A covered put is a short put position
combined with a short futures position.
Current Account Deficit - The total trade deficit plus how much
money we owe other countries and investors to pay for the trade
deficit.
Derivatives - Complicated financial instruments, like options and
futures contracts, that derive their value by reference to an
underlying asset or index.
Developed Markets - Usually referring to the U.S., Europe, Japan
and Russia. These are more mature economies that will grow more
slowly, and so have less growth opportunity for investors, but are
also less risky.
Diversification - Basically, not having all your eggs in one basket. Lo
wering your financial risk by having your assets in things that aren’t
affected by the same trends.
Doha Round of Trade Talks - Started in 2001, the Doha round of
trade talks was designed to reduce trade restrictions to help
developing nations. Instead, it has stalled due to developed
countries’ unwillingness to remove farm subsidies. Developing
countries are afraid that, if they open their markets to these low-
priced goods, their farmers will be put out of business.
Dumping - Selling goods below cost to gain market share in a
foreign country. Usually supported by the government with subsidies
and low cost loans.
Economies of Scale - The ability of larger companies to produce
things more cheaply per unit because they produce so many.
Emerging Markets - Usually referring to countries that have more
raw materials to develop, and are growing faster than the developed
markets. They usually include Brazil, India, South Korea, South
Africa,Mexico, Taiwan, Indonesia, Egypt, Turkey, and Hong Kong.
EUA (European Allowance) - An allotment of carbon that the EU
allows a company to produce. Companies that produce less can sell
the EUA on the market to companies that produce more than their
allotment.
Farm Bill - The U.S. farm bill is a comprehensive piece of legislation
that revises 60+ laws that govern farm support, food assistance,
agricultural trade and rural development. The farm bill is enacted
every 5 years and implements U.S. agricultural policy.
Fast-track Trade Promotion Authority - Gave President Bush the
authority to negotiate trade agreements, giving Congress only the
ability to approve or disapprove, and not attach amendments.
Expired
FDI (Foreign Direct Investment) - The investment foreign countries
have made in a country’s economy.
Foreign Reserves - A country's reserve of foreign currencies and
gold.
Free Trade Agreement - An agreement between countries to
eliminate tariffs and other trade impediments.
Futures Contract - An agreement to purchase or sell a commodity
for delivery in the future at an agreed upon price that may be
satisfied by delivery (hardly ever used) or offset (a compensating
option).
Globalization - A highly controversial trend towards freedom of trade
between countries all around the world. Underdeveloped countries
worry that they cannot compete fairly.
Hang Seng Index - Hong Kong’s blue chip stock index.
Hedge - Reduce financial risk through protective purchases in
investments that will offset the risk.
Hedge Fund - A privately owned investment fund, whose managers
usually get a percent of any gains. To achieve above market
returns, they use sophisticated high risk derivatives. The primary
investors are wealthy individuals and institutions.
Hegemony - The leadership or predominance of one country over
others, usually used to describe the United States' relationship to
other countries in the world.
Inflation Targeting - When central banks set monetary policy to
keep inflation within a designated range.
Intifada - Arab term meaning uprising, applied to Palestinian
rebellions against Israeli occupation.
Inverted Yield Curve - When the Fed Funds rate pays higher
interest than the 30-year Treasury Bond.
IPO (Initial Public Offering) - The first time a company sells stock on
the stock market, known as going public.
Islamist - Muslim fundamentalism that advocates a return to Islamic
values in government and Sharia law.
Kospi Index - South Korea’s major stock index.
Kyoto Protocol - Adopted as part of the UN International Convention
on Climate Change in 1997 in Kyoto, Japan. Participating countries
agree that, between 2008-2012, they will emit 5% less greenhouse
gases (CO2, CH4, N2O, HFCs, PFCs, and SF6) than they did in
1990.
LBO (Leveraged Buyout) - Using a loan to buy another company.
Usually the loan is secured by the assets of the target company.
Leverage - Controlling a large amount of stocks with a small amount
of the investor’s money, through either derivatives or loaned money.
Liquidity - Amount of money, or capital, that is circulating in the
economy and available for investment.
Marshall Plan - The U.S. spent $82 billion in economic and military
aid between 1948-1961 to postwar Europe to prevent starvation
and the spread of Communism. It was named for Secretary of State
George C. Marshall, who received a Nobel Peace Prize for it.
mcf - A measure of gas usage equivalent to one thousand cubic
feet of natural gas.
Mercosur - A trade alliance formed in 1991 between Brazil,
Argentina, Paraguay, and Uruguay. Chile and Bolivia are associate
members. Venezuela wants to join.
Mortgage-backed Securities - A package of mortgages that are
resold to investors. This removes constraints on banks to make
sure the loans are to qualified borrowers.
NAFTA (North American Free Trade Agreement) Signed in 1992,
and ratified in 1994, by the United States, Canada, and Mexico. It
called for the gradual elimination of tariffs and certain other trade
barriers between the three nations.
Nationalize - When a government takes over ownership of a
business, usually a utility or oil company. The former private owner
may be allowed to retain partial ownership.
NATO (North Atlantic Treaty Organization) - An alliance of 26
countries roughly bordering the north Atlantic Ocean - Canada, U.
S., most EU members, and Turkey. NATO was established after
World War II as part of the United Nations. Originally designed to
defend only member nations, it expanded its role to include the war
on terrorism after 9/11, which was considered an attack on the U.S.
Nikkei 225 - Japan’s stock index.
Nuclear Non-Proliferation Treaty - Signed in 1968, and made
permanent in 1995 by almost all countries, except India, Israel,
Pakistan and North Korea, who are suspected of having or
developing nuclear weapons in defiance of the treaty. Under the
treaty, nations that have nuclear weapons agree (1) not to help
countries that do not already have such weapons acquire them; (2)
to help non nuclear-armed countries benefit from the peaceful uses
of nuclear energy; and (3) to seek nuclear disarmament. Also,
countries without nuclear weapons agree (1) not to acquire nuclear
weapons and (2) to allow the International Atomic Energy Agency
(IAEA) to inspect nuclear facilities and materials in each country.
Option - A derivative that gives the owner the right to buy or sell
stock at an agreed upon price within a certain period of time.
PNTR (Permanent Normal Trade Relationship) - Denotes non-
discriminatory trading relationship. In other words, all countries with
PNTR have the same, lower tariffs than countries without. Only a
few countries do not have this status, and are thus at a trading
disadvantage.
Private Equity Firms - Companies that raise money through private
investors, including governments and pension funds, to buy
ownership (equity) in corporations.
Privatization - When a government sells all or part of a state-owned
company, usually a utility, to a private company.
Purchasing Power Parity - How well someone is able to live in a
country. For example, if people in China make half of what people in
the U.S. make, but Coca-Cola only costs half as much, then they
have equivalent purchasing power parity.
Put Option - The right to sell stock at an agreed upon price at any
time up to an agreed upon date. The investor hopes the stock price
goes down by the date, so they can buy it at the lower market rate,
and sell it at the (higher) agreed upon price.
Roadmap for Peace - The Quartet's suggestion for MIddle East
peace: Israel and Palestine establish two separate countries with
internationally recognized boundaries, Israel withdraw from occupied
territories, and Palestine must recognize Israel’s right to exist.
SENSEX - India’s major stock index, the Bombay Stock Exchange
Sensitive Index, is comprised of 30 stocks.
Shanghai Composite Index - Mainland China’s major stock index.
Sharia - Muslim religious law.
Short sale - The promise to sell a stock that the seller does not now
own at an agreed upon price. The investor hopes the stock price
declines, so they can buy it at the lower price and sell it at the
(higher) agreed upon price.
Sovereign Wealth Funds - An investment pool of foreign reserves
which a country's government invests in assets.
Tariffs - Taxes levied against imports from another country.
Third World - Economically developing countries in Asia, Africa and
South America.
TIPS (Treasury Inflated Protected Securities) U.S. Treasury Bonds
that have the prinicipal re-adjusted in response to the Consumer
Price Index. As inflation increases, the value of the bond increases.
Trade Deficit - When one country imports more goods than it
exports. It usually has to borrow from other countries to pay for the
imports.
Trade Promotion Authority - Gave President Bush the authority to
negotiate trade agreements, giving Congress only the ability to
approve or disapprove, and not attach amendments. Expired June
30, 2007.
VAT (Value Added Tax) - Most European countries have this tax,
which allows them to tax the value-added that other countries have
added to an import.
Volatility - How much and how quickly the price of an asset changes.
High volatility means the asset is risky, low volatility means it is safe
relative to the market.
Yen Carry Trade - When currency speculators borrow in one
country’s currency that have a low interest rate to reinvest in
currencies and assets in countries that have a higher rate of return.
Many experts believe that some of the global liquidity is due to the
carry trade in yen, which has close to a zero interest rate cost.
Washington Consensus - A 1980's IMF doctrine that said that
deregulation, privatization, and open trade with primarily the U.S.
would help Latin America increase economic growth. Many of those
countries now feel they were exploited, which helps explain why they
are attracted to China as a trading partner.