What Is a Recession and Other Economic Terms You Should Know
With the memories (and aftermath) of the 2007-2009 Great Recession still painfully fresh for too many families, worries about recent economic fluctuations are on the rise. The US economy contracted again in the second quarter of this year, the Bureau of Economic Analysis announced today, and many pundits and ordinary Americans see a recession looming. You may be among them, or you may be wondering what the hell “gross domestic product” and “recession” mean, not to mention how nervous you must be about it.
Do not despair. Knowledge is power, so let’s look at some economic terms you should know. These terms are from the Federal Reserve Bank of St. Louis , CORE Econ and The Economist .
Full Advantage
A person or country has an absolute advantage if the resources they use to produce a good are less than those of any other person or country. (Input, defined below, is any resource used to create goods or services, such as labor, materials, or equipment.)
Adjusting gap
It refers to the delay between an external change in labor market conditions and the movement of the economy towards equilibrium as a result. Or how long it takes the market to adjust to something new, such as a labor shortage.
Arbitration
It is the practice of buying a product at a low price in one market to sell it at a higher price in another. Essentially, merchants take advantage of lower prices in one country or region and then bring the goods they received at a low price to a country or region where those goods can make them more money. As long as the value of the trade is below the price gap, they will make a profit. The term is also used in promotions. For example, shares listed on both the London Stock Exchange and the New York Stock Exchange may be subject to arbitrage.
Assets
An asset is something that is owned and has value. It will have a yield or some other value for the owner. The individual, corporation or country that owns the asset is expected to benefit from it in the future. For example, if you own a house, it is an asset.
Bank rescue
The term is familiar to anyone who knows about the Great Recession, but a bank bailout occurs when a country’s government buys a stake in a bank or otherwise intervenes to prevent its collapse. When discussing salvation, you will also hear the term “injection” which means the same thing.
Bankruptcy
This happens when the court decides that the debtor cannot make payments to the creditor. In America, the bankruptcy code protects firms from creditors and is friendly to borrowers. In other countries, bankrupt firms close faster and debts are repaid as assets are sold off. Bankruptcy approaches in each country are important to its economic situation, as unpaid payments are bad for bottom lines, as well as frustrating would-be entrepreneurs.
Gap in negotiations and bargaining power
The economy is a complex field, but the workforce is at the core of earning and spending money. Workers are necessary and, as a result, can bargain to some extent (especially if they are unionized ), capitalizing on their value as an economic engine for their own self-interest. The bargaining gap is the difference between the real wage that companies are willing to offer to give workers an incentive to do their job and the real wage that allows them to maximize profits. Trading power is the degree to which someone has an advantage in obtaining a larger share of the profits.
Connection
It is a type of interest-bearing financial asset in which the issuer promises to pay the holder a certain amount over time. Bonds are issued by governments, companies and some specialized organizations and are an alternative option for issuers to raise money, in addition to selling shares or obtaining bank loans.
broad money
This applies to all money in circulation: the sum of bank money and money owned by the non-bank population.
Capitalism
This is the American economic system. The main form of economic organization is the firm, where private owners of capital hire workers to produce goods and services for profit. In capitalist economic systems, private property, markets, and firms are the primary economic institutions.
Capital
Capital refers to cash or liquid assets that are held or acquired to meet expenses. Essentially, this includes all assets of a company that have a monetary value. From a budgeting point of view, capital refers to cash flows. This is the amount of money used to start a business, invest to make more money, or buy assets.
Consumer Price Index (CPI)
It is a measure of the general price level that consumers have to pay for goods and services. It measures the average change over time in prices paid.
Credit
A loan is a transaction between two parties in which one, the lender or lender, provides the borrower with money, goods, services, or collateral. In return, the borrower promises to make future payments in respect of what has been lent. You are probably familiar with credit cards and your credit score, so you get the idea.
Default
Default is the failure to make the required payments on a debt, whether it be default on interest or principal, and whether the debt is a loan or a security. Individuals and companies can default, but so can entire countries.
Requirement
Demand is an economic concept that describes the desire of the consumer to purchase goods or services, as well as their willingness to pay a certain price for them. You often hear this used with the word “offer” which refers to how much of a particular product or service is available. The price of widely available goods tends to be lower because demand is lower, but when something becomes scarce, if people are willing to pay more for it to get it, prices will rise.
Depreciation
This is a gradual loss in the value of an asset. This can happen because the asset is in use (for example, when the house is thoroughly vandalized by the family but not repaired), or because the asset is outdated (think old technology, like your computer from the 1990s). ). Conversely, appreciation occurs when an asset is worth more over time, whether it is because it has been well preserved or because it has become increasingly rare.
Derivative
A derivative is a financial instrument that can be traded. Its value is based on the performance of underlying assets such as stocks, bonds or real estate. Derivative payments are not derived from holding the cash flows of any one company. Basically, they are influenced by external sources, so there is some risk.
diminishing returns
As investment in an area increases, the rate of return on investment cannot continue to rise. In effect, once the optimum performance level is reached, output will decrease. That’s why we basically (try to) stick to the 40-hour work week: productivity goes down, so returns go down after workers reach a certain limit.
donation
A person’s giftedness is facts about him that can affect his income. This may include their physical condition (assets) or stock portfolio (shares), as well as their level and quality of education, special training, work experience, citizenship, nationality, gender, social class, and state employment benefits.
Equilibrium
It refers to the combination of economic variables, such as price and quantity, to which economic processes drive the economy. It is self-reproducing and does not change until an outside force changes it. When discussing the market, equilibrium means that there is no tendency for the quantity of things bought and sold to change.
Impartiality
Equity refers to the investment of a person or company in a project. This is the value of the investment that would be a return to the individual or shareholders if all of the company’s assets were liquidated and the company’s debts were paid. In essence, it is a personal stake in a company or an investment.
Gross domestic product (GDP)
It’s actually a very simple concept: GDP refers to the total value of goods produced in a country and services provided there in one year.
Government spending
Any government spending to buy goods and services is government spending.
Human capital
As mentioned, employees are the heart of finance. Human capital refers to the knowledge, skills, attributes and characteristics that determine the productivity and earnings of workers. Investments in human capital (education, training and socialization) can increase productivity at the individual level, leading to economic growth.
Inflation
You know what inflation is because we live with it every day, but its definition is any increase in the general price level in an economy. It is measured throughout the year, so when we, for example, discuss gas prices, we compare the current price in the region with what it was in the same region a year ago. Thus, inflation-adjusted prices are prices that take these changes into account. The cost of production rises during periods of inflation, so do the cost of goods and services.
Interest
Interest is the monetary payment associated with the privilege of borrowing money. Basically, when you take out a line of credit or a loan, you have to buy it, so you get back what you borrowed plus interest, which is basically the fee you pay to get all that money up front. You can also earn interest on your own investments in the market.
Investments
Investment is the purchase of goods that will not be consumed immediately but will be used over time to create wealth. It may refer to an asset purchased with the intention of making more money in the future. Buying shares or a house at low prices is considered an investment because hopefully when you sell these things you will make a profit. The problem, of course, is that the market will be influenced by external factors and you could end up losing money.
Work force
This is the number of people in a given population who are of working age and work outside the household. It also includes those who are unemployed but work to get a job. Thus, the employment rate refers to how much of the labor force is working, and the unemployment rate refers to how much of the workforce is not working.
Lending rate
The lending rate refers to the average interest charged by commercial groups to both firms and households.
Liquidity
The ease with which any asset or security can be converted into cash without affecting its market price is known as liquidity. Thus, cash is the most “liquid” asset. The faster you can turn something into cash, the more liquid it will be, so stocks and bonds that can be sold quickly by a broker are also highly liquid, as are gold coins or collectibles that can be sold easily. If something cannot be exchanged for cash quickly enough to prevent financial loss, liquidity risk arises.
Field
Margin refers to the difference between the cost of producing a good or service and the price it is sold. This is the ratio of profit to revenue. If it costs $1 to produce one slice of pizza and then sells that slice for $2, the profit margin is $1.
Market
In economics, we often talk about “the market”. These are the means by which goods and services are exchanged. Buyers and sellers interact in the market, but the market is impersonal.
Mortgage
If you own a house (or even dream of one), you know what a mortgage is: it’s an agreement between a borrower and a lender that gives the lender the right to take your property if you don’t pay it back with interest. Mortgage-backed securities (MBS) are financial assets that use mortgage loans as collateral.
Net
The network is often used in the economy. It refers to the amount of something that comes out after taking into account two or more variables, so think of it as a way of describing the remaining value of something after taking into account certain factors. For example, net income refers to total income minus depreciation. Net worth refers to assets less liabilities, which are the outstanding amounts of money owed to an individual or entity.
Pareto
It’s a little tricky, but every time you hear “Pareto” it refers to the Pareto Criterion, and you can assume that this means that none of the participants will be worse off. So, if something is Pareto dominant, it means that one party involved in a transaction or exchange may be in a better position than the other, but neither of them will be in a worse position. A Pareto improvement is a change that benefits at least one party without harming anyone else.
Price gap
A price gap is the difference between the price of a good in the country that exports it and its price in the country that imports it, including shipping costs and trade taxes. Ideally, when global markets are in competitive equilibrium, the difference will consist entirely of trading costs. (This is closely related to arbitration.)
prudential policy
Any policy that emphasizes reducing the likelihood of a catastrophic outcome, even if it is costly, is a prudential policy. It is better to spend a little more time and money to avoid disaster than to move fast and risk going broke. It comes from the word “prudent”, which means caution and foresight.
recession
A recession is a period when output declines. Recessions end when the economy starts growing again, but a recession can still take place when the economy is growing if output is below normal levels. In this case, the process does not end until production returns to normal. If GDP falls for two quarters in a row, this is an indicator of a recession, but this is not the official definition of a recession; a recession is usually officially declared by the National Bureau of Economic Research , a group founded in the 1920s (the Biden administration has recently gotten into hot water on social media and with pundits on the right for controversy over the issue, but that’s how recessions have long been defined). Trade and industrial activity declines during a recession, which means job losses are likely as well as inflation.
Share
A share is a part of some assets that can be traded. The capital of the company can be divided into equal parts. The owners of these shares are entitled to a portion of the profits.
Stock
A share is a security that represents the ownership of a share of a corporation or issuing company. Shares are divided into the “shares” mentioned above. If you own shares in a public company, you really own a small part of that company, and the more shares you have, the more of the company you own. If the stock rises in price, your investment will generate more profit when you sell it. If it decreases, you will lose money. Stocks and shares are traded alongside other financial assets on a stock exchange.
Solvent
A firm or individual is considered solvent when their net worth is positive or zero. If a bank has assets that exceed its liabilities, it is solvent. If you have assets that exceed your debt, you are also solvent.
substandard
Subprime borrowers are those whose credit scores are low and considered riskier by lenders as they may have difficulty repaying what they borrow. Thus, a subprime mortgage is issued to one of these higher-risk borrowers. They tend to have higher interest rates that are harder for a person to repay, but are designed to compensate the lender for taking on more risk when lending money to a subprime borrower.