Concepts in Economics to Connect the Dots

A
arms length price is price at which two unrelated and non-desperate parties would agree to a transaction. This is most often an issue in the case of companies with international operations whose international subsidiaries trade with each other. For such companies, there is often an incentive to reduce overall tax burden by manipulation of inter-company prices. Tax authorities want to ensure that the inter-company price is equivalent to an arm's length price to prevent the loss of tax revenue. Also known as transfer pricing

B
Basel III (or the Third Basel Accord) is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It was agreed upon by the members of the Basel Committee on Banking Supervision in 201011, and was scheduled to be introduced from 2013 until 2015; changes from April 1, 2013 extended implementation until March 31, 2018 however. The third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. Capital requirements The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of "risk-weighted assets" (RWA). Basel III introduced "additional capital buffers", (i) a "mandatory capital conservation buffer" of 2.5% and (ii) a "discretionary counter-cyclical buffer", which would allow national regulators to require up to another 2.5% of capital during periods of high credit growth. Leverage ratio Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets; The banks were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the US Federal Reserve Bank announced that the minimum Basel III leverage ratio would be 6% for 8 SIFI banks and 5% for their bank holding companies. Liquidity requirements Basel III introduced two required liquidity ratios. The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.

bottom of the pyramid was originally used by Franklin d. Roosevelt to refer to the forgotten man at the bottom of the pyramid. In 2004 professor C. K. Prahalad wrote The Fortune at the Bottom of the Pyramid. The bottom of the pyramid is the largest, but poorest socioeconomic group. In global terms, this is the 4 billion people who live on less than $2.50 per day (Wikipedia). This phrase is used in particular by people instead of being seen as victims of circumstances, should be seen as promising entrepreneurs. base rate is the minimum interest rate of a bank below which it cannot lend, except in cases allowed by RBI. The Base Rate system has replaced the BPLR system with effect from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently Foundation - 2013 Page 1

black swan is an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.

C
crowding-out effect the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending current account deficit occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. A substantial current account deficit is not necessarily a bad thing for certain countries. Developing counties may run a current account deficit in the short term to increase local productivity and exports in the future cash reserve ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without any floor or ceiling rate with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure the liquidity and solvency of Banks (Section 42 (1) of RBI Act 1934) capital market is the market for long-tem loanable funds used by industry and commerce mainly for fixed investment

D
demographic dividend is a concept denoting the benefits to an economy from a significantly large workforce (as a proportion to total workforce) say, in the age group 18 - 39 years (This advantage may last for upto 30-40 years for a country like India, for instance, which can harness its workforce to produce greater GDP and wealth, provided the workers are suitably skilled. In contrast, the Chinese working population is aging rapidly, which would slow down its growth after about 20 years.) dependency ratio is an age-population ratio of those typically not in the labor force (the dependent part) and those typically in the labor force (the productive part). It is used to measure the pressure on productive population (Japan and Europe have high dependency ratio because of their high proportion of aged population). downsizing is large scale shedding of employees by major corporations, sometimes also used to refer to the disposal of subsidiaries and other unwanted activities, especially in times of recession or downturn

E
economic stimulus is the attempts by governments or government agencies to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kick start a lagging or struggling economy. Governments can use tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few, to accomplish this.

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effective exchange rate is the exchange rate of a country measured by a reference to a weighted average of the exchange rate of the currencies of the countrys trading partners

F
Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources. Components of fiscal deficit the primary component of fiscal deficit includes revenue deficit and capital expenditure. Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received. Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities. In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). Arguments: Fiscal deficit lead to inflation According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy. In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation. Expert recommendation Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure. Impact Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced. foreign direct investment (FDI) is an investment in a country by a foreign corporate or institution in a greenfield project or in the extension of the project in manufacturing or service sector. foreign institutional investment (FII) is an investment by a foreign entity in the financial assets or security in the host country, which may be volatile (foreign portfolio investment) free market economy is an economy system in which the allocation of resources is determined solely by supply and demand in free markets

G
gross domestic product (GDP) the market value of all final goods and services produced Foundation - 2013 Page 3

within a country in a given period of time Gini coefficient is a measure showing the degree of inequality in a frequency distribution such as personal income. G = O denotes that there is no inequality gross national product (GNP) is the market value of all goods and services producted in one year by labour and property supplied by the residents of a country

H
haircut is the difference between prices at which a market maker can buy and sell a security. It is the percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin and collateral levels. (Also nowadays refers to the loss European Commercial Banks may have to bear on their outstanding advances to weak economies like Cyprus, Greece etc) human development index (HDI) is a composite statistic of life expectancy, education, and income indices to rank countries into four tiers of human development. It was created by economist Mahbub ul Haq, followed by economist Amartya Sen in 1990, and published annually by the United Nations Development Programme

I
Impossible trinity (Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time: A fixed exchange rate. Free capital movement (absence of capital controls). An independent monetary policy.

Inflation target is the adoption of an explicit level of inflation to which monetary policy is geared towards steering the economy Core Inflation a measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of Core inflation is most often calculated by taking the Consumer Price Index (CPI) and excluding certain items from the index, usually energy and food products. Other methods of calculation include the outliers method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation. Headline Inflation The raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes current year prices based on the base year's values. The headline figure is not adjusted for seasonality or for the often volatile elements of food and energy prices, which are removed in the Core CPI. Headline inflation will usually be quoted on an annualized basis, meaning that a monthly headline figure of 4\% Foundation - 2013 Page 4

inflation equates to a monthly rate that, if repeated for 12 months, would create 4\% inflation for the year. Comparisons of headline inflation are typically made on a year-overyear basis. Inflation is a great threat to long-term investors because it erodes the value of future dollars. Inflation can stifle economic growth and cause a rise in prevailing interest rates. While headline inflation tends to get the most attention in the media, core inflation is often considered the more valuable metric to follow. Core inflation removes the CPI components that can exhibit large amounts of volatility month to month, which can cause unwanted distortion to the headline figure. Both headline and core results are followed closely by investors, and are also used by economists and central banking figures to set economic growth forecasts and monetary policy.

J
job search the process by which workers find appropriate jobs given their tastes and skills

K
KYC norms are the items of evidence establishing the genuineness of the identity of a buyer of a financial product (banks services) comprising acceptable proofs such as voter ID card ration card PAN card etc. monetary policy the setting of the money supply by policymakers in the central bank moral hazard the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour mezzanine debt is when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders. merger is the fusion of two or more companies into one, in roughly equal terms millennium development goals (MDGs) are eight international development goals that were officially established following the Millennium Summit of the United Nations in 2000, following the adoption of the United Nations Millennium Declaration. All 193 United Nations member states and at least 23 international organizations have agreed to achieve these goals by the year 2015. The goals are: 1. 2. 3. 4. 5. 6. 7. 8. Eradicating extreme poverty and hunger, Achieving universal primary education, Promoting gender equality and empowering women, Reducing child mortality rates, Improving maternal health, Combating HIV/AIDS, malaria, and other diseases, Ensuring environmental sustainability, and Developing a global partnership for development. Page 5

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money market consists of the financial institutions that deal in short term securities and loans, gold and foreign exchange monopsony is a market where there is only one buyer of the item sold.

N
nominal exchange rate the rate at which a person can trade the currency of one country for the currency of another national debt is the total outstanding borrowings (stock of borrowings) of the government exchequer national income (NI) is the total incomes of residents of an economy in a given period after providing for capital new normal is a business term used to describe changed economic conditions following the 2006 08 crisis which affected all countries ninja loan is a slang term for a loan extended to a borrower with "no income, no job and no assets". Whereas most lenders require the borrower to show a stable stream of income or sufficient collateral, a NINJA loan ignores the verification process.

p
Phillips curve a curve that shows the short-run trade-off between inflation and unemployment producer price index a measure of the cost of a basket of goods and services bought by firms public saving the tax revenue that the government has left after paying for its spending pass through phenomenon (in monetary economics) refers to the degree and speed with which variations in the key policy rates are transmitted through the interest rate spectrum across the financial sector policy paralysis is the widespread perception in Indias business and corporate circles about the absence of major economic policy initiatives and poor implementation of ongoing central government projects leading to Indias recent poor economic preference ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going (Ex: Sahara Deposits Scheme, Private Chit Fund Schemes in West Bengal etc.)

Q
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quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy (QE is a post 2006 08 recession phenomenon)

R
rational expectations the theory that people optimally use all the information they have, including information about government policies, when forecasting the future rational people people who systematically and purposefully do the best they can to achieve their objectives (behavioural economics challenges this belief) real exchange rate the rate at which a person can trade the goods and services of one country for the goods and services of another remittance is a transfer of money by a foreign worker to his or her home country (India with US $ 69 billion is on top among the worlds nations in remittances) repo rate is the rate at which the Central Bank lends money to commercial banks against collaterals for a short period (reverse repo rate is the opposite of this) returns to scale is the proportionate increase in output resulting from proportionate increase in all inputs. Firms may face decreasing, increasing or constant returns to scale depending on the inherent nature of production and various other factors

S
sacrifice ratio the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point shoeleather costs the resources wasted when inflation encourages people to reduce their money holdings signaling an action taken by an informed party to reveal private information to an uninformed party stagflation a period of falling output and rising prices structural unemployment unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for every one who wants one statutory liquidity ratio (SLR) stands for Statutory Liquidity Ratio. Apart from CRR, every bank is required to maintain in India at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR) Foundation - 2013 Page 7

savings ratio is the proportion of households income that is saved, usually expressed as a percentage of total households disposable income. The aggregate of this in a country would give the national savings rate (aggregate saving rate). Saving function gives the relationship between aggregate saving and income that include non-personal savings sustainability economics involves ecological economics where social aspects including cultural, health-related and monetary/financial aspects are integrated. Moving towards sustainability is also a social challenge that entails international and national law, urban planning and transport, local and individual lifestyles and ethical consumerism. sustainability is the capacity to endure. In ecology, the word describes how biological systems remain diverse and productive over time. Long-lived and healthy wetlands and forests are examples of sustainable biological systems. For humans, sustainability is the potential for long-term maintenance of well being, which has ecological, economic, political and cultural dimensions. Healthy ecosystems and environments are necessary to the survival and flourishing of humans and other organisms. There are a number of major ways of reducing negative human impact. The first of these is environmental management. This approach is based largely on information gained from earth science, environmental science and conservation biology. The second approach is management of human consumption of resources, which is based largely on information gained from economics. A third more recent approach adds cultural and political concerns into the sustainability matrix. sustainable development is the idea that economic development should proceed at a pace and in manner that will conserve the environment and depletable natural resources systemic risk is the risk of a collapse in the functioning of the financial system mostly because of its inter connectivity with other parts of the economy, leading to an adverse impact on the real economy

T
trade off is a technique of reducing or forgoing one or more desirable outcomes in exchange for increasing or obtaining other desirable outcomes in order to maximize the total return or effectiveness under given circumstances take over is a merger of two companies which occurs against the wishes of one company take-off stage in economic growth represents the point at which old blocks and the resistance to steady, growth are finally overcome and growth becomes self-perpetuating (WW Rostow) top line and bottom line approximate or thumb index of income and profit of a company used to gauge its financial strength. Top line is the first entry in the financial statement of a company which is gross sales or revenue. The bottom line is generally the last entry of a revenue statement and is basically the net profit

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