Chapter 30: Quick guide to economics

In the previous chapter we looked at reporting on industry and finance. We mentioned investigative reporting and showed you how to read a simple balance sheet. This chapter is a quick guide to the language of economics.

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The field of economics and finance is massive and growing every year. From being a specialist area employing relatively few people 50 years ago, the finance sector in particular has grown to employ hundreds of millions of people throughout the world, in fields as diverse as government, banking, investment, trade and accountancy.

It is not the intention of 'The News Manual' to teach the specific areas you may cover as a journalist, only to teach you how to cover them. However, to be a good journalist in any field you need to understand the basic concepts of economics and finance. You should read about it in books or on the Internet and follow the finance sections of newspapers and magazines until you gain at least a basic understanding. And do not switch off the radio or television when the newsreader says: "And now news on finance"!

You must also understand the basic language of economics and finance. As we mentioned in Chapter 11: Language & style - words, specialist areas of life often have their own specialist language; this is especially true of economics and finance. This "jargon" may seem mysterious and complex but you must make some attempt at least to understand the basics.

It is not possible here to cover the whole range of terms and concepts used in economic and financial reporting. However, the following is a list of terms which you should know. Although based on the British economy, most of the meanings are universal. We also provide links in the Links page to some further resources.

Words which appear in bold type are alternative terms for the word being defined; the full definitions of words in CAPITALS can be found in the list under that heading; words which appear in italics are important terms which you should note.

account: Record of financial dealings, such as a bank account.

assets: Something you own which has a monetary value. These include current assets, usually cash or SHARES which can be converted into money; fixed assets such as buildings or land: intangible assets such as regular customers. Liquid assets can be quickly converted into other forms (money is the most liquid of all). Non-liquid assets (such as specialist machinery) cannot quickly be converted into other forms.

average: A single number intended to represent a range of numbers. Also called the arithmetic mean, it is the sum of all the numbers divided by the number of numbers. Other ways of describing representative numbers include the median, which is the middle number in a range, and the mode, which is the number which occurs most often in the range.

balance of payments: An indication of the financial dealings between the source country and other nations. It consists of the CURRENT ACCOUNT, which is what we spend abroad compared to what other countries buy from us; and the capital account, which is the inward and outward flow of investments, grants and loans.

balance of trade: The BALANCE OF PAYMENTS on the CURRENT ACCOUNT.

balance sheet: The statement of the value of a company on a given date, showing the ASSETS and LIABILITIES.

bankruptcy: A declaration by a court that an individual (or company) cannot meet their debts on a given date. They are said to be insolvent. Bankruptcy proceedings can be started by either the debtor or their unpaid creditors. The court appoints a receiver to administer the company until it either recovers or is sold off (LIQUIDATED).

bear/bull markets: The bear is a STOCK EXCHANGE speculator who sells shares in the hope that the price will fall and he can buy them back later at a lower price. The bull buys shares in the hope that they will rise in value and he can sell them at a profit.

blue chip: SHARES which are regarded as a safe investment. These are usually in bigger, well-established companies.

bond: Form of fixed-interest, longer-term SECURITY issued by governments, companies, banks or other institutions.

budget: An estimate of income and spending for a future period.

capital: Material wealth owned by an individual or company, which can be used to create more wealth. Although originally used to mean physical goods such as land, buildings or machinery, it also means an amount of money.

cash flow: The flow of money payments to or from a firm.

Central Bank: See RESERVE BANK.

commodity markets: The international system of trading in commodities, usually raw materials such as agricultural or mining produce. Commodities are often traded as FUTURES.

compound interest: Interest which is calculated on the sum of the CAPITAL plus previous interest added to the capital.

Consumer Price Index (CPI): The cost of living in one year compared with the cost of living in other years. This measures the change in the price of a "basket" of goods and services (such as rents, basic foods or power bills) for the average household, in relation to the price during a base year. It is occasionally called the Retail Price Index.

consumption tax: A tax on retail sales. Also called purchase tax.

cost: In simple terms, the money one spends to achieve something. (Opportunity cost is an economic term for anything you have to do without to achieve something else).

credit: The use of goods or services without needing to make immediate payment.

currency: Notes and coins which are the medium of exchange in a country.

current account: The most common form of bank account, in which money is easily deposited and can be withdrawn immediately. It does not usually pay interest or pays only low interest. It is also the part of a BALANCE SHEET which records the current transactions, i.e. excluding any alterations to CAPITAL.

debentures: Fixed-interest SHARES in a company issued in return for long-term loans from the people who buy them (often set at between 10 and 40 years). Debenture shareholders must be paid interest and are first in line for any payments if the company is LIQUIDATED in BANKRUPTCY.

debt: Money or property owed by one person, company or country to another.

deficit: The amount by which spending is greater than income. Thus we have budget deficits and balance of payments deficits.

deflation: A fall in the CONSUMER PRICE INDEX in a country. The opposite of INFLATION.

demand: The willingness and ability to pay for goods or service.

deposits:. Money placed in an account at a bank or other similar institutions.

depreciation: The drop in the value of an ASSET through using it. Companies make an allowance for depreciation of such things as machinery or vehicles before they calculate their PROFIT.

devaluation: The reduction in the official rate at which one CURRENCY is exchanged for another. It lowers the price of EXPORTS to buyers in other countries and raises the price of IMPORTS for consumers at home.

discount: A temporary reduction in price.

dividend: The amount of a company's PROFITS which the board of directors decides to give out to shareholders each year or half-year. It is usually expressed as either a percentage of the nominal value of each SHARE or as an amount of money, such as three cents per share.

Dow Jones Index: An index showing the overall values of SHARES on the Wall Street Stock Exchange in New York, compared with their value in the base year the index started.

earnings: The return for effort put into a job or the income of a business.

entrepreneur: The term usually applied to the owner-manager of a company.

equity: The value of a company's ASSETS left over when all LIABILITIES have been taken out (except for payments to shareholders).

European Community (EC): An association of European countries with shared economic, political and social interests. The EC has grown out of the European Economic Community (or Common Market), which was originally formed to encourage the freer movement of goods and services between members.

exchange rate: The price (rate) at which one CURRENCY is exchanged against another.

exports: The goods and services which are sold to people in other countries.

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Financial Times Stock Ex­change (FTSE) Indexes: A number of price indexes which are published by The Financial Times news­paper, showing changes in the London finance markets. The FTSE 100 Index averages the performance of the top 100 companies trading on the London STOCK EXCHANGE to show how active SHARE trading has been. The initials “FTSE” are usually pronounced as “footsie” in broadcasting.

financial year: The annual period at the end of which government and company ACCOUNTS must be completed. Tax returns, for example, are filed at the end of the financial year. Financial years vary from country to country, although typically they start on the first day of January, April or July. Also called the fiscal year.

fiscal policy: The part of government policy concerned with raising money through taxation and other ways of controlling spending within the country.

foreign exchange: The amount of money and other liquid ASSETS that are held by a country in foreign CURRENCIES.

foreign investment: Spending by people in one country on income-yielding ASSETS in another country.

free trade area: An association of countries where all or most barriers between trade (such as QUOTAS, TARIFFS or SUBSIDIES) have been removed.

fringe benefits: Rewards to employees in addition to the wages or salaries they are paid. They can include company cars, subsidised housing and education, employer-paid health INSURANCE and clothing allowances.

futures: Contracts made in the present to buy or sell ASSETS at a future time. Futures allow manufacturers and traders to protect themselves against price changes.

G8: An international forum of the world’s eight wealthiest nations – The USA, Britain, Germany, Japan, France, Italy, Canada and Russia.

GATT: The General Agreement on Tariffs and Trade was an international body through which countries could bargain with each other over TARIFFS and QUOTAS. That work is now done by the WORLD TRADE ORGANISATION.

gilt-edged securities: Fixed-interest government SECURITIES. These usually involve less risk to the investor because they are backed by a government.

goods and services tax (GST): See VALUE ADDED TAX.

Gross Domestic Product: GDP is the total market value of the goods and services produced within the nation.

gross income: The total income before tax and other deductions are taken away.

holding company: A company which controls one or more subsidiary companies, usually by holding a majority of SHARES in these subsidiaries.

imports: The goods and services which are bought from people in other countries.

import restrictions: Restrictions on the IMPORT of products into a country, usually by means of TARIFFS and QUOTAS.

income tax: A tax on income, usually the individual's, not companies or corporations.

indexation: The automatic linking of a monetary obligation (such as a salary, a pension or repayment of a loan) to price levels. If prices rise by a certain amount, so will the obligation if it is index-linked or indexed.

inflation: A rise in the general level of prices.

insolvency: See BANKRUPTCY

insurance: The payment of a PREMIUM to an insurer, who in turn promises to pay compensation in the event of certain events such as fire, theft, accidents or illness.

interest rate: The price of borrowed money. It is normally calculated as the difference between what was lent and what will be repaid, expressed as a proportion of the amount lent. This is usually calculated over a year. There are many interest rates, such as MORTGAGE rate, OVERDRAFT rate etc.

interim dividend: Part payment of the annual DIVIDEND by a company, paid part-way through the FINANCIAL YEAR.

International Monetary Fund: The IMF was established to help trade between nations by reducing trade barriers and stabilising EXCHANGE RATES. Member countries put money in according to the size of their economies. Money is lent to countries which have BALANCE OF PA­MENTS problems, to stabilise EXCHANGE RATES. See also WORLD BANK.

investment trust: A company whose only object is to invest CAPITAL in a range of other companies. Members of the trust are issued with SHARES.

invisible earnings: The items on a BALANCE OF PAY­MENTS account which a country earns without exporting physical goods. These usually include such things as returns on foreign investment or commission on services provided to other countries.

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liabilities: Outstanding debts which have yet to be paid off.

liquidate: To pay off debts. A company is liquidated when it is sold to pay off debts, especially during BANKRUPTCY.

liquidity: Having enough money readily available to meet all current debts.

liquidity ratio: The amount of money a bank can get hold of immediately from cash and other ASSETS, expressed as a proportion of the bank's total DEPOSITS.

market forces: The forces of supply and demand - the prices for which people are prepared to sell goods and services, and the prices other people are prepared to pay for them.

means test: An investigation into an individual's income and wealth to determine whether or not they should receive special benefits.

merger: The joining of two or more companies into one, usually with the consent of all the companies. See also TAKEOVER.

money market: The financial institutions which deal in borrowing, lending and FOREIGN EXCHANGE, over a short period.

money supply: The amount of money which exists in the economy over a given time.

monopoly: An individual, firm or collective which produces all or almost all of a product or service in a market.

mortgage: A loan agreement between two parties (one is usually a bank or other financial institution) by which the lender of money (mortgagee) takes temporary ownership of an ASSET (often a building) and returns the ownership to the borrower of the money (mortgagor) once the debt is settled.

national debt: The total outstanding borrowings of central government.

net income: Income after the deduction of tax and any other compulsory charges.

nominal value: The face value at which a BOND or SHARE was first sold. This is not the same as its current market price.

option: An agreement between a buyer and a seller in which the buyer agrees to buy (or the seller to sell) at a fixed price within a certain time.

ordinary share: SHARES in a venture whose holders will only be paid a DIVIDEND after the holders of DEBENTURES and PREFERENCE SHARES have been paid.

OECD: The Organisation for Economic Cooperation and Development was formed to promote stable economic growth among members, encourage international trade and help developing countries. As well as publishing regular economic reports, it is a forum for discussing international money problems.

OPEC: The Organisation of Petroleum Exporting Countries represents the world's main producers and exporters of crude petroleum.

overdraft: An agreement with a bank allowing a customer to take more money than they have in their ACCOUNT, up to a certain limit. The customer is charged INTEREST on the overdraft.

payroll tax: Also referred to as withholding tax, it is a tax levied on an employer's salaries and wages bill. The employer often takes the major component from their employee’s pay through systems such as Pay-As-You-Earn (PAYE) or Pay-As-You-Go (PAYG).

pension fund: A sum of money laid aside and invested to provide a regular income on retirement or in the case of disability. See also SUPERANNUATION.

per capita income: An AVERAGE of how much people in a country earn. The total income of a population is divided by the number in the population.

preference shares: The holders of preference SHARES lie between DEBENTURE and ORDINARY SHARES in risk and expected income from their investment. They are paid after debenture shareholders (but before ordinary shareholders) in the distribution of DIVIDENDS and in the case of BANKRUPTCY. This is the least common form of shareholding.

premium: A regular payment made in return for an INSURANCE policy.

prime rate: The basis for commercial INTEREST RATES. It is the rate charged by commercial banks to extremely low-risk corporate borrowers for short-term loans.

private enterprise: Production and sale of goods and services by privately-owned businesses, as opposed to government economic activity (called public enterprise).

productivity: The ratio between output and input. Labour productivity is a measure of how efficiently workers produce their goods or services.

profit: Revenue minus costs: the difference between what is put into an activity and what is received from it (a negative figure is called a loss).

protectionism: Imposing TARIFFS and QUOTAS to restrict IMPORTS and thereby protect a domestic industry from overseas competition.

public company: A company which has been legally incorporated and which may offer SHARES for sale to the general public. Also known as a corporation.

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quotas: The limit set by a government on the amount of a product which can be IMPORTED.

real terms: Something is expressed "in real terms" when its value has been adjusted to take into account changes in the purchasing power of money (usually due to INFLATION or CURRENCY changes).

reflation: Economic policy designed to increase demand for goods and services and so bring down unemployment. It is often achieved by increasing MONEY SUPPLY and lowering INTEREST RATES.

Reserve Bank: A central bank established by the government to control the issue of CURRENCY within a country - or economic area - to maintain a stable economy. The Reserve Bank holds reserves of funds in case commercial banks cannot meet demands for funds by depositors. In many countries it sets official interest rates by determining how much it charges other banks to borrow from it.

revenue: Money coming into a company. Money which is earned, rather than ASSETS which are owned (often called CAPITAL).

rights issue: An offer of new SHARES to existing shareholders.

seasonal unemployment: Unemployment due to the seasonal nature of some trade. For example, employment among agricultural workers is highest during harvests.

securities: Usually the word to cover BONDS, and also stocks and SHARES. Securities can be bought and sold. The term is also used for property or income promised as a guarantee that a loan will be repaid.

share: One of a number of equal parts by which the CAPITAL of a company is divided. Each share entitles the owner to a pr­portion of the company DIVIDENDS and the value of the company if it is LIQUIDATED in BANKRUPTCY. See also DEBENTURES, PREFERENCE and ORDINARY shares.

stock exchange: A market in which SECURITIES are bought and sold.

subsidy: Government payment to the producer of goods, intended to make prices lower than they would otherwise be (and/or increase the income of the producer).

Superannuation: Often shortened to “super”, it is a system whereby workers and/or their employers set aside money from their wages in a separate fund to pay for their retirement, either as a PENSION or a lump sum.

take-over: The buying of one company by another, either by paying money for SHARES or (in the case of larger companies) by exchanging SECURITIES (usually shares).

tariff: A government tax on imports.

trust: Money invested by an individual or group for the benefit of someone else (often the person making the money available to them).

turnover: The total sales revenue of a business.

unit trust: An organisation which takes money from subscribers and invests it in a wide range of investments to minimise risk. In return, it issues units to the subscribers, which it promises to buy back at any time. Unit trusts are aimed at small investors.

Value-added tax (VAT): A tax which is imposed at every stage at which goods or services are exchanged, from pr­mary production to final consumption. In some countries it is called a goods and services tax (GST).

World Bank: An international organisation which lends money gathered from its members (usually the richer countries) to help development in poorer nations. It is generally controlled by the seven wealthier nations. See also G8.

World Trade Organisation (WTO): An international organisation representing 151 member countries with responsibility for developing international trade and supervising trade agreements between members.

yield: The income from a SECURITY as a proportion of its current market price. The dividend yield is the DIVIDEND as a percent­age of the market price of the security.

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Index to Chapter 30
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