Economic Terms

Is a cost/benefit that is imposed on third parties i.e. economic agents who were not involved directly in the production/consumption of the good.

The presence of an externality in a market signals market failure and therefore society's welfare is not being maximised. 

There are four different forms of externalities that can arise in an economy:

• Negative Production Externalities
• Positive Production Externalities
• Negative Consumption Externalities
• Positive Consumption Externalities

The ease with which factors of production can be switched between different productive processes. This determines how flexible an economy is. The extent to which a factor can be physically relocated and how easily it can be applied to a different productive process will have a big influence on factor mobility.

An input that is used in the production process i.e. land, labour, capital and enterprise.

The inputs that are used in the production process to facilitate the production of the goods and services which contribute to an economy's GDP. An input can be classified as either labour, capital, land or enterprise, depending on the function that the input serves in the production process. A summary of the main characteristics of the four factors of production are highlighted in the table below.

• Labour represents the mental and physical human input into the production process. Therefore the quantity (size of the workforce) and quality (productivity of workforce) of labour affects the importance of labour in the production process of any good or service. Factors such as increased education and training and an increase in migration levels can result in an increase in output of an economy's resources. Workers receive a wage based on their productivity and monetary value to a company at any particular point in time i.e. for every hour of labour supplied by workers this is in return for an hourly wage rate.
• Land represents all of the natural resources a country is endowed with such as the land or the sea. However, it also includes all of the resources which can be extracted and cultivated from those natural resources such as agricultural products from farms. Developing countries are often land abundant (large endowment of natural resources) and therefore specialise and rely upon the agricultural sector for economic growth. The reward for land is rent as landowners rent the land out to producers across the economy.
• Capital represents the goods which are used in the production process to help produce the final product. It is made up of two different forms of capital: working capital and fixed capital. Fixed capital represents the machinery, technology, and buildings which are used to help produce the final goods and services. Working capital represents the day-to-day capital used to help produce goods in the future, this can include cash or the stock of unfinished inventories. Capital owners receive a reward of interest as producers increase their capital stock by taking out loans and borrowing from the private sector. Therefore, interest represents the opportunity cost of borrowing for firms and the reward for owners of each unit of capital.
• Enterprise represents the individuals that help organise the complex mix of factors of production in the production process of any good or service so that a profit is made as a result. Examples of enterprise may include managers or investors that take risks in the company with their own money to gain a share of higher profits in the future.

Records the capital transfers made by individuals moving between countries and by Governments due to support provided to other countries. The amounts recorded are small relative to the current and capital account.

Aims to protect consumers, promote greater competition and ensure a stable financial environment.

 

Below represents the current 'twin peaks' regulatory structure of the financial sector with the FCA being a subsidary of the Bank of England.

Is when there is a situation in the financial system in which financial assets suddenly lose a large part of their nominal value. One of the most common ways a financial crisis can start is from a bank run/panic causing the failure of a healthy bank and suddenly this stems a recession and full financial problems for the economy. This is often called a twin or triple crisis.

As firms grow in size they will gain access to more sources of finance and improved terms.

Are financial intermediaries providing financial services such as deposit taking, credit provision, insurance cover, pension schemes and investment funds e.g. banks, insurance companies, asset managers, hedge funds and private equity funds. They facilitate the link between savers and borrowers.

Organise the issue and trade of shares, bonds and commodities. Liquidity in these markets is provided by real time adjustment of prices to match buyers and sellers. Financial markets can be divided up into 3 seperate markets: Money Markets, Capital Markets and Foreign Exchange Markets.

Below is a breakdown of the types of financial markets that economic agents have access to in order to secure finance.