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Economic Terms

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Average propensity to consume

The proportion of income that consumers are likely to spend.

Average propensity to save

The proportion of income that consumers are likely to save.

Average Variable Costs (AVC)

The average variable cost per unit of output produced.

Below is an illustrated example of how to calculate the AVC for different levels of output for a hypothetical firm. These points can then be used to map out the AVC curve for this firm.

Bad Good

Is a good that when consumed yields disutility i.e consumption is unpleasant or does not lead to satisfaction or positive utility. For example if a consumer consumed expired food that makes you ill, this would be an example of a bad good as after consumption the consumer will have less utility than before. In effect these goods ar just opposites of a normal good.

However, there is some subjective judgement over whether a good is beneficial to consume or in fact it leads to reduced utility. For instance, even though the health effects of smoking can make smoking a bad, smokers believe they enjoy smoking which make it a good at the time of consumption.

Balance of payments account

A financial document that measures a country’s economic activities with all other countries over a period of time. These documents are made up of two different accounts: Current Account and Financial Account.

The current account is a main measure of trade of goods and services between other countries and therefore is a sign of the relative competitiveness of a country to the rest of the world. The financial account is a measure of financial flows between countries such as trades of financial assets. These documents must balance and therefore if a country is running a large deficit on one of the accounts then they must have a similarly large surplus on the other account to make the balance of payments 'balance'.

The diagram below shows the UK's balance of payments position from the years 1946-2010. The most striking image from this diagram is that the UK have been continuing to finance a growing current account deficit with a growing financial account surplus i.e. selling financial assets to borrow money to finance the deficit on goods and services to live beyond ther means. 


Balance of trade in goods

The value of goods exported minus the value of goods imported.

Balance of trade in services

The value of services exported minus the value of services imported.

Balance Sheet

A financial account that reports a company's assets, liabilities and net worth position of a bank. This account provides a neat summary of the bank's performance levels over a given financial year for shareholders and investors alike.

Below is an example of some of the typical instruments that would appear on both sides of the balance sheet for a financial institution.

Balanced budget

When the amount of tax revenue forecast in the Government’s budget is equal to the cost of all planned expenditure.

Bank Failure

Occurs when a bank becomes technically insolvent (liabilities > assets) and all of the equity capital for the bank has been exhausted i.e. it no longer has any equity capital to act as a buffer stock and absorb losses that the bank makes.  

The process of a bank failure is as follows: The bank's assets fall in value on the balance sheet because of non-performing loans (NPLs) and this makes the bank a loss which the equity capital must cover, but as the equity capital shrinks the bank becomes more vulnerable on its balance sheet. Eventually (if these loses continue) they will become insolvent when the losses they have made on assets exceed the level of equity capital.




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