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Economic Terms

0-9   A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Business taxes

These are taxes imposed on businesses such as corporation tax (on profits) and VAT (on sales).


A period of economic activity characterised by sharp contractions in real output due to policy initiatives designed to correct high rates of inflation.

A bust is often characterised by output and employment falling below the full employment level and as a result creating a negative output gap. As well as introducing a possible deflationary spiral if demand contracts too severely. Below is a diagram to illustrate the AD-SRAS framework for an economy suffering a bust.


The Common Agricultural Policy is a system of subsidies and programmes to encourage and control the supply of agricultural products within the EU.

It works by guaranteeing farmers a given price for their agricutltural products and therefore removes any uncertainty around and instability around crop prices. It would work in the same way as a buffer stcok scheme should work. The EU would buy goods from EU farmers at the high price if their was oversupply in the market. The amount they would buy wold be equal to (Qs-Qd). This price was often far higher than the market price so that it could supplement farmer's incomes during uncertain times. However it did incentivise farmers to over-produce to receive a higher income from the EU government and therefore was very inefficient. The process of the CAP is shown below in the diagram.


The factor of production that is used to produce goods and services. Capital can be either fixed capital e.g. offices, factories, machines, tools, vehicles and transport links or working capital e.g. raw materials and components. The reward for the use of capital is interest.

Capital account

Records all the flows of capital arising from investment and currency transactions - Foreign Direct Investment (more than 10% of the share value of a company acquired), Portfolio Investments (less than 10% of the share value of a company acquired), trade credit, loans, currency trading and bank deposit movements.

Capital Adequacy Ratio

This ratio is used to protect depositors and promote the stability and efficiency in financial markets. The amount due to be held by banks depends on the risk profile of their assets i.e. the riskier the assets the larger the capital charge attatched to it.



Capital Adequacy Requirements

These are the requirements implaced on banks for the minimum amount of capital they have to hold against the value of their assets to act as a buffer stock towards losses that could threaten the solvency of an individual bank and the systemic stability of an entire industry. Since 1988 the Basle Committee has set these and has called them BASLE, with additional follow-ups to improve these requirements called BASLE II and BASLE III.

Capital deepening

Is when capital levels increase at a faster rate than labour inputs i.e. total capital and capital per worker increases.

Capital gain

The difference between the acquisition and sale price of capital. This is mostly associated with investments in assets e.g. property, shares and other financial assets.

Capital good

Goods that are used in the production of other goods and services e.g. machinery, computers, vehicles. They will create more value than consumer good and contribute to economic growth.

The diagram below shows an economy that is positioned to produce either capital goods or consumer goods and because capital goods have a bigger influence on economic growth, this economy is slanted towards producing more capital goods compared to consumer goods. But, it is still positioned on the PPF and therefore is fully utilising all the resources available in the economy.

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