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Economic Terms

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Positive flows in to the circular flow of income generated by revenue from exports, government spending and investments (loans and credit).

Below is an illustration of some of the most common injections which draw money into the circular flow of income and expenditure from foreign entities. The most obvious example of this is the demand for a country's exports from respective foreign countries, as well as forms of  foreign direct investment (FDI).


Innovation is the development and improvement of existing products, processes, services, technologies, or ideas.

Insurance Company

A company that sells insurance policies to an individual for suitable protection against adverse events. These companies are charaterised by long-term liabilities of uncertain vaue and liquid value-certain assets. Among the major categories of financial institution, this balance sheet structure is least likely to give rise to systemic risk, as asset transformation function in the reverse direction of banks. However, the main form of regulation imposed on insurance companies is based on consumer protection, reflecting the fact that it is difficult for consumers to assess an insuree's financial strength or the quality of its products.

Intellectual property right

This gives firms or individuals an exclusive right to receive all the benefits that arise from any of their innovations or creations. This right will last for a number of years and will be easier to enforce where a patent is granted or if a clear copyright exists.

Interbank Lending

When banks extend loans to other banks for a specified period of time. These interbank loans are typically of a short-term maturity of one week or less, which many being classed as 'overnight loans'. The loans are made at the interbank rate.

Below is a graphical depiction of how an interbank loan works, in which there is a transfer of money and that money has be to paid alongside a level of interest attached to the base rate.







This is where the outcomes for firms depend not only on their own decisions but also upon other firms' decisions. Oligopoly markets are the type of market structure that is characterised by a high level of interdependency as firms always have to take into account the reaction of rival firms when setting their own prices.

Below is an illustration of how interdependency works. For instance Firm A sets a unit price of £10 but the market outcome of that pricing decision depends on the type of reaction that Firm B takes. The flowchart shows that Firm B could react in three ways. Firstly they could end up charging more than £10 which means that Firm A will have undercut Firm B and steal the entire market for themselves (assuming competing over a homogeneous good). Firm B could also match the price of £10 and both firms would roughly share the market between themselves. Finally, Firm B could also decide to undercut Firm A and charge a price lower than £10 and as a result they would capture the entire market. Therefore, before Firm A sets their price they have to form a rational expectation of what other firms in the market will do, to be able to set their profit-maximising price.


The reward for providing capital.

Interest rate

The price of money i.e. the cost of borrowing and the reward for lending money. The rate is determined by forces of demand and supply on money markets.

Internal economies/diseconomies

Economies of scale or diseconomies of scale that arise because of the growth of a firm.


Describes the commercial activities that firms and businesses internationally engage in. For instance in the banking world this refers to the trend that financial services are conitnually becoming global and products and services can be sold to international cutomers. This has created complexities for regulatory authorities when regulating the industry.


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