Economic terms and concepts part 1

ECONOMIC TERMS AND CONCEPTS PART 1
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ECONOMIC TERMS AND
CONCEPTS PART 1
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Table of Contents
Accrual basis: .................................................................................................................. 3
Activity rate / Labor Force Participation Rate:.................................................................. 3
ADS conversion offer: ...................................................................................................... 3
Adverse selection:............................................................................................................ 3
Agricultural labourer: ...................................................................................................... 4
Alpine convertible Bond:.................................................................................................. 4
Ammortisation: ............................................................................................................... 4
Andean pact: (Now Andean Community).......................................................................... 5
Animal spirit:................................................................................................................... 5
Antitrust Laws: ................................................................................................................ 5
Appreciation:................................................................................................................... 6
Arbitrage:........................................................................................................................ 6
ARCs:............................................................................................................................... 7
Asset:.............................................................................................................................. 7
Assigned revenue: ........................................................................................................... 8
Autarky: .......................................................................................................................... 8
Backwardation: ............................................................................................................... 9
Back-to-back loan:........................................................................................................... 9
Bad debt:........................................................................................................................11
Balanced budget:............................................................................................................11
Balance of payments: .....................................................................................................12
Balloon payment: ...........................................................................................................12
Basing point price system: ..............................................................................................12
Bellwether stock:............................................................................................................13
BFS (board for financial supervision): ..............................................................................13
Black-Scholes:.................................................................................................................14
Bracket creep: ................................................................................................................15
Broad based fund: ..........................................................................................................15

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ECONOMIC TERMS AND CONCEPTS
Accrual basis:
An accounting method which considers revenues and expenses as they accrue, even the
cash would not have been received or paid during the period of accrual. Accrual principle is
one of the important principles of accounting.
Only Indian Railways still relies on Cash Basis of Accounting. All other major government and
private organizations rely on accrual principle.
Activity rate / Labor Force Participation Rate:
The ratio of labor force of a country to the populations is known as the activity rate or
participation rate. It is in per cent and always a proportion of the total population of the
country - the economically active population. The rate varies from one country to another
depending upon several factors such as school leaving age, retirement age, popularity of
Higher Education, social customs, opportunities, etc.
ADS conversion offer:
Conversion of local shares into American Depositary Shares(ADS) of a company is called an
ADS conversion offer.
The offer allows local (indian) investors to convert their shares into ADS and sell it in the US
markets.
The investment proceeds are distributed among Indian investors.
The company under ADS does not issue new shares. Existing shares are converted into ADS.
The scheme can only be used by companies listed on both Indian and American markets.
Adverse selection:
Adverse selection is used in Insurance business.
In a case where there is asymmetry in information between the seller and buyer of an
insurance policy in favor of the buyer because buyer has access to information that seller
(company) does not, there is said to be adverse selection.

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The other kind of market failure is moral hazard.
Adverse selection is one among the two kinds of the market failure often associated with
insurance business which means doing business with the people one would have better
avoided.
Agricultural labourer:
A person who work on another person’s land for wages in money or kind or share is
regarded as an agricultural labourer. He or she has no risk in the cultivation, but merely
works on another person's land for wages. An agricultural labourer has no right of lease or
contract on land on which he/she works.
Alpine convertible Bond:
An ACB (Alpine Convertible Bond) is a Foreign Currency Convertible Bond (FCCB) issued by
an Indian company exclusively to the Swiss investors.
Ammortisation:
Payment of a loan in installments by the borrower. It is usually done in an agreed period and
every installment includes a part of the total loan plus the interest.

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Ammortisation is generally used for capital allocation of intangible assets. To amortise a
loan means to “kill it off”.
Andean pact: (Now Andean Community)
Andean pact was a regional pact to establish a common market link among south American
countries. It started originally in 1969.
Andean pact was signed through “Cartagena agreement” in 1969 with its headquarters in
Lima, peru.
At present it has Peru, Equador, Columbia, Bolivia.
The pact had almost collapsed by the mid -1980s due to regional, economic and political
instabilities and was relaunched in 1990 (the original member Chile was dropped and the
new member Venezuela was added to it). Venezuela dropped out in 2006
Animal spirit:
Animal Spirits is a term used by the famous British economist, John Maynard Keynes, to
explain financial and buying decisions in conditions of uncertainty. In Keynes' 1936
publication, The General Theory of Employment, Interest and Money, animal spirits
describes the human emotion that drives consumer confidence.
Adam Smith, another famous British economist, believed that if people pursued their own
economic self-interests in a free market economy, there would be no need for government
intervention, John Maynard Keynes understood that people might be irrationally guided in
pursuing their economic self-interests. In his book, The General Theory of Employment,
Interest and Money, Keynes explained that trying to estimate the yield of various industries,
companies or activities using general knowledge and available insight would realize little to
nothing. Therefore, the only way people can make decisions in such an uncertain
environment is if they are guided by animal spirits.
Antitrust Laws:
Antitrust laws, also referred to as "competition laws," are statutes developed by the various
Governments around the world to protect consumers from predatory business practices by
ensuring that fair competition exists in an open-market economy.
It is a category of the government policy which deals with monopoly.

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Such laws intend to stop uses of ‘market power’ by big companies and at times to prevent
corporate mergers and acquisitions that would strengthen monopoly.
Appreciation:
It shows increase in value and is used in economics in the following two senses:
1) It is an increase in the price of an asset over time, such as price rises in land, factory
building, houses, offices, etc. It is also known as capital appreciation.
2) It is an increase in the value of currency against foreign currency or currencies. It is
market-based if the economy follows the floating-currency exchange-rate system.
Arbitrage:
Arbitrage opportunity is said to arise when an investor is able to earn profits out of the price
differences of the same product in different markets at the same time.
For example, buying and selling any product, financial securities ( bonds) or foreign
currencies in different markets/economies. A foreign currency might be trading at Rs 10 in
Indian market but at an equivalent of Rs 15 in another foreign market. The act of taking
advantage of this situation is called as arbitrage opportunity.
As globalisation is promoting liberalised cross-border movement of goods and services
around the world, arbitrage is prevalent today. To avoid arbitrage the WTO member
countries that is the official countries in the process of globalisation under compulsion to
chalk out homogenous economic policies and a level-playing field at the international level
is emerging.

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ARCs:
Assets Reconstruction Companies(ARCs) are companies which acquire non-performing
assets(NPAs) from banks or financial institutions along with the underlying securities
mortgaged and/ or hypothecated by the borrowers to the lenders.
Asset:
Anything which has a ' money value' owned by an individual or firm is an asset.
It is of three types:
1) Tangible Asset: All physical assets such as land, machinery, building, consumer durables
(refrigerator, car, TV, radio,etc.), etc. (the assets which are in the material form).
2) Intangible Assets: All non-physical/immaterial assets such as brand names, good-will,
credit-worthiness, knowledge, know-how, etc.
3) Financial Assets: All financially valid valuables other than tangibles and intangibles such as
currencies, bank deposits, bonds, securities, shares, etc.

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Assigned revenue:
The term is used to refer to various tax/duty/cess/surcharge/levy etc., proceeds of which
are (traditionally) collected by State Government on behalf of local bodies (the PRIs), and
subsequently adjusted with/assigned to the PRIs.
Examples – entertainment tax, surcharge on stamp duty, local cess on land revenue, lease
on mines and minerals etc.
Autarky:
The idea of self-sufficiency and 'no' imports by a country.
None of the countries of the world has been able to produce all the goods and services
required by its population at competitive prices, however, some tried to live it up at the cost
of inefficiency and comparative poverty.
Difference between self-sufficiency and self-reliance ----
Self Sufficiency - the state of not requiring any aid, support, or interaction for survival. A
totally self-sufficient economy that does not trade with the outside world is called autarky
Self reliance – Self reliance is a positive concept wherein an economy tries to rely on itself
for majority of basic needs but does not try to isolate itself from other economies for trade,
export and import.
The focus of self reliance is on protection against unseen or unexpected situations that may
arise in the future.
Indian economy confused self-reliance with self-sufficiency immediately after
Independence. We wanted to be self-reliant but instead framed our policies in a desire to be
self-sufficient.

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Backwardation:
A term of future trading which means a commodity valued higher today (i.e., spots market)
than the futures (i.e., future market). So the spot price is higher than the forward price in
case of backwardation. When the situation is opposite, it is known as Contango.
NOTE: Backwardation and Contango have been Explained through Videos in derivatives
section of “Finance Theory Course for RBI and NABARD”
Back-to-back loan:
A term of International banking, is an arrangement under which two firms (i.e., companies)
in different economies (i.e., countries) borrow each other's currency and agree to repair
(such loans) at a specified future date.
Each company gets full amount of the loan on the repayment date in their domestic
currency without any risk of losses due to exchange rate fluctuations. It has been developed
as a popular tool of minimising the exchange-rate exposure risk among the multi-national
companies. This is also known as parallel loan.
One example would be an American company wishing to open a European office and a
European company wishing to open an American office. The American company may lend

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the European company $1 million for initial leasing and other costs. This loan is calculated in
U.S. dollars. Simultaneously, the European company loans the American company the
equivalent of $1 million in euros at the current exchange rate to help with their leasing and
other costs. Because both loans are made in the local currencies, there is no currency risk
when the loans are paid back.
Mall
Mallya will take 1 million pounds and transfer to nirav in Bermuda so that nirav can set up
his shop in London.
Nirav modi will take an equivalent loan from Bermuda Bank (equal to 1 million pounds, in
the currency of bermuda) and transfer to Mallya so that he can setup his brewery in
bermuda.
Mallya In London
Mallya wants to loan
money from Bermuda
to setup a “Loser-King-
Fisher”
Modi In Bermuda
Modi wants to loan money
from London to setup a
Jewellery Shop to sell “fake
diamonds”

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Bad debt:
An accounting term to show the loans which are unlikely to be paid back by the borrower as
the borrower has become insolvent/bankrupt. Banks might write off such bad debts against
the profits of the trading as a business cost.
Balanced budget:
The annual financial statement (i.e. the budget) of a government which has the total
expenditures equal to the taxes and other receipts. Most governments, in practice run
unbalanced budgets, i.e., deficit projects or surplus budgets- either the expenditure being
higher or lower than the taxes and the other receipts, respectively.
A deficit budget helps growing or developing economies to spend more than what they earn
to enable capital creation in the economy.

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Balance of payments:
The balance of payments is a statement of all transactions made between entities
in one country and the rest of the world over a defined period of time, such as a quarter or
a year.
The balance of payments (BOP), also known as balance of international payments,
summarizes all transactions that a country's individuals, companies and government bodies
complete with individuals, companies and government bodies outside the country. These
transactions consist of imports and exports of goods, services and capital, as well as transfer
payments such as foreign aid and remittances.
BOP divides transactions into two accounts- current account and capital account.
If a country cannot fund its imports through exports of capital, it must do so by running
down its reserves. This situation is often referred to as a balance of payments deficit.
Balloon payment:
When the final payment of a debt is more than the previous payments, it is balloon
payment.
In mortgage payments, the initial monthly payments are small compared with the final
payment that is required to made towards the end of the loan period.
Basing point price system:
A method of pricing in which a differential (i.e., varying) price is fixed for the same product
for the customers of the different locations-nearer the customer, cheaper the product. This
is done usually to neutralize the transportation cost of the bulky products such as cement,
iron and steel, petroleum, etc.
A pricing system in which the buyer pays a base price plus a set shipping price depending
on the distance from a specific location. The basing point pricing system sets a

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predetermined location, known as the basing point, then adds a transportation charge
depending on how far away the buyer is from that location.
Bellwether stock:
A share which often reflects the state of the whole stock market. The technical analysts,
associated with the stock-market, usually keep a track-record of such shares and go on to
forecast the future stock movements.
BFS (board for financial supervision):
For the purpose of supervision and surveillance of the Indian financial system, a Board of
Financial Supervision (BFS) was set up by the RBI in November 1994. The board supervises
commercial banks, non-banking financial companies (NBFCs), financial Institutions, primary
dealers and the clearing Corporation of India (CCI).
Financial regulation and supervision are the two important functions of the RBI.
Though the RBI is known for its function of monetary policy implementation,
financial regulation and supervision are more effort taking as well as sophisticated
functions. Supervision helps the RBI to continuously check to assess the health and
stability of the financial system. Without effective supervision, the financial
system may face crisis.
Regulation is just stipulating rules in accordance with the laws framed by the
government for the effective control over the financial system. There is the
Banking Regulation Act to regulate banks.
Supervision is different from regulation. Here, the RBI goes to the headquarter of
the bank to check whether the bank’s balance sheet is good. Objective of
supervision is to ensure that banks remains healthy and stable.
Several norms are there for effective supervision. Supervision requires onsite
surveillance of banks. Since the RBI is the regulator for most of the money market
institutions including banks and Non-Banking Financial Institutions, there need a
separate entity. The RBI has constituted a separate unit for supervision and it is

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called Board for Financial Supervision (BFS). The convention in central banking is
that regulation and supervision should not be done by the same entity.
Board for Financial Supervision
The Board for Financial Supervision (BFS) was constituted in November 1994 to
supervise the money market institutions in the country. The BFS has been
constituted as an autonomous body under the RBI.
Board is drawn from the members of the Central Board of the Reserve Bank with
the Governor as Chairman and one of the Deputy Governors as full time Vice-
Chairman. The Board exercises the powers of supervision and inspection under the
RBI Act, 1934 and the Banking Regulation Act, 1949 in relation to the different
sectors of the financial system.
The BFS was initially given the mandate for supervision of commercial banks,
Financial Institutions and NBFCs. Later, urban cooperative banks and primary
dealers were also brought under the purview of the BFS.
periodical on-site inspection of banks that is supplemented by off-site monitoring
and surveillance. Since 1995, on-site inspections are based on CAMELS (Capital
adequacy, asset quality, management, earning, liquidity and systems and controls)
model and aim at achieving the set objectives.
The domestic banks are rated on CAMELS model while foreign banks are rated on
CALCS model (capital adequacy, assets quality, liquidity, compliance and systems).
Black-Scholes:
A formula devised for the pricing of financial derivatives of options-made explosive growth
possible in them by the early 1970s in the US. Myron Scholes and Robert Merton were
awarded Nobel Prize Economics for their part in devising this formula. The co-inventor
Fischer Black had died (1995) by then.
Black-Scholes is a pricing model used to determine the fair price or theoretical value for a
call or a put option based on six variables such as volatility, type of option, underlying stock

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price, time, strike price, and risk-free rate. The quantum of speculation is more in case of
stock market derivatives, and hence proper pricing of options eliminates the opportunity for
any arbitrage. There are two important models for option pricing – Binomial Model and
Black-Scholes Model.
Black scholes model applies to only European options
Bracket creep:
Increasing income due to inflation (via increased dearness allowances, individual income
goes for an increase) pushes individuals into higher tax brackets and leaves them worse off
(as there real income has not increased and their disposable income, i.e., income after tax
payments, falls)- this phenomenon is known as the bracket creep.
The result is an increase in income tax liability but no increase in real purchasing power.
Broad based fund:
This is a fund established or incorporated outside India, which has at least 20 investors with
no single individual investor holding more than 49 per cent of the shares or units of the
fund.
If the broad based fund has institutional investor(s), then it is not necessary for the fund to
have 20 investors. Further, if the broad based fund has an institutional investor who holds
more than 49 percent of the shares or units in the fund, then the institutional investor must
itself be a broad based fund.
In India, the following entities proposing to invest on behalf of broad based funds, are
eligible to be registered as FIIs:
(1).Asset Management Companies (2).Investment Manager/Advisor (3).Institutional
Portfolio Managers (4).Trustee of a Trust and (5).Bank

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Economic terms and concepts part 1

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Economic terms and concepts part 1