ONLY Economics Terminologies

Compulsory monetary contribution to the state's revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organizations.

Money center banks
Banks located in economic hubs (in large cities such as Los Angeles, New York, London, and Hong Kong) and earn revenue from transactions between themselves and governments, big businesses, and other banks, rather than the individual consumer. Regular banks usually take their cues from these banks, especially as they regard interest rates and other business practices. Also called money market center banks.

Real cost
The overall actual expense involved in creating a good or service for sale to consumers. The real cost of production for a business typically includes the value of all tangible resources such as raw materials and labor that are used in the production process.

✓ The Fisher equation and it's application

The Fisher equation expresses the relationship between nominal interest rates and real interest rates under inflation. Named after Irving Fisher, an American economist, it can be expressed as real interest rate ≈ nominal interest rate − inflation rate.
In more formal terms, where r equals the real interest rate,
i equals the nominal interest rate, and π equals the inflation rate, the Fisher equation is
r = I - π
It can also be expressed as ;
(1 + i) = (1 + r)(1 + π)

✓ Let's consider an application of the Fisher equation in the context of borrowing. Suppose you want to take out a loan for $10000 with a nominal interest rate of 5% per year. If the expected inflation rate is 2% per year we can use the Fisher equation to calculate the real interest rate.

Nominal Interest Rate = Real Interest Rate + Inflation Rate

5% = Real Interest Rate + 2%

To isolate the real interest rate we subtract 2% from both sides of the equation:

5% - 2% = Real Interest Rate

Therefore the real interest rate is 3%.

This means that after adjusting for inflation the real interest rate on the loan is 3%. So if inflation remains at 2% per year you would need to earn a return of at least 3% on your investment or project to be able to repay the loan and still make a profit.

On the other hand if you were a lender the Fisher equation would help you determine the nominal interest rate to charge on the loan to ensure you are adequately compensated for the real interest rate and expected inflation. By adjusting the nominal interest rate based on inflation expectations lenders can protect their purchasing power and ensure a fair return on their lending.

In summary the Fisher equation is a useful tool to analyze the impact of inflation on borrowing and lending. It allows borrowers and lenders to consider the real interest rate and adjust for inflation to make informed financial decisions.

Economic cost
The sacrifice involved in performing an activity, or following a decision or course of action. It may be expressed as the total of opportunity cost (cost of employing resources in one activity than the other) and accounting costs (the cash outlays).

Sunk cost
Money already spent and permanently lost. Sunk costs are past opportunity costs that are partially (as salvage, if any) or totally irretrievable and, therefore, should be considered irrelevant to future decision making. This term is from the oil industry where the decision to abandon or operate an oil well is made on the basis of its expected cash flows and not on how much money was spent in drilling it. Also called embedded cost, prior year cost, stranded cost, or sunk capital.

Accounting cost
Monetary value of economic resources used in performing an activity.

Inferior goods
Not a substandard-good, but the term in economics for an item for which income elasticity of demand is less than zero. As the consumers become monetarily better off (earn higher incomes), the demand for such goods (such as basic food) falls because consumers can now afford higher priced substitutes.

Normal goods
Good for which demand (consumption) increases as consumer income rises, but at a rate slower than the rate of increase in income. Defined also as a good for which the income elasticity of demand is positive but less than one. Also called necessary good, it is the opposite of inferior goods.

Benchmarking
A measurement of the quality of an organization's policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of its peers. The objectives of benchmarking are (1) to determine what and where improvements are called for, (2) to analyze how other organizations achieve their high performance levels, and (3)to use this information to improve performance.

✓✓ What is the Phillips Curve?

The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.

✓ The concept behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa.

✓ This belief system caused many governments to adopt a "stop-go" strategy where a target rate of inflation was established, and fiscal and monetary policies were used to expand or contract the economy to achieve the target rate. However, the stable trade-off between inflation and unemployment broke down in the 1970s with the rise of stagflation, calling into question the validity of the Phillips curve.

✓✓ The Phillips Curve and Stagflation

Stagflation occurs when an economy experiences stagnant economic growth, high unemployment and high price inflation. This scenario, of course, directly contradicts the theory behind the Philips curve. The United States never experienced stagflation until the 1970s, when rising unemployment did not coincide with declining inflation. Between 1973 and 1975, the U.S. economy posted six consecutive quarters of declining GDP and at the same time tripled its inflation.