Glossary of economics terms

Annual average percent change

Compares the four-quarter average for one year with the four-quarter average from the previous year.

Annual percent change

The percentage change from the same period of the previous year.

Arbitrage

The process of buying goods in one market while simultaneously selling them to another market (sometimes through a chain of transactions) to derive profit.

Balance of payments

See current account.

Compensation of employees

Wages and salaries paid to employees, including bonuses, holiday pay and contributions made by employers to employees' superannuation.

CPI

Consumers price index. This measures the change in prices of goods and services relating to the household sector. It is the measure of inflation targeted by the Reserve Bank.

Commodity

Any object produced for consumption or exchange in markets, often used more narrowly to describe raw foodstuffs and materials, e.g. aluminium, beef.

Comparative advantage

A situation where two countries can both gain from trading together, even when one country can produce all goods more efficiently than the other. Under comparative advantage, each country should specialise in producing those goods in which they are 'most-best' in absolute terms or 'least-worst' in relative terms. This will maximise the combined output of the two countries with trade allowing each country to be better of  than before.

Consumption

Goods or services that are bought and used up in a single period. These include goods and services used by households or private not-for-profit organisations (collectively known as private consumption), or government (public consumption).

Cost-benefit analysis

A technique that evaluates the costs and benefits arising from an investment project. CBA differs from financial investment analysis through its inclusion of social costs and benefits.

Current account

A component of a country's balance of payments. The current account balance is the difference between the payments a country receives from overseas and the payments it makes. It includes balances of merchandise trade, services, investment income, and transfer payments. The term ‘balance of payments’ is commonly used interchangeably with ‘current account’, although technically the balance of payments also includes capital transactions.

Deflator

‘Deflating’ is the process of turning a 'nominal' figure into a 'real' one in order to reflect volume movements. Hence a deflator is an index of price change.

Diminishing returns

The situation where successive increases of a particular input into a production system yield less and less additional output.

Discounted cash flow analysis

A financial analysis technique that values future events at a lower value than today. See time value of money.

Disposable income

Income after tax and other compulsory deductions such as ACC levies.

Economic growth

GDP growth. The rate of change in real gross domestic product.

Economic rent

The amount paid to utilise a productive input in excess of the opportunity cost of that input.

Exchange rate

The price of one currency in terms of another currency.

Externality

A side effect from production or consumption, which may be beneficial or adverse to a thrid party.

Fiscal operating balance

The difference between government revenue and expenditure.

Fiscal policy

Government policy regarding its own revenue and expenditure.

Free rider

Someone who avoids paying for a service because the benefits of the service cannot be restricted solely to those paying for it. This is ofetn used as an argument for compulsory contributions to fund such services.

GDE

The expenditure measure of GDP. It covers spending on consumption and investment plus net exports (i.e. GNE plus net exports).

GDP

Gross domestic product. The production measure of a country's total output. The total market value of goods and services produced in New Zealand after deducting the cost of goods and services used in the process of production, over a given time period.

GNE

Gross national expenditure. Total expenditure on consumption and investment by New Zealand residents.

GNP

Gross national product. Gross domestic product plus income earned from foreign investments less domestic income accruing to foreigners.

Gross fixed capital formation

Spending on fixed assets, i.e. buildings and equipment.

Gross output

Total sales of goods and services, including goods and services used in the production process.

Hedging

A process whereby a buyer or seller fixes the prices of goods for some future point in time.

Income elasticity of demand

The degree to which consumers change their consumption of a product in response to changes in income.

Interest rate

Interest is the amount paid to a lender over and above the original sum borrowed. The rate is expressed as an annual percentage of the original sum. The interest rate can be thought of as the price of money.

Intermediate consumption

Goods and services used in the production of other goods or services.

Investment

Purchase of new fixed assets and stocks.

Labour force

The part of the working age population in work or actively seeking employment.

Marginal cost

The cost of producing an additional unit of output.

Marginal revenue

The revenue from the sale of an additional unit of output.

Market

A conceptual meeting place of the forces of supply and demand. A market is not confined to a physical location, and a market can exist for any product or service.

Market failure

Market failure occurs when a freely operating market does not bring about the best allocation of resources.

Merit good

A product (or service) that is deemed to be particularly desirable. The government often encourages consumption of merit goods, using subsidy or regulation.

Monetary aggregates

Measures of the amount of money in circulation or in accounts with financial institutions.

Monetary conditions

Describes the combination of the strength of the currency and the level of the interest rate. Monetary conditions are tightened when the exchange rate appreciates or the interest rate rises.

Monetary policy

Policy implemented by the Reserve Bank to influence money supply and hence inflation. This is achieved via changes to the OCR.

Money illusion

The situation where people confuse increases in nominal money balances with increases in real purchasing power.

Net exports

Exports minus imports.

'Nominals’ and 'reals'

'Nominal' or 'current price' figures are expressed in terms of the prevailing prices of the relevant time period. 'Real' or 'constant price' figures are adjusted for inflation and are thus expressed in terms of the prevailing prices in a specified base year. Real values are often referred to as ‘volumes’.

OCR

The official cash rate. This is the interest rate the Reserve Bank sets in conducting monetary policy. Commercial banks can borrow cash overnight from the Reserve Bank at an interest rate 25 basis points above the OCR, and deposit cash at 25 basis points below the OCR.

Operating surplus

Producers' profits before interest payments or receipts.

Opportunity cost

The next best alternative that must be foregone when something is produced.  For example, the opportunity cost of investing in new machinery may be the interest that could have been earned by leaving the money in the bank.

Participation rate

The percentage of the working age population that is in the labour force.

PPI

Producers price index. The PPI outputs index measures changes in prices received by producers. The PPI inputs index measures changes in costs of production excluding labour and depreciation costs.

Price elasticity of demand

The degree to which consumers change their consumption of a product in response to changes in the price of the product.

Productivity

The amount of output produced by a unit of input.

Public good

A product (or service) with benefits from which no-one can be excluded, no matter who pays for it.  Use of a public good by one person does not diminish its availability of its benefits to others (e.g. national defence)

Purchasing Power Parity

A theorem which states that the exchange rate between two countries is in equilibrium if a unit of currency from one country can purchase the same set of goods in the other country.

Quarterly percent change

The percentage change from the previous three month period.

Saving rate

The proportion of household income saved. Measured as the residual once consumption spending is subtracted from disposable income.

Seasonal adjustment

Adjusting a time series to measure and remove the regular seasonal components (e.g. the effect of Christmas on food retail sales).

Stocks

Goods that have been produced but are not yet sold.

Tax

Direct tax is paid from income (e.g. PAYE and company tax). Indirect tax is levied on sales (e.g. GST and excise duties).

Terms of trade

The ratio of goods export prices to goods import prices. Measures the purchasing power of New Zealand’s merchandise exports in terms of its merchandise imports

Time value of money

The concept that a given sum of money is worth more today than at some point in the future. This reflects both the potential to earn interest over the time period, and the risk of not receiving the money at the end of the period.

Tradeable goods

Tradeable goods are those that can be traded internationally, whether they actually are or not (e.g. oil). Non-tradeable goods are all other goods and services (e.g. restaurant meals).

TWI

Trade weighted index. A summary measure of the value of the New Zealand dollar calculated from the exchange rate with each of our five major trading partners.

Unemployment rate

The proportion of the labour force not in work, but actively seeking employment.

Value added

The difference between the value of total output and the cost of the intermediate inputs used in the rpoduction process.

Yield curve

A curve showing the interest rate return by the term of deposit.

Yield gap

In New Zealand, the yield gap is normally defined as the difference between 10 year bond rates and 90 day interest rates. This differs from international convention where it is defined as the difference between average dividend yields and long-term government rates.