Some Economic Terms (Part 3) - Daily Current Affair Article

1. CREDIT SCORE

  • A credit score is a number between 300–850 that depicts a consumer's credit worthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.
  • A credit score plays a key role in a lender's decision to offer credit.
  • The FICO scoring system is used by many financial institutions.
  • Factors considered in credit scoring include repayment history, types of loans, length of credit history, and an individual's total debt.
  • One metric used in calculating a credit score is credit utilization or the percentage of available credit currently being used.
  • It is not always advisable to close a credit account that is not being used since doing so can lower a person's credit score

2. DEFICIT SPENDING AND BUDGET

SURPLUS

  • In the simplest terms, deficit spending is when a government's expenditures exceed its revenues during a fiscal period, causing it to run a budget deficit. The phrase "deficit spending" often implies a Keynesian approach to economic stimulus, in which the government takes on debt while using its spending power to create demand and stimulate the economy.
  • Deficit spending occurs when government spending exceeds its revenue.
  • Deficit spending often refers to intentional excess spending meant to stimulate the economy.
  • British economist John Maynard Keynes is the most well-known proponent of deficit spending as a form of economic stimulus.
  • A budget surplus occurs when income exceeds expenditures. The term often refers to a government's financial state, as individuals have "savings" rather than a "budget surplus." A surplus is an indication that a government's finances are being effectively managed.
  • A budget surplus is when income exceeds expenditures.
  • The term "budget surplus" is used in reference to a government's financial state.
  • The U.S. government ran a budget surplus during the final years of Bill Clinton's presidency.

3. DIMINISHING MARGINAL UTILITY

  • The Law Of Diminishing Marginal Utility states that, all else equal, as consumption increases, the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed. Utility is an economic term used to represent satisfaction or happiness. Marginal utility is the incremental increase in utility that results from consumption of one additional unit.
  • Marginal utility may decrease into negative utility, as it may become entirely unfavorable to consume another unit of any product. Therefore, the first unit of consumption for any product is typically highest, with every unit of consumption to follow holding less and less utility. Consumers handle the law of diminishing marginal utility by consuming numerous quantities of numerous goods.

4. ECONOMIES OF SCOPE

  • An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently. In such a case, the long-run average and marginal cost of a company, organization, or economy decreases due to the production of complementary goods and services.
  • Economies of scope describe situations where producing two or more goods together results in a lower marginal cost than producing them separately.
  • Economies of scope differ from economies of scale, in that the former means producing a variety of different products together to reduce costs while the latter means producing more of the same good in order to reduce costs by increasing efficiency.
  • Economies of scope can result from goods that are co-products or complements in production, goods that have complementary production processes, or goods that share inputs to production.

5. FUNCTIONS OF MONEY

  • Functions of money can be broadly categorised into the following two types:

(a) Primary functions

  • Medium of exchange:
  • It means that money can be used to make payments for all the transactions of goods and services.
  • A buyer can buy goods through money, and a seller can sell goods for money.
  • It is an essential function of money.

Measure of value:

  • Money serves as a measure of value.
  • The value of all goods and services is expressed in terms of money.

(b) Secondary functions

Standard of deferred payments:

  • It means that money acts as a ‘standard’ for making future payments.
  • It has made deferred payments much easier than before.
  • Example: When we borrow money from somebody, we have to return both the principal as well as the interest amount in the future.
  • Money is a convenient mode of calculation and payment of interest amount to be paid in the future.
  • This function has facilitated borrowing and lending.
  • It has also led to the creation of financial institutions.

Store of value:

  • A store of value implies a store of wealth.
  • Money can be easily stored for future use.
  • It is the most convenient and economical means to store earnings and wealth.

Transfer of value:

  • Money also serves for transfer of value.
  • It facilitates buying and selling of goods not only in the domestic country but also in other parts of the world.

6. GDP DEFLATOR

  • The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
  • This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
  • Since the deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices — it is seen as a more comprehensive measure of inflation.
  • GDP price deflator = (nominal GDP ÷ real GDP) x 100

7. GROSS HAPPINESS INDEX

  • Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan, Jigme Singye Wangchuck in the 1970s. The concept implies that sustainable development should take a holistic approach towards notions of progress and give equal importance to non-economic aspects of wellbeing.
  • The Gross National Happiness Index is a single number index developed from 33 indicators categorized under nine domains.
  • The GNH Index is constructed based upon a robust multidimensional methodology known as the Alkire-Foster method.
  • The concept of GNH has often been explained by its four pillars: good governance, sustainable socio-economic development, cultural preservation, and environmental conservation
  • Gross national happiness (GNH) measures economic and moral progress as an alternative to gross domestic product measurement in Bhutan.

8. HYPERINFLATION

  • Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
  • Although hyperinflation is a rare event for developed economies, it has occurred many times throughout history in countries such as China, Germany, Russia, Hungary, and Argentina.
  • Hyperinflation refers to rapid and unrestrained price increases in an economy, typically at rates exceeding 50% each month over time.
  • Hyperinflation can occur in times of war and economic turmoil in the underlying production economy, in conjunction with a central bank printing an excessive amount of money.
  • Hyperinflation can cause a surge in prices for basic goods—such as food and fuel—as they become scarce.
  • While hyperinflations are typically rare, once they begin, they can spiral out of control.

9. LIABILITY

  • A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
  • A liability (generally speaking) is something that is owed to somebody else.
  • Liability can also mean a legal or regulatory risk or obligation.
  • In accounting, companies book liabilities in opposition to assets.
  • Current liabilities are a company's short-term financial obligations that are due within one year or a normal operating cycle (e.g. accounts payable).
  • Long-term (non-current) liabilities are obligations listed on the balance sheet not due for more than a year.

10. LOCAL TAX

  • A local tax is an assessment by a state, country, or municipality to fund public services ranging from education to garbage collection and sewer maintenance. Local taxes come in many forms, from property taxes and payroll taxes to sales taxes and licensing fees. They can vary widely from one jurisdiction to the next.
  • Taxes levied by cities and towns are also referred to as municipal taxes.

Sources

  • The Hindu
  • The Balance
  • The Economic Times
  • Sustainable development UN website
General Studies Paper 3
  • Economy