Economics

Economic/ Business Cycle:

Predictable long term pattern changes in national income. Traditional business cycles undergo four stages: expansion, prosperity, contraction and recession. After a recessionary phase, the expansionary phase can start again. The phases of the business cycle are characterized by changing employment, industrial productivity and interest rates. Some economist believe that stock price trends precede business cycle stages.

Nasdq
(National Association of Security Dealers Automated Quotation Systems).

A computer system established by the NASD (National Association of Security Dealers) by providing dealers with current bid and ask price quotes on over the counter stocks and some listed stocks. Unlike the AMEX and the NYSE, the NASDAQ:
1. Does not have a trading floor that brings together buyers and sellers. Instead all trading done in the Nasdaq exchange is done on a network of computers and telephones. 2.It does not employ market specialists to buy unfilled orders like the NYSE does. The NASDQ BEGAN WHEN BROKERS STARTED INFORMALLY trading via telephone; the network was later fomalized and linked by computer in the early 1970s. In 1998, the parent company of the NASDAQ purchased the AMEX, although the two continue to operate separately. Oders for stock are sent out electronically on the NASDAQ, where the markets list their buy and sell prices. Once a price is agreed upon, the transaction is executed electronically.

Letter of Intent

A letter from one comapny to another acknowledging a willingness and ability to do business. A letter of intent is most often issued as acknowledgement of the fact that a merger between companies or an acquisition is being considered seriously. In other cases, it is issued by a mutual fund shareholder to indicate that he/she would like to invest certain amounts of money at certain specified times. In exchange for signing a letter of intent, the shareholder would often qualify for reduced sales charges. A letter of intent is not a contract and cannot be enforced, it is just a document stating serious intent to carry out certain business activities.

Economics

A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: Macroeconomics, which concentrates on the behaviour of the aggregate economy, and microeconomics, which focuses on individual consumers.

Keynesian Economy

Believes that markets react very slowly to changes in equilibrium (special changes in prices) and that active government intervention is sometimes the best method to get the economy back into equilibrium.

Neoclassical economics

An approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize utility or profit. It also increased the use of mathematical equations in the study of various aspects of the economy.

Positive Economics
(Objective)

Study of economics based on objective analysis. Most economists today focus on positve economic analysis, which uses what is and what has been occurring in an economy as the basis for any statements about the future. Positive economics stands in contrast to normative economics, which uses value judgements.

Xample: A positive economics statement would be: " Increasing interest rates will encourage people to save". This is considered a positive economic statement because it does not contain value judgments and its accuracy can be tested.

Most of the information that we hear in the media today is a combination of positive and normative economics statement or theories. Because of this, investors should always be careful to separate out what is objective and what is subject analysis.

Normative Economics
(Subjective)

Economic perspective that incorporates subjectivity within its analyses. Is the study or presentation of "what it ought to be" rather than what it actually is. It deals heavily in value judgments and theoretical scenarios (opposite of positive economics).

Normative statements are often heard in the media because they tend to represent a theory or opinion rather than objective analysis. It is a great way to establish goals and generates ideas, but it should not be used as a basis for policy decisions.

Xample: " We should cut taxes in haalf to increase disposable income levels". On the other hand a positive/ objective economic observation would be, " Big tax cuts would help many people, but government budget constraints make that option infeasible".

Microeconomics

Branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on PATTERNS of supply and demand and the determination of price and output in individual markets (e.g. coffee industry).

Microeconomics looks at the smaller pictureand focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who hav any desire to start their own buinsess or who want to learn the rationale behind the pricing of particualr products and seervices would be more interested in this area.

Macroeconomics

Field of economics that studies the behavior of the aggregate economy. It examines economy-wide phenomena such as changes in:
1.unemployment,
2.national income,
3.rate of growth,
4.gross dometic product, 5.inflation and price levels.

Macroeconomics is focused on the movement and trends in the economy as a whole, while in microe the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as, the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example.

Mortgage Bond

A bond secured by a mortgage on a property. Mortgage bonds are backed by real estate or physical equipment that can be liquidated. These are usually considered high-grade, save investments. If an issuer in default has both secured and unsecured bonds outstanding, secured bondholders ar paid off first, then unsecured bondholders. Naturally, because unsecured bonds carry greater risk than secured bonds, they usually pay higher yields.

Futures Contract

A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk futures convey and obligation to buy.The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and oppossite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning the represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguised from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearing houses. Also, in order to insure that payment will occur, futures have a margin requirement that mu

Zero sum-game

Situation or interaction in which one participant's gains result only from another's equivalent losses.

Classical Economics

School of economic thought which stresses that economies function most efficiently if everyone is allowed to pursue his or her self interest, in an environment of free and open competition. In other words, its Lazzies Fares economics or "let it be economics" which the financial system functions at its best with the least of government intervention or regulation. In addition, believers or supporters of classical economics are also against increases of the minimum wage, duties and restrinctions on free trade.

Mercantilism

Body of economics thought popular during the mid 16th and late 17th centuries. It held that money was wealth accumulation of gold and silver was the key to properity, and one nation's gain was another's loss. It exhorted governments to maintain surplus of exports over imports through tariffs (duties), colonialism, and other such measures. This economic view dissapeared until a UK economist John Maynard Keynes stated that a surplus in balance-of-trade stimulates demand, thus increasing the national wealth. When corporations, politicians, and unions demand control over imports throught higher-duties to proctect local jobs and industries, they are resorting to mercantilism.

Balance of trade (BOT)

Largest component of a country's current account in its balance of payments (BOP) accounts, it shows the difference between export earnings and import expenditure. Called "favorable" when the amount realized from physical (or tangible or visible) exports is more than the amount spent on physical imports, otherwise called "unfavorable". Also called trade balance.

Market Economy

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little goverment intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's econoic activity. This type of economy works on the assumption that market forces, such as, supply and demand, are the best determinantes of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.

Production Possibility Frontier (PPF).
See investopedia for charts.

A curve that compares the trade offs between two goods produced by an economy in order to demonstrate the efficient use of resources. Points along the curve are considered efficient and obtainable, and show the maximum amount of one good that can be produced in relation to another. Points within the curve are considered obtainable but inefficient. Points outside the curve are considered impossible to obtain. A classic example considers and economy that can produce either guns or butter, and shows how a government can spend a finite amount of resources on guns (defense), butter (non-defense) or a combination of the two.