One is bound to come across economics in one’s everyday life. We can’t quite delete money, can we? And this makes it important that we know some of the words that are related to economics. For our purpose, we call them the words of wealth. We introduce you to 10 such words today:
1. Capital: Material wealth used or available for use in the production of more wealth.
2. Paid-Up Capital: That part of the issued capital of a company that has been paid up by the shareholders.
3. Venture capital: Money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable. Also called risk capital.
4. Hedge funds: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).
5. Capital Gains: A realized increase in the value of a capital asset, as when a share is sold for more than the price at which it was purchased. Strictly speaking, the term refers to capital appreciation outside the normal courses of business. In India capital gains are subject to Capital Gains Tax (CGT). The tax does not cover gains arising from the sale of personal belongings, including cars or principal dwelling houses, but it does cover gains from the sale of stock exchange securities.
6. Cost of Capital: The payment made by a firm for using long-term capital used in business. The average cost of capital to a firm that uses several sources of long-term funds (loans, share capital) to finance its investments will depend upon the individual cost of each separate source (for example, interest on loans) weighted in accordance with the proportions of each source used.
7. Dividend: That part of a company’s profit, which Directors decide to distribute to the shareholders. It is generally expressed as a percentage of the nominal value of the capital to which it relates.
8. Deficit Financing: The use of borrowing to finance an excess of expenditure over income. Most often, it refers to governments, who often spend more than they can raise in taxation. The term is normally used in economics to refer to a planned budget deficit incurred in the interests of expanding aggregate demand by relaxing fiscal policy and thus injecting purchasing power into the economy, a policy advocated by Keynes to increase employment in the 1930s. In India, this has been a popular tool to plug the deficit so far, but in future, there are likely be some restrictions on the total amount of deficit financing each year the government can avail of.
9. Deflation: 1. A sustained reduction in the general price levels. Deflation is often accompanied by declines in output and employment and is distinct from ‘disinflation’, which refers to a reduction in the rate of inflation.
Deflation can be brought about by either internal or external forces in an open economy.
II: A deliberate policy of reducing aggregate demand and output to reduce inflation rate and the quantity of imports and lower the exchange rates, thus improving export performance and the BoP. Aggregate demand may be reduced by fiscal policy (increasing taxes or reducing government expenditure) or money supply.
10. Inflation: Persistent increase in the general level of prices. It can be seen as a devaluing of the worth of money.
These are just definitions for some of the words that you encounter in the world of economics. We will come out with another one soon.
Disclaimer: the definitions for these terms are picked up from different sources on the internet.