Economic Terminology

Firstly happy new year!

In this month’s wealth pipeline we explain in layman terms some of the commonly used economic terminology which sadly is becoming increasingly discussed because of the current global sovereign debt issues. 

Gross Domestic Product

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.  Economists monitor changes in real GDP (adjusted for inflation).  GDP can also be described as a sum of consumption, investment, government spending and net exports.

Terms of Trade

Terms of trade is simply what quantity of imports can be purchased through the sale of a fixed quantity of exports.  A common example used in Australia is the quantum of flat screen televisions that can be imported with a tonne of iron ore exported.  This statistic is sometimes used as a proxy for the relative social welfare of a country. 

Balance of Payments

Balance of payments (BOP) are an accounting record of all monetary transactions between a country and the rest of the world.  These transactions include payment for the country’s exports and imports of goods, services, financial capital and financial transfers.  The BOP accounts summarise international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.  

Current Account

The current account is one of the two primary components of the balance of payments, the other being the capital account.  The current account is the sum of the balance of trade (exports minus imports of goods and services, net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Balance of Trade

The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period.  It is the relationship between a nation’s imports and exports.  A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap.  The balance of trade is sometimes divided into a goods and a services balance.

Capital Account

Where the current account reflects a nation’s net income, the capital account reflects the net change in national ownership of assets.  A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows will effectively be borrowings or sales of assets rather than earnings.

Government Budget

A government budget is a plan of a government’s revenue and spending over a certain period of time (usually a year).  A positive balance (where revenue exceeds spending) is known as a government surplus; a negative balance is referred to as a government deficit.

Primary Balance

The primary balance is simply a government’s budget excluding interest income and interest payable.

Negative Growth

 By definition, growth must be an increase.  Therefore it is impossible to have negative growth!

Positive Contraction

 See above!