ECONOMY : TERMS & DEFINITIONS

ECONOMY : TERMS & DEFINITIONS

A collection of Important terminologies which are in recent news

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1) DEMOGRAPHIC DIVIDEND

• It is defined by the United Nations Population Fund (UNFP) As, “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older).”
• In other words, it is “a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents.

• Due to the dividend between young and old, there is a great potential for economic gains, which has been termed as the "demographic gift"
• India is currently going through a phase of demographic dividend.

2) EASE OF DOING BUSINESS

• It is an aggregate figure that includes different parameters which define the ease of doing business in a country.
• Ease of doing business is an index published by the World Bank.
• It is computed by aggregating the distance to frontier scores of different economies.
• The distance to frontier score uses the 'regulatory best practices' for doing business as the parameter and benchmark economies according to that parameter.

• Indicators for which distance to frontier is computed include construction permits, registration, getting credit, tax payment mechanism etc.
• Countries or states are ranked as per the index.

3) CRYPTO-CURRENCY

• A crypto-currency is a digital asset designed to work as a medium of exchange like our hard currency.
• It is a digital or virtual currency that uses cryptography for security making it difficult to counterfeit.
• It is not issued by any central authority, rendering it immune to government interference or manipulation.
• The anonymous nature of crypto-currency transactions makes them well-suited for money laundering and tax evasion.
• Ex: Bitcoin,  Litecoin, Namecoin and PPCoin.

4) MOST FAVOURED NATION

• Most Favoured Nation is a treatment accorded to a trade partner to ensure non-discriminatory trade between two countries vis-a-vis other trade partners. (Trade advantages include low tariffs or high import quotas.)
• The importance of MFN is shown in the fact that it is the first clause in the General Agreement on Tariffs and Trade (GATT).
• Under WTO rules, a member country cannot discriminate between its trade partners.
• If a special status is granted to a trade partner, it must be extended to all members of the WTO.
• India granted MFN status to Pakistan in 1996, Pakistan still hasn’t granted India with MFN status.

5) CROWDING OUT EFFECT

• Crowding out is a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financial resources and raising interest rates..
• Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity.
• During expansionary fiscal policy defict can be financed by increased taxes, borrowing, or both
• This leads to an increase in interest rates.

• Increased interest rates affect private investment decisions.
• A high magnitude of the crowding out effect may even lead to lesser income in the economy

• The Masala bonds refer to rupee-denominated bonds through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency.

• Basically, they are debt instruments that are typically used by corporates to raise money from investors.
• By the issuance of rupee denominated bonds, Indian entity is protected against the risk of currency fluctuation, typically associated with borrowing in foreign currency.
• Masala bonds also help in internationalization of the rupee and in expansion of the Indian bond markets.
• These bonds are usually traded on the London Stock Exchange (LSE) and not in India. The first Masala bond was issued by the International Finance Corporation (IFC), the investment arm of the World Bank. Chinese bonds, named Dim-sum bonds after a popular dish in Hong Kong, and Japanese bonds are named Samurai after the country’s warrior class.

7) DUTCH DISEASE

• Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves.
• The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market.
• It also leads to higher levels of cheap imports and can lead to de-industrialisation as industries apart from resource exploitation are moved to cheaper locations.
• In the long run, these factors can contribute to higher unemployment due to manufacturing jobs being moved to lower-cost countries. The origin of the phrase is the Dutch economic crisis of the 1960s following the discovery of North Sea natural gas.

8) DEMONETIZATION

• Demonetization is the act of stripping a currencyunit of its status as legal tender.
• It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
• Sometimes, a country completely replaces the old currency with new currency.
• The opposite of demonetization is remonetization, in which a form of payment is restored as legal tender.
  • reasons why nations demonetize their local units of currency:
  • to combat inflation
  • to combat corruption and crime (counterfeiting, tax evasion)
  • to discourage a cash-dependent economy
  • to facilitate trade
• In 2016, the Indian government demonetized the 500- and 1000- rupee notes.

9) SOIL RATE

• Soil rate is the rate at which notes are considered to be too damaged to use and have been returned to the central bank.
• RBI data show that in India low denomination notes have a soil rate of 33% per year. In contrast, the soil rate for the Rs.500 note is 22%, and the Rs 1000 is 11%.(Before demontization).
• In principle, if a rupee denomination note and foreign denomination note fulfill a similar transaction function then their soil rates should be similar (all else equal ).

• If the Indian soil rate is instead lower, this suggests that a fraction of notes are not being used for transaction but rather for storing black money.

10) ECONOMIC TSUNAMI

• An economic tsunami is a set of circumstances that produce an event that triggers considerable distress in the financial markets and/or the economy.
• As with a natural tsunami, in an economic tsunami the resulting effects can be felt far and wide, across numerous geographic regions and/or industrial sectors.
• The 2008 subprime mortgage crisis that led to an economic crisis in the United States is one example of an economic tsunami.
• When homeowners continued to default on mortgages, the mortgage-backed securities based on those mortgages began defaulting, and the insurance companies that covered those securities could not cover the rising claims.
• Additionally, rising unemployment caused a drop in spending, which caused many businesses to go under or lay off more employees, worsening the crisis.

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