Economics vocabulary start from 'C'

1. Cannibalise

   Eating people is wrong. Eating your own business may not be. FIRMS used to be reluctant to launch new products and SERVICES that competed with what they were already doing, as the new thing would eat into (cannibalise) their existing business. In today's innovative, technology-intensive economy, however, a willingness to cannibalise is more often seen as a good thing. This is because INNOVATION often takes the form of what economists call creative destruction (see SCHUMPETER), in which a superior new product destroys the market for existing products. In this environment, the best course of action for successful firms that want to avoid losing their market to a rival with an innovation may be to carry out the creative destruction themselves.

   
   

   Capacity

   The amount a company or an economy can produce using its current equipment, workers, CAPITAL and other resources at full tilt. Judging how close an economy is to operating at full capacity is an important ingredient of MONETARY POLICY, for if there is not enough spare capacity to absorb an increase in DEMAND, PRICES are likely to rise instead. Measuring an economy's OUTPUT GAP - how far current OUTPUT is above or below what it would be at full capacity - is difficult, if not impossible, which is why even the best-intentioned CENTRAL BANK can struggle to keep down INFLATION. When there is too much spare capacity, however, the result can be DEFLATION, as FIRMS and employees cut their prices and wage demands to compete for whatever demand there may be.

   
   

   Capital

   MONEY or assets put to economic use, the life-blood of CAPITALISM. Economists describe capital as one of the four essential ingredients of economic activity, the FACTORS OF PRODUCTION, along with LAND, LABOUR and ENTERPRISE. Production processes that use a lot of capital relative to labour are CAPITAL INTENSIVE; those that use comparatively little capital are LABOUR INTENSIVE. Capital takes different forms. A firm's ASSETS are known as its capital, which may include fixed capital (machinery, buildings, and so on) and working capital (stocks of raw materials and part-finished products, as well as money, that are used up quickly in the production process). Financial capital includes money, BONDS and SHARES. HUMAN CAPITAL is the economic wealth or potential contained in a person, some of it endowed at birth, the rest the product of training and education, if only in the university of life. The invisible glue of relationships and institutions that holds an economy together is its social capital.

   
   

   Capital adequacy ratio

   The ratio of a BANK’s CAPITAL to its total ASSETS, required by regulators to be above a minimum (“adequate”) level so that there is little RISK of the bank going bust. How high this minimum level is may vary according to how risky a bank’s activities are.

   
   

   Capital asset pricing model

   A method of valuing ASSETS and calculating the COST OF CAPITAL (for an alternative, see ARBITRAGE PRICING THEORY). The capital asset pricing model (CAPM) has come to dominate modern finance.

   The rationale of the CAPM can be simplified as follows. Investors can eliminate some sorts of RISK, known as RESIDUAL RISK or alpha, by holding a diversified portfolio of assets (see MODERN PORTFOLIO THEORY). These alpha risks are specific to an individual asset, for example, the risk that a company's managers will turn out to be no good. Some risks, such as that of a global RECESSION, cannot be eliminated through diversification. So even a basket of all of the SHARES in a stockmarket will still be risky. People must be rewarded for investing in such a risky basket by earning returns on AVERAGE above those that they can get on safer assets, such as TREASURY BILLS. Assuming investors diversify away alpha risks, how an investor values any particular asset should depend crucially on how much the asset's PRICE is affected by the risk of the market as a whole. The market's risk contribution is captured by a measure of relative volatility, BETA, which ­indicates how much an asset's price is expected to change when the overall market changes.

   Safe investments have a beta close to zero: economists call these assets risk free. Riskier investments, such as a share, should earn a premium over the risk-free rate. How much is calculated by the average premium for all assets of that type, multiplied by the particular asset's beta.

   But does the CAPM work? It all comes down to beta, which some economists have found of dubious use. They think the CAPM may be an elegant theory that is no good in practice. Yet it is probably the best and certainly the most widely used method for calculating the cost of capital.

   
   

   Capital controls

   government-imposed restrictions on the ability of CAPITAL to move in or out of a country. Examples include limits on foreign INVESTMENT in a country's FINANCIAL MARKETS, on direct investment by foreigners in businesses or property, and on domestic residents' investments abroad. Until the 20th century capital controls were uncommon, but many countries then imposed them. Following the end of the second world war only Switzerland, Canada and the United States adopted open capital regimes. Other rich countries maintained strict controls and many made them tougher during the 1960s and 1970s. This changed in the 1980s and early 1990s, when most developed countries scrapped their capital controls.

   The pattern was more mixed in developing countries. Latin American countries imposed lots of them during the debt crisis of the 1980s then scrapped most of them from the late 1980s onwards. Asian countries began to loosen their widespread capital controls in the 1980s and did so more rapidly during the 1990s.

   In developed countries, there were two main reasons why capital controls were lifted: free markets became more fashionable and financiers became adept at finding ways around the controls. Developing countries later discovered that foreign capital could play a part in financing domestic investment, from roads in Thailand to telecoms systems in Mexico, and, furthermore, that financial capital often brought with it valuable HUMAN CAPITAL. They also found that capital controls did not work and had unwanted side-effects. Latin America's controls in the 1980s failed to keep much money at home and also deterred foreign investment.

   The Asian economic crisis and CAPITAL FLIGHT of the late 1990s revived interest in capital controls, as some Asian governments wondered whether lifting the controls had left them vulnerable to the whims of international speculators, whose money could flow out of a country as fast as it once flowed in. There was also discussion of a 'Tobin tax' on short-term capital movements, proposed by James TOBIN, a winner of the NOBEL PRIZE FOR ECONOMICS. Even so, they mostly considered only limited controls on short-term capital movements, particularly movements out of a country, and did not reverse the broader 20-year-old process of global financial and economic LIBERALISATION.

   
   

   Capital flight

   When CAPITAL flows rapidly out of a country, usually because something happens which causes investors suddenly to lose confidence in its economy. (Strictly speaking, the problem is not so much the MONEY leaving, but rather that investors in general suddenly lower their valuation of all the assets of the country.) This is particularly worrying when the flight capital belongs to the country’s own citizens. This is often associated with a sharp fall in the EXCHANGE RATE of the abandoned country’s currency.

   
   

   Capital gains

   The PROFIT from the sale of a capital ASSET, such as a SHARE or a property. Capital gains are subject to TAXATION in most countries. Some economists argue that capital gains should be taxed lightly (if at all) compared with other sources of INCOME. They argue that the less tax is levied on capital gains, the greater is the incentive to put capital to productive use. Put another way, capital gains tax is effectively a tax on CAPITALISM. However, if capital gains are given too friendly a treatment by the tax authorities, accountants will no doubt invent all sorts of creative ways to disguise other income as capital gains.

   
   

   Capital intensive

   A production process that involves comparatively large amounts of CAPITAL; the opposite of LABOUR INTENSIVE.

   
   

   Capital markets

   Markets in SECURITIES such as BONDS and SHARES. Governments and companies use them to raise longer-term CAPITAL from investors, although few of the millions of capital-market transactions every day involve the issuer of the security. Most trades are in the SECONDARY MARKETS, between investors who have bought the securities and other investors who want to buy them. Contrast with MONEY MARKETS, where short-term capital is raised.

   
   

   Capital structure

   The composition of a company’s mixture of DEBT and EQUITY financing. A firm’s debt-equity ratio is often referred to as its GEARING. Taking on more debt is known as gearing up, or increasing lever age. In the 1960s, Franco Modigliani and Merton Miller (1923–2000) published a series of articles arguing that it did not matter whether a company financed its activities by issuing debt, or equity, or a mixture of the two. (For this they were awarded the NOBEL PRIZE FOR ECONOMICS.) But, they said, this rule does not apply if one source of financing is treated more favourably by the taxman than another. In the United States, debt has long had tax advantages over equity, so their theory implies that American FIRMS should finance themselves with debt. Companies also finance themselves by using the PROFIT they retain after paying dividends.

   
   

   Capitalism

   The winner, at least for now, of the battle of economic 'isms'. Capitalism is a free-market system built on private ownership, in particular, the idea that owners of CAPITAL have PROPERTY RIGHTS that entitle them to earn a PROFIT as a reward for putting their capital at RISK in some form of economic activity. Opinion (and practice) differs considerably among capitalist countries about what role the state should play in the economy. But everyone agrees that, at the very least, for capitalism to work the state must be strong enough to guarantee property rights. According to Karl MARX, capitalism contains the seeds of its own destruction, but so far this has proved a more accurate description of Marx's progeny, COMMUNISM.

   
   

   Cartel

   An agreement among two or more FIRMS in the same industry to co-operate in fixing PRICES and/or carving up the market and restricting the amount of OUTPUT they produce. It is particularly common when there is an OLIGOPOLY. The aim of such collusion is to increase PROFIT by reducing COMPETITION. Identifying and breaking up cartels is an important part of the competition policy overseen by ANTITRUST watchdogs in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper. The desire to form cartels is strong. As Adam SMITH put it, 'People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.

   
   

   Catch-up effect

   In any period, the economies of countries that start off poor generally grow faster than the economies of countries that start off rich. As a result, the NATIONAL INCOME of poor countries usually catches up with the national income of rich countries. New technology may even allow DEVELOPING COUNTRIES to leap-frog over industrialised countries with older technology. This, at least, is the traditional economic theory. In recent years, there has been considerable debate about the extent and speed of convergence in reality.

   One reason to expect catch-up is that workers in poor countries have little access to CAPITAL, so their PRODUCTIVITY is often low. Increasing the amount of capital at their disposal by only a small amount can produce huge gains in productivity. Countries with lots of capital, and as a result higher levels of productivity, would enjoy a much smaller gain from a similar increase in capital. This is one possible explanation for the much faster GROWTH of Japan and Germany, compared with the United States and the UK, after the second world war and the faster growth of several Asian 'tigers', compared with developed countries, during the 1980s and most of the 1990s.

   
   

   Central bank

    A central bank sets short-term INTEREST RATES and oversees the health of the FINANCIAL SYSTEM, including by acting as LENDER OF LAST RESORT to commercial banks that get into financial difficulties. The Federal Reserve, the central bank of the United States, was founded in 1913. The Bank of England, known affectionately as the 'Old Lady of Threadneedle Street', was established in 1694, 26 years after the creation of the world's first central bank in Sweden. With the birth of the EURO in 1999, the MONETARY POLICY powers of the central banks of 11 European countries were transferred to a new EUROPEAN CENTRAL BANK, based in Frankfurt.

   During the 1990s there was a trend to make central banks independent from political intervention in their day-to-day operations and allow them to set interest rates. Independent central banks should be able to concentrate on the long-term needs of an economy, whereas political intervention may be guided by the short-term needs of the GOVERNMENT. In theory, an independent central bank should reduce the risk of INFLATION. Some central banks are legally requried to set interest rates so as to hit an explicit inflation target. Politicians are often tempted to exploit a possible short-term trade-off between inflation and UNEMPLOYMENT, even though the long-term consequence of easing policy in this way is (most economists say) that the unemployment rate returns to what you started with and inflation is higher. An independent central bank, because it does not have to worry about persuading an electorate to vote for it, is more likely to act in the best long-run interests of the economy.

   
   

   Ceteris paribus

   Other things being equal. Economists use this Latin phrase to cover their backs. For example, they might say that “higher interest rates will lead to lower inflation, ceteris paribus”, which means that they will stand by their prediction about INFLATION only if nothing else changes apart from the rise in the INTEREST RATE.

   
   

   Charity

   “Bah! Humbug”, was Scrooge’s opinion of charitable giving. Some economists reckon charity goes against economic rationality. Some have argued that the popularity of charitable giving is proof that people are not economically rational. Others argue that it shows that ALTRUISM is something that people get pleasure (UTILITY) from, and so are willing to spend some of their INCOME on it. An interesting question is the extent to which the state is competing with private charity when it redistributes money from rich to poor or spends more on health care and whether this is inefficient.

   
   

   Classical economics

   The dominant theory of economics from the 18th century to the 20th century, when it evolved into NEO-CLASSICAL ECONOMICS. Classical economists, who included Adam SMITH, David RICARDO and John Stuart Mill, believed that the pursuit of individual self-interest produced the greatest possible economic benefits for society as a whole through the power of the INVISIBLE HAND. They also believed that an economy is always in EQUILIBRIUM or moving towards it.

   Equilibrium was ensured in the LABOUR market by movements in WAGES and in the CAPITAL market by changes in the rate of INTEREST. The INTEREST RATE ensured that total SAVINGS in an economy were equal to total INVESTMENT. In DISEQUILIBRIUM, higher interest rates encouraged more saving and less investment, and lower rates meant less saving and more investment. When the DEMAND for labour rose or fell, wages would also rise or fall to keep the workforce at FULL EMPLOYMENT.

   In the 1920s and 1930s, John Maynard KEYNES attacked some of the main beliefs of classical and neo-classical economics, which became unfashionable. In particular, he argued that the rate of interest was determined or influenced by the speculative actions of investors in BONDS and that wages were inflexible downwards, so that if demand for labour fell, the result would be higher UNEMPLOYMENT rather than cheaper workers.

   
   

   Closed economy

   An economy that does not take part in inter­national trade; the opposite of an OPEN ECONOMY. At the turn of the century about the only notable example left of a closed economy is North Korea.

   
   

   Collateral

   An ASSET pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to meet the required INTEREST charges or repayments.

   
   

   Commoditisation

   The process of becoming a COMMODITY. Micro­chips, for example, started out as a specialised technical innovation, costing a lot and earning their makers a high PROFIT on each chip. Now chips are largely homogeneous: the same chip can be used for many things, and any manufacturer willing to invest in some fairly standardised equip ment can make them. As a result, COMPETITION is fierce and PRICES and profit margins are low. Some economists argue that in today's economy the faster pace of innovation will make the process of commoditisation increasingly common.

   
   

   Commodity

   A comparatively homogeneous product that can typically be bought in bulk. It usually refers to a raw material - oil, cotton, cocoa, silver - but can also describe a manufactured product used to make other things, for example, microchips used in personal computers. Commodities are often traded on commodity exchanges. On AVERAGE, the PRICE of natural commodities has fallen steadily in REAL TERMS in defiance of some predictions that growing CONSUMPTION of non-renewables such as copper would force prices up. At times the oil price has risen sharply in real terms, most notably during the 1970s, but this was due not to the exhaustion of limited supplies but to rationing by the OPEC CARTEL, or war, or fear of it, particularly in the oil-rich Middle East.

   
   

   Communism

   The enemy of CAPITALISM and now nearly extinct. Invented by KARL MARX, who predicted that feudalism and capitalism would be succeeded by the 'dictatorship of the proletariat', during which the state would 'wither away' and economic life would be organised to achieve 'from each according to his abilities, to each according to his needs'. The Soviet Union was the most prominent attempt to put communism into practice and the result was conspicuous failure, although some modern followers of Marx reckon that the Soviets missed the point.

   
   

   Comparative advantage

   Paul Samuelson, one of the 20th century's greatest economists, once remarked that the principle of comparative advantage was the only big idea that ECONOMICS had produced that was both true and surprising. It is also one of the oldest theories in economics, usually ascribed to DAVID RICARDO. The theory underpins the economic case for FREE TRADE. But it is often misunderstood or misrepresented by opponents of free trade. It shows how countries can gain from trading with each other even if one of them is more efficient - it has an ABSOLUTE ADVANTAGE - in every sort of economic activity. Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing.

   To see how this theory works imagine two countries, Alpha and Omega. Each country has 1,000 workers and can make two goods, computers and cars. Alpha's economy is far more productive than Omega's. To make a car, Alpha needs two workers, compared with Omega's four. To make a computer, Alpha uses 10 workers, compared with Omega's 100. If there is no trade, and in each country half the workers are in each industry, Alpha produces 250 cars and 50 computers and Omega produces 125 cars and 5 computers.

   What if the two countries specialise? Although Alpha makes both cars and computers more efficiently than Omega (it has an absolute advantage), it has a bigger edge in computer making. So it now devotes most of its resources to that industry, employing 700 workers to make computers and only 300 to make cars. This raises computer output to 70 and cuts car production to 150. Omega switches entirely to cars, turning out 250.

   World output of both goods has risen. Both countries can consume more of both if they trade, but at what PRICE? Neither will want to import what it could make more cheaply at home. So Alpha will want at least 5 cars per computer, and Omega will not give up more than 25 cars per computer. Suppose the terms of trade are fixed at 12 cars per computer and 120 cars are exchanged for 10 computers. Then Alpha ends up with 270 cars and 60 computers, and Omega with 130 cars and 10 computers. Both are better off than they would be if they did not trade.

   This is true even though Alpha has an absolute advantage in making both computers and cars. The reason is that each country has a different comparative advantage. Alpha's edge is greater in computers than in cars. Omega, although a costlier producer in both industries, is a less expensive maker of cars. If each country specialises in products in which it has a comparative advantage, both will gain from trade.

   In essence, the theory of comparative advantage says that it pays countries to trade because they are different. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad.

   There is no reason to assume that a country's comparative advantage will be static. If a country does what it has a comparative advantage in and sees its INCOME grow as a result, it can afford better education and INFRASTRUCTURE. These, in turn, may give it a comparative advantage in other economic activities in future.

   
   

   Competition

   The more competition there is, the more likely are FIRMS to be efficient and PRICES to be low. Economists have identified several different sorts of competition. PERFECT COMPETITION is the most competitive market imaginable in which everybody is a price taker. Firms earn only normal profits, the bare minimum PROFIT necessary to keep them in business. If firms earn more than this (excess profits) other firms will enter the market and drive the price level down until there are only normal profits to be made.

   Most markets exhibit some form of imperfect or MONOPOLISTIC COMPETITION. There are fewer firms than in a perfectly competitive market and each can to some degree create BARRIERS TO ENTRY. Thus firms can earn some excess profits without a new entrant being able to compete to bring prices down.

   The least competitive market is a MONOPOLY, dominated by a single firm that can earn substantial excess profits by controlling either the amount of OUTPUT in the market or the price (but not both). In this sense it is a price setter. When there are few firms in a market (OLIGOPOLY) they have the opportunity to behave as a monopolist through some form of collusion (see CARTEL). A market dominated by a single firm does not necessarily have monopoly power if it is a CONTESTABLE MARKET. In such a market, a single firm can dominate only if it produces as efficiently as possible and does not earn excess profits. If it becomes inefficient or earns excess profits, another more efficient or less profitable firm will enter the market and dominate it instead.

   
   

   Competitiveness

   'Real economists don't talk about competitiveness,' said Paul Krugman, a much-respected contemporary economist. Real businessmen and real politicians talk about it all the time, however. Many FIRMS have undergone savage downsizing to remain competitive, and governments have set up numerous committees to examine how to sharpen their countries' economic performance.

   Mr Krugman's objection was not to the use of the term competitiveness by companies, which often do have competitors that they must beat, but to applying it to countries. At best, it is a meaningless word when applied to national economies; at worst, it encourages PROTECTIONISM. Countries, he claimed, do not compete in the same way as companies. When two companies compete, one's gain is the other's loss, whereas international trade, Mr Krugman argued, is not a ZERO-SUM GAME: when two countries compete through trade they both win.

   Yet measures of national competitiveness are not complete nonsense. A country's future prosperity depends on its GROWTH in PRODUCTIVITY, which GOVERNMENT policies can influence. Countries do compete in that they choose policies to promote higher living standards. Even so, conceptual and measurement difficulties mean that the growing number of indices purporting to compare the competitiveness of different countries should probably be taken with a large pinch of salt.

   Complementary goods

   When you buy a computer, you will also need to buy software. Computer hardware and software are therefore complementary goods: two products, for which an increase (or fall) in DEMAND for one leads to an increase (fall) in demand for the other. Complements are the opposite of SUBSTITUTE GOODS. For instance, Microsoft Windows-based personal computers and Apple Macs are substitutes.

   
   

   Concentration

   The tendency of a market to be dominated by a few big FIRMS. A high degree of concentration may be evidence of ANTITRUST problems, if it reflects a lack of COMPETITION. Traditionally, economists examined whether there was too much concentration using the HERFINDAHL-HIRSCHMAN INDEX, which is determined by adding the squares of the market shares of all firms involved. A low Herfindahl indicated many competitors and thus great difficulty in exercising MARKET POWER; a high Herfindahl, however, suggested a concentrated market in which PRICE rises are easier to sustain. More recently, antitrust authorities have placed less emphasis on concentration. One reason is that it is hard to define the market in which concentration should be measured. Instead, antitrust authorities have turned their attention to finding examples of firms earning excessive profits or holding back INNOVATION, although this too raises tricky conceptual and practical questions.

   
   

   Conditionality

   When there are strings attached, for example, to INTERNATIONAL AID or loans from the IMF or WORLD BANK. The delivery of the MONEY may be made subject to the GOVERNMENT of the country implementing economic or political reforms desired by the donor or lender.

   
   

   Consumer confidence

   How good consumers feel about their economic prospects. Measures of average consumer confidence can be a useful, though not infallible, indicators of how much consumers are likely to spend. Combined with measures such as business confidence, it can shed light on overall levels of economic activity.

   
   

   Consumer prices

   What people are usually thinking of when they worry about INFLATION. The PRICES paid by whoever finally consumes goods or SERVICES, as opposed to prices paid by FIRMS at various stages of the production process .

   
   

   Consumer surplus

   The difference between what a consumer would be willing to pay for a good or service and what that consumer actually has to pay. Added to PRODUCER SURPLUS, it provides a measure of the total economic benefit of a sale.

   
   

   Consumption

   What consumers do. Within an economy, this can be broken down into private and public consumption . The more resources a society consumes, the less it has to save or invest, although, paradoxically, higher consumption may encourage higher INVESTMENT. The LIFE-CYCLE HYPOTHESIS suggests that at certain stages of life individuals are more likely to be saving than consuming, and at other stages they are more likely to be heavy consumers. Some economists argue that consumption taxes are a more efficient form of TAXATION than taxes on wealth, CAPITAL, property or INCOME.

   
   

   Contestable market

   A market in which an inefficient firm, or one earning excess profits, is likely to be driven out by a more efficient or less profitable rival. A market can be contestable even if it is dominated by a single firm, which appears to enjoy a MONOPOLY with MARKET POWER, and the new entrant exists only as potential COMPETITION.

   
   

   Corruption       

   Being corrupt is not just bad for the soul, it also harms the economy. Research has found that in countries with a lot of corruption, less of their GDP goes into INVESTMENT and they have lower GROWTH rates. Corrupt countries invest less in education, a sector of the economy that pays big economic dividends but small bribes, than do clean countries, thereby reducing their HUMAN CAPITAL. They also attract less FOREIGN DIRECT INVESTMENT.

   There is no such thing as good corruption, but some sorts of corruption are less bad than others. Some economists point to similarities between bribery and paying taxes or buying a licence to operate. Where it is predictable - where the briber knows what to pay and can be sure of getting what it pays for--corruption harms the economy far less than where it is capricious.

   The absence of corruption has huge economic benefits, however, by allowing the development of institutions that enable a market economy to function efficiently. In many of the world's more corrupt countries, the distinction between private interest and public duty is still unfamiliar. Countries that have made graft the exception rather than the rule in the conduct of public affairs have been helped to grow by the emergence of institutions such as an independent judiciary, a free press, a well-paid civil service and, perhaps crucially, an economy in which FIRMS have to compete for customers and CAPITAL.

   
   

   Cost of capital

   The amount a firm must pay the owners of CAPITAL for the privilege of using it. This includes INTEREST payments on corporate DEBT, as well as the dividends generated for shareholders. In deciding whether to proceed with a project, FIRMS should calculate whether the project is likely to generate sufficient revenue to cover all the costs incurred, including the cost of capital. Calculating the cost of EQUITY capital can be tricky.

   
   

   Cost-benefit analysis

   A method of reaching economic decisions by comparing the costs of doing something with its benefits. It sounds simple and common-sensical, but, in practice, it can easily become complicated and is much abused. With careful selection of the assumptions used in cost-benefit analysis it can be made to support, or oppose, almost anything. This is particularly so when the decision being con templated involves some cost or benefit for which there is no market PRICE or which, because of an EXTERNALITY, is not fully reflected in the market price. Typical examples would be a project to build a hydroelectric dam in an area of outstanding natural beauty or a law to require factories to limit emissions of gases that may cause ill-health.

   
   

   Credit creation

   Making loans. Often the amount of credit creation is subject to REGULATION. Lenders may have limits on the amount of loans they can make relative to the ASSETS they have, so that they run little RISK of BANKRUPTCY (see Basel 1 and 2 and CAPITAL ADEQUACY RATIO). A CENTRAL BANK tries to keep the amount of credit creation below the level at which it would increase the MONEY SUPPLY so much that INFLATION accelerates. This was never easy to get right even when most lending was by BANKS, but it has become much harder with the recent growth of non-bank lending, such as by credit-card com­panies and retailers.

   
   

   Credit crunch

   When BANKS suddenly stop lending, or BOND market LIQUIDITY evaporates, usually because creditors have become extremely RISK AVERSE.

   
   

   Creditor

   A lender, whether by making a loan, buying a BOND or allowing MONEY owed now to be paid in the future.

   
   

   Crony capitalism

   An approach to business based on looking after yourself by looking out for your own. At least until the crisis of the late 1990s, some Asian companies, and even governments, were notable for awarding contracts only to family and friends. This was often a form of CORRUPTION, resulting in economic inefficiency.

   
   

   Crowding out

   When the state does something it may discourage, or crowd out, private-sector attempts to do the same thing. At times, excessive GOVERNMENT borrowing has been blamed for low private-sector borrowing and, consequently, low INVESTMENT and (because the economic returns on public borrowing are typically lower than those on private DEBT, especially corporate debt) slower economic GROWTH. This has become less of a concern in recent years as government indebtedness has declined and, because of GLOBALISATION, FIRMS have become more able to raise CAPITAL outside their home country. Crowding out may also come from state spending on things that might be provided more efficiently by the private sector, such as health care, or even through CHARITY, redistribution.

   
   

   Currency board

   A means by which some countries try to defend their currency from speculative attack. A country that introduces a currency board commits itself to converting its domestic currency on demand at a fixed EXCHANGE RATE. To make this commit ment credible, the currency board holds RESERVES of foreign currency (or GOLD or some other liquid ASSET) equal at the fixed rate of exchange to at least 100% of the value of the domestic currency that is issued.

   Unlike a conventional CENTRAL BANK, which can print MONEY at will, a currency board can issue domestic notes and coins only when there are enough foreign exchange reserves to back it. Under a strict currency board regime, INTEREST RATES adjust automatically. If investors want to switch out of domestic currency into, say, US dollars, then the SUPPLY of domestic currency will automatically shrink. This will cause domestic interest rates to rise, until eventually it becomes attractive for investors to hold local currency again.

   Like any fixed exchange rate system, a currency board offers the prospect of a stable exchange rate and its strict discipline also brings benefits that ordinary exchange rate pegs lack. Profligate governments, for instance, cannot use the central bank's printing presses to fund large deficits. Hence currency boards are more credible than fixed exchange rates. The downside is that, like other fixed exchange rate systems, currency boards prevent governments from setting their own interest rates.

   If local inflation remains higher than that of the country to which the currency is pegged, the currencies of countries with currency boards can become overvalued and uncompetitive. Governments cannot use the exchange rate to help the economy adjust to an outside SHOCK, such as a fall in export prices or sharp shifts in capital flows. Instead, domestic WAGES and prices must adjust, which may not happen for many years, if ever.

   A currency board can also put pressure on banks and other financial institutions if interest rates rise sharply as investors dump local currency. For emerging markets with fragile banking systems, this can be a dangerous drawback. Furthermore, a classic currency board, unlike a central bank, cannot act as a LENDER OF LAST RESORT. A conventional central bank can stem a potential banking panic by lending money freely to banks that are feeling the pinch. A classic currency board cannot, although in practice some currency boards have more freedom than the classic description implies. The danger is that if they use this freedom, governments may cause currency speculators and others to doubt the government's commitment to living within the strict disciplines imposed by the currency board.

   Argentina's decision to devalue the peso amid economic and political crisis in January 2002, a decade after it adopted a currency board, showed that adopting a currency board is neither a panacea nor a guarantee that an exchange rate backed by one will remain fixed come what may.

   
   

   Currency peg

   When a GOVERNMENT announces that the EXCHANGE RATE of its currency is fixed against another currency or currencies. 

   
   
   

कार्बन फुटप्रिंट

कार्बन फुटप्रिंट का मतलब किसी एक संस्था, व्यक्ति या उत्पाद दवारा किया जाने वाला कुल कार्बन उत्सर्जन होता है| दूसरे शब्दों में, इसका मतलब कार्बन डाई-आक्साइड या ग्रीनहाउन गैसों का उत्सर्जन भी होता है| कार्बन फुटप्रिंट का नाम इकोलाँजिकल फुटप्रिंट का ही एक अंश है| उससे अधिक यह जीवनचक्र आकलन (एलसीए) का हिस्सा है|

किसी व्यक्ति, संस्था या वस्तु के कार्बन फुटप्रिंट का आकलन ग्रीनहाउन गैसों के उत्सर्जन के आधार पर किया जा सकता है| संभवत: कार्बन फुटप्रिंट का सबसे बड़ा कारण इंसान की इच्छा ही होती है| इसके साथ घर में इस्तेमाल होने वाली बिजली की जरूरत भी इसका बड़ा कारण है|

वैञानिकों के अनुसार इंसान की क़रिब सभी आदतें, जिनमें खानपान से लेकर पहने जाने वाले कपड़े तक शामिल हैं, कार्बन फुटप्रिंट का कारण बनते हैं|

दूसरे शब्दों में हर काम के लिए ऊर्जा की जरूरत पड़ती है और इससे कार्बन डाई-आक्साइड (सीओ2) गैस निकलती है, जो धरती को गर्म करने वाली सबसे अहम गैस है| हम दिन, महीने या साल में जितनी सीओ2 पैदा करते हैं, वह हमारा कार्बन फुटप्रिंट है| इसे कम से कम रख कर ही पृथ्वी को जलवायु परिवर्तन के प्रकोप से बचाया जा सकता है|

ग्रीनहाउस गैसों में कमी लाने के कई तरीके हैं। सौर, पवन ऊर्जा के अधिक इस्तेमाल और पौधा रोपण आदि से कार्बन उत्सर्जन में कमी लाई जा सकती है। कार्बन उत्सर्जन और अन्य ग्रीनहाउस गैसों का वातावरण में निकास जीवाश्म ईंधन, कच्चे तेल और कोयले के जलने से होता है। क्योटो प्रोटोकॉल में कार्बन उत्सर्जन और ग्रीनहाउस गैसों पर निश्चित समय-सीमा के अंतर्गत रोक लगाने का मसौदा भी प्रतुत किया गया था।

मानव द्वारा अपने कार्बन फुटप्रिंट में कमी घर में विद्युत प्रयोग में कमी से, फ्लोरेसेंट बल्बों के प्रयोग से लाई जा सकती है। बर्तनों को हाथ से धोकर, उन्हें खुले वातावरण में रखकर सुखाने से भी लाब होगा। कांच, धातुओं, प्लास्टिक और कागज को एक से अधिक बार प्रयोग में लाना चाहिये। रेफ्रिजरेटर की रफ्तार धीमी रखना चाहिये। घर की दीवारों पर हल्के रंग का रोगन भी इसमें सहायक होता है।

कार्बन न्यूट्रल :  कार्बन न्यूट्रल से मतलब यह है कि जितनी मात्रा में किसी व्यक्ति, घटना या संगठन से कार्बन का उत्सर्जन होता है, उसे शून्य करने के लिए उसके अनुरूप कार्बन क्रेडिट खरीदा जाए (जो प्रमाणपत्र के रूप में मिलता है) अथवा उसके अनुरूप वृक्षारोपण किया जाए या सौर ऊर्जा जैसे पर्यावरण अनुकूल ऊर्जा स्रोतों का इस्तेमाल किया जाए।

भारत में कार्बन डाई ऑक्साइड (ग्रीन हाउस गैसों से इतर) कम करनेवाली परियोजनाओं के कार्यान्वयन से कार्बन क्रेडिट जुटाए जा सकते हैं। प्रत्येक एक टक कार्बन डाई ऑक्साइड कम करने पर एक कार्बन क्रेडिट मिलता है।

लागू किए गए कार्बन कार्यक्रम के अनुसार कार्बन क्रेडिट को भिन्न-भिन्न नामों से जाना जाता है।

·         सर्टिफाइड एमिशन रिडक्शन्स (सीईआर)- ईयू एमिशन ट्रेडिंग सिस्टम के अंतर्गत अनुपालन के उद्देश्य से औद्योगिक प्रदूषणकर्ताओं द्वारा व्यवहृत

·         वेरिफाइड एमिशन रिडक्शन्स (वीईआर्स)- गैर-निष्पादन उद्देश्यों जैसे सीएसआर, कार्बन फुट-प्रिंटिंग एवं दुनिया में कहीं भी ऐसे अन्य प्रयासों के लिए व्यवहृत

Economics Vocabulary start from 'B'

Backwardation

When a commodity is valued more highly in a spot market (that is, when it is for delivery today) than in a futures market (for delivery at some point in the future). Normally, interest costs mean that futures prices are higher than spot prices, unless the markets expect the price of the commodity to fall over time, perhaps because there is a temporary bottleneck in supply. When spot prices are lower than futures prices it is known as contango.

Balance of payments

The total of all the money coming into a country from abroad less all of the money going out of the country during the same period. This is usually broken down into the current account and the capital account. The current account includes:

• visible trade (known as merchandise trade in the United States), which is the value of exports and imports of physical goods;
• invisible trade, which is receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights, as well as cross-border dividend and interest payments;
• private transfers, such as money sent home by expatriate workers;
• official transfers, such as international aid.

The capital account includes:

• long-term capital flows, such as money invested in foreign firms, and profits made by selling those investments and bringing the money home;
• short-term capital flows, such as money invested in foreign currencies by international speculators, and funds moved around the world for business purposes by multinational companies. These short-term flows can lead to sharp movements in exchange rates, which bear little relation to what currencies should be worth judging by fundamental measures of value such as purchasing power parity.

As bills must be paid, ultimately a country's accounts must balance (although because real life is never that neat a balancing item is usually inserted to cover up the inconsistencies).

"Balance of payments crisis" is a politically charged phrase. But a country can often sustain a current account deficit for many years without its economy suffering, because any deficit is likely to be tiny compared with the country's national income and wealth. Indeed, if the deficit is due to firms importing technology and other capital goods from abroad, which will improve their productivity, the economy may benefit. A deficit that has to be financed by the public sector may be more problematic, particularly if the public sector faces limits on how much it can raise taxes or borrow or has few financial reserves. For instance, when the Russian government failed to pay the interest on its foreign debt in August 1998 it found it impossible to borrow any more money in the international financial markets. Nor was it able to increase taxes in its collapsing economy or to find anybody within Russia willing to lend it money. That truly was a balance of payments crisis.

In the early years of the 21st century, economists started to worry that the United States would find itself in a balance of payments crisis. Its current account deficit grew to over 5% of its GDP, making its economy increasingly reliant on foreign credit.

Balanced budget

When total public-sector spending equals total government income during the same period from taxes and charges for public services. Politicians in some countries, such as the United States, have argued that government should be required to run a balanced budget in order to have sound public finances. However, there is no economic reason why public borrowing need necessarily be bad. For instance, if the debt is used to invest in things that will increase the growth rate of the economy--infrastructure, say, or education--it may be justified. It may also make more economic sense to try to balance the budget on average over an entire economic cycle, with public-sector deficits boosting the economy during recession and surpluses stopping it overheating during booms, than to balance it every year.

Bank

Starting out as places that would guard your money, banks became the main source of credit creation. Increasingly, however, borrowers are turning to the financial markets and to non-savings institutions, such as credit-card companies and consumer-finance firms, when they need a loan. This is reducing the profitability of traditional bank lending and has led many banks to enter new areas of business, such as selling insurance policies and mutual funds. Increasingly, too, traditional banks are selling off parcels of their loans in the financial markets by a process called securitisation.

What the most efficient split is between bank lending and other sorts of lending is debatable. Economists argue endlessly about whether an economy such as the United States, in which firms rely more heavily on the equity and debt markets than on banks to fund their investment, is better than one such as, say, Germany, in which banks have traditionally been the main source of corporate finance.

Banks come in many different forms. Commercial banks, also known as retail banks, cater directly for the general public and lend to (mostly small and medium-sized) firms. In the past, they did so largely through a network of bank branches, although increasingly these are giving way to atm machines, the telephone and the Internet. Wholesale banks largely transact with other banks and financial institutions. Investment banks, also known as merchant banks, concentrate on raising money for companies from private investors or in the financial markets, by finding buyers for their equity and corporate bonds. Universal banks do most or all of the above including, through bancassurance, selling insurance. These banks have long been a feature of continental European economies. However, in the United States financial laws such as the Glass-Steagall Act have separated different forms of banking from each other and kept banks out of the insurance business. These laws were abolished in 1999, although during the preceding couple of decades regulators effectively dismantled them by changing the way they were applied. Even so, because of these and other laws, which for many years stopped banks from operating across state borders, the United States has far more lending institutions than other countries. In 2003 there were over four lending institutions per 100,000 people in the United States, compared with fewer than one per 100,000 in the UK and France.

Bankruptcy

When a court judges that a debtor is unable to make the payments owed to a creditor. How bankrupts are treated can affect economic growth. If bankrupts are punished too severely, would-be entrepreneurs may be discouraged from taking the financial risks needed to make the most of their ideas. However, letting off defaulting debtors too readily may discourage potential creditors because of moral hazard.

America's bankruptcy code, in particular its Chapter 11 protection for firms from their creditors, is particularly friendly to troubled borrowers, allowing them to borrow more money and giving them time to work out their problems. Some other countries quickly close down a bankrupt firm, and try to repay its debts by selling off any assets it has.

Barriers to entry (or exit)

How firms keep out competition--an important source of incumbent advantage. There are four main sorts of barriers.

• A firm may own a crucial resource, such as an oil well, or it may have an exclusive operating licence, for instance, to broadcast on a particular radio wavelength.
• A big firm with economies of scale may have a significant competitive advantage because it can produce a large output at lower costs than can a smaller potential rival.
• An incumbent firm may make it hard for a would-be entrant by incurring huge sunk costs, spending lots of money on things such as advertising, which any rival must match to compete effectively but which have no value if the attempt to compete should fail.
• Powerful firms can discourage entry by raising exit costs, for example, by making it an industry norm to hire workers on long-term contracts, which make firing an expensive process.

Barter

Paying for goods or services with other goods or services, instead of with money. It is often popular when the quality of money is low or uncertain, perhaps because of high inflation or counterfeiting, or when people are asset-rich but cash-poor, or when taxation or extortion by criminals is high. Little wonder, then, that barter became popular in Russia during the late 1990s.

Basel 1 and 2

An attempt to reduce the number of bank failures by tying a bank's capital adequacy ratio to the riskiness of the loans it makes. For instance, there is less chance of a loan to a government going bad than a loan to, say, an internet business, so the bank should not have to hold as much capital in reserve against the first loan as against the second. The first attempt to do this worldwide was by the Basel committee for international banking supervision in 1988. However, its system of judging the relative riskiness of different loans was crude. For instance, it penalised banks no more for making loans to a fly-by-night software company in Thailand than to Microsoft; no more for loans to South Korea, bailed out by the IMF in 1998, than to Switzerland. In 1998, "Basel 2" was proposed, using much more sophisticated risk classifications. However, controversy over these new classifications, and the cost to banks of administering the new approach, led to the introduction of Basel 2 being delayed until (at least) 2005.

Basis point

One one-hundredth of a percentage point. Small movements in the interest rate, the exchange rate and bond yields are often described in terms of basis points. If a bond yield moves from 5.25% to 5.45%, it has risen by 20 basis points.

Bear

An investor who thinks that the price of a particular security or class of securities (shares, say) is going to fall; the opposite of a bull.

Behavioural economics

A branch of economics that concentrates on explaining the economic decisions people make in practice, especially when these conflict with what conventional economic theory predicts they will do. Behaviourists try to augment or replace traditional ideas of economic rationality (homo economicus) with decision-making models borrowed from psychology. According to psychologists, people are disproportionately influenced by a fear of feeling regret and will often forgo benefits even to avoid only a small risk of feeling they have failed. They are also prone to cognitive dissonance, often holding on to a belief plainly at odds with new evidence, usually because the belief has been held and cherished for a long time. Then there is anchoring: people are often overly influenced by outside suggestion. People apparently also suffer from status quo bias: they are willing to take bigger gambles to maintain the status quo than they would be to acquire it in the first place.

Traditional utility theory assumes that people make individual decisions in the context of the big picture. But psychologists have found that they generally compartmentalise, often on superficial grounds. They then make choices about things in one particular mental compartment without taking account of the implications for things in other compartments.

There is lots of evidence that people are persistently and irrationally overconfident. They are also vulnerable to hindsight bias: once something happens they overestimate the extent to which they could have predicted it. Many of these traits are captured in prospect theory, which is at the heart of much of behavioural economics.

Beta

Part of an economic theory for valuing financial securities and calculating the cost of capital, known as the capital asset pricing model, beta measures the sensitivity of the price of a particular asset to changes in the market as a whole. If a company's shares have a beta of 0.8 it implies that on average the share price will change by 0.8% if there is a 1% change in the market. There is a long-running debate about whether a beta calculated from a security's past relationship with the market actually predicts how that relationship will behave in future, leading some doubting economists to claim that beta is "dead".

Big Mac index

The Big Mac index was devised by Pam Woodall of The Economist in 1986, as a light-hearted guide to whether currencies are at their "correct" level. It is based on one of the oldest concepts in international economics, purchasing power parity (PPP), the notion that a dollar, say, should buy the same amount in all countries. In the long run, argue ppp fans, currencies should move towards the exchange rate, which equalises the prices of an identical basket of goods and services in each country. In this case, the basket is a McDonalds' Big Mac, which is produced in more than 100 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in the United States as elsewhere. Comparing actual exchange rates with PPP signals whether a currency is undervalued or overvalued. Some studies have found that the Big Mac index is often a better predictor of currency movements than more theoretically rigorous models.

Black economy

If you pay your cleaner or builder in cash, or for some reason neglect to tell the taxman that you were paid for a service rendered, you participate in the black or underground economy. Such transactions do not normally show up in the figures for GDP, so the black economy may mean that a country is much richer than the official data suggest. In the United States and the UK, the black economy adds an estimated 5-10% to GDP; in Italy, it may add 30%. As for Russia, in the late 1990s estimates of the black economy ranged as high as 50% of GDP.

Black-Scholes

A formula for pricing financial options. Its invention allowed a previously undreamed of precision in the pricing of options (which had hitherto been done using crude rules of thumb), and probably made possible the explosive growth in the markets for options and other derivatives that took place after the formula became widely used in the early 1970s. Myron Scholes and Robert Merton were awarded the nobel prize for economics for their part in devising the formula; their co-inventor, Fischer Black (1938-95), was ineligible, having died.

Bonds

Gentlemen prefer bonds, punned Andrew Mellon, an American tycoon. A bond is an interest-bearing security issued by governments, companies and some other organisations. Bonds are an alternative way for the issuer to raise capital to selling shares or taking out a bank loan. Like shares in listed companies, once they have been issued bonds may be traded on the open market. A bond's yield is the interest rate (or coupon) paid on the bond divided by the bond's market price. Bonds are regarded as a lower risk investment. government bonds, in particular, are highly unlikely to miss their promised payments. Corporate bonds issued by blue-chip "investment grade" companies are also unlikely to default; this might not be the case with high-yield "junk" bonds issued by firms with less healthy financials.

Bounded rationality

A theory of human decision making that assumes that people behave rationally, but only within the limits of the information available to them. Because their information may be inadequate (bounded) they make take decisions that appear to be irrational according to traditional theories about homo economicus (economic man).

Brand

The stalking-horse for international capitalism. A focus for all the worries about environmental damage, human-rights abuses and sweated labour that opponents of globalisation like to put on their placards. A symbol of America's corporate power, since most of the world's best-known brands, from Coca Cola to Nike, are American. That is the case against.

Many economists regard brands as a good thing, however. A brand provides a guarantee of reliability and quality. Consumer trust is the basis of all brand values. So companies that own the brands have an immense incentive to work to retain that trust. Brands have value only where consumers have choice. The arrival of foreign brands, and the emergence of domestic brands, in former communist and other poorer countries points to an increase in competition from which consumers gain. Because a strong brand often requires expensive advertising and good marketing, it can raise both price and barriers to entry. But not to insurperable levels: brands fade as tastes change; if quality is not maintained, neither is the brand.

Bretton Woods

A conference held at Bretton Woods, New Hampshire, in 1944, which designed the structure of the international monetary system after the second world war and set up the imf and the world bank. It was agreed that the exchange rates of IMF members would be pegged to the dollar, with a maximum variation of 1% either side of the agreed rate. Rates could be adjusted more sharply only if a country's balance of payments was in fundamental disequilibrium. In August 1971 economic troubles and the cost of financing the Vietnam war led the American president, Richard Nixon, to devalue the dollar. This shattered confidence in the fixed exchange rate system and by 1973 all of the main currencies were floating freely, at rates set mostly by market forces rather than government fiat.

Bubble

When the price of an asset rises far higher than can be explained by fundamentals, such as the income likely to derive from holding the asset. The Chicago Tribune of April 13th 1890, writing about the then mania in real-estate prices, described "men who bought property at prices they knew perfectly well were fictitious, but who were prepared to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit". Such behaviour is a feature of all bubbles.

Famous bubbles include tulip mania in Holland during the 17th century, when the prices of tulip bulbs reached unheard of levels, and the South Sea Bubble in Britain a century later, although there have been many others since, including the dotcom bubble in internet company shares that burst in 2000. Economists argue about whether bubbles are the result of irrational crowd behaviour (perhaps coupled with exploitation of the gullible masses by some savvy speculators) or, instead, are the result of rational decisions by people who have only limited information about the fundamental value of an asset and thus for whom it may be quite sensible to assume the market price is sound. Whatever their cause, bubbles do not last forever and often end not with a pop but with a crash.

Budget

An annual procedure to decide how much public spending there should be in the year ahead and what mix of taxation, charging for services and borrowing should finance it. The budgeting process differs enormously from one country to another. In the United States, for example, the president proposes a budget in February for the fiscal year starting the following October, but this has to be approved by Congress. By the time a final decision has to be made, ideally, no later than September, there are often three competing versions: the president's latest proposal, one from the Senate and another from the House of Representatives. What finally emerges is the result of last-minute negotiations. Occasionally, delays in agreeing the budget have led to the temporary closure of some federal government offices. Contrast this with the UK, where most of what the government proposes is usually approved by parliament, and some changes take effect as soon as they are announced (subject to subsequent parliamentary vote).

Bull

An investor who expects the price of a particular security to rise; the opposite of a bear.

Business confidence

How the people who run companies feel about their organisations' prospects. In many countries, surveys measure average business confidence. These can provide useful signs about the current condition of the economy, because companies often have information about consumer demand sooner than government statisticians do.

Business cycle

The long-run pattern of economic growth and recession. According to the Centre for International Business Cycle Research at Columbia University, between 1854 and 1945 the average expansion lasted 29 months and the average contraction 21 months. Since the second world war, however, expansions have lasted almost twice as long, an average of 50 months, and contractions have shortened to an average of only 11 months. Over the years, economists have produced numerous theories of why economic activity fluctuates so much, none of them particularly convincing. A Kitchin cycle supposedly lasted 39 months and was due to fluctuations in companies' inventories. The Juglar cycle would last 8-9 years as a result of changes in investment in plant and machinery. Then there was the 20-year Kuznets cycle, allegedly driven by house-building, and, perhaps the best-known theory of them all, the 50-year kondratieff wave. hayek tangled with keynes over what caused the business cycle, and won the nobel prize for economics for his theory that variations in an economy's output depended on the sort of capital it had. Taking a quite different tack, in the late 1960s Arthur Okun, an economic adviser to presidents Kennedy and Johnson, proclaimed that the business cycle was "obsolete". A year later, the American economy was in recession. Again, in the late 1990s, some economists claimed that technological innovation and globalisation meant that the business cycle was a thing of the past. Alas, they were soon proved wrong.

Buyer's market

A market in which supply seems plentiful and prices seem low; the opposite of a seller's market.

European Union

The EU is a unique economic and political partnership between 27 European countries that together cover much of the continent. It was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict. The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, a huge single market has been created and continues to develop towards its full potential. But what began as a purely economic union has also evolved into an organisation spanning all policy areas, from development aid to environment. A name change from  the EEC to the European Union (the EU) in 1993 reflected this change.

The EU has delivered half a century of peace, stability, and prosperity, helped raise living standards, and launched a single European currency. Thanks to the abolition of border controls between EU countries, people can travel freely throughout most of the continent. And it's also become much easier to live and work abroad in Europe. The EU is based on the rule of law. This means that everything that it does is founded on treaties, voluntarily and democratically agreed by all member countries. These binding agreements set out the EU's goals in its many areas of activity. One of its main goals is to promote human rights both internally and around the world. Human dignity, freedom, democracy, equality, the rule of law and respect for human rights: these are the core values of the EU. Since the 2009 signing of the Treaty of Lisbon, the EU's Charter of Fundamental Rights brings all these rights together in a single document. The EU's institutions are legally bound to uphold them, as are EU governments whenever they apply EU law.

The single market is the EU's main economic engine, enabling most goods, services, money and people to move freely. Another key objective is to develop this huge resource to ensure that Europeans can draw the maximum benefit. As it continues to grow, the EU remains focused on making its governing institutions more transparent and democratic. More powers are being given to the directly elected European Parliament, while national parliaments are being given a greater role, working alongside the European institutions. In turn, European citizens have an ever-increasing number of channels for taking part in the political process.

EU Treaties: The European Union is based on the rule of law. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU member countries. For example, if a policy area is not cited in a treaty, the Commission cannot propose a law in that area.

A treaty is a binding agreement between EU member countries. It sets out EU objectives, rules for EU institutions, how decisions are made and the relationship between the EU and its member countries. Treaties are amended to make the EU more efficient and transparent, to prepare for new member countries and to introduce new areas of cooperation – such as the single currency.

The main treaties are:

Treaty of Lisbon

Signed: 13 December 2007
Entered into force: 1 December 2009

Purpose: to make the EU more democratic, more efficient and better able to address global problems, such as climate change, with one voice.

Main changes: more power for the European Parliament, change of voting procedures in the Council, citizens' initiative, a permanent president of the European Council, a new High Representative for Foreign Affairs, a new EU diplomatic service.

The Lisbon treaty clarifies which powers:

•     belong to the EU
•     belong to EU member countries 
•     are shared.

Treaty of Nice

Signed: 26 February 2001
Entered into force: 1 February 2003

Purpose: to reform the institutions so that the EU could function efficiently after reaching 25 member countries.

Main changes: methods for changing the composition of the Commission and redefining the voting system in the Council.

Treaty of Amsterdam

Signed: 2 October 1997
Entered into force: 1 May 1999

Purpose: To reform the EU institutions in preparation for the arrival of future member countries.

Main changes: amendment, renumbering and consolidation of EU and EEC treaties. More transparent, decision-making

Treaty on European Union - Maastricht Treaty

Signed: 7 February 1992
Entered into force: 1 November 1993

Purpose: to prepare for European Monetary Union and introduce elements of a political union (citizenship, common foreign and internal affairs policy).

Main changes: establishment of the European Union and introduction of the co-decision procedure, giving Parliament more say in decision-making. New forms of cooperation between EU governments – for example on defence and justice and home affairs.

Single European Act

Signed: 17 February 1986 (Luxembourg) / 28 February 1986 (The Hague)
Entered into force: 1 July 1987

Purpose: to reform the institutions in preparation for Portugal and Spain's membership and speed up decision-making in preparation for the single market.

Main changes: extension of qualified majority voting in the Council (making it harder for a single country to veto proposed legislation), creation of the cooperation and assent procedures, giving Parliament more influence.

Merger Treaty - Brussels Treaty

Signed: 8 April 1965
Entered into force: 1 July 1967

Purpose: to streamline the European institutions.

Main changes: creation of a single Commission and a single Council to serve the then three European Communities (EEC, Euratom, ECSC). Repealed by the Treaty of Amsterdam.

Treaties of Rome - EEC and EURATOM treaties

Signed: 25 March 1957
Entered into force: 1 January 1958

Purpose: to set up the European Economic Community (EEC) and the European Atomic Energy Community (Euratom).

Main changes: extension of European integration to include general economic cooperation.

Treaty establishing the European Coal and Steel Community

Signed: 18 April 1951
Entered into force: 23 July 1952
Expired: 23 July 2002

Purpose: to create interdependence in coal and steel so that one country could no longer mobilise its armed forces without others knowing. This eased distrust and tensions after WWII. The ECSC treaty expired in 2002.

When new countries joined the EU, the founding treaties were amended:

•     1973 (Denmark, Ireland, United Kingdom)
•     1981 (Greece)
•     1986 (Spain, Portugal)
•     1995 (Austria, Finland, Sweden)
•     2004 (Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia).
•      2007 (Bulgaria, Romania)