The Washington Post has invited its readers to submit general questions about economic and business issues and will attempt some answers in occasional articles, the second of which appears today. Send your inquiries to: Questions, c/o Business & Finance section, The Washington Post, 1150 15th Street NW, Washington, D.C., 20071.
Today's question: Many articles contain undefined economic and financial terms. Please explain some of these.
The jargon of economics and business can be a morass for readers and reporters alike. News stories sometimes casually toss in words and phrases that may belong in a textbook but can be confusing in a newspaper. What follows is a list and definitions of some of the more commonly used terms in business and economics.
Economic Growth. An increase in the production of all things we use, consume, invest in or otherwise produce. Growth can come in several forms. Education and training can improve the output of a labor force, for example, resulting in improved quality and quantity of production.
Gross National Product. The value of all goods and services produced and sold in the United States in any given year. Although the cost of a lawyer's services would be included, the salary of a construction worker likely wouldn't be counted because it is reflected in the final price of the building he or she worked on. GNP is valuable as a measurement of the nation's well-being because it is an indicator of the nation's actual economic growth. But it is criticized because it doesn't reflect the cost of such things as pollution or other environmental damage, or the depletion of natural resources.
Federal Reserve Banks. The bank for banks. The Federal Reserve is the operating arm of the government in monitoring and controlling the money system and financial policies of this country. There are 12 Federal Reserve banks located around the country. Each is actually a separate corporation, but all are under the umbrella of the Federal Reserve system here and its board of governors. Like the central bank of many other countries, the Fed is charged with regulating the supply of this country's money. The 12 regional banks of the system lend money to commercial banks at a preset interest rate -- called a discount rate -- to cover those banks' short-term cash needs. That interest rate is set high or low, in a deliberate effort to influence loan policies at the nation's commercial banks.
Discount Rate. The interest rate that banks which are members of the Federal Reserve system have to pay when they borrow money from one of the 12 Federal Reserve banks around the country. The banks use these loans, which generally are made for 15 days or less, to insure that they have adequate funds on hand to meet customers' demands for cash. By manipulating the discount rate, the Fed's Board of Governors attempts either to discourage or encourage bank lending.
Consumer Price Index. One of the most important economic indicators to come out of Washington. It frequently is used, for example, to determine the size of wage increases in labor contracts. It measures the changes in the price of various items from an average family budget. Each item used in the index is given a weighted average based on how important it is perceived to be to the consumer. Food, clothing and rent are among the areas surveyed. The price of each item is noted every month and then compared to the price of that item during a preset base year in an attempt to show the changes in the cost of the item both month to month and since the base year.
Cost of Living. A term, used generally in wage negotiations, to indicate how much more it costs to live today than some earlier time without a noticeable change in lifestyle. The consumer price index generally is used to show the rise in the cost of living.
International Monetary Fund. An agency created in the closing months of World War II to loan money to countries that have trouble exporting enough to pay for the imports they need. The fund, as it is known, frequently will offer advice to countries on how to conduct their economies and also functions as a regulator of sorts of foreign exchange rates, the value of one country's currency compared with another's.
Commercial Paper. A promissory note from a corporation given to an investor or a bank that loans the corporation money for a short time. Large corporations frequently will issue commercial paper to raise money to meet short-term obligations. Those who loan the money to the company are said to have bought the commercial paper, and generally are paid back within six months. When the corporation needs more time for repayment, it then issues a similar device known as a bond.
Foreign Exchange Rates. The always changing value of one currency in comparison with others. The so-called exchange rate between the U.S. and Great Britain, for example, is the value of the dollar with respect to the value of the British pound sterling. The dollar is said to drop in value, for example, if it takes more dollars to buy a pound today than it did yesterday. The exchange rate is important because it determines, among other things, how much Americans have to pay for British goods imported here. Many large companies that have significant investment abroad have a tremendous stake in exchange rates. Some companies, although operating efficiently, at times have had to declare losses abroad merely because the value of the dollar dropped during a prolonged period, thus raising the cost of purchasing foreign goods. Thousands of money traders located in key financial centers around the world buy and sell currency on a minute-to-minute basis, sometimes profiting on the rise or fall in value of a currency during those short periods of time. The value of currencies rises or falls for many reasons, but because they are bought and sold in an open marketplace, their prices ultimately are determined by demand. If, for example, there are new indications that the U.S economy will worsen, foreign investors will sell dollars in large numbers, thus increasing the supplies of, and reducing the demand for, the dollar. The result is that the value of the dollar, as compared to other world currencies, is lower. In that case, the dollar is said to be "dropping in value on foreign exchange markets."
Two reference works that define many similar terms are Dictionary of Economics by Harold S. Sloan and Arnold J. Zurcher (Barnes & Noble Books' Everyday Handbooks series) and Encyclopedia of Economics (The Dushkin Publishing Group Inc.).