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Economic Terms

All   0-9   A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Underwriting

Is where a bank sets a price at which new securitites will be issued onto the market, with some banks guaranteeing that they themselves will buy up the rest of the shares if they fail to sell at that price. This is one of the main traditional activities of investment banks and this is the main way that they aid their customers to raise finance for their own personal investment projects.


Unemployment

Is a term that applies to individuals that are of working age, but currently do not have a job and have been actively seeking employment.

In most cases, unemployed people are individuals who are willing and available to work but often cannot find a job that matches their preferences. If an individual is unemployed they still make up part of the labour force as they are likely to continue to contribute towards the economy for most of their working life.

In the UK, the official measures of unemployment and employment is measured using the Labour Force Survey - which is a household survey of the current employment positions of agents. 

Below is a breakdown of the amount of workers who were classed as employed, unemployed or outside the labour force and economically inactive in the UK from June to August 2014. This measurement is taken using the government's Labour Force Survey.

There are many different forms of unemployment in an economy:

  • Cyclical unemployment
  • Structural unemployment
  • Frictional unemployment
  • Seasonal unemployment
  • Real wage unemployment (Classical unemployment)

Unemployment is used as an indicator to judge how strong and robust an economy is and if the unemployment rate is close to the natural rate of unemployment then this is a sign the economy is close to full employment and as a result any further expansions in the economy in the short run will introduce inflationary pressures in the economy. This is why Central Banks of a country always use unemployment data when making their decision on interest rate changes in the economy. 

Low unemployment is an economic aspect that all governments aspire to achieve because it creates a high level of confidence in the economy which can spur on economic growth and investment. It can also improve the budget position of the government by improving the inflow of tax revenue whilst simultaneously reducing the level of benefits required to be paid out. Low unemployment also satisfies one of the main macroeconomic objectives for the government but it could simultaneously create a conflict with other objectives. The most notable one is the trade-off between unemployment and inflation that is displayed in the Phillips Curve. It can also create problems on the current account position of a country as higher consumption fueled by greater confidence can increase consumption of imports.

It is important to note that unemployment is not always as negative for an economy as it seems. For instance, a high level of unemployment increases the pool of available workers for firms to employ and this creates the potential for these firms to expand, adding to the productive capacity of the economy. Also with persistent unemployment some workers may become disillusioned with the labour market and decide to go down the self-employment route and by doing so could increase entrepreneurial innovation and activity in the economy, which is beneficial for an economy. 

Another evaluation point to consider regarding unemployment is that if we have a situation where output falls, it does not always feed into higher levels of unemployment because of important time lags between the economic cycle and the unemployment cycle i.e. firms will postpone laying off workers until they are sure that an economic downturn is likely to be sustained. In some cases firms may even engage in labour hoarding - where they keep their workers on the payroll during an economic downturn, ready to re-employ when the economy recovers.


Unemployment trap

When individuals who currently do not have a job do not perceive any benefit in working as the earnings received after taxes is not sufficient to replace the welfare benefits given up when they accept a job. 


Unintended consequences

When a government intervention has an impact (usually negative) that was not intended when the policy was implemented e.g. favourable taxation of fuel efficient cars has achieved environmental benefits but has reduced the total tax revenue arising from vehicle licence duty.

Unit elastic supply

When the proportionate change in supply is equal to the proportionate change in price. In this case the PES value will be equal to 1.

Below is a diagram to show the characteristics of a unit elastic supply curve:

The supply curve has the typical upward sloping relationship between quantity supplied and price, as a result of the greater profit incentives that arise from higher prices. But with a unit elastic supply curve, quantity supplied and price change by the same factor when moving along the supply curve. 


Unit of Account

Is a nominal monetary unit of measure or currency used to value the cost of goods, services, assets, liabilities, income and expenses. This is one of the three functions of an efficient and successful monetary system, alongside a store of value and a medium of exchange.


Unitary elastic demand

The proportionate change in quantity is equal to the proportionate change in price. it will represent a single point on most demand curves (the midpoint of demand curves) or if the demand curve is a rectangular hyperbola (like below) the elasticity value at every point on the curve will represent a Price elasticity of demand value equal to 1.


Universal Bank

A financial institution that offers the full range of financial services to customers. These types of bank's offer both the services of a traditonal commerical bank (deposit and lending taking activities) and an investment bank (underwriting of new securities).

Below is the simple breakdown of a universal bank i.e. its two main functions are to carry out commerical and investment banking activities.


Unstable cobweb effect

A period of great market instability which is initiated by a supply side shock. The instability continues for some time as the cobweb diverges due to demand that is more inelastic than supply. It may require government intervention to re-establish a stable equilibrium position.

A good harvest in period 1 means supply rises to Q1, so that prices fall to P1. If producers plan their period 2 production under the expectation that this low price will continue, then the period 2 supply will be higher, at Q2. Prices therefore fall to P2 when they try to sell all their output. As this process repeats itself, oscillating between periods of low supply with high prices and then high supply with low prices, the price and quantity trace out a spiral. This all occurs because the slope of the supply curve is less than the absolute value of the slope of the demand curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards. This is called the unstable or divergent case.

 


Utility

The usefulness of or satisfaction with a product i.e. the degree to which a good or service satisfies a consumer's wants or needs. The price consumers are prepared to pay for a good is taken to represent the financial value of utility.


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