Finance Explained

Gilt-edged securities, also known as gilts, are debt securities issued by the government of the United Kingdom.   They are called gilt-edged securities because they are considered to be among the highest quality and most secure investments available, with a long history of low default rates and stable returns. Gilts are issued in a range of maturities, from short-term bills with a maturity of less than one year, to long-term bonds with a maturity of over 25 years. They pay a fixed rate of interest, known as the coupon, which is paid to investors on a regular basis, typically semi-annually. The principal amount of the gilt is repaid to the investor at the end of the term of the gilt. Gilts are issued by the UK Debt Management Office (DMO), which is an agency of the UK government responsible for managing the government's debt. The DMO issues gilts on behalf of the government to finance its borrowing requirements, and sets the terms and conditions of the gilts, including the coupon ra...

Gross domestic product, or GDP, is a measure of the total value of all goods and services produced within a country in a given period of time, typically a year. There are three approaches to measuring GDP: the expenditure approach, the production approach, and the income approach. Expenditure approach The expenditure approach to measuring GDP, denoted as GDP(E), measures the total value of all final goods and services produced within a country, based on the amount of money spent on these goods and services. Final goods and services are those that are consumed by the end user, rather than being used as inputs in the production of other goods and services. The expenditure approach to GDP includes four components: Personal consumption expenditures: This is the total value of all goods and services consumed by households, including durable goods (such as cars and appliances), nondurable goods (such as food and clothing), and services (such as healthcare and education). Gross private domest...

Frictional unemployment refers to the unemployment that results from the normal functioning of the labor market.   It arises from the fact that it takes time for workers to search for and find new jobs, and for employers to search for and find suitable employees. Frictional unemployment is a natural and inevitable part of the labor market, and is not necessarily a sign of an unhealthy economy. There are several factors that contribute to frictional unemployment: Job search: When workers are looking for new jobs, they may temporarily be out of work while they search for suitable employment opportunities. This is known as job search unemployment. Resignation and retirement: When workers leave their current jobs in order to retire or to pursue other opportunities, they may be temporarily out of work while they transition to their new roles. Geographical mobility: When workers move to new areas in search of employment, they may experience temporary unemployment while they look for jobs...

Financial intermediation services indirectly measured, or FISIM, refers to the value of the services provided by financial intermediaries, such as banks and other financial institutions, in facilitating transactions between borrowers and lenders.  FISIM is typically calculated as the difference between the interest rates paid by borrowers and the interest rates received by lenders, minus the costs incurred by the financial intermediaries in providing these services. FISIM is an important concept in national accounts and macroeconomic analysis, as it helps to capture the economic value of the services provided by the financial sector. It is typically included in the measurement of gross domestic product (GDP) and other macroeconomic indicators, as it reflects the contribution of the financial sector to economic activity. There are several ways in which financial intermediaries provide value to the economy through their intermediation services. These include: Information gathering an...

Final consumption expenditure is a measure of the amount of money that is spent on goods and services by households, governments, and nonprofit organizations for the satisfaction of their own needs and wants.  It is one of the main components of GDP, along with gross capital formation (investment) and exports minus imports (net trade). Final consumption expenditure can be divided into two categories: household final consumption expenditure and government final consumption expenditure. Household final consumption expenditure is the money that is spent by households on goods and services for their own consumption, such as food, housing, and healthcare. Government final consumption expenditure is the money that is spent by governments on goods and services, such as education, defense, and public health. Final consumption expenditure is an important measure of economic activity, as it reflects the demand for goods and services by households, governments, and nonprofit organizations. It...

The European System of Accounts (ESA) is a set of rules and guidelines for the compilation of national accounts data in the European Union (EU). National accounts data is a set of statistical indicators that measure the economic activity of a country, including gross domestic product (GDP), national income, and employment. The ESA is designed to ensure that national accounts data is compiled in a consistent and comparable manner across the EU, so that it can be used to compare economic performance between different countries. The ESA is updated periodically to reflect changes in economic circumstances and to ensure that it remains relevant and useful. The ESA consists of a set of principles and guidelines that outline how national accounts data should be compiled, including definitions of key concepts, classification systems, and methods for estimating and measuring economic activity. The ESA also includes a set of sector accounts, which provide a detailed breakdown of economic activit...

The European Central Bank (ECB) is the central bank of the European Union (EU) and is responsible for implementing the monetary policy of the eurozone, which is the group of EU member states that have adopted the euro as their currency. The ECB was established in 1998 and is headquartered in Frankfurt, Germany. The primary objective of the ECB is to maintain price stability in the eurozone, which means keeping inflation under control. The ECB uses a variety of tools to achieve this objective, including setting interest rates, conducting open market operations, and providing liquidity to the banking system. One of the main tools used by the ECB to implement monetary policy is the setting of interest rates. Interest rates affect the cost of borrowing, and therefore influence the level of spending and economic activity in an economy. By setting interest rates, the ECB can influence the level of demand for goods and services, and help to keep inflation under control. The ECB also conducts ...

Current Price Series, also known as nominal price series or "money" series, are economic data that are not adjusted for the effects of inflation. These series reflect the prices that are actually paid for goods and services in a particular period, and are typically measured in monetary units such as dollars or pounds. Current price series are the opposite of constant price or "real" series, which are adjusted for the effects of inflation in order to facilitate comparison over time. While constant price series allow us to compare the "real" or inflation-adjusted value of economic data, current price series provide a measure of the nominal or "money" value of the data. Current price series are useful for understanding the actual prices that are being paid for goods and services in a particular period, as well as the overall level of economic activity in an economy. However, they can be less useful for comparing data over time, as they do not take i...

Cost-benefit analysis is a tool used to evaluate the costs and benefits of a particular policy, program, or project. It is a systematic way of comparing the costs of an initiative to the benefits it is expected to produce, in order to determine whether it is worth pursuing. Cost-benefit analysis involves estimating the costs of an initiative, including both the direct costs (such as materials, labor, and equipment) and the indirect costs (such as the opportunity cost of resources that could be used elsewhere). It also involves estimating the benefits of the initiative, including both the tangible benefits (such as increased profits or improved efficiency) and the intangible benefits (such as improved quality of life or environmental benefits). The costs and benefits are then compared to determine the net benefits of the initiative. If the net benefits are positive, it means that the benefits of the initiative are expected to outweigh the costs, and it may be worth pursuing. If the net ...

The Consumer Prices Index (CPI) is a measure of the average change in the prices of a basket of goods and services consumed by households. It is used as a measure of inflation, as well as a tool for indexing the value of money over time. The CPI is calculated by the Office for National Statistics (ONS) in the United Kingdom, and is based on a basket of goods and services that is representative of the consumption patterns of the average household. The basket is updated periodically to ensure that it remains representative of current consumption patterns. The price of each item in the basket is measured at regular intervals, and the CPI is calculated as the percentage change in the overall price of the basket between two periods. For example, if the CPI was 100 in January and 110 in December, this would indicate that the average price of the basket of goods and services had increased by 10% over the course of the year. The CPI is often used as a measure of inflation, as it reflects the c...

Constant price or "real" series, also known as constant price estimates or "real" estimates, are economic data that have been adjusted for the effects of inflation.  These estimates are produced by deflating the nominal data, which reflects current prices, by a price index such as the consumer price index (CPI). The resulting data series is expressed in "real" or "constant" prices, which means that the data is shown in terms of the prices that prevailed in a particular base period. The main purpose of creating constant price series is to facilitate comparison of economic data over time, by eliminating the distorting effect of inflation on the data. Without adjusting for inflation, it can be difficult to determine whether changes in the data reflect genuine changes in economic activity or simply reflect changes in the general level of prices. For example, consider the case of GDP. If we just compare the nominal GDP of two different years, it may a...

Chained volume measures (CVM) is a method of adjusting economic data for price changes over time, in order to make the data more comparable and easier to understand. CVM is used to adjust data from different periods for inflation, so that the data can be compared in "real" terms. This means that the data is adjusted for the effects of inflation, so that the comparison between different periods is more meaningful. For example, if we wanted to compare the GDP of a country in two different years, we could simply compare the nominal GDP figures for those years. However, this would not take into account the fact that the general level of prices may have changed between the two years. Inflation would cause the nominal GDP figures to be higher in the later year, even if the actual amount of economic activity had not increased. To correct for this, we can use CVM to adjust the GDP figures for inflation, so that we can compare the "real" GDP of the two years. This will give ...

You may have heard the term 'Amortization' or been asked to consider it, but what exactly does it mean? Essentially, Amortization is the process of spreading out the cost of an asset, such as a loan or an intangible asset, over a period of time.  This is typically done through a series of equal payments, called amortization payments, which are made on a regular basis, such as monthly or annually. Each amortization payment consists of a portion of the principal amount of the loan or asset, plus interest. For example, if you take out a £100,000 loan with a 10% interest rate and a 10-year repayment period, your monthly amortization payment would be £1,073.64, which would consist of £869.62 in principal and £204.02 in interest. Over the course of the loan, you would make a total of 120 amortization payments, and you would pay a total of £128,437.68, which would include £100,000 in principal and £28,437.68 in interest. The advantage of amortization is that it allows the cost of an a...

It's a big question, but let's try to explain what Economics is and some of its general principles. Essentially, Economics is a social science that studies how individuals, businesses, governments, and other organizations make choices about how to use limited resources, such as land, labor, raw materials, and capital, to produce, exchange, and distribute goods and services. These choices are influenced by the forces of supply and demand, as well as by government policies, such as taxes, subsidies, and regulations. At its core, economics is concerned with the allocation of scarce resources in order to maximize the satisfaction of human wants and needs. In other words, it is about finding the most efficient and effective ways to produce and distribute goods and services, so that people can have the things they need and want, without wasting or depleting valuable resources. Opportunity cost One of the key concepts in economics is opportunity cost , which is the value of the next b...

Microeconomics is the branch of economics that studies the behaviour of individual economic actors, such as households and firms, and how they make decisions regarding the allocation of their limited resources.  It is concerned with issues such as the determination of prices, the distribution of income, and the level of production, and seeks to understand how these factors are influenced by market forces and government policies. Law of supply and demand One of the key concepts in microeconomics is the law of supply and demand, which is a fundamental principle that explains the relationship between the quantity of a good or service that is available and the price at which it is sold. The law of supply and demand states that, all else being equal, an increase in the supply of a good or service will lead to a decrease in the price, while a decrease in the supply will lead to an increase in the price. This relationship is represented by the supply and demand curve, which shows the rela...

Macroeconomics is the study of the economy as a whole, including the factors that influence the overall level of economic activity and the behavior of the economy over time. It is concerned with issues such as economic growth, unemployment, inflation, and the balance of payments, and seeks to understand how these factors are affected by macroeconomic policy and the global economic environment. One of the key tools used in macroeconomics is gross domestic product (GDP), which is a measure of the total value of all goods and services produced within an economy in a given period of time. GDP is often used as a gauge of the overall health of an economy, and can be calculated in three different ways: as the total value of goods and services produced (output approach), as the total income earned (income approach), or as the total expenditure on goods and services (expenditure approach). Another important concept in macroeconomics is inflation, which is an increase in the general level of pri...

The stock market is a familiar term to any casual investor, but what is it exactly?   The stock market is a financial market where securities, such as stocks and bonds, are bought and sold. It is a crucial part of the global economy, as it provides companies with access to capital, and it allows investors to earn returns on their investments. There are many different stock markets around the world, and they can be broadly classified into two main categories: primary markets and secondary markets. Primary markets are where new securities are issued and sold to the public for the first time. Companies looking to raise capital will often issue new stocks or bonds, and these securities are then sold to investors through a primary market. The proceeds from the sale of the securities are used by the company to fund its operations and growth. Secondary markets are where existing securities are bought and sold among investors. Once securities have been issued in a primary market, they are ...