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capital gearingorleverage the proportion of fixed-interest LOAN CAPITAL to SHARE CAPITAL employed in financing a company. Where a company raises most of the funds that it requires by issuing shares and uses very few fixed-interest loans, it has a low capital gearing; where a company raises most of the funds that it needs from fixed-interest loans and few funds from SHAREHOLDERS, it is highly geared. Capital gearing is important to company shareholders because fixed-interest charges on loans have the effect of gearing up or down the eventual residual return to shareholders from trading profits. When the trading return on total funds invested exceeds the interest rate on loans, any residual surplus accrues to shareholders, enhancing their return. On the other hand, when the average return on total funds invested is less than interest rates, then interest still has to be paid, and this has the effect of reducing the residual return to shareholders. Thus, returns to shareholders vary more violently when highly geared.
The extent to which a company can employ fixed-interest capital as a source of long-term funds depends to a large extent upon the stability of its profits over time. For example, large retailing companies whose profits tend to vary little from year to year tend to be more highly geared than, say, mining companies whose profit record is more volatile.
capital goods the long-lasting durable goods, such as machine tools and furnaces, that are used as FACTOR INPUTS in the production of other products, as opposed to being sold directly to consumers. See CAPITAL, CONSUMER GOODS, PRODUCER GOODS.
capital inflow a movement of funds into the domestic economy from abroad, representing either the purchase of domestic FINANCIAL SECURITIES and physical ASSETS by foreigners, or the borrowing (see BORROWER) of foreign funds by domestic residents.
Capital inflows involve the receipt of money by one country, the host, from one or more foreign countries, the source countries. There are many reasons for the transfer of funds between nations:
(a) FOREIGN DIRECT INVESTMENT by MULTINATIONAL COMPANIES in physical assets such as the establishment of local manufacturing plant;
(b) the purchase of financial securities in the host country which are considered to be attractive PORTFOLIO investments;
(c) host-government borrowing from other governments or international banks to alleviate short-term BALANCE OF PAYMENTS deficits;
(d) SPECULATION about the future EXCHANGE RATE of the host country currency and interest rates, expectation of an appreciation of the currency leading to a capital inflow as speculators hope to make a capital gain after the APPRECIATION of the currency.
By contrast, a CAPITAL OUTFLOW is the payment of money from one country to another for the sort of reasons already outlined. See also FOREIGN INVESTMENT, HOT MONEY.
capital-intensive firm/industry a firm or industry that produces its output of goods or services using proportionately large inputs of CAPITAL equipment and relatively small amounts of LABOUR. The proportions of capital and labour that a firm uses in production depend mainly on the relative prices of labour and capital inputs and their relative productivities. This in turn depends upon the degree of standardization of the product. Where standardized products are sold in large quantities, it is possible to employ large-scale capital-intensive production methods that facilitate ECONOMICS OF SCALE. Aluminium smelting, oil refining and steelworks are examples of capital-intensive industries. See MASS PRODUCTION, CAPITAL-LABOUR RATIO.
capitalism see PRIVATE-ENTERPRISE ECONOMY.
capitalization issueorscrip issue the issue by a JOINT-STOCK COMPANY of additional SHARES to existing SHAREHOLDERS without any further payment being required. Capitalization issues are usually made where a company has ploughed back profits over several years, so accumulating substantial RESERVES, or has revalued its fixed assets and accumulated capital reserves. If the company wishes to capitalize the reserves, it can do so by creating extra shares to match the reserves and issue them as BONUS SHARES to existing shareholders in proportion to their existing shareholdings. See also RETAINED PROFIT.
capital-labour ratio the proportion of CAPITAL to LABOUR inputs in an economy. If capital inputs in the economy increase over time at the same rate as the labour input, then the capital-labour ratio remains unchanged (see CAPITAL WIDENING). If capital inputs increase at a faster rate than the labour input, then CAPITAL DEEPENING takes place. The capital-labour ratio is one element in the process of ECONOMIC GROWTH. See CAPITAL-INTENSIVE FIRM/INDUSTRY, LABOUR-INTENSIVE FIRM/INDUSTRY, AUTOMATION.
capital loss the deficit realized when an ASSET (house, SHARE, etc.) is sold at a lower price than was originally paid for it. Compare CAPITAL GAIN.
capital market the market for long-term company LOAN CAPITAL and SHARE CAPITAL and government BONDS. The capital market together with the MONEY MARKET (which provides short-term funds) are the main sources of external finance to industry and government. The financial institutions involved in the capital market include the CENTRAL BANK, COMMERCIAL BANKS, the saving-investing institutions (INSURANCE COMPANIES, PENSION FUNDS, UNIT TRUSTS and INVESTMENT TRUST COMPANIES), ISSUING HOUSES and MERCHANT BANKS.
New share capital is most frequently raised through issuing houses or merchant banks, which arrange for the sale of shares on behalf of client companies. Shares can be issued in a variety of ways, including: directly to the general public by way of an ‘offer for sale’ (or an ‘introduction’) at a prearranged fixed price; an ‘offer for sale by TENDER’, where the issue price is determined by averaging out the bid prices offered by prospective purchasers of the share subject to a minimum price bid; a RIGHTS ISSUE of shares to existing shareholders at a fixed price; a placing of the shares at an arranged price with selected investors, often institutional investors. See STOCK EXCHANGE.
capital movements the flows of FOREIGN CURRENCY between countries representing both short-term and long-term INVESTMENT in physical ASSETS and FINANCIAL SECURITIES and BORROWINGS. See CAPITAL INFLOW, CAPITAL OUTFLOW, BALANCE OF PAYMENTS, FOREIGN INVESTMENTS.
capital outflow a movement of domestic funds abroad, representing either the purchase of foreign FINANCIAL SECURITIES and physical ASSETS by domestic residents or the BORROWING of domestic funds by foreigners. See CAPITAL INFLOW, BALANCE OF PAYMENTS, FOREIGN INVESTMENT, HOT MONEY.
capital-output ratio a measure of how much additional CAPITAL is required to produce each extra unit of OUTPUT, or, put the other way round, the amount of extra output produced by each unit of added capital. The capital-output ratio indicates how ‘efficient’ new INVESTMENT is in contributing to ECONOMIC GROWTH. Assuming, for example, a 4:1 capital-output ratio, each four units of extra investment enables national output to grow by one unit. If the capital-output ratio is 2:1, however, then each two units of extra investment expands national income by one unit. See CAPITAL ACCUMULATION, PRODUCTIVITY. See also SOLOW ECONOMIC-GROWTH MODEL.
capital stock the net accumulation of a physical stock of CAPITAL GOODS (buildings, plant, machinery, etc.) by a firm, industry or economy at any one point in time (see POTENTIAL GROSS NATIONAL PRODUCT).
The measurements most frequently used for the value of a country’s capital stock are from the NATIONAL INCOME and expenditure statistics. These statistics take private and public expenditure on capital goods and deduct CAPITAL CONSUMPTION (see DEPRECIATION 2) to arrive at net accumulation (which may be positive or negative). The more relevant value of capital stock, from the economist’s point of view, is the present value of the stream of income such stock can generate. More broadly, the size of a country’s capital stock has an important influence on its rate of ECONOMIC GROWTH. See CAPITAL ACCUMULATION, CAPITAL WIDENING, CAPITAL DEEPENING, DEPRECIATION METHODS, PRODUCTIVITY, CAPITAL-OUTPUT RATIO.
capital transfer tax see WEALTH TAX.
capital widening an increase in the CAPITAL input in the economy (see ECONOMIC GROWTH) at the same rate as the increase in the LABOUR input so that the proportion in which capital and labour are combined to produce national output remains unchanged. See CAPITAL DEEPENING, CAPITAL-LABOUR RATIO, PRODUCTIVITY.
cardinal utility the (subjective) UTILITY or satisfaction that a consumer derives from consuming a product, measured on an absolute scale. This implies that the exact amount of utility derived from consuming a product can be measured, and early economists suggested that utility could be measured in discrete units referred to as UTILS. However, because it proved impossible to construct an accurate measure of cardinal utility, ORDINAL UTILITY measures replaced the idea of cardinal utility in the theory of CONSUMER EQUILIBRIUM. See DIMINISHING MARGINAL UTILITY.
cartel a form of COLLUSION between a group of suppliers aimed at suppressing competition between themselves, wholly or in part. Cartels can take a number of forms. For example, suppliers may set up a sole selling agency that buys up their individual output at an agreed price and arranges for the marketing of these products on a coordinated basis. Another variant is when suppliers operate an agreement (see RESTRICTIVE TRADE AGREEMENT) that sets uniform selling prices for their products, thereby suppressing price competition but with suppliers then competing for market share through PRODUCT DIFFERENTIATION strategies. A more comprehensive version of a cartel is the application not only of common selling prices and joint marketing but also restrictions on production, involving the assignment of specific output quotas to individual suppliers, and coordinated capacity adjustments, either removing over-capacity or extending capacity on a coordinated basis.
Cartels are usually established with the purpose of either exploiting the joint market power of suppliers to extract MONOPOLY profits or as a means of preventing cut-throat competition from forcing firms to operate at a loss, often resorted to in times of depressed demand (a so-called ‘crisis cartel’). In the former case, a central administration agency could determine the price and output of the industry, and the output quotas of each of the separate member firms, in such a way as to restrict total industry output and maximize the joint profits of the group. Price and output will thus tend to approximate those of a profit-maximizing monopolist. See Fig. 21.
A number of factors are crucial to the successful operation of a cartel, in particular the participation of all significant suppliers of the product and their full compliance with the policies of the cartel. Non-participation of some key suppliers and ‘cheating’ by cartel members, together with the ability of buyers to switch to substitute products, may well serve to undermine a cartel’s ability to control prices. In many countries, including the UK, the USA and the European Union, cartels concerned with price fixing, market sharing and restrictions on production and capacity are prohibited by law. See COMPETITION POLICY (UK), COMPETITION POLICY (EU), ORGANIZATION OF PETROLEUM-EXPORTING COUNTRIES (OPEC).
Fig. 21 Cartel. D is the industry demand curve, showing the aggregate quality that the combined group may sell over a range of possible prices and MR is the industry marginal revenue curve. The industry marginal cost curve ΣMC is constructed from the marginal cost curves of the individual firms making up the cartel. For any given level of industry output, the cartel is required to calculate the allocation of the output among member firms on the basis of their individual marginal costs to obtain the lowest possible aggregate cost of producing their output. To maximize industry profit, the cartel will set price OP and produce output OQ. Quotas of Q
and Q
are given to firms A and B respectively where a horizontal line drawn from the intersection of MR and ΣMC (the line of aggregate marginal costs) intersects MC
and MC
. Profit contributed by each firm is computed by multiplying the number of units produced by the difference between industry price and the firm’s average cost at that level of output. The aggregate profit is then divided among the member firms in some agreed manner, not necessarily, it is to be noted, in the same proportion as actually contributed by each of the individual firms. Disputes over the sharing of aggregate profit frequently lead to the break-up of cartels.
cash see CURRENCY.
cash and carry a form of wholesaling that requires customers (predominantly RETAILERS) to pay cash for products bought and to collect these products themselves from a warehouse. See DISTRIBUTION CHANNEL.
cash card see COMMERCIAL BANK.
cash discount see DISCOUNT.
cash drain a constraint on the expansion of the MONEY SUPPLY through BANK DEPOSIT CREATION, caused by individuals retaining larger amounts of cash than usual. This means that not all of the increase in cash calculated by using the reciprocal of the RESERVE ASSET RATIO is passed on from the public back into the banking system. For example, a new deposit of £100 is made into the banking system. Assuming a 10% reserve asset ratio, the average fraction of money held in cash form is one-tenth and the reciprocal 10. Thus ultimately a £1,000 increase in money supply is theoretically possible. If the public’s demand for cash grows, however, then the increase in the money supply will not be 10 times the initial deposit, but something less.
cash flow the money coming into a business from sales and other receipts and going out of the business in the form of cash payments to suppliers, workers, etc.
cash limits a means of controlling public sector spending by setting maximum expenditure totals for government departments or nationalized industries, deliberately making no allowance for inflation. See GOVERNMENT (PUBLIC) EXPENDITURE.
cash ratio see CASH RESERVE RATIO.
cash reserve ratio the proportion of a COMMERCIAL BANK’S total assets that it keeps in the form of highly liquid assets to meet day-to-day currency withdrawals by its customers and other financial commitments. The cash reserve ratio comprises TILL MONEY (notes and coins held by the bank) and its operational BALANCES WITH THE BANK OF ENGLAND. The cash reserve ratio is a narrowly defined RESERVE ASSET RATIO that can be used by the monetary authorities to control the MONETARY BASE of the economy. See BANK DEPOSIT CREATION, MONETARY BASE CONTROL, MONETARY POLICY.
CAT see COMPETITION APPEALS TRIBUNAL.
caveat emptor a Latin phrase meaning ‘let the buyer beware’. Put simply, this means that the supplier has no legal obligation to inform buyers about any defects in his goods or services. The onus is on the buyer to determine for himself or herself that the good or service is satisfactory. Compare CAVEAT VENDOR.
caveat vendor a Latin phrase meaning ‘let the seller beware’. In brief, this means that the supplier may be legally obliged to inform buyers of any defects in his goods or services. Compare CAVEAT EMPTOR.
census a comprehensive official survey of households or businesses undertaken at regular intervals in order to obtain socioeconomic information. In the UK, a population census has been carried out every 10 years since 1891 to provide information on demographic trends. This data is useful to the government in the planning of housing, education and welfare services. A production census is carried out annually to provide details of industrial production, employment, investment, etc. A distribution census provides data about wholesaling and retailing. This information can be used by the government in formulating its economic and industrial policies.
central bank a country’s leading BANK, generally responsible for overseeing the BANKING SYSTEM, acting as a ‘clearing’ banker for the COMMERCIAL BANKS (see CLEARING HOUSE SYSTEM) and for implementing MONETARY POLICY. In addition, many central banks are responsible for handling the government’s budgetary accounts and for managing the country’s external monetary affairs, in particular the EXCHANGE RATE.
Examples of central banks include the USA’s Federal Reserve Bank, Germany’s Deutsche Bundesbank, France’s Banque de France and the European Union’s EUROPEAN CENTRAL BANK. (For a more detailed discussion of a central bank’s activities see the BANK OF ENGLAND entry.)
centralization the concentration of economic decision-making centrally rather than diffusing such decision-making to many different decision-makers. In a country, this is achieved by the adoption of a CENTRALLY PLANNED ECONOMY where the state undertakes to own, control and direct resources into particular uses. In a firm, centralization involves top managers retaining authority to make all major decisions and issuing detailed instructions to particular divisions and departments. See U-FORM ORGANIZATION.
centrally planned economyorcommand economyorcollectivism a method of organizing the economy to produce goods and services. Under this ECONOMIC SYSTEM, economic decision-making is centralized in the hands of the state with collective ownership of the means of production, (except labour). It is the state that decides what goods and services are to be produced in accordance with its centralized NATIONAL PLAN. Resources are allocated between producing units, and final outputs between customers by the use of physical quotas.
The main rationale underlying state ownership of industry is the view that the collective ownership of the means of production ‘by the people for the people’ is preferable to a situation in which the ownership of the means of production is in the hands of the ‘capitalist class’ who are able to exploit their élite position to the detriment of the populace at large. State control of industry enables the economy as a whole to be organized in accordance with some central plan, which by interlocking and synchronizing the input-output requirements of industry is able to secure an efficient allocation of productive resources. Critics of state-owned economic systems argue, however, that in practice they tend to be ‘captured and corrupted’ by powerful state officials, and that their top-heavy bureaucratic structures result in a highly inefficient organization of production and insensitivity to what customers actually want. See PRIVATE-ENTERPRISE ECONOMY, MIXED ECONOMY, NATIONALIZATION, COMMUNISM.
certificate a document signifying ownership of a FINANCIAL SECURITY (STOCK, SHARE, etc.). In the UK, such certificates are issued in the name of the person or company recorded in the company’s register of SHAREHOLDERS as the owner of these shares, new certificates being issued to buyers when shares are sold. In countries like the USA, where BEARER BONDS are used, stock certificates merely note the number of stocks or shares represented and do not include the name of the owners, the holder of the certificate being presumed to be the owner.
certificate of deposit a FINANCIAL SECURITY issued by BANKS, BUILDING SOCIETIES and other financial institutions as a means of borrowing money for periods ranging from one month to five years. Once issued, certificates of deposit may be bought and sold on the MONEY MARKET and are redeemable on their maturity for their face value plus accrued interest.
certificate of incorporation a certificate issued by the COMPANY REGISTRAR to a new JOINT-STOCK COMPANY whose MEMORANDUM OF ASSOCIATION and ARTICLES OF ASSOCIATION are acceptable to the Registrar. A company starts its legal existence from the date of its incorporation and thereafter is able to enter into contracts, etc., in its own name.
certificate of origin a document used to authenticate the country of origin of internationally traded goods. Most trading countries are prepared to accept certificates of origin issued by government departments of their trade partners or their appointees (CHAMBERS OF COMMERCE in the UK). However, complications as to their precise country of origin often arise in the case of goods that are assembled in one country using components that are in the main imported from others. See LOCAL CONTENT RULE, EXPORT.
ceteris paribus a Latin term meaning ‘other things being equal’ that is widely used in economic analysis as an expository technique. It allows us to isolate the relationship between two variables. For example, in demand analysis, the DEMAND CURVE shows the effect of a change in the price of a product on the quantity demanded on the assumption that all of the ‘other things’ (incomes, tastes, etc.) influencing the demand for that product remain unchanged.
chain store a multi-branch retail firm. All types of retailer, ranging from SPECIALIST SHOPS to DEPARTMENT STORES, can be organized to take advantage of the economics of HORIZONTAL INTEGRATION. Unlike single-shop concerns, chain stores are able to maximize their sales potential through geographical spread and maximize their competitive advantage by being able to secure BULK-BUYING price concessions from manufacturers and the supply of OWN LABEL BRANDS. See SUPERMARKET, DISCOUNT STORE, COOPERATIVE, DO-IT-YOURSELF STORE, RETAILER, DISTRIBUTION CHANNEL.
Chamberlin, Edward (1899–1967) an American economist who helped develop the theory of MONOPOLISTIC COMPETITION in his book The Theory of Monopolistic Competition. Prior to Chamberlin’s work, economists classified markets into two groups:
(a) perfect competition, where firm’s products are perfect substitutes;
(b) monopoly, where a firm’s product has no substitutes.
Chamberlin argued that in real markets goods are often partial substitutes for other goods, so that even in markets with many sellers the individual firm’s DEMAND CURVE might be downward sloping. He then proceeded to analyse the firm’s price and output decisions under such conditions and derive the implications for market supply and price. See also ROBINSON.
chamber of commerce an organization that operates primarily to serve the needs of the business community in an industrial city or area. Chambers of commerce provide a forum for local businessmen and traders to discuss matters of mutual interest and provide a range of services to their members, especially small businesses, including, for example, in the UK, information on business opportunities locally and nationally and, in conjunction with the DEPARTMENT OF TRADE AND INDUSTRY, export advisory services, export market intelligence, etc. See also BUSINESS LINK.
Chancellor of the Exchequer the UK government official heading the TREASURY whose main responsibility is the formulation and implementation of the government’s economic policy.
Chancellors of the Exchequer since 1970:
A. Barber 1970–74 (Conservative);
D. Healey 1974–79 (Labour);
G. Howe 1979–83 (Conservative);
N. Lawson 1983–89 (Conservative);
J. Major 1989–90 (Conservative);
N. Lamont 1990–93 (Conservative);
K. Clarke 1993–97 (Conservative) and
G. Brown 1997–to date (Labour).
change in demand see DEMAND CURVE (SHIFT IN).
change in supply see SUPPLY CURVE (SHIFT IN).
channel see DISTRIBUTION CHANNEL.
cheap money a government policy whereby the CENTRAL BANK is authorized to purchase government BONDS on the open market to facilitate an increase in the MONEY SUPPLY (see MONETARY POLICY).
The increase in money supply serves to reduce INTEREST RATES, which encourages INVESTMENT because previously unprofitable investments now become profitable as a result of the reduced cost of borrowing (see MARGINAL EFFICIENCY OF CAPITAL/INVESTMENT).
Cheap money policy, through MONEY SUPPLY/SPENDING LINKAGES, increases AGGREGATE DEMAND. Compare TIGHT MONEY. See LIQUIDITY TRAP.
cheque a means of transferring or withdrawing money from a BANK or BUILDING SOCIETY current account. In the former case, the drawer of a cheque creates a written instruction to his or her bank or building society to transfer funds to some other person’s or company’s bank or building society account (the ‘payee’). In the latter case, money may be withdrawn in cash by a person or company writing out a cheque payable to themselves. Cheques may be ‘open’, in which case they may be used to draw cash, or ‘crossed’ with two parallel lines, in which case they cannot be presented for cash but must be paid into the account of the payee. See COMMERCIAL BANK.
cheque card see COMMERCIAL BANK.
Chicago school a group of economists at Chicago University, most notable of whom is Milton FRIEDMAN, who have adopted and refined the QUANTITY THEORY OF MONEY, arguing the need for governments to control the growth of the MONEY SUPPLY over the long term. Within the broad parameters set by stable money growth, the Chicago school stresses the importance of the market system as an allocative mechanism, leaving consumers free to make economic decisions with minimal government interference. See MONETARISM.
Chinese wall the segregation of the stockbroking, jobbing (see MARKET MAKER), fund management, etc., activities of a financial institution in order to protect the interest of its clients. For example, the same institution could be responsible for making a market in a particular financial security while at the same time offering investment advice to clients to purchase this security, with the danger that the advice given will not be impartial. See CITY CODE.
choice the necessity for CENTRALLY PLANNED ECONOMIES and PRIVATE ENTERPRISE ECONOMIES to have to choose which goods and services to produce and in what quantities, arising from the relative SCARCITY of economic resources (FACTORS OF PRODUCTION) available to produce those goods and services. See ECONOMICS, PREFERENCES.
c.l.f.abbrev. for cost-insurance-freight, i.e. charges that are incurred in transporting imports and exports of goods from one country to another. In BALANCE-OF-PAYMENTS terms, c.i.f. charges are added to the basic prices of imports and exports of goods in order to compute the total foreign currency flows involved. See F.O.B.
circular flow of national income model a simplified exposition of money and physical or real flows through the economy that serves as the basis for macroeconomic analysis. In Fig. 22 (a) the solid lines show how, in monetary terms, HOUSEHOLDS purchase goods and services from BUSINESSES using income received from supplying factor inputs to businesses (CONSUMPTION EXPENDITURE). In physical terms (shown by the broken lines), businesses produce goods and services using factor inputs supplied to them by households.
The basic model can be developed to incorporate a number of ‘INJECTIONS’ to, and ‘WITHDRAWALS’ from, the income flow. In Fig. 22 (b), not all the income received by households is spent – some is saved, SAVINGS is a ‘withdrawal’ from the income flow. INVESTMENT expenditure ‘injects’ funds into the income flow. Part of the income accruing to households is taxed by the government and serves to reduce disposable income available for consumption expenditure. TAXATION is a ‘withdrawal’ from the income flow. GOVERNMENT EXPENDITURE on products and factor inputs ‘injects’ funds into the income flow. Households spend some of their income on imported goods and services. IMPORTS are a ‘withdrawal’ from the income flow. On the other hand, some output is sold to overseas customers. EXPORTS represent a demand for domestically produced goods and services and hence constitute an ‘injection’ into the income flow. See also AGGREGATE DEMAND, EQUILIBRIUM LEVEL OF NATIONAL INCOME MODEL.
Fig. 22 Circular flow of national income model. (a) The basic model of the relationship between money flows and physical flows. (b) A more complex model, incorporating injections to and withdrawals from the income flow.
City code a regulatory system operated voluntarily by interested parties to the UK STOCK EXCHANGE that lays down ‘rules of good conduct’ governing the tactics and procedures used in TAKEOVER BIDS and MERGERS. The general purpose of the code is to ensure that all SHAREHOLDERS (both the shareholders of the firm planning the takeover and those of the target firm) are treated equitably, and that the parties City (of London) involved in arranging a takeover bid do not abuse privileged ‘insider’ information, or misuse such tactics as CONCERT PARTIES, DAWN RAIDS and CHINESE WALLS.
The City code is administered by the City Panel on Takeovers and Mergers, which is responsible for formulating rules of practice and for investigating suspected cases of malpractice. See also INSIDER TRADING.
City (of London) the centre of the UK’s FINANCIAL SYSTEM, embracing the MONEY MARKETS (commercial banks, etc.), CAPITAL MARKET (STOCK EXCHANGE), FOREIGN EXCHANGE MARKET, COMMODITY MARKETS and INSURANCE MARKETS. The City of London is also a major international financial centre and earns Britain substantial amounts of foreign exchange on exports of financial services.
City Panel on Takeovers and Mergers see CITY CODE.
claimant count unemployment measure a UK measure of UNEMPLOYMENT that is based on the number of people claiming unemployment-related benefits (see JOBSEEKERS ALLOWANCE) at job centre offices. The unemployment rate is then expressed as a percentage of ‘workforce jobs’ (the number of persons recorded as being in full-time and part-time employment) plus claimant unemployment. In 2004 (third quarter) the unemployment rate was calculated at 2.7% using this measure. Compare INTERNATIONAL LABOUR ORGANIZATION UNEMPLOYMENT MEASURE. See REGISTERED UNEMPLOYMENT.
classical economics a school of thought or a set of economic ideas based on the writings of SMITH, RICARDO, MILL, etc., which dominated economic thinking until about 1870, when the ‘marginalist revolution’ occurred.
The classical economists saw the essence of the economic problem as one of producing and distributing the economic wealth created between landowners, labour and capitalists; and were concerned to show how the interplay of separate decisions by workers and capitalists could be harmonized through the market system to generate economic wealth. Their belief in the power of market forces led them to support LAISSEZ-FAIRE, and they also supported the idea of FREE TRADE between nations. After about 1870, classical economic ideas receded as the emphasis shifted to what has become known as NEOCLASSICAL ECONOMIC ANALYSIS, embodying marginalist concepts.
Classical economists denied any possibility of UNEMPLOYMENT caused by deficient AGGREGATE DEMAND, arguing that market forces would operate to keep aggregate demand and POTENTIAL GROSS NATIONAL PRODUCT in balance (SAY’S LAW). Specifically, they argued that business recessions would cause interest rates to fall under the pressure of accumulating savings, so encouraging businesses to borrow and invest more, and would cause wage rates to fall under the pressure of rising unemployment, so encouraging businessmen to employ more workers. See LABOUR THEORY OF VALUE, KEYNES, PRIVATE ENTERPRISE ECONOMY.
clearing bank see COMMERCIAL BANK.
clearing house system a centralized mechanism for settling indebtedness between financial institutions involved in money transmission and dealers in commodities and financial securities. For example, in the case of UK commercial banking, when a customer of Bank A draws a cheque in favour of a customer of Bank B, and the second customer pays in the cheque to Bank B, then Bank A is indebted to Bank B for the amount of that cheque. There will be many thousands of similar transactions going on day by day, creating indebtedness between all banks. The London Clearing House brings together all these cheques, cross-cancels them and determines at the end of each day any net indebtedness between the banks. This net indebtedness is then settled by transferring balances held by the COMMERCIAL BANKS at the CENTRAL BANK (BANK OF ENGLAND).
A similar ‘clearing’ function is performed in the commodities and financial securities market by, for example, the International Commodities Clearing House and the London Financial Futures Exchange. See STOCK EXCHANGE, FUTURES MARKET, COMMODITY MARKET.
closed economy an economy that is not influenced by any form of INTERNATIONAL TRADE, that is, there are no EXPORTS or IMPORTS of any kind. By concentrating on a closed economy, it is possible to simplify the CIRCULAR FLOW OF NATIONAL INCOME MODEL and focus upon income and expenditure within an economy.
In terms of the circular flow, AGGREGATE DEMAND in a closed economy is represented by:
