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Glossary

Page history last edited by Stubborn Mule 10 years, 7 months ago

A Glossary of Terms

 

While I try to keep to plain English in Stubborn Mule blog posts, from time to time some jargon creeps in, particularly from finance and economics. For the benefit of those lucky enough to have avoided this jargon to date, I will compile explanations here. First cab off the rank is GDP.

 

Asset Allocation

The distribution of an investment across a range of asset classes, such as equities, bond, property and cash. A common approach for large institutional investors (such as pension or superannuation funds) is to have a "strategic asset allocation" (SAA) policy which specifies percentage allocations to different asset classes. Investment managers may be obliged to maintain this SAA within specified tolerance bands. This can lead to forced buying and selling. For example, if equities decline in value and bonds increase in value then a portfolio may fall below its equity target allocation while bonds rise above their target, leading the investment manager to buy equities (possibly into a market that is still falling) and sell bond.

 

Asset Allocators

Investors managing their investments in line with strategic asset allocation targets.

 

Fiat Money

Traditionally, paper money and most coins have been "backed" by a commodity such as gold or silver. The value of the money was seen to be derived from the right to take it back to a back and exchange it for a certain amount of the backing commodity. By contrast, fiat money is not backed by anything. It is simply declared to be legal tender. The term "fiat" comes from the Latin, meaning "let it be". So, fiat money is money simply because it is declared to be money. The only inherent value that fiat money really has is that taxes liabilities can be discharged using fiat money. Of course, in practice, fiat money derives value from the fact that it is widely used throughout the economy despite the fact that most people do not understand that how it comes into existence. In fact, many users of fiat money tend to assume that it is in fact backed by something. While there are many critics of fiat currency, and it has been at the heart of inflationary crises in the past, it is an essential part of the workings of most modern developed economies.


Gross Domestic Product (GDP)
GDP is a measure of a country's economic activity. It is the total of all final goods and services produced in a country. Here "final" means that there should be no double counting. if a factory produces a widget and sells it to a retailer who sells it to you, only the "final" sale of the widget should be counted. Equivalently, the original sale to the retailer could be counted and then only the additional mark-up (or "value add") charged by the retailer is counted. Some argue that GDP is a seriously flawed approach to assessing a country's productivity, but it is very widely used nevertheless.

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