General FinanceFinancial Dictionary -> General Finance
Welcome to the General Finance section of Financial Dictionary. The purpose of this section is to define common financial terms used in everyday life. Unfortunately debt has become an integral part in the lives of most people and almost everybody in the western word has become a borrower. Often a person, who doesn't have sufficient income to qualify for a loan, needs a co-borrower who also becomes responsible for the loan repayment. On the other site of the debt equation sits the lender. One of the most common loans is the mortgage loan. The homebuyer signs a purchase agreement with the seller and borrows money from the lender to pay for the house (real property).
When you use almost any financial product the business/individual that offers you the product frequently receives commission for the service. For example if you lease an apartment the real estate broker that found you the apartment will receive a fee from the landlord.
The financial crisis crushing markets worldwide, has forced central banks and governments to change their monetary policy and fiscal policy and ease money supply in order to get credit flowing again. Governments worldwide are running huge budget deficits in attempt to revive weakened economies. With GDP (Gross Domestic Product) shrinking and economic recession the order of the day, consumers have stopped spending and left many corporations and franchises struggling to acquire working capital and survive. Globalization is also taking heavy toll on developed economies, with thousands of workers losing their jobs. The inflation or deflation debate still rages, while the middle class is shrinking at alarming speed. The debate focuses on core and headline inflation and inflationary pressures on local markets and economies. Food and oil prices are subject to fluctuation. Core inflation is an indicator of long-term price trends and excludes prices that are volatile and subject to change (i.e. food and oil). There are alternative indicators such as the trimmed estimator and moving average which are used to measure and predict inflationary trends. Headline inflation is different in that it takes into account price volatility and inflationary spikes. The majority of developed countries use both indicators while some countries such as India use headline inflation. According to some finance experts headline rates can be a good indicator of long-term trends but is too volatile to make predictions over a short period of time. According to opponents, the problem with headline inflation is that it can cause government interest rate increases in response to price fluctuations. Oil is one commodity in question. Regardless of policy changes, all sectors of the economy will be affected. There is also a link between gross domestic product and inflation. For example, rapid GDP growth may cause inflation spikes which affect stock market gains.
The reason is that money loses value. In the view of economists, GDP growth should be limited to 2.5 – 3.5 per year. GDP growth is also an important indicator because it affects the unemployment rate. Very low unemployment rates actually have a negative effect on the economy because demand increases at a faster rate than supply. This leads to price increases. As a consequence of low unemployment rates, businesses are forced to raise wages. To make up for wage increases, they offer products and services at higher prices. One outcome is hyperinflation which is basically inflation that is out of control. It is generally associated with imbalances between demand and supply and significant increases in money supply. There are different causes for hyperinflation, including lack of central banks and regulatory environment, excessive printing of paper currency, and others. Deflation is different from hyperinflation and refers to a decrease in the prices of services and goods. There is a difference between disinflation and deflation, and the former refers to decreasing inflation rates at a gradual pace. Deflation, on the other hand, is the opposite of inflation and can be caused by different factors, one being lower levels of investment, consumer, and government spending. Deflation also refers to a reduction in financing (credit availability) and money supply. One problem with deflationary pressures is that they can cause a deflationary spiral. Another problem is that the real value of debt increases. Thus the goal of central banks is to keep prices at stable levels to avoid hyperinflation and deflationary spirals.
Depression refers to a downturn of economic activity and is associated with an imbalance between money supply and the supply of goods. There are different reasons why depressions occur, including bank failures and stock market crashes. While a perfect market means no recessions, crashes, or bubbles, these phenomena occur, the most recent being the housing bubble. The housing bubble occurred as a result of deregulation, changes in house taxing policies, risky financial products, and low rates of interest. High home prices and sub-prime lending also contributed to the housing bubble and subprime mortgage crisis. The result was a significant increase in mortgage delinquencies and foreclosures, and many consumers lost their homes. Homeowner speculation also contributed to the subprime mortgage crisis and so did risky lending practices. This can lead to a surge in mortgage fraud and other illegal practices. Predatory lending refers to unethical and fraudulent practices that target certain categories of borrowers and can have a negative effect on the economy.
You can also learn the definitions of following financial terms - Contract, Estate, Generally Accepted Accounting Principles (GAAP), Insurance, Social Security, Gross National Product (GNP), and Accounting.
This section of the site describes frequently used financial words that do not fit in other site categories. To learn more about these terms just follow the links above.