covenant a specific condition in a legal agreement or CONTRACT. For instance, a formal agreement between a COMMERCIAL BANK and a JOINT-STOCK COMPANY to which it is loaning money might contain a covenant stipulating a limit on dividend distributions from profits.
covered interest arbitrage the borrowing and investing of foreign currencies to take advantage of differences in INTEREST RATES between countries. For example, a company could borrow an amount of one currency (say, the UK pound (£)), convert this into another currency (say, the US dollar ($)) and invest the proceeds in the USA. Concurrently, the company would sell $s for £s in the FUTURES MARKET for delivery at a future specified date. The company would earn a profit on such a transaction if the rate of return on its investment in the USA were greater than the combined expenses of interest payments on the amount of £s borrowed and the costs of concluding the forward exchange contract. Covered interest ARBITRAGE takes advantage of (and in the process tends to eliminate) any temporary discrepancies between relative interest rates in two countries and the forward exchange rate of the two countries’ currencies. See INTERNATIONAL FISHER EFFECT.
covering a means of protecting the domestic currency value of the future proceeds of an international trade transaction, usually by buying or selling the proceeds of the transaction in the FUTURES MARKET for foreign currencies.
CPI see CONSUMER PRICE INDEX.
crawling-peg exchange-rate system a form of FIXED EXCHANGE-RATE SYSTEM in which the EXCHANGE RATES between currencies are fixed (pegged) at particular values (for example £1 = $2) but which are changed frequently (weekly or monthly) by small amounts to new fixed values to reflect underlying changes in the FOREIGN EXCHANGE MARKETS: for example, £1 = $1.90 cents, the repegging of the pound at a lower dollar value (DEVALUATION), or £1 = $2.10 cents, the repegging of the pound at a higher dollar value (REVALUATION).
creative destruction see SCHUMPETER.
credibility 1 the extent to which individuals and firms believe that the government will carry out the macro-economic policies that it promises to pursue. Credibility is important in influencing the EXPECTATIONS that individuals and firms have about future economic policies, and these expectations in turn affect their current behaviour. 2 the extent to which potential market entrants believe that incumbent firms will react to their entry, for example, by cutting their prices. The credibility of such threats by incumbent firms will determine whether potential entrants decide to enter a market. See BARRIERS TO ENTRY, LIMIT PRICING, POTENTIAL ENTRANT.
credit a financial facility that enables a person or business to borrow MONEY to purchase (i.e. take immediate possession of) products, raw materials and components, etc., and to pay for them over an extended time period. Credit facilities come in a variety of forms, including BANK LOANS and OVERDRAFTS, INSTALMENT CREDIT, CREDIT CARDS and TRADE CREDIT. Interest charges on credit may be fixed or variable according to the type of facilities offered or, in some cases, ‘interest-free’ as a means of stimulating business.
In many countries CREDIT CONTROLS are used as an instrument of MONETARY POLICY, with the authorities controlling both the availability and terms of credit transactions. See CONSUMER CREDIT ACT 1974, INTEREST RATE.
credit card a plastic card or token used to finance the purchase of products by gaining point-of-sale CREDIT. Credit cards are issued by commercial banks, hotel chains and larger retailers. See EFTPOS.
credit controls 1 the regulation of borrowing from the FINANCIAL SYSTEM as part of MONETARY POLICY. OPEN MARKET OPERATIONS are one general means of limiting the expansion of credit. A more selective form of control is consumer INSTALMENT CREDIT regulation (hire purchase). Under this arrangement, the purchase of certain goods is regulated by the authorities stipulating the minimum down-payment and the maximum period of repayment.
2 the control that a firm exercises over its TRADE DEBTORS in order to ensure that customers pay their DEBTS promptly and to minimize the risk of bad debts. The purpose of credit control is to minimize the funds that a firm has to tie up in debtors, so improving profitability and LIQUIDITY. See FACTORING, WORKING CAPITAL.
credit creation see BANK-DEPOSIT CREATION.
creditor a person or business that is owed money by an individual or firm for goods, services or raw materials that they have supplied but for which they have not yet been paid (trade creditors) or because they have made LOANS. Creditors are also termed ‘accounts payable’. See DEBTORS, CREDIT.
creditor nation a country that has invested more abroad than has been invested internally. A creditor nation receives more interest and dividends on its investments abroad than it has to pay out on investments made in the country, with a consequent surplus on its BALANCE OF PAYMENTS. Many DEVELOPED COUNTRIES are creditor countries. Compare DEBTOR COUNTRY.
credit squeeze any action taken by the monetary authorities to reduce the amount of CREDIT granted by COMMERCIAL BANKS, FINANCE HOUSES, etc. Such action forms part of the government’s MONETARY POLICY directed towards reducing AGGREGATE DEMAND by making less credit available and forcing up INTEREST RATES.
creeping inflation small increases in the general level of prices in an economy. See INFLATION, HYPERINFLATION.
Crest see SHARE PURCHASE/SALE.
cross-elasticity of demand a measure of the degree of responsiveness of the DEMAND for one good to a given change in the PRICE of some other good.
(i) cross-elasticity of demand =
Products may be regarded by consumers as substitutes for one another, in which case a rise in the price of good B (tea, for example) will tend to increase the quantity demanded of good A (coffee, for example). Here the cross-elasticity of demand will be positive since as the price of B goes up the quantity demanded of A rises as consumers now buy more A in preference to the more expensive B.
(ii) cross-elasticity of demand =
Alternatively, products may be regarded by consumers as complements that are jointly demanded, in which case a rise in the price of good B (tea, for example) will tend to decrease not only the quantity demanded of good B but also another good, C (sugar, for example). Here the cross-elasticity of demand will be negative since a rise in the price of B serves to reduce the quantity demanded of C.
The degree of substitutability between products is reflected in the magnitude of the cross-elasticity measure. If a small increase in the price of good B results in a large rise in the quantity demanded of good A (highly cross-elastic), then goods B and A are close substitutes. Likewise, the degree of complementarity of products is reflected in the magnitude of the cross-elasticity measure. If a small increase in the price of good B results in a large fall in the quantity demanded of good C (highly cross-elastic), then goods C and B are close complements.
Cross-elasticities provide a useful indication of the substitutability of products, so helping to indicate the boundaries between markets. A group of products with high cross-elasticities of demand constitutes a distinct market, whether or not they share common technical characteristics; for example, mechanical and electronic watches are regarded by consumers as close substitutes. See MARKET.
cross-sectional data information gathered for the same period of time that is split into certain groupings based upon characteristics such as age, income, etc. Compare TIME SERIES DATA.
cross-subsidization the practice by firms of offering internal subsidies to certain products