Fig. 34 Crowding-out effect. (a) An increase in government expenditure raises real NATIONAL INCOME and output (see EQUILIBRIUM LEVEL OF NATIONAL INCOME), which in turn increases the demand for money from Dm to Dm1, with which to purchase the greater volume of goods and services being produced. (b) This causes the equilibrium INTEREST RATE to rise (from r to r1), which then reduces – ‘crowds out’ – an amount of private INVESTMENT (ΔT). (c) An increase in government expenditure by itself would increase AGGREGATE DEMAND from AD to AD1, but, allowing for the fall in private investment, the net result is to increase aggregate demand to only AD2.
crowding-out effect an increase in GOVERNMENT EXPENDITURE that has the effect of reducing the level of private sector spending. Financial crowding-out of the type described in the captions to Fig. 34 would occur only to the extent that the MONEY SUPPLY is fixed, so that additional loanable funds are not forthcoming to finance the government’s additional expenditure. If money supply is fixed, then increases in the PUBLIC SECTOR BORROWING REQUIREMENT associated with additional government expenditure will tend to increase interest rates as the government borrows more, these higher interest rates serving to discourage private sector investment. On the other hand, if additional loanable funds were obtainable from, say, abroad, then additional government borrowing could be financed with little increase in interest rates or effect on private investment.
The term ‘crowding-out’ is also used in a broader sense to denote the effect of larger government expenditure in pre-empting national resources, leaving less for private consumption spending, private sector investment and for exports. Such real crowding-out would occur only to the extent that total national resources are fixed and fully employed so that expansion in public sector claims on resources contract the amount left for the private sector. Where unemployed resources can be brought into use, additional claims by both the public and private sectors can be met. See MONEY-SUPPLY/SPENDING LINKAGES, MARGINAL EFFICIENCY OF CAPITAL/INVESTMENT.
cum dividend adj. (of a particular SHARE) including the right to receive the DIVIDEND that attaches to the share. If shares are purchased on the STOCK EXCHANGE cum. div., the purchaser would be entitled to the dividend accruing to that share when the dividend is next paid. Compare EX DIVIDEND.
currency the BANK NOTES and coins issued by the monetary authorities that form part of an economy’s MONEY SUPPLY. The term ‘currency’ is often used interchangeably with the term cash in economic analysis and monetary policy.
currency appreciation see APPRECIATION 1.
currency depreciation see DEPRECIATION 1.
currency matching see EXCHANGE RATE EXPOSURE.
currency swap see SWAP.
current account 1 a statement of a country’s trade in goods (visibles) and services (invisibles) with the rest of the world over a particular period of time. See BALANCE OF PAYMENTS.
2 an individual’s or company’s account at a COMMERCIAL BANK or BUILDING SOCIETY into which the customer can deposit cash or cheques and make withdrawals on demand on a day-to-day basis. Current accounts (or sight deposits as they are often called) offer customers immediate liquidity with which to finance their transactions. Most banks and building societies pay INTEREST on current account balances that are in credit. See BANK DEPOSIT, DEPOSIT ACCOUNT.
current assets ASSETS, such as STOCKS, money owed by DEBTORS, and cash, that are held for short-term conversion within a firm as raw materials are bought, made up, sold as finished goods and eventually paid for. See FIXED ASSETS, WORKING CAPITAL.
current liabilities all obligations to pay out cash at some date in the near future, including amounts that a firm owes to trade CREDITORS and BANK LOANS/OVERDRAFTS. See WORKING CAPITAL.
current yield see YIELD.
Customs and Excise a government agency for the collection of INDIRECT TAXES levied in accordance with appropriate rates, rules and regulations. In the UK, Her Majesty’s Customs and Excise typically collects revenue from VALUE-ADDED TAX and EXCISE DUTY payable on alcoholic drink, tobacco and betting. The agency also enforces the laws regarding the import and export of certain goods, collects IMPORT DUTIES and seeks to prevent attempts to avoid paying import duties by smuggling. See also INLAND REVENUE.
customs duty a TAX levied on imported products (see IMPORTS). Unlike TARIFFS, customs duties are used primarily as a means of raising revenue for the government rather than as a means of protecting domestic producers from foreign competition. See TAXATION.
customs union a form of TRADE INTEGRATION between a number of countries in which members eliminate all trade barriers (TARIFFS, etc.) amongst themselves on goods and services, and establish a uniform set of barriers against trade with the rest of the world, in particular a common external tariff. The aim of a customs union is to secure the benefits of international SPECIALIZATION AND INTERNATIONAL TRADE, thereby improving members’ real living standards. See GAINS FROM TRADE, TRADE CREATION, EUROPEAN UNION, MERCOSUR.
cyclical fluctuation the short-term movements, both upwards and downwards, in some economic variable around a long-term SECULAR TREND line. See Fig. 35. See DEMAND MANAGEMENT.
cyclically adjusted public-sector borrowing requirement see PUBLIC-SECTOR BORROWING REQUIREMENT.
cyclical unemployment the demand-deficient UNEMPLOYMENT that occurs as a result of a fall in the level of AGGREGATE DEMAND and business activity during the RECESSION and DEPRESSION phases of the BUSINESS CYCLE.
cyclical variation see TIME-SERIES ANALYSIS.
Fig. 35 Cyclical fluctuation. The pronounced short-term swings in output growth rates over the course of the BUSINESS CYCLE, around a rising long-term trend growth line for the country’s GROSS NATIONAL PRODUCT.
dawn raid a situation in which a potential TAKEOVER bidder for a company buys a substantial shareholding in the target company at current market prices, often through intermediaries (to disguise the identity of the bidder). This shareholding can then be used as a platform for a full takeover bid for all the shares at a stated offer price. See TAKEOVER BID, CITY CODE.
deadweight loss the reduction in CONSUMERS’ SURPLUS and PRODUCERS’ SURPLUS that results when the output of a product is restricted to less than the optimum efficient level that would prevail under PERFECT COMPETITION. Fig. 36 shows the demand and supply curves for a product, and their interaction establishes the equilibrium market price OP. At this price, consumers’ surplus is shown as the diagonally shaded area ABP and producers’ surplus as the vertically shaded area APO. If output is restricted from OQ to OQ1, then the price paid by consumers would rise to OP1 and consumers’ surplus would be reduced by the amount ACE, while the price received by producers would fall to OP2 and producers’ surplus would be reduced by the amount ADE.
Deadweight loss is particularly likely to occur