Howdy, everyone. We will discuss the Top 5 Key Terms related to Finance and Economics one must know to tackle the problems encountered in real-world and daily life scenarios. Also, you need those when you haven’t studied much about them in High School due to various reasons, therefore now is the time to just have a look at them.
So to start and make you familiar with these topics let me first introduce you with what Finance and Economics mean.
Finance means the management of large amounts of money, especially by governments or large companies, or providing funds for (a person or enterprise).
Economics means the branch of knowledge concerned with the production, consumption, and transfer of wealth or the condition of a region or group as regards material prosperity.
As now you are familiar with these topics. We will first talk about Finance and then later proceed with the second term Economics. Let’s get started.
First, on the list of financial terms, assets are the economic resources a business has. In a broad sense, assets include everything your company owns that has some economic value. These are generally broken down into six different types of assets.
If assets are the resources your company owns that contribute to its economic value, liabilities are its exact opposite. In fact, liabilities are just that — things your company is responsible for by law, especially debts or financial obligations.
For example, any debt accrued by a business in the course of starting, growing, and maintaining its operations is a liability. This could include bank loans, credit card debts, and monies owed to vendors and product manufacturers.
Liabilities, like assets, can be divided into subcategories. The two primary types of liabilities are often referred to as current liabilities and non-current liabilities.
Business expenses are any cost that is “ordinary and necessary” to run a business or trade. These expenses are the costs your company incurs each month in order to operate, and include things like rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs. To remain financially solid, businesses are often encouraged to keep expenses as low as possible.
4. Profit and loss
To remain financially healthy, a business must regularly generate more revenue from the sale of its product or service than it costs to make that product or service. Say it costs a company $2 to make a T-shirt, but that company sells the T-shirt for $10.
In the above case, the company’s profit is $8. On the other hand, a loss is a money that a company, well, loses. For instance, if a T-shirt is stolen or destroyed and can no longer be sold, it would be counted as a loss.
5. Net profit
In accounting jargon, your net profit might also be referred to as net income or net earnings. And because it’s usually found on the last line of a company’s income statement, it’s often also called the bottom line.
But just what is it? Well, this is the total amount a business has earned or lost at the end of a specified accounting period, usually a month.
To determine your net profit, you would subtract all your business expenses from your total sales revenue in order to determine just how much money your company has earned above and beyond the cost of producing and selling your product or service. Net profit is usually used to determine whether a business’s earnings are increasing or decreasing.
Most of us are familiar with the concept of interest in our daily lives. If we invest $100 at 10% interest for a year, at the end of the year we will have $110. What if we waited another year we would have $121.
If you thought that we should have $120, look again. 10% of $110 is $11, so if we add this amount to what we have, we get $121.
This phenomenon is called compounding interest, where we get more and more money from an investment as time goes on, even at the same interest rate because interest is accruing based on all the money we have now, not just what we started with.
2. Supply and Demand
Consider a good that is being sold in many places across a nation. From the perspective of a consumer, generally, a higher price will mean fewer units of the goods are sold. Generally, a lower price will mean that more units of the goods are sold.
From the perspective of a producer, however, the higher the price is, the more they will want to produce the good. Again, the opposite is generally true as well; the lower the price, the less they will want to produce the good.
This is the point where producers and consumers exchange goods at a cost and quantity that represents a balance between the consumer’s wish to pay less money and the producer’s wish to make more money.
Equilibrium is the point where everybody willing to pay the market price has their demand satisfied, and anybody willing to produce at the market price has a buyer for the good.
Also, an important term opportunity cost is used in economics. It means the loss of other alternatives when one alternative is chosen.
A useful definition of capital is anything that can enhance the ability to do economically useful work.
Economically useful essentially means anything that has value to human beings. There are many ways to produce value, so it makes sense that there are several types of capital that we can refer to.
4. Gross Domestic Product
Gross domestic product (GDP) is an economic measure intended to represent the sum of all economic activity in a country.
Economic activity is measured according to market value. Therefore GDP is the sum of all market value delivered in a country. This quantity is usually presented on a yearly scale. It is in terms of Purchasing Power.
In economics, an externality is something that affects other people who are not part of a specific economic exchange/interaction but is not accounted for in the price of the transaction in question.
Externalities can be positive or negative. Positive externalities are good for people not involved in the trade in question, while negative externalities are bad.
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