Dr. Pass - Economics

countervailing dutya TAX levied on an imported product (see IMPORTS) that raises the price in the domestic market as a means of counteracting ‘unfair’ trading practices by other countries. Countervailing duties are frequently employed against imported products that are deliberately ‘dumped’ (see DUMPING) or subsidized by EXPORT INCENTIVES. See TARIFF, IMPORT DUTY, BEGGAR-MY-NEIGHBOUR POLICY.

countervailing powerthe ability of large buyers to offset the market power of huge suppliers as in BILATERAL OLIGOPOLY. Large buyers usually have the upper hand in a vertical market chain (for example, multiple retailers buying from food manufacturers) because, unless suppliers collude (see COLLUSION), a large buyer is able to play one supplier off against another and obtain favourable discounts on bulk purchases. Provided that competition is strong in final selling markets, countervailing power can play an important role in checking monopolistic abuse.

The economist J. K. GALBRAITH uses the phrase ‘countervailing power’ in a slightly different way to refer to the growth of trade unions and consumer groups in response to the growth of large firms.

coupon 1a document that shows proof of legal ownership of a FINANCIAL SECURITY and entitlement to payments thereon; for example, a SHARE certificate or BEARER BOND certificate.

2a means of promoting the sale of a product by offering buyers of the product coupons that can be redeemed for cash, gifts or other goods.

coupon interest ratethe INTEREST RATE payable on the face value of a BOND. For example, a £100 bond with a 5% coupon rate of interest would generate a nominal return of £5 per year. See EFFECTIVE INTEREST RATE.

Cournot, Augustin(1801–77) a French economist who explored the problems of price in conditions of competition and monopoly in his book The Mathematical Principles of the Theory of Wealth (1838). Cournot concentrated attention on the exchange values of products rather than their utilities, and he used mathematics to explore the relationship between the sale price of products and their costs, developing the idea of a MONOPOLY price. Cournot is also known for his work on DUOPOLY, his analysis showing that two firms would react to one another’s output changes until they eventually reached a stable output position from which neither would wish to depart.

covenanta 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 arbitragethe 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.

coveringa 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.

CPIsee CONSUMER PRICE INDEX.

crawling-peg exchange-rate systema 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 destructionsee SCHUMPETER.

credibility 1the 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.

credita 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 carda 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 1the 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 creationsee BANK-DEPOSIT CREATION.

creditora 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 nationa 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 squeezeany 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.