C To cash-in-advance constraint (Economics)


1 Total consumer expenditure of a national economy. This is shown as a function of national income in the consumption FUNCTION.

2 The lowest quality of security, according to Standard & Poor, as such securities have no interest paid on them.


Transactions between the dollar and sterling in foreign exchange trading.


1 coastal and commercial navigation between ports.

2 Permission for an air carrier of a foreign country to pick up passengers or freight in another country for transport to a third country.

cab rank rule

The customary regulation that UK barristers must accept a brief appropriately priced if it is within their competence.

cadastral survey

A survey of the ownership, extent and value of land usually undertaken for taxation purposes.

Cadbury code of corporate governance

The recommendations of the committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cad-bury. The final report, issued in December 1992, recommended at least three nonexecutive directors on boards of directors, checks on the power of any individual with ‘unfettered powers of decision’ and an audit committee of non-executives.

Cairn’s Group

The group of major agricultural exporting countries founded in 1986 and based in Australia. It consists of Argentina, Australia, Brazil, canada, chile, colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand and Uruguay. It seeks to liberalize trade in agricultural products, especially through reductions in agricultural export subsidies and barriers to consumer markets: these entail changes in national agricultural policies. The group also acts as the representative of these countries in general AGREEMENT ON TARIFFS AND TRADE talks.


An order to pay a further instalment of cash for the purchase of shares.

call centre

Business premises where workers dealing with incoming and outgoing telephone calls undertake market research, sell products or answer customer enquiries. These centres have been criticized for the low rates of pay offered and for strict working conditions. By 2001 there were in the UK about 7,000 call centres of all sizes employing in total about 400,000 workers. A centre with fewer than twenty staff is called a ‘pocket centre’.

call money

Money lent within the City of London by CLEARING BANKS to DISCOUNT HOUSES for short periods, sometimes only overnight, and immediately payable on demand. This is ranked after cash and deposits with the Bank of England as the most liquid asset of the UK clearing banks as it can be recalled at any time.

call option

The right to buy a stock exchange security at the current price within a specified period, normally three months.

Cambridge Circus

Several young economists who debated with keynes in the early 1930s the development of his ideas in A Treatise of Money (1930) into the theories central to The General Theory of Employment, Interest and Money. The group included Joan robinson, Roy harrod, Richard kahn, James meade and Piero sraffa.

Cambridge controversies

Disputes between economists in Cambridge, England (robinson and kaldor), and Cambridge, Massachusetts (solow and samuelson), about the nature of capital. In particular, the English contestants attacked the neoclassical assumptions of their transatlantic opponents by questioning the existence of the aggregate production function. Also, they debated the theory of profits and capital, the determination of savings and the interest rate, aggregate capital and the re-switching of techniques.

Cambridge Economic Policy Group

A group of Cambridge economists led by Wynne Godley who recommended an expansionary fiscal policy and import controls in order to alleviate UKunemployment after 1974. They opposed the use of demand management and incomes policies as central instruments for determining the level of AGGREGATE DEMAND.

Cambridge School \

successive generations of economists at Cambridge University, particularly after the establishment of the separate Economics Tripos in 1903. The school was founded by Marshall and was made famous in the 1930s by keynes, its intellectual leader. After 1945 its prominent leaders included kaldor, Joan robinson, sraffa and Wynne Godley. A succession of ideas has occupied the school in the post-war period: in the 1950s, the refinement of Keynesian ideas; in the 1960s, ‘the CAMBRIDGE CONTROVERSIES’ about CAPITAL; and, more recently, an examination of the nature of markets to show that market CLEARING is so poor that DISEQUILIBRIUM is a major economic problem.

Canal Age

The period 1757-1830 in UK history when a network of 4,250 miles (6,800 km) of navigable rivers and canals was created to transport agricultural produce and the manufactures of the Industrial Revolution. It was succeeded by a railway age.

canons of taxation

Adam smith’s criteria for taxes: equality (based on a person’s ability to pay), certainty (the time for payment, manner of payment and quantity to be paid should be clear), convenience (payable at the time the taxpayer is in receipt of income) and economy in collection.

Cantillon effect

The differential impact of an increase in the money supply. As different recipients of extra cash have different uses for it, there will be a change in the relative demand for, and relative prices of, goods and services. The rate of interest will fall if the recipients of the extra money save and invest.

Cantillon, Richard, c.l680-c.l734

Irish-born banker and economist who spent much of his life in France where he made a large personal fortune after the collapse of John law’s Mississippi Company. His writings on economics, other than the Essai sur la Nature du Commerce en General, appear to have perished with him when his house in Albemarle Street, London, was burnt down. His remarkable Essai showed his keen reading of several economists, including petty, and his immense practical knowledge of banking. In many senses he anticipated quesnay and other physiocrats by setting out a model of the economy with villages, market towns and cities engaged in mutual exchanges. Also, he powerfully explained the role of the entrepreneur in economic activity, with a more plausible explanation than Smith’s invisible hand postulate. His analysis of exchange rates, open market operations and the bank credit multiplier gives his work a modern focus.


The maximum interest rate paid on a floating rate security by its issuer. The seller gives funds to cover interest payments over a specified rate. Also applies to an adjustable rate mortgage.


1 The maximum output that a firm or a national economy can produce from its existing supply of factors of production. A firm can increase its capacity by enlarging its labour force or its capital stock.

2 The maximum amount of money which a financial institution can lend.

capacity charge

A component of the price of the goods or services of public enterprises which is expected to cover the costs of fixed capital.

capacity utilization

The ratio of the actual output of a firm, industry or national economy to its maximum output at a point in time. This ratio will fluctuate cyclically. A high degree of utilization will be a signal for more net investment.


1 Durable goods capable of producing a stream of goods or services over a period of time.

2 A factor of production distinct from land, the entrepreneur and the labour currently being used.

3 A sum of money which is invested in a business enterprise.

4 Accumulated expenditures giving rise to higher subsequent incomes, as in human CAPITAL.

5 Wealth.

6 stored-up labour; exchange value which is becoming wealth, according to Marx.

capital account

A balance of payments account which records the flow of capital assets between one country and the rest of the world. World interest rates will have a major influence on a country’s capital account, as capital mobility is stimulated by differences in the rates of return to financial assets in different countries.

capital accumulation

Increasing the capital stock by undertaking investment in excess of replacement investment. This accumulation has been viewed as the expansion of the productive potential of the economy and as the adjustment of the amount of capital to the equilibrium level necessary to achieve an optimal allocation of scarce resources. Adam smith attributed this investment to a person’s desire for betterment; marx to the innate greed of capitalists. Today, the principal motivation is to achieve a desired rate of economic growth.

capital adequacy

Sufficient capital to protect depositors and counter-parties from the risks present in a bank’s balance sheet and off-balance sheet activities. Rules have been devised to ensure adequacy, especially by the Basle Committee on Banking Supervision. The committee issued the Capital Accord 1988 (revised 1999, 2000). This included a minimum capital 8 per cent of liabilities, with higher requirements for each of the five classes of asset according to risk. Subsequently the committee experimented with internal models to calculate market risks of capital and ordered more disclosure of information. Other capital adequacy tests are based on measuring liquidity, solvency, market and settlements risks.

capital asset pricing model

A model which demonstrates that the reward for holding a risky security which is part of a well-diversified portfolio is based on its beta risk. It is assumed that the securities market is in a state of frictionless perfect competition, that investors invest for the same length of time and have identical expectations concerning the probable returns from securities invested then, and that investors can borrow or lend unlimited amounts of money at a risk-free rate of interest. The publication of beta statistics for many shares has often enabled investors to increase the overall return to their portfolios. Criticisms of the model are directed chiefly at its assumptions.

capital-augmenting technical progress \

Technical progress which increases output even though the rate of investment remains the same as measured in machine hours.

capital budgeting

Appraising the financial implications of investment plans using techniques such as calculating discounted cash flow, net present VALUE, PAYBACK METHOD and RATES OF return. As major investments are risky and irreversible, capital budgeting is a crucial managerial activity of firms.

capital consumption

depreciation. Given that fixed assets have only a limited life-span, it is necessary to add to the annual costs of an enterprise or a national economy an estimate of the amount notionally spent on the wear and tear of such assets. Capital consumption is deducted from the gross national product to obtain the net national product, or NATIONAL INCOME.

capital controls

Barriers to the flow of capital between countries erected in order to calm financial markets and provide short-term protection for a country with a balance of payments deficit. The UK suddenly abandoned its controls in 1979; in the European Union controls have been progressively abandoned.

capital deepening

Investment which produces an increase in a capital-labour ratio because the capital stock grows at a faster rate than the labour force.

capital flight

A capital outflow from a particular country. This is broadly defined as all purchases of foreign assets (other than to increase official reserves), together with the errors and omissions item of a balance of payments; narrowly, it can be regarded as short-term capital outflows (hot money) plus errors and omissions.

capital gains tax

A tax based on the increase in capital value of an asset between its purchase and its sale. This tax discourages investors from adjusting their portfolios and reduces business for stockbrokers. The country with the highest rate of tax is Australia (48.5 per cent) followed by the UK and the USA.

capital income tax

A tax levied on the returns from investments or capital. Often such a tax is levied at a higher rate than taxes on employment incomes.

capital intensive

A form of production using much physical capital per unit of labour input. The degree of factor intensity is usually measured by the slope of an isoquant.


1 A socioeconomic system of production using ROUNDABOUT METHODS OF PRODUCTION.

2 An economy based on private enterprise.

3 The use of markets not planning to allocate economic resources.

4 Production motivated by the profit motive.

The physiocrats and classical economists such as smith regarded capitalism as the natural form of economic organization based upon man’s propensity to truck and barter and likely to be the most successful in increasing economic welfare. marx criticized many definitions of capitalism for being timeless, ignoring the different historical forms it takes, and for the institution of private property, which prevents the reconciliation of individual and general interests, causing the alienation of workers. Marxists have classified capitalism into different stages, namely agricultural capitalism, merchant capitalism, industrial capitalism and state capitalism.

capitalist imperialism

The exercise of power by major capitalist countries over less developed countries, often through the medium of multinational corporations. Marxists have argued that the declining rate of profit on home production forced capitalists to expand overseas.


The conversion of an interest payment or a liquid asset into permanent capital. A company can capitalize its cash reserves by the issue of shares (a free, bonus or scrip issue). A debtor, even a nation, can capitalize interest payments by adding them to the original sum borrowed.

capitalization effect of a tax

The reduced value of an asset resulting from the imposition of a tax on the income from the asset; for example, a tax on the imputed income from owner-occupied housing depresses the value of houses.

capital-labour ratio

The amount of physical capital employed by each worker usually measured by dividing the value of the capital stock by the size of the labour force. These ratios are central to theories of growth and of comparative ADVANTAGE.

capital market

A market which issues securities to raise long-term capital.

capital mobility

The flow of financial capital between one employment and another. It was assumed by ricardo and other practitioners of classical economics that capital would flow between places and industries until rates of profit were equalized.

capital-output ratio

The amount of capital divided by the amount of output produced by it. This measure of capital intensity underlies the


capital re-switching

A return to more capital-intensive methods of production because a technique has become more profitable through an increase in the marginal product of capital or a fall in the rate of interest.

capital reversing

A challenge to the neoclassical view that input substitution responds to the relative scarcity of factors of production. Instead of relative prices, changes in the quantity of capital lead to capital reversing. Also known as reverse capital deepening because a lower rate of profit can be associated with a lower capital-labour ratio.

capital tax

A tax based on the value of assets. Such taxes, which are very costly to collect because of valuation problems, rarely constitute a large proportion of a country’s total tax revenue but are imposed for the distributional reason of increasing the relative tax burden of the rich. In practice, governments often reduce the effective rate of capital taxes by a variety of allowances, e.g. to allow for depreciation, life insurance and pensions.

capital theory

A theory which links the theories of production, growth, value and distribution to explain why capital produces a return which keeps capital intact but yields interest (or profit) which is permanent. Over the past 200 years the notion of capital has varied greatly: to many of the classical economists it was to a large extent the raw materials and the wages fund; later it was viewed as a physical intermediate good. To marx capital was a social mode of production; to the austrian school time was crucial to the concept; to fisher capital was a stock which produced a stream of income with its value determined by relative preference for future rather than present goods. Important debates include the relationship between the rate of interest and the value of capital, as well as discussion of the notion of aggregate capital. As there are many important sub-species of capital, including human capital and equity capital, specialist theories of capital are also propounded. Capital theory expanded its concerns in the 1960s within the context of growth theory. A major issue discussed then was the method of measuring aggregate or social capital to achieve a value independent of distribution and prices. Joan robinson suggested using labour time as a measure; Champernowne introduced a CHAIN INDEX METHOD.

capital transfer tax

UK tax introduced in 1975 on transfers of wealth payable by the donor or recipient during life or at death. Estate duty, in force from 1894 to 1975, was the predecessor of this tax.

capital utilization

1 The proportion of fixed capital (buildings and machinery) in use. If machinery is worked for only half of a time period, the capital utilization rate is 50 per cent.

2 Actual output as a percentage of potential output at a reference date.

capital value

A valuation of an asset broadly measured either by discounting the total future income expected from the asset or by capitalizing the expected income.

capital widening

An increase in the real capital stock leaving the capital-labour ratio unchanged as the capital stock and the labour force grow at the same rate.

capping an interest rate

Separating the part of interest payments in excess of real interest payments and then capitalizing it by adding it to the long-term debt.

captive insurance

An insurance company whose business is mainly supplied and controlled by its owners. The principal beneficiaries are those originally insured.

carbon sequestration

Storing carbon dioxide by planting trees or pumping into underground reservoirs: an approach to reducing global warming.

carbon sink

An area with trees and plants which has been created to absorb carbon dioxide. This has been proposed to reduce global warming.

carbon tax

A tax related to the carbon content of coal, natural gas or oil, which is imposed to improve the natural environment. The tax can take the form of a fixed amount per ton of carbon embodied in each fuel or be an ad valorem tax. The level of the tax is related to the emission reduction target chosen.

cardinal utility

The satisfaction obtained from consumption, or engaging in an economic activity, which is directly measurable in monetary or other units. The cardinalist argues that it is possible to compare, e.g. in utils, the relative amount of satisfaction from consuming different quantities of the same or other goods. Thus, the law of diminishing marginal utility could be described as follows: a woman obtains 10 utils from the first glass of champagne, 8 utils from the second, 6 utils from the third …. Proxy measures of utility, e.g. the amount of money which a person is prepared to give up to obtain x amount of a good, have all been considered too indirect.


An unpaid family worker who provides nursing and domestic care to young, infirm or elderly relatives. Moral obligation is the basis for undertaking this work.

Caribbean Basin Initiative

An arrangement agreed in 1984 to give exports of countries of the Caribbean region tariff-free access to the USA.

Caribbean Community

A common market with agricultural and industrial integration founded in 1973 in succession to the Caribbean Free Trade Area (1968-73). The members are Angu-illa, Antigua, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St Kitts-Nevis, St Lucia, St Vincent, Trinidad and Tobago.

Caribbean Development Bank

Development bank founded in 1970 consisting of seventeen member countries from the Caribbean region as well as Canada and the UK.

carry-back, carry-forward system

A tax system which permits businesses to carry net operating losses back or forward against past or future gains in income or capital appreciation.

carrying capacity

The ability of a particular area to sustain a population at a specified level of subsistence, usually specified as the number of persons per unit of land.


A person believing that the value of a currency depends on the power of the issuing authority and not on its intrinsic value or its convertibility into gold.

carte a memoire

French for smart card.


An association of producers who agree to fix common prices and output quotas in an oligopolistic market. As the aim of a cartel is to prevent competition, there is a tendency for the producers to strive to maintain existing market shares, with the consequence that a firm can only increase its output if total market demand rises. The device of a cartel has long been used as a method of restricting competition: Adam smith acknowledged the existence of cartels in the eighteenth century: ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.’ Firms afraid of the effects of recession are eager to join such associations, e.g. in the 1880s in the USA and in Germany in the interwar period. Increasingly tough legislation in the USA and Western Europe has outlawed many cartels. The organization of petroleum export-ingcountries has some of the characteristics of a cartel.


The most liquid of assets, consisting of coin and banknotes; often defined as a zero-interest asset, although Goodhart and others have suggested that interest could be paid by running a national lottery on the serial numbers of the notes. Commercial banks also regard deposits at the ‘central’ bank as cash.

cash accounting

The recording of income and expenses when cash is actually received or spent. This method is often used to calculate income tax.

cash budgeting

Predicting the cash flows of a business.

cash crop

Agricultural produce marketed for cash, rather than retained for the use of the farmer’s household.

cash-deposits ratio

The ratio of a bank’s holdings of cash to its total deposits, sometimes used as a measure of control over the banking system to guarantee its liquidity. In the second half of the twentieth century, liquid asset ratios came to be the preferred method of controlling the total volume of bank deposits.

cash dispenser

A machine provided by a bank or other deposit-taking institution, often at its premises, to dispense cash through the insertion of a card to account-holders of that bank or a bank in association with it. Usage of dispensers varies from country to country. In the UK and France they are particularly popular: by 1985, there were 6,886 in the UK and 7,172 in France but only 2,000 in West Germany.

cash economy

Part of a national economy using cash to make all payments. This occurs either because of a shortage of banking facilities or because of a desire to evade tax. In modern economies, much of the black or informal economy is of this nature.

cash flow

1 The net amount of money received by a firm over a given period.

2 Retained profits and funds set aside for depreciation. This flow permits a firm to finance its own investment.

cash flow accounting

Accounting based on the transactions which are recorded when payment is actually made. Contrast with accrual accountiNG.

cash-in-advance constraint

A good has the status of money through being involved in most types of exchange, so purchases within a period are constrained by the amount of money available at the beginning of that period. Also known as the finance or effective demand constraint.

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