Adding-up controversy To agency theory (Economics)

adding-up controversy

A dispute concerning ‘solutions’ to the problem of ensuring that the total amount of income going to factors of production is equal to the national income. From P.H. Wicksteed’s An Essay in the Coordination of the Laws of Distribution (1894) onwards, many attempts to solve the problem have been limited to the special case of a long-run perfectly competitive equilibrium.

additional facilities

Extra credit arrangements of the international monetary fund to ease the balance of payments difficulties of member countries. These include:

• 1963 Compensatory Financing Facility to provide compensation for a shortfall in export earnings;

• 1969 Buffer Stock Financing Facility;

• 1974-5 Oil Facility;

• 1974 Extended Fund Facility;

• 1974 Supplementary Financing Facility;

• 1986 Structural Adjustment Facility.


The imposition of an extra obligation. This is also a financing principle of the european union in that some grants it makes have to be matched by a grant from a member state set as a fixed proportion of the Eu grant.

additional-worker hypothesis

The assertion that unemployment will encourage more labour force participation amongst secondary workers thus increasing the size of the labour force. This often occurs when there is a shift from heavy to light industry. if those made redundant in the heavy industries are males but the jobs available in the light industries are predominantly suitable for females, then male unemployment will coincide with women joining the labour force.

adjustable peg

A fixed exchange rate which can occasionally be altered according to certain rules. The best example is the bretton woods agreement which permitted revaluations and devaluations of up to 10 per cent without the permission ofthe international monetary fund. An adjustable peg has the disadvantage of requiring the costly accumulation of foreign exchange reserves and can be unstable as every rumour about a currency change may provoke speculation necessitating an adjustment. A currency can be pegged to another single currency (often the US dollar) or to a basket of currencies such as a special drawing right or a basket chosen to reflect the trade structure of the country.

adjustable rate mortgage

A mortgage bearing an interest rate that fluctuates according to market interest rates. These are popular with savings institutions as they have less interest risk, and with individuals and households because they offer lower initial interest rates.

adjustment cost

The cost to an economic agent, e.g. a firm or a household, of a change in the value of a variable crucial to its decisions. If, for example, a firm were to change its capital stock by embarking on an investment programme, it would incur the adjustment costs of research, planning, installation of equipment and training of workers.

adjustment gap

The ratio of international to domestic food prices. The greater the amount of farm support, the greater the gap. In the 1980s, the ratio for the european community was about one-third.

adjustment speed

The time it takes a price to adjust to excess demand or excess supply in a particular market. This is crucial to the study of money wage rates, product prices, interest rates and nominal exchange rates.

administered inflation

Inflation brought about by firms increasing the profit mark-up on their products; a form of cost-push inflation.

administered pricing

The practice of setting prices according to a formula, irrespective of the short-run forces of demand and supply. This is possible because of the market power of monopolistic and oligopolistic firms. As it is expensive to change prices (e.g. new catalogues have to be printed) and as there is always the possibility of adverse consumer reaction, there is a tendency for prices to be more rigid when administered. As part of an anti-inflation programme, especially in wartime, governments will administer major prices, the prices of goods and services prominent in most consumers’ budgets; in these circumstances the rules for increasing prices are strictly laid down. Most administered prices are calculated by adding a profit margin to average cost.

administrative cost

1 The personnel and equipment costs of collecting taxes (public finance).

2 costs incurred to manage an enterprise (managerial economics).

administrative costs of regulation

All the costs of employing officials and running the offices of regulatory agencies. These are contrasted with compliance costs.

ad valorem tax

An indirect tax levied as a percentage of the value of a transaction. sales taxes, excise duties and value-added taxes are major examples. in calculating such taxes, either the final price of the good or service or the value added at a particular stage of production is the basis. This tax reduces the amount of revenue that a firm obtains from the sale of a good or a service.


A bank loan or an overdraft which has a term of less than three years, usually less than one year. When a bank creates money, it does so by allowing advances to its customers, i.e. permitting them to draw on the extra bank deposits created for them. An overdraft is a permission to ‘overdraw’ up to a certain amount for a specified period, but a loan results in an immediate crediting of the borrower’s account.

advance corporation tax

An interim settlement of uK corporation tax. if a company makes a qualifying distribution of earnings, e.g. by distributing a dividend, during its accounting period, it pays a proportion of the amount of the dividend as an advanced payment of tax which will later be deducted from its tax liability for that period. The proportion levied varies from year to year but has often been about 30 per cent.

advanced organic economy

An economy which reaches a considerable level of real income by using agricultural products, especially wood, for energy and raw materials. A pre-industrial economy.

adverse selection

A problem of insurance arising when the insurer does not know whether or not an insured person is at risk, with the consequence that the same premium is charged, irrespective of whether that individual is likely to claim. This can occur, for example, if applicants for life insurance do not disclose all their health details.

adverse supply shock

A change in a factor price, e.g. of energy or labour, which reduces aggregate supply at each price level. in the short term, the macroeconomic consequences of a shock are an increase in the price level and a fall in output.


A communication activity used to influence potential buyers, voters or others who can help the advertiser to reach defined goals. For firms, it is a selling cost incurred with the hope of increasing sales. Advertising increases the amount of information available in a market but also helps to create monopoly situations as it can be a barrier to entry. The theory of monopolistic competition was the first major economic theory to incorporate considerations of advertising. By advertising, oligopolists can create wants and markets, escaping the strictures of consumer sovereignty. The annual amount of a firm’s advertising expenditure is often determined by an arbitrary ratio of advertising expenditure to sales revenue with the frequent effect of redistributing demand among the firms of an industry and adding to their costs, not of enlarging total expenditure on a particular good or service. Although large advertising expenditures are associated with market economies, advertising has a role in command economies, particularly to

increase consumer demand for products new to the market or in excess supply.

Advisory, Conciliation and Arbitration Service

The central UK body, set up in 1974 under the trade union and labour relations act, to promote an improvement in industrial relations, to encourage an extension of collective bargaining and its reform through advice, conciliation, enquiries and arbitration, and to run the central arbitration committee. An important aspect of its activities has been the publication of codes of practice in industrial relations.

affinity card

A credit card linked with a charity that receives donations in proportion to the amount spent by the user of that card.

affirmative action

A series of actions taken by an employer or public authority to advance the opportunities of disadvantaged groups, especially ethnic minorities, to increase their representation, particularly in employment and other activities.

American Federation of Labor and Congress of Industrial Organizations: a merger of two rival labour federations of the USA in 1955 which brought back the breakaway industrial unions that had separated from their colleagues in craft unions. Some US labour unions are not affiliated to the AFL-CIO.

African-American economists

The earliest black economists in the USA include William Edward Burghardt Du Bois (1868-1963), Sadie Tanner Mossell Alex-ander(1898-1989), George Edmund Haynes (1880-1960) and William Henry Dean Jr (1910-52). Their work has included the study of migration, discrimination and location theory:

African Development Bank

A bank operating from 1966: it finances investment projects in Africa and raises capital throughout the world. By 1985, it had fifty African and twenty-five non-African countries as members, including the UK, the USA, Germany and Japan.

after-hours dealings

Dealings in stocks and shares after the London stock exchange closes for the day. Such bargains are recorded as the next day’s business. In the past these dealings were at less attractive prices to both buyer and seller because of the greater risk of trading when market opinion was unknown; now, long hours of electronic dealing have removed this price differential.


The trading in securities immediately after they have been issued.

age-earnings profile

A graph plotting earnings against age. Such profiles are frequently used in human capital analysis to show the financially beneficial effects of education. More education usually raises the profile to a new plateau; rules for salary structures and seniority can also affect the profile’s shape. The frequently used method of constructing a profile from cross-section data provides a poor estimate if age differentials in earnings change. longitudinal data provide a more accurate picture of life-time earnings.


ageing population

1 population with an increasing proportion of its population in older age groups, often because a large group born in a period of high birth rate is maturing.

2 A population with a rising median age. In developed countries, a decline in the birth rate since the 1960s has added to this demographic effect. A slower growth in gross national product of a nation can encourage emigration of the young, with the consequence that the remaining population ‘ages’. A typical pattern of consumption and saving is associated with each age group and hence, when a population ‘ages’, it changes its demand for particular goods and services in the private and public sectors; also, innovation may be affected and the size of the multiplier for the whole economy may change.


Treating people who have reached a particular age, the customary age of retirement in that society or even younger, as of little value so that they are excluded from employment and many other activities. This form of discrimination is being fought by senior citizens’ lobbies in the USA and elsewhere. Increasing shortages of young workers in developed countries in the late twentieth century have diminished some of this discrimination. Also, firms which have waived age rules have discovered that many older workers have lower absenteeism, and higher numeracy and literacy than younger workers.

agency broker

A stockbroker who buys and sells shares of companies from market-makers. It is argued that agency brokers have the advantage of being able to find better prices than an individual market-maker can offer and of providing more confidentiality.

agency cost

A cost arising from a contractual relationship between a principal and an agent. These costs include the expenses of drawing up and enforcing a contract, as well as transaction costs, moral hazard costs and information costs. Agency costs are major determinants of how firms are organized and how their staff are remunerated.

agency pass-through

A mortgage pass-through security guaranteed by a US agency such as the Government National Mortgage Association so that there is no default on the principal and interest payments.

agency shop

A voluntary union shop, extensively present in the US public sector, in which employees pay the equivalent of union dues in return for that union acting as a bargaining agent. it is used to evade the ban on closed shops in right-to-work states.

agency theory

A theory of the firm which explores the relationships between property rights and financial structures. The central concept used is the ‘agency relationship’, i.e. the contractual relationship between a principal person(s) and those who render services as agents, e.g. between the stockholders of a corporation and the managers they appoint to run that firm. The costs of the agency include the costs to the principal of monitoring the agreement and any loss if the agent’s decisions fail to maximize his or her welfare; the agent often incurs the costs of putting up a bond as a guarantee of not harming the principal. This theory can be applied to many other aspects of co-operative behaviour.

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