baby-boom period
The 1970s when persons who were born in the high-birth-rate period following the Second World War became adults.
baby-bust generation
The 1990s and later when there were fewer young adults.
back testing
A simulation of actual trading in securities using past data.
backwardation
1 The charge made on a stock exchange for carrying the settlement of a bargain into the next accounting period.
2 In commodity markets, it is the amount by which a spot price and the cost of carrying a commodity over time exceeds the forward price. The opposite is contango.
backward-bending labour supply curve
A curve plotting the supply of labour against wage rates which becomes negatively sloped at higher wage rates as proportionately less labour is supplied. This phenomenon is caused by the relative size of the income and substitution effects of the wage rate change. As an increase in the wage rate also represents an increase in the price of leisure, this price effect can be divided into a substitution effect (the effect on the number of hours of leisure chosen of an increase in its price) and an income effect (the effect of an increased wage rate that a given income is reached with fewer hours of work – in the figure, beyond point A higher real wage discourages workers from supplying more hours of work). A negative income effect greater than zero or a positive substitution effect will produce the backward bend in the labour supply curve.
backwash effect
The unfavourable effect of economic growth in a region on other regions in the same national economy. The growing region attracts capital and labour from other regions, bringing about a concentration in economic activity and regional economic differentials. This effect has been noted in the context of the study of the core and periphery of a country.
bad
An output from economic activity which does not benefit consumers. Most bads are external costs associated with production, e.g. pollution and other health hazards. Bads must be taken into account when measuring the welfare conferred by a particular level of the national income.
bad equilibrium
A balance in an economy at a low level of activity, e.g. low per capita income, a structural imbalance in the balance of payment and unequal income distribution.
badge engineering
Production of a range of automobile/car models with similar characteristics to create a number of distinct brands.
Bagehot, Walter, 1826-77
Nineteenth-century economic and political journalist who was the most famous editor of The Economist (1861-77) and inventor of the treasury bill, still used by the UK Treasury as a source of short-term finance. After his debut as an economics writer with a review of John Stuart mill’s Principles of Political Economy (first published in 1848) he quickly showed his ability to distil economic truth from a mass of evidence. in Lombard Street (1873) he acutely analysed the UK banking system and money market showing the crucial role of the Bank of England and the importance of confidence as the basis of credit.
Bailey, Samuel, 1791-1870
A major opponent of the Ricardian theory of value, mainly known for his A Critical Dissertation on the Nature, Measures and Causes of Value: Chiefly in Reference to the Writings of Mr Ricardo and his Followers (1825) in which he equated value with ‘esteem’ and emphasized its essentially relative nature. in his attack on intrinsic and labour theories of value, he stressed the importance of the forces of supply and demand as determinants of relative value. His entire career was spent on the sheffield Town Trust (a quasi-governmental agency), although he stood for election to parliament in 1832 and 1835.
Bain, Joe Staten, 1912
An American economist educated at the University of California at Los Angeles and Harvard, and a professor of economics for thirty years at Berkeley, california, until his retirement in 1975. He is particularly famous for his study of barriers to entry as a cause of monopoly power. Also, he has provided a detailed examination of the relationship between concentration ratios and profitability.
Baker plan
us plan for easing the Third World debt problem, proposed by us secretary for the Treasury James Baker at the annual meeting of the world bank and the international monetary fund in Seoul, South Korea, October 1985. It proposed that once the debtor countries put together ‘supply-side packages’ (trade liberalization and more reliance on the price mechanism to allocate resources) and serviced their debts on time, money would be available in the form of loans from the World Bank, the IMF and commercial banks. It was not enthusiastically received among debtor countries (except for Mexico which reached a preliminary agreement in July 1986 to obtain US$7 billion of money as a loan). The plan has been criticized because it tries to solve a debt problem by creating more debt; gives time for procrastination and fails to deal with the root problem -that the rate of growth of Third World exports has been slower than the rate of interest on dollar loans since 1981.
It was proposed in 1986 that the World Bank would lend a net us$20 billion over three years to a selected group of fifteen countries with a combined foreign debt of us$430 billion; it was difficult to persuade the commercial banks, who are lending less to these countries, to match the generosity of the World Bank.
balanced budget
A government budget which equates revenue with expenditure. This prudent approach to fiscal policy long advocated by conservative finance ministers has frequently been attacked by keynesians who regard it as an inflexible rule which ignores the levels of aggregate demand and unemployment. A government surplus will increase public sector saving; a government deficit will require borrowing. However, unbalanced budgets could result in crowding out or long-term insolvency of a country (if the national debt is financed at a rate of interest in excess of the country’s rate of growth) or inflation (if a country increases its money supply to finance its borrowing).
balanced budget multiplier
A measure of the expansion or contraction of national income which occurs despite an equal change in the revenue and expenditure of a government. An expansion in national income is possible where the propensity to consume of a government is greater than the private sector’s. If the government taxed £100 million of personal income at 30 per cent, it would receive revenue of £30 million which, if spent in its entirety, would be a greater addition to total demand than if the tax was not raised but was left with persons who habitually saved 20 per cent of their incomes.
balanced growth
1 Growth of different sectors of an economy at the same rate. This has been advocated by many development economists as a strategy. Ragnar Nurske propounded the view that growth should take the form of the co-ordinated and simultaneous application of capital to a wide range of industries so that the national economy would not be a mixture of expanding, declining and stationary sectors.
2 steady state growth such that the real variables of the economy, including output and employment, grow at the same positive rates.
Balance for Official Financing
The current balance of the balance of payments + capital transfers + investment transactions + balancing item.
balance of payments
1 Credits and debits in international transactions.
2 The record of the transactions between the residents of one country and the rest of the world in a given time period. The balance of payments is divided into a current account which records trade in goods and services and a capital account. In accounting terms the balance of payments always ‘balances’, as a surplus or deficit has to be offset by loans granted or received, but the balance does not indicate whether there is an equilibrium between a domestic economy and rest of the world demand. A balance of payments may be in deficit in the ‘stock’ sense of a country switching from cash balances into stocks of commodities, or in the ‘flow’ sense of a country spending more than its income, a more serious type of deficit. There have been changes in the presentation of the UK balance of payments accounts. Before 1970, the equation used was visible + invisible balance = current balance + balance of long-term capital = basic balance + balancing item + balance of monetary movements = 0
From 1970 to 1980, it was visible + invisible balance = current balance + balance of private and other autonomous capital flows + balancing item = total currency flow + allocation of special drawing rights – gold subscription to the IMF + total official financing = 0
After 1980, it has been visible + invisible balance = current balance + total investment and other capital transactions + balancing item + allocation of special drawing rights – gold subscription to the IMF = total official financing + methods of financing = 0
The US balance of payments consists of:
exports of goods and services + transfer of goods and services under US military grants net — imports of goods and services — US military grants of goods and services net — unilateral transfers (excluding military grants) net — US assets abroad net (increase/capital outflow) + foreign assets in the USA net (increase/ capital inflow) + allocations of special drawing rights + balances of the above subaccounts.
balance of payments equilibrium
A balance within the overall accounting balance of payments. The equilibria most frequently examined are in the current account, in the visible trade account or in the current and long-term capital accounts combined. The balance chosen for examination depends on the purpose of the analysis. If the performance of industry is being considered, then the balance of trade will be examined, but the capital accounts merit attention if a foreign exchange market is under scrutiny.
balance sheet
A statement of the assets and liabilities of a firm or other organization which possesses property. The assets show what the firm owns, and what the firm owes is indicated by its liabilities. For a bank, the management of its balance sheet from day to day is a central part of its business tasks.
balancing item
Part of the balance for official financing which takes into account statistical discrepancies.
Baldwin envelope
As defined by Baldwin: ‘The consumption possibility frontier for a large country constructed as the envelope formed by moving the foreign offer curve along the country’s transformation curve.’
balloon payment
An additional and large charge levied at the end of a lease or loan.
bancor
An international currency proposed by keynes at bretton woods as part of his international clearing union scheme. It was hoped that this new currency would be the medium for settling intercountry indebtedness. As Keynes’s recommendation was not accepted, the US dollar assumed the role designed for bancor.
bandit problem
A learning problem. Repeatedly a choice is made from a fixed number of options in order to maximize the total reward over a particular time period. The one-armed bandit is a familiar slot machine game.
Assets of a bank which constitute its ultimate means of meeting the demands of its creditors. It consists of both the stockholders’ equity in a bank and funds obtained by selling bonds and notes with a maturity of more than seven years on average. This capital is necessary to reduce the demands made on deposit insurance organizations, e.g. the federal deposit insurance corporation, and on uninsured deposit holders. As definitions of this capital (e.g. whether to include both stock and equity) vary from country to country, in January 1987 the Bank of England and the US banking authorities created a common system for measuring the capital strength of UK and US banks. The system introduced the concept of primary capital and assigned a weight to each asset or off-balance-sheet item so that a risk-asset ratio could be calculated.
bank charges
The charges that retail banks make to their customers for bank advances or for various transactions, including the transfer of funds, the purchase of foreign currency and accounting facilities. These tend to be greatest in countries with high inflation and consequently high and variable nominal interest rates, and also where there are many regulations restricting the types of financial mediation. As both the UK and the US economies have had these characteristics, there has been great scope in their banking sectors for a reduction in charges.
Bank Charter Act 1844
UK statute which was the last major nineteenth-century attempt to regulate the UK banking system by the creation of new rules for the operation of the Bank of England, particularly through control of the note issue. The Bank was divided into an Issue Department responsible for the note issue and a Banking Department engaged in other bank activities. The Bank’s note issue was limited to a ‘fiduciary issue’ of £14 million (backed by government securities) and the remainder was backed by gold which rose and fell in amount according to international transactions. The Act also regulated the seventy-two country banks which had rights of note issue: not until 1921 did the Bank have a monopoly of note issue in England and Wales (Scotland retained its separate banking system with a number of banks having the power to issue banknotes after the Act of Union in 1707). The rigidity of the Act necessitated its suspension during several trade depressions. However, it did represent a triumph for the thinking of the currency school.
bank deposits
The liabilities of banks which constitute the major part of the money supply of modern national economies. They are liabilities because a bank can transfer its deposits by cheque to other banks who then have a claim on it. Such deposits are created by an individual or firm giving an asset to a bank, e.g. coin and banknotes, or a promise to repay a loan at a future date.
bank efficiency
A measure of a bank’s effectiveness in using the money available to it. This can be assessed by the ‘mark-up’ between interest rates, i.e. either the ninety-day bank time deposit day rate minus the prime rate of interest, or the bank demand deposit rate minus the bank prime rate. Mark-ups are similar within one country but differ between countries.
banker’s turn
The margin between the rate of interest a bank pays to depositors and the rate it receives for money lent out.
Bank for International Settlements
Founded in Basle, Switzerland, in 1930 by Belgium, Germany, italy, Japan and the UK. Since 1945 it has continued to arrange currency swaps between European central banks. it is also the agent for the european monetary co-operation fund and other European institutions.
bank holding company
A company which owns one or more banks and, often, firms engaged in non-banking activities. The development of such companies in the USA in the twentieth century made the expansion of banking possible, despite the existence of unit banking.
Bank Holding Company Act 1956
US federal statute which defined a bank holding company as one which directly or indirectly owns or holds power to vote 25 per cent or more of the shares of two or more major banks. previously, bank holding companies were only mildly controlled by the banking act 1933 if they were member banks of the Federal Reserve System. In 1966, the Act was amended to apply antitrust law to the chartering and acquisitions of these companies. The 1956 Act prohibited the companies from participation in non-banking activities; amendments to the Act in 1970 permitted the Board of Governors of the Federal Reserve System to authorize many non-banking activities, which have included leasing, insurance, mortgage banking, community development and data processing.
banking
Money changing originally; after the Church permitted the charging of interest, primarily money lending. Banks began producing money by issuing banknotes and then expanded credit by creating bank deposits, which became the major part of the broadly defined money supply. The power to create credit made banks key institutions in modern economies, influencing the level of economic activity.
In the twentieth century banks increased in size through mergers and joint operations (e.g. in the UK through mergers in the 1920s and 1960s, and in the USA through the growth of bank holding companies), through internationalization of their operations and by an extension of the range of their services. In a sense, every major commercial bank of today aims to be a financial conglomerate supplying every form of credit, financial advice and service.
Banking Act 1979
The aims of this UK statute were to regulate deposit-taking business under the control of the Bank of England. It defined ‘deposit-taking business’ as the receiving of deposits of money and then lending to others, or as being financed out of the capital or interest received by way of deposit. The Act also set up a Deposit Protection Board to manage a deposit protection fund.
Banking Act 1987
This UK statute extended the amount of regulation of deposit-taking business under the banking act 1979, gave the Bank of England exclusive powers to authorize the business of deposit taking and to revoke such powers, instructed the Bank of England to establish a Board of Banking Supervision and regulated financial advertisements.
Banking School
A group of UK economists, led by Thomas Tooke and John Stuart mill, who argued that there could never be an excess note issue as notes were only issued to cover real transactions. Also, they wanted the Bank of England to have higher reserves and the growing importance of bank deposits to be incorporated into monetary theory.
bank margin
The operating margin of a bank.
banknote
Paper currency issued by a bank. Although the first known notes were issued by chinese banks in the eleventh century, it was not until the eighteenth and nineteenth centuries that they substantially replaced coinage and bills of exchange. In London, banknotes originally took the form of receipts for bullion stored with goldsmiths and then became a form of bank advance when banks discovered their power to create money. When countries were on the gold standard, it was possible to convert banknotes into bullion; since 1931 notes have been fiat money In most countries the only note issue today is that of the central bank (the limited power of Scottish banks to issue notes is exceptional).
Bank of Canada
The central bank of Canada founded in 1934 and taken into government ownership in 1938. It has the task of formulating and executing monetary policy.
Bank of England
The UK’s central bank which received its first charter in 1694. Although originally a privately owned bank, it administered the national debt from 1752. In a series of statutes culminating in the bank charter act 1844, it was increasingly subjected to government regulation, particularly in its note-issuing powers. After the collapse of the gold standard in 1931, it operated exchange controls from 1939 to 1979 and from 1945 was more and more involved in supervising the UK banking sector. It was nationalized in 1946. It conducts monetary policy through open market operations and by influencing market interest rates. The note issue is now entirely fiduciary, but the monetary assets backing the note issue are used for the bank’s daily interventions in government security and money markets. Also, the bank holds accounts for about 130 overseas central banks, the international monetary fund and some private and public sector clients. It acts, too, as the registrar of government stocks of the UK, several Commonwealth countries and UK local authorities.
Bank of Italy
The central bank of Italy founded in 1883 through the merger of four note-issuing banks. It was granted its independence from the Italian government in 1993.
Bank of Japan
The central bank of Japan controlled by the Policy Board whose members are chosen by the Cabinet and approved by the Diet.
bank rate
The lowest rate charged by the Bank of England prior to September 1971 for discounting high-quality short-term bills presented by financial institutions to preserve their liquidity. it was replaced by the minimum lending rate.
A legal action which leads to the control of the property of an insolvent debtor for the benefit of creditors. After the court has appointed a receiver, the debtor can make an offer to his or her creditors.
bank settlement system
An electronic means of transferring deposits between banks to settle their mutual indebtedness. In the USA, Fed Wire is the Federal Reserve’s system, Bank Wire is a system for domestic payments and chips is a system for payments between New York banks. Japan has the Zenyin system for interbank transfers. The UK has chaps for the clearing banks, as well as bacs.
bank underwriting
The underwriting by banks, especially the subsidiaries of US bank holding companies, of the debt securities of low-credit-rated firms. This practice has enhanced the credit of many small firms.
Banque de France
The central bank of France founded in 1800 by Napoleon i and nationalized in 1946. it was granted independence to formulate monetary policy in 1994.
Baran, Paul, 1910-64
Leading US Marxist economist of Russian descent who was educated at the Universities of Berlin and Harvard. During 1940-7, he worked in the US Office of strategic services, and was professor of Economics at stanford university from 1948 to 1964. His exposition of Marxist economics included theories of monopoly capital and dependency.
