Financial deepening
An increase in the ratio of financial assets to real assets. This will depend on the number and range of financial institutions and household savings.
Financial economy
An economy using a variety of financial assets and services, other than money, for the purposes of exchange and storing value; a ‘post-money’ economy.
‘financial engineering’
1 The making of major deals, especially mergers and underwriting, rather than daily trading in major financial centres such as Wall Street, New York. As a consequence the structure of ownership of industries is radically changed.
2 The use of financial instruments to solve problems. Risk management, trading, investment management and structured finance are all within its ambit.
financial intermediary
An institution collecting deposits and making loans. Apart from the prominent example of banks, there are many financial intermediaries today including building societies (savings and loans institutions), insurance companies and hire-purchase finance houses. The creation of many new types of institution has made the task of monetary control more difficult for central banks and finance ministries.
financial investment
The purchase of financial assets, e.g. stocks and shares. As most of the financial assets traded represent claims to past investment in fixed capital and inventories, financial investment is different from ‘investment’.
financial journalism
The specialized reporting of financial and economic news. it had its origins in the reporting of prices in Antwerp and Venice in the sixteenth century and in Lloyd’s List, founded in 1734. Newspaper articles on financial matters probably began in Great Britain, as London was the first major financial centre. Thomas Massa Alsager became the first financial editor of The Times in 1817, although the Weekly Register of Baltimore was a pioneer of us business journalism from 1811. Early reports concentrated on stock movements and banking liquidity but, with the participation of major economic writers in journalism, the financial press broadened its interests to an examination of home and foreign economies. The Economist was founded in 1843 by James Wilson (a former Financial Secretary to the Treasury), The Statist in 1873 by Sir Robert Giffen, Financial News in 1884 and the Financial Times in 1888 (the last two merging in 1945).
Many leading economists, including KEYNES, SAMUELSON and GALBRAITH have regularly contributed to the press. This is one of the most demanding forms of journalism as a great deal of technical expertise is required, as well as personal integrity to resist the demands of many businesses and interest groups wanting favourable coverage.
financial leverage ratio
Total debt as a proportion of total assets; also known as gearing. This is an indication of the extent to which a firm has to meet interest payments. If a firm suffering a downturn in its gross profits has high leverage, it could face insolvency.
financial liberalization
The removal of government regulations, as happened in the USA in the 1980s, to permit the prices and availability of finance to be market determined. principal forms of liberalization include deregulation of interest rate fixing and barriers to capital flows between countries and industries.
financial panic
A lack of confidence in a banking system causing depositors to reclaim their deposits, thereby bringing about the collapse they fear. In a centralized banking system, a collapse in part of the system can be overcome by a central bank helping to restore liquidity.
financial policy
For a firm, this will include its attitude towards raising capital, distributing dividends, structuring its debt and investing its surplus funds.
financial regime
The set of laws, government guidelines and policies which set the boundaries to the activities of financial institutions.
Financial Reporting Council
UK council set up in 1990 to replace the Accounting Standards Committee. With its subsidiaries, the Accounting Standards Board and Review Panel, it can make regulations on the form of company accounts to standardize the treatment of, for example, goodwill and off-balance-sheet finance.
financial repression
The limitation of banking and other financial sector activity by regulations such as reserve requirements, interest rate ceilings, rules about the composition of bank balance sheets, foreign exchange regulations and burdensome taxation of the financial sector.
Financial Services Act 1986
This UK statute set out the regulation of investment business in the UK and also regulated the business of insurance companies and friendly societies. (the bank of ENGLAND, LLOYD’S and CLEARING HOUSES are exempt from its provisions.) It made provision for the Secretary of State to recognize ‘SELF-REGULATING ORGANIZATIONS’ to regulate the carrying on of investment business by enforcing rules on their members and to recognize ‘professional bodies’ to regulate professions. The Act controls the promotion and advertising of investment schemes and can ban persons as unfit to conduct investment business.
Financial Statement and Budget Report
An annual report of the UK Treasury on the UK’s recent economic performance and forecasts for the next year. The major sections of the report detail output and expenditure aggregates, movements in the retail price index, the growth of money, gross domestic product at market prices, the current account balance of payments and the public sector borrowing requirement. This report is colloquially referred to as the ‘Red Book’.
financial system
Interrelated institutions engaged in collecting savings and distributing them to borrowers, making possible the separation of the ownership of wealth from the control of physical capital. The more developed an economy is, the greater its range of financial instruments; for example, since 1960 the US and UK financial systems have produced a large range of new instruments, e.g. derivatives, in order to meet the different needs of savers and borrowers. New financial facilities contribute to economic growth.
Financial Times Actuaries All-Share Index
A London stock market price index designed by actuaries and compiled by the Financial Times, which began in 1962. The purpose of this index is to indicate the level of the whole UK equity market by including over 700 shares, more than 80 per cent of market capitalization.
Financial Times Industrial Ordinary Share Index
A price index of thirty leading industrial shares traded on the international stock exchange of London which was first published in 1935. This valuation of stock market shares is made at the beginning of each trading day, hourly throughout and at the end of the day.
Financial Times Stock Exchange 100 Share Index
A price index of the shares of the 100 largest companies traded on the international stock exchange of London. It was introduced in 1984 as a means of basing futures contracts on the UK equity market. Popularly known as ‘Footsie’.
fine-tuning
The frequent use of monetary and fiscal policies to avoid prolonged recessions and inflation by keeping a national economy steadily on course. The over-ambitious attempts of the US Administration to achieve precise goals prompted Walter Heller to describe such a policy as ‘fine-tuning’. As a policy it ran into difficulties partly because those using it believed that disturbances were caused by aggregate demand and not by supply shocks. The problems of ignoring supply shocks became vividly clear after the oil-price increases of 1974.
firm
1 The basic unit for organizing production which performs the crucial role of linking product, factor and money markets.
2 An administrative organization utilizing a pool of resources.
3 A business organization under a single management with one or more establishments.
A firm can be classified according to the number of persons owning it or according to the extent of the liability of its owners for the firm’s debts. A sole trader is the single owner with unlimited liability; a partnership has joint ownership but unlimited liability; companies and corporations are owned by many shareholders with limited liability.
firm consumption
The proportion of a firm’s production it consumes itself, e.g. the electricity a power station consumes to run its own operations.
firm-specific asset
Tangible and intangible property of use only to a particular firm. These assets enhance the uniqueness of a firm and its competitiveness but affect its ability to borrow as specific assets cannot be redeployed so are unsuitable as collateral for loans.
first best economy
An abstract model of a real economy in which resources are allocated according to the rules of pareto optimality
first-degree price discrimination
Selling different units of output at different prices so that each price is the maximum amount of money a consumer will pay.
First Development Decade
A name given to the 1960s by President John F. Kennedy when he launched the USA’s Peace Corps.
first economy
A socialist economy following the dictates of the national plan. It consists of governmental agencies, state-owned firms, cooperatives and other officially registered institutions.
First Industrial Revolution
The bunching of innovations, introduction of steam power and establishment of factories chiefly in Great Britain from 1760 to 1830.
first-in, first-out
A method of valuing physical stocks which, by assuming the oldest stocks will be used first, values at historic cost. The method has largely been abandoned in favour of the last-in, last-out principle. The FIFO method has the effect of including in profits the effects of stock appreciation, thus giving an unrealistic picture of a firm’s financial state.
first-price auction
A method of selling whereby the buyers submit sealed written bids with the item going to the highest bidder. This method is used weekly by the US Treasury when it issues its short-term securities, and also by Scottish solicitors for the sale of houses.
First Welfare Theorem
The assertion that every competitive equilibrium is PARETo-efficient in that markets clear, consumers maximize utility and firms maximize profits. externalities are absent and the price mechanism is superior to other forms of co-ordination of demand and supply.
First World
Developed free market economies which were early to industrialize and, until the emergence of large oil revenues in developing countries, had the highest per capita incomes.
fiscal approximation
Bringing the tax rates of different countries into line, e.g. the different rates of value-added tax in the european community, as a preparation for the single market of 1992.
fiscal crisis
A shortage in the tax revenues needed to finance a desired level of public expenditure. Marxists and others have asserted that there is a built-in tendency for modern fiscal systems to head for crisis as the increasing demands for egalitarianism and more public services are not matched by a desire to pay more taxation. A concern for the disincentive and allocative effects of higher rates of tax makes it difficult to raise extra tax revenue, making a fiscal crisis incurable.
fiscal dividend
Tax reductions and/or increases in government expenditures.
fiscal drag
1 The reduction in personal disposable income resulting from tax rates not being adjusted for inflation.
2 The increase of tax revenue at a faster rate than public expenditure.
The spending power of taxpayers is ‘dragged’ down by an increase in average tax rates: for example, if pre-tax incomes rise by 10 per cent and personal allowances are not increased then many taxpayers will be pushed into higher tax bands. The rooker-wise amendment of 1975 attempted to reduce much of fiscal drag in the UK; in the USA, the Tax Reform Act of 1980 indexed the us individual income tax for the same reason. Fiscal drag can be remedied by a fiscal dividend.
fiscal federalism
The system of sharing tax revenues and public expenditure commitments between a central government and state governments. By making grants to lower levels of government, a national government can determine the standard of provision of public services, especially education. Different levels of government can be financed by different types of tax, e.g. an income tax for the national level but sales and property taxes for the state and local levels, or by the different governments of a country sharing in the revenues from the same range of taxes.
fiscal illusion
An unawareness of actual fiscal policy because of the poor definitions used of ‘taxes’, ‘spending’ and ‘deficits’. By not making explicit the financing of every government programme, the size of a fiscal stimulus cannot be properly measured. illusion can only be cured by identifying for each fiscal instrument its direct effect on the economy and its indirect effects through the changing of household budget constraints.
fiscal indicators
Measures of the fiscal effects of a government which include national and regional expenditures and net lending.
fiscalist
An economic policy-maker preferring fiscal to monetary policies. Many Keyne-sians tend to favour a fiscal approach on the grounds that it can be used to pursue a greater range of policy aims than monetary policy.
fiscal military state
A state in which wealthy corporations and individuals together with the armed forces have dominant political power.
fiscal mobility
The geographical movement of taxpayers from high-tax to low-tax areas. The extent of this movement depends on several factors including the availability of housing and employment and the non-tax attractions of different places.
fiscal neutrality
The nature of a government’s public finance policy which does not favour one group of persons, type of consumption or behaviour over another. The extent of neutrality is apparent from a study of a country’s tax and benefit structure. As a policy, neutrality is recommended because its non-interventionist character gives greater freedom to individuals. A way of implementing it is by abolishing most tax allowances.
fiscal policy
The taxation and expenditure policy of a government. Prior to keynes, public finance economists were chiefly interested in tax incidence; subsequently, they accorded fiscal policy a more active role, making it a major part of stabilization policy in the 1950s and 1960s. The extent to which fiscal policy can be employed depends on what a government can observe of economic behaviour (thus it cannot tax the black economy), on behavioural responses to fiscal changes and on time lags.
fiscal rectitude
A strict fiscal policy of cutting public expenditure and reducing the amount of government borrowing, usually with the aim of keeping a national budget in balance or surplus for several years. This policy has often been recommended by the INTERNATIONAL MONETARY FUND to correct balance of payments deficits.
fiscal stance
1 The combination of taxation and expenditure chosen by a government.
2 The effect of the public sector on the level of aggregate demand, often measured by the size of a government’s deficit. This is only valid if there has been no change in economic conditions.
fiscal union
A group of separate countries, or states within them, subject to the same taxing and spending authority. These unions provide mutual insurance and economies of scale in the provision of public goods. There is a greater chance of redistribution the greater the geographical scope of the union, but a large union is likely to create more taxpayer discontent as it is difficult to aggregate the preferences of a great range of people.
fiscal year
The twelve-month period chosen by a government or a business organization for accounting purposes. in 1974 the starting date for the us government’s fiscal year was changed from 1 July to 1 october, partly to enable us congressional appropriations to be made by the start of the fiscal year.
Fisher effect
An effect of monetary policy that causes nominal interest rates to rise to a level which reflects price changes.
Fisher equation of exchange
A famous statement of the quantity theory of money as MV = PT. M is the stock of money, P the general price level, V the velocity of circulation and T the volume of transactions.
Fisher, Irving, 1867-1947
The celebrated US economist who made major contributions to capital, interest and monetary theory. During his long career as student and professor at Yale University (1892-1935), he published many influential works. His doctoral thesis, Mathematical Investigations in the Theory of Value and Price (1892) advanced general equilibrium theory; his The Nature of Capital and Income (1906) and The Rate of Interest (1907) introduced the important distinctions between real and nominal interest rates and between stocks and flows. Many works on monetary economics, including The Purchasing Power of Money (1911) and Booms and Depressions (1932) showed a progression from an exposition of the quantity theory of money to a concern with stabilization policies. His contribution to economic statistics in The Making of Index Numbers (1927) is well known. His other writings on nutrition, prohibition and pacifism made him known to a wider public. He also earned a great deal from inventing a visible card index system widely used by businesses.
five-star mutual fund
A US fund achieving the best return to capital employed relative to the return on a treasury bill for a given amount of risk (based on a comparison with other funds’ performance) in a particular time period. With hundreds of funds achieving this rating, this form of assessment has begun to be questioned.
five-year plan
A medium-term national economic plan, first used in the USSR in 1928 and subsequently followed by many developing countries including India and China. These plans set targets for the economy as a whole and for particular sectors. Early plans used principally physical output targets but subsequent plans have set more goals, sometimes in conflict with each other. The broad framework of the five-year plan is supplemented by an annual operational plan setting detailed goals for individual enterprises.
fixed capital
Investment in buildings and equipment. Demand for fixed capital is determined within the framework of a firm’s plan, including its sale projections and the cost of finance.
fixed cost
A cost to an enterprise which is incurred even when that enterprise’s output is zero. These costs occur in the short run. The principal examples of them are equipment costs and the costs of factors of production which a firm has contracted to pay for a minimum period of time, e.g. managerial staff. In the long term, all costs become variable as fixed capital can be changed and contracts revised.
fixed exchange rate
An exchange rate whose value is tied to gold or a major currency or basket of currencies. The gold standard was not used after the Second World War, being replaced by a DOLLAR STANDARD under BRETTON WOODS until 1971. Later in Europe a fixed exchange rate regime tied several currencies to other European currencies under the EXCHANGE RATE MECHANISM of the EUROPEAN monetary system. Currencies with a fixed parity are permitted to vary only within a narrow range above and below par value. Fixed exchange rates promote stability in international trade but carry the cost of holding greater reserves of foreign currencies and other reserve assets. A revaluation or devaluation of a fixed exchange rate creates considerable problems of adjustment in the national economy concerned.
fixprice
A price determined exogenously outside the model of a market. keynesian economics with its assumptions of a floor to the rate of interest and to money wages employs this method. In an economy with much oligopolistic industry, firms fix their prices independently of market forces and can be in a state of disequilibrium for a considerable time by increasing or decreasing their stocks. Some would argue that there was a fixprice economy as early as 1890.
flat pay-off
A situation when there are few financial penalties for departing from an optimum position.
flat rate tax
1 An income tax levied at the same rate for every level of income. The justification for a tax of this kind is its simplicity and lack of the disincentive effects inherent in some forms of tax progression. However, a flat rate tax is likely to be an unfair burden on low-income groups if its rate is high.
2 in 2000 Russia introduced a 13 per cent income tax flat rate in place of a sliding scale of 12 per cent to 39 per cent.
flawed marketplace
1 A competitive market which generates multiple prices for the same thing.
2 A market requiring social action to protect resources, people, capital and human values.
flexible firm
A firm with a core of permanent employees and a periphery of temporary workers whose labour force fluctuates in size according to the demand for its products. in Japan, many industries have this type of organization through the extensive use of subcontractors who themselves have the flexibility which comes from employing temporary workers.
flexible working-time schemes
Non-standard distributions of working hours with several starting and finishing times. These proliferate in the service sector and have been important in the recruitment of women with domestic responsibilities and others who want to combine labour market activity with equally demanding pursuits.
flex mex
Methods rich countries employ to attempt to achieve reduction targets for green house gas emissions. These methods include investing in reductions in other countries, especially by joint implementation, EMISSION REDUCTIONS BANKING and clean development mechanisms.
flexprice
A price freely fluctuating in order to equate demand with supply, e.g. a price determined at an auction. Such a view of prices is central to marshallian economics.
flight from money
A reduction in the demand for money because of an expectation of rising prices or a fall in nominal interest rates.
floating exchange rate
A market-determined exchange rate which can change continuously as it is not pegged to another currency or to gold by a central bank. Canada, after the Korean War, floated the Canadian dollar in 1950-62 and again in 1970 after the vietnam War; Lebanon from 1950 and Japan and some West European countries from August to December 1971 also floated their currencies. in practice, an exchange rate can be stabilized by speculation or central bank intervention, the latter being ‘a dirty float’. Although lower reserves of gold and hard currencies are needed under a floating exchange rate regime, this regime has disadvantages, including a greater amount of uncertainty amongst exporters.
floating rate note
A long-term security whose rate of interest is linked to short-term interest rates.
Some of these notes are perpetuals with no maturity date. Changes in the US and UK rules concerning the definition of banks’ primary capital has substantially reduced the demand for these notes, although their yields, which are higher than those for commercial paper and certificates of deposit, will continue to make them attractive to many money market investors.
floor
1 The trough of a business cycle or trade cycle after which production, employment and prices rise.
2 The minimum rate of interest which an issuer of a floating rate security is required to pay.
floor planning
Inventory financing by US commercial banks, e.g. to contribute to the purchase by dealers in consumer durables of the goods they have on display.
floor price
A minimum controlled price, e.g. a minimum wage or agricultural product prices. Minimum wage laws are enforced by inspectorates; agricultural prices are prevented from falling below pre-set minima by government purchases of excess production. If Pi is the floor price and Pe is the equilibrium price the government can satisfy both producers and consumers by purchasing quantity AB.
flotation
The market debut of a company when its shares are offered to the public for the first time. The motives for a flotation include the desire of the original owners to reduce their financial stake in that company as well as the wish to obtain more finance.
flow of funds account
A component of a system of national income accounts showing financial transactions between the major sectors of the economy. The transactions analysed are purchases and sales, and transfers such as taxes and dividends. The sectors used are different types of business, non-profit organizations, central and local government, banks, savings institutions, insurance, other finance and the rest of the world.
flypaper effect
The effect of giving grants, particularly under a system of federal finance, to governments and not individuals. The grants ‘stick’ to their use as expenditure and cannot be used to reduce taxation as could happen if individuals directly received these grants.
Fogel, Robert William, 1926
Educated at Columbia and Johns Hopkins Universities, he taught at Rochester, Chicago and Harvard Universities before being appointed Charles R. Wargreen Professor of American Institutions at Chicago in 1981. His renowned works on economic history include Railroads and American Growth: Essays in Econometric History (1964), which asserted that railways made only a small contribution to the growth of the us gross national product, and Time on the Cross: the Economics of American Slavery (1974, with stanley Engerman), which stated that slavery was economically efficient although morally repugnant. in 1993 he shared with north the nobel prize FOR ECONOMICS.
Food and Agriculture Organization
Rome-based united Nations agency founded in 1945. It aims (1) to raise nutrition levels, (2) to improve the efficiency of the production and distribution of all agricultural products and (3) to improve the condition of rural populations. FAO provides an information service, technical assistance and the promotion of national and international action, including international commodity agreements.
food chain
The linked stages of production of food from the original farmer to the ultimate consumer.
football pool
A method of gambling on the outcome of a number of football matches on the same day. The fixed stakes of the punters are accumulated in a fund out of which dividends are paid to those who have successfully predicted the outcome of matches, with most points going to a prediction of teams which score the same number of goals as each other. The balance of the weekly fund is acquired by the pools promoter.
football transfer system
The method of selling professional footballers from one club to another. The fee is paid to bind the player to play exclusively for the new club. Both the transferring club and the transferred player financially benefit. The fee is proportional to the previous performance of the player with the expectation that excellence will continue. Since 1978 in the UK a player can negotiate a move to a new club on the expiry of a one- to five-year contract.
footloose industry
An industry locatable anywhere without incurring extra locational costs. Heavy industries, e.g. steel and shipbuilding, are not footloose; new industries using microchip technology can locate in many places without increasing their costs, although proximity to large markets and the availability of regional subsidies will guide them to particular locations.
footloose knowledge
Technical knowledge not specific to any production process and which is interchangeable between industries.
Footsie
Slang for financial times stock exchange 100 SHARE INDEX.
forced labour
Taxation of employment earnings causing a person to work longer hours than is necessary to obtain a given income. nozick advances this argument in his discussion of redistribution.
forced saving
1 Involuntary saving arising in an economy when it is at full employment and has an excess supply of loans. That excess supply pushes down the market rate of interest and stimulates an increased demand for investment finance, bringing about general inflation. As a consequence of a rise in prices, those with fixed incomes can consume less and so savings are ‘forced’ out of them: this extra saving finances the extra investment. This view was widely held by members of the Classical School, including bentham, thornton, malthus and John Stuart mill; in the twentieth century, robertson and pigou were also adherents of this doctrine. A crucial part of keynes’s transition in thinking, which resulted in his General Theory of Employment, Interest and Money, was to reject this doctrine.
2 Compulsory saving as part of a tough fiscal policy. keynes recommended this as a method of financing the Second World War. He argued that this taxation of current incomes was needed to match current consumption and domestic production and imports as a means of preventing inflation. This ‘deferred pay’ would accumulate at compound interest in friendly societies and the post Office Savings Bank. The scheme was adopted. Forced savings were gradually repaid as post-war credits after 1945 in line with the improvement of the national economy.
