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Bized - Glossary of finance
Category: Economy and Finance
Date & country: 14/09/2007, UK
Words: 1332

Buying economies of scale
The ability of large firms to purchase their inputs at a larger discount than small firms.

Business Organisation
A business organisation aims to meet needs by providing goods or services to customers. All organisations: have a formal structure; aim to achieve objectives; use resources; require direction; are legally regulated.

Business cycle
The tendency of economies to move, over time, through periods of boom and slump and occurs when real GDP moves away from its trend path. The business cycle is the fluctuations in the rate of economic growth that take place in the economy. These fluctuations appear to occur around every five years and have probably occurred ever since economies have occurred! It is the aim of all governments to try to dampen the effects of the business cycle and get more balanced long-term growth, but so far they have had limited success. The peak of the business cycle is usually referred to as a boom, and the trough as a recession or depression.

Building societies
Financial institutions which offer a range of services but which specialise in providing loans (mortgages) for house purchase. Building Societies have mutual status and the deregulation of the financial sector in the mid 1980s has led to many of them converting into PLCs, losing their mutual status.

Buffer stock scheme
A buffer stock scheme is a form of intervention to try to stabilise the price of a commodity. Stocks of the commodity are kept and sold when the price is high to try to reduce it. When the price is low further stocks of the commodity are bought.

Budget surplus
When government income exceeds government expenditure. The budget surplus in the UK used to be called the Public Sector Debt Repayment. It is now termed as a negative Public Sector Net Cash Requirement.

Budget deficit
When government expenditure exceeds government income.

Budget line
A budget line is a line showing the alternative combinations of any two goods that a consumer can afford at given prices for the goods and a given level of income. If one of the prices changes, then the budget line will pivot and if income changes it will shift. When combined with indifference curves, the budget line will help show consumer equilibrium for maximising utility. Also known as a consumption possibility curve.

Broad money
Include not only assets used as a medium of exchange, but also those used as a temporary store of value - i.e. immediate and potential purchasing power. It is a definition of money that includes some less liquid types of money as well as the narrower forms of money like notes and coins. The most commonly used measure of broad money in the UK is M4.

Bretton Woods system
An arrangement of fixed exchange rates which operated between 1945 and 1971. The system was negotiated at the Bretton Woods conference in 1944.

Break-even pricing
Setting price equal to short run average cost. Setting price at this level will ensure the firm breaks even with no loss and no profit.

Bretton Woods conference
This was a conference that took place just before the end of the second world war in Bretton Woods in America. As a result of this conference the International Monetary Fund (IMF) and the World Bank (then called the International Bank for Reconstruction and Development (IBRD)) were founded. The conference also developed the post-war system of pegged (fixed) exchange rates. The system lasted until 1971 when it broke down.

Brand loyalty
A situation when a consumer is reluctant to switch from consumption of a favoured good.

When a firm's short run total revenue equals its short run total cost. Below break-even output the firm makes a loss, above it a profit.

The amount of goods that have to be sold in order for the business to make neither a loss nor a profit.

Break-even charts
A diagram showing the total revenue and the total cost curves for a business. The break-even production level is also shown.

Brand image
The view held by consumers about a particular brand of good or service. The stronger the brand image the more inelastic the demand for the product is likely to be.

Boston matrix
A grid containing four types of product, used as a means of analysing the product range of a business. The four types of product are cash cows, dogs, problem children or wild cards and stars.

Securities issued by companies and the government as a way of raising finance. Gilt-edged securities are a type of bond.

Black markets
Created when buyers and sellers meet to negotiate the exchange of a prohibited or illegal good. More generally any unofficial market in which prices are inordinately high.

Black economy
Unrecorded production. The Black economy results from activity that has not been recorded through the tax system or other conventional means of recording.

Birth rate
The number of live births per thousand of the population in a year. The birth rate is also often called the 'crude birth rate'.

Base year
The year in which calculations, usually indexes, commence and with which other years are compared.

Benefits are payments from the government to people who are in need. This may because they are unemployed or there is an insufficient level of income in the household. Examples include unemployment benefits, income support and housing benefit.

Bias is a term which refers to how far the average statistic lies from the parameter it is estimating, that is, the error which arises when estimating a quantity. Errors from chance will cancel each other out in the long run, those from bias will not.

Bilateral aid
Assistance given by one country to another.

Bilateral aid
Official development assistance that takes place between a donor country and a recipient country.

The direct exchange of goods and services without the use of money.

Base rate
The rate of interest on which financial institutions base their lending rates. It is used to set all their other interest rates. Their loan rates will be a certain percentage above the base rate, and their savings rates below. When they change their base rate, this will then automatically change all their other rates.

This generally refers to factors inhibiting the free movement of resources e.g. restrictive laws relating to the movement of goods, capital and labour.

Barriers to entry
Obstacles to the entry of new firms into a market. Barriers to entry may take various forms. They may be technical barriers, legal barriers or barriers that arise from strong branding of the product.

Bar graph
A form of diagrammatic presentation used for comparing different magnitudes. It consists of two or more bars of equal width, usually upright, showing the make-up of some entity at different times or in different places. The lengths of the bars and the areas of the constituent parts are pro rata (proportionately according to an exactly calculable factor) to the absolute magnitudes of the statistics that they represent.

Bar chart
A bar chart is a way of summarising a set of categorical data. It is often used in exploratory data analysis to illustrate the major features of the distribution of the data in a convenient form. It displays the data using a number of rectangles, of the same width, each of which represents a particular category. The length (and hence area) of each rectangle is proportional to the number of cases in the category it represents, for example, age group, religious affiliation.

Banking department
That part of the Bank of England which carries out banking functions for the government and for the banking sector.

Bank of England Core Purposes
The Bank has three core purposes. They are firstly to maintain the integrity and value of the currency. This mainly means maintaining price stability (low inflation). The second core purpose is to maintain the stability of the financial system, both domestic and international. This requires close monitoring of all events that may affect financial stability. The final core purpose is to seek to ensure the effectiveness of the UK's financial system.

Bank of England 1998
The Bank of England Act 1998 was an Act of Parliament that made various changes to the work of the Bank. It set out the statutory basis for the Monetary Policy Committee (which was formed in 1997). It passed the responsibility for supervision of banks and financial institutions from the Bank to the Financial Services Authority and responsibility for the management of the National Debt was passed to the Debt Management Office (an agency of the Treasury).

Bank multiplier
Shows by how much total liabilities can increase as a result of a rise in liquid assets

Bank of England
The Central Bank of the UK. The Bank of England is based in Threadneedle street in the City of London. In 1997 the Labour government gave them operational independence and they are now responsible for the maintenance of price stability. They set interest rates (through the Monetary Policy Committee) to ensure they meet the inflation target set by the government.

Balancing items
Represents the net total of errors and omissions in the other items in the balance of payments. Adding this to the current account balance and the capital account balance should give a result of zero, indicating that the balance of payments balances.

Balanced budget
The situation where government income matches government expenditure. Classical economists argued that this should always be the aim of government policy. Keynesians on the other hand said that in times of low economic activity the government should run a deficit (spending more than its revenue) to boost the economy and when the economy was booming they could run a surplus (spending less than revenue). In this way they could balance the budget in the long-run.

A broad measure of money which consists of notes, coins and all deposits with banks and building societies denominated in sterling.

Balance of trade
The difference between the value of visible exports and visible imports. Calculated as the value of exports minus the value of imports.

Balance sheet
The balance sheet is one of the financial statements that limited companies and PLCs produce every year for their shareholders. It is like a financial snapshot of the company's financial situation at that moment in time. It is worked out at the company's year end, giving the company's assets and liabilities at that moment. It is given in two halves - the top half shows where the money is currently being used in the business (the net assets), and the bottom half shows where that money came from (the capital employed). The value of the two halves must be the same - capital employed = net assets, hence the term balance sheet.

Balance of payments
A record of the income and expenditure transactions between UK residents and persons abroad. The balance of payments accounts record all flows of money in and out of the UK. These flows might result from the sale of exports (an inflow or credit) or from the UK purchasing imports from overseas (an outflow or debit). They might also arise from other countries investing in the UK (inward investment - a credit), or from UK companies investing abroad (a debit). All flows of money are added together and grouped according to their type. The overall account is then called the balance of payments - principally because the total of outflows must be equivalent to the total of inflows. The balance of payments therefore balances!!

Backward integration
Occurs when a company joins with a firm that is involved at an earlier stage of the production chain. An example might be a brewery taking over a hop or barley farm.

Backward sloping supply curve
A curve showing that as the price of a good or service rises, so the quantity offered for sale falls. For example a worker may use an increase in wage rates to work fewer hours and enjoy more leisure time.

Average variable cost
The average variable cost is the total variable cost divided by output. The average variable cost curve will generally be u-shaped because of the presence of increasing returns initially in the short run reducing average variable costs initially. Eventually, however, diminishing returns will set in and the average variable cost will start to rise.

Average total costs
The amount spent on producing each unit of output. The average cost is calculated by dividing the total level of cost by the level of output. The average fixed cost will be made up of two elements; the average fixed and average variable cost. The average cost curve will tend to be u-shaped due to the presence of increasing and then diminishing returns.

Average revenue
The average revenue is the total revenue divided by the level of output. It is therefore the price.

Average revenue curve
A curve which plots average revenue. It is equivalent to the demand curve. The shape of the average revenue curve will depend on the situation the firm is in. If the firm has price setting power then the average revenue curve (demand curve) will be downward-sloping. If the firm is a price-taker then the average revenue curve will be horizontal and the same as the marginal revenue curve.

Average rate of tax
The average rate of tax is the total amount of income tax paid as a percentage of a person's income. For example if they earn £20, 000 and have paid £2, 500 in income tax, their average rate of tax is 12.5%. However, their marginal rate of tax will be 23% as that is the rate they will pay on the next pound they earn.

Average rate of return
The average rate of return is a method of investment appraisal that measures the net return from the investment as a percentage of the initial cost of the investment. Generally investment projects with the highest average rate of return will be chosen.

Average propensity to consume
The proportion of disposable income spent: APC = C/Y. For example, if a person spends £4,000 of a £10,000 income, then the APC is 0.4.

Average propensity to save
The proportion of disposable income saved, APS = S/Y. For example, if a person spends £4,000 of a £10,000 income, then they have saved £6,000. The APS is therefore 0.6.

Average earnings
Total earnings divided by those in employment. Average earnings are often expressed as an index; the average earnings index.

Average fixed cost
Total fixed cost divided by output. The average fixed cost will decline as output increases. This is because as output increases the fixed costs are spread further and further.

Average product of labour
The average product is the output per worker. The average product will tend to rise initally in the short run with increasing returns to the variable factor, but will eventually begin to fall when diminishing returns set in. The marginal product curve will intersect the average product curve at its peak.

Autonomous consumption
Autonomous consumption is the level of consumption when income is zero. It is consumption that does not vary with income.

Autonomous expenditure
Amount spent in an economy even when income is zero. It does not vary with income.

Average cost pricing
Setting price equal to average cost.

Average costs
The amount spent on producing each unit of output. The average cost is calculated by dividing the total level of cost by the level of output. The average fixed cost will be made up of two elements; the average fixed and average variable cost. The average cost curve will tend to be u-shaped due to the presence of increasing and then diminishing returns.

Attrition is also known as labour turnover. It is the rate at which workers leave a firm and are replaced by new employees.

Automatic stabilisers
Changes in government expenditure and tax revenue which occur without any change in government policy as GDP increases or falls. Automatic stabilisers will help to dampen fluctuations in the trade cycle. An example would be that in a recession as unemployment rises, the government is forced to pay out more in benefits. This is an 'automatic' increase in government expenditure. This increases aggregate demand and helps compensate for the lack of demand in the recession.

Appropriate technology
A technology that complements the factor endowments of the country.

Movements of funds to take advantage of differences in exchange or interest rates, and this quickly eliminates any such differences.

Asset demand
The desire to hold wealth or assets. They may be held say as shares, property etc. or as money.

An asset is something which a person or firm owns that is of value. For banks their main assets will be cash and any investments they have (including their holdings of government securities). For individuals, their assets may be either cash in the bank, properties or perhaps other financial assets like gilt-edged securities.

Appreciation of sterling
When market forces raise the value of the £ from one rate to another. This may be caused either by an increase in demand and/or perhaps a decrease in supply of the currency.The factors that might cause an increase in the demand for a currency include an increase in the interest rate, lower inflation compared to main trading partners, or an increase in the rate of economic growth in the main trading partners.

An increase in the value of an asset. The term can also be used to refer to the appreciation of a currency. In other words it is when the value of a currency, expressed in terms of another currency, rises.

The paying off of a loan principal.

Ancillary firms
Firms which provide goods and services for other firms.

J curve effect
The tendency for a fall in the value of the currency to worsen the balance of trade before it improves the position.

Zero sum game
A zero sum game occurs when any gain made by one player is exactly balanced by losses to other players.

Zero growth
A situation where the economy does not grow at all. This can also be termed stagnation if it continues for very long. Given worries about the environment and the depletion of natural resources, some economists have argued that zero growth should be the aim of policy. This has yet to gain much credence, but a considerable amount of work has gone into trying to achieve 'sustainable growth'.

Allocative inefficiency
Occurs when it is possible to redistribute goods to increase the welfare of any one consumer without reducing the welfare of some other consumer.

Alternative hypothesis
The alternative hypothesis, Ha, is a statement of what a statistical hypothesis test is set up to establish. For example, in a clinical trial of a new drug, the alternative hypothesis might be that the new drug has a different effect, on average, compared to that of the current drug. We would write Ha: the two drugs have different effects, on average. The alternative hypothesis might also be that the new drug is better, on average, than the current drug. In this case we would write Ha: the new drug is better than the current drug, on average.

Allocative efficiency
Allocative efficiency refers to the efficiency with which markets are allocating resources. A market will be allocatively efficient if it is producing the right goods for the right people at the right price. An allocatively efficient market is therefore one which has no imperfections. This will be true when marginal cost is equal to average revenue in the market. It occurs where a firm produces at MC = AR (marginal cost pricing).

Dissatisfaction workers feel with the tasks they are required to perform.

World Trade Organisation (WTO)
The World Trade organisation replaced GATT in 1995. The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

The yield of something is the income from it as a percentage of its price. The yield of a gilt-edged security would therefore be the income you got from it each year, as a percentage of the price you paid for it.

Works' councils
A group within a company representing all interests.

World Bank
The bank aims to encourage capital investment for reconstruction and development in member countries.

Working population
The number of people who are eligible and willing to work.

Assistance given to an individual, firm, region or government. Usually used in the context of overseas aid where governments give assistance to other countries.

Agricultural sector
The part of the economy comprised of farming, fishing, forestry, hunting.

Aggregate supply curve
The aggregate supply curve shows the amount that will be supplied by the firms in the economy at each price level. There is a lot of debate about the exact shape of the curve. Many classical economists and monetarists argue that the shape differs between the short-run and long-run. In the short-run there may some increase in output if demand increases, but in the long-run any increases in demand will be inflationary. However, Keynesians do not distinguish between the short-run and long-run. They believe in a curve that shows a gradual bottleneck in production pushing up prices as the level of full-employment is reached. All three possible shapes are shown below.

Aggregate monetary demand
Total demand in an economy measured in nominal terms. Also referred to as aggregate demand. Aggregate demand is the total level of demand in the economy. It is the total of all desired expenditure at any time by all groups in the economy. The main groups who spend are consumers (consumption), firms (who spend on investment), government (government expenditure) and overseas (exports). Total aggregate demand is therefore: AD = C + I + G + (X-M) where C = consumption expenditure, I = investment expenditure, G = government expenditure and (X - M) = net exports (exports - imports)

African Development Bank
A regional bank started in 1966 to support the development of Independent African states through loans and assistance.

Ageing population
When the average age per person is rising. This is currently true of the UK.

Aggregate demand
The total of all planned expenditure in an economy at each level of prices. Aggregate demand is the total level of demand in the economy. It is the total of all desired expenditure at any time by all groups in the economy. The main groups who spend are consumers (consumption), firms (who spend on investment), government (government expenditure) and overseas (exports). Total aggregate demand is therefore: AD = C + I + G + (X-M) where C = consumption expenditure, I = investment expenditure, G = government expenditure and (X - M) = net exports (exports - imports)

Aggregate demand curve
The aggregate demand curve shows the level of aggregate demand at every price level. It will always be downward sloping as there will be less demand at higher price levels. This is because as prices rise people will have lower real incomes, and so will be more reluctant to spend. This is known as an 'income effect'. There may also be a 'substitution effect' as people switch from spending money to saving to maintain the real value of their savings. They may also switch from domestically made goods to imported goods, further reducing aggregate demand as prices rise.

An advance is a loan given by a financial institution. These loans can take various forms and need to be repaid with interest.

A way of increasing demand by bringing the product to the attention of consumers. Advertising can be either informative or persuasive advertising. The intention of advertising is to shift the demand curve to the right. The effectiveness of advertising can be measured by the advertising elasticity of demand. The advertising elasticity of demand measures the percentage increase in demand divided by the percentage increase in advertising spending.

Adjustable peg
When the exchange rate is maintained within agreed margins around a central parity but with the possibility that the central parity may be changed.

Adam Smith
(1723-90) Adam Smith is often seen as the founding father of economics. He developed much of the theory about markets that we regard as standard theory now Adam Smith was Scottish and after graduating from Glasgow (at the amazing age of 17!!) he was a fellow at Oxford and then he lectured back in Scotland again - first at Edinburgh and then Glasgow Universities. Surprisingly this was not in economics. Adam Smith's main work was 'The Wealth of Nations' He wrote it in five books and it was published in 1776. In the work he stressed the benefits of division of labour (specialisation) and its need, and outlined the workings of the market mechanism (price system). Perhaps the concept most associated with him is the 'invisible hand'. He argued that markets would guide economic activity and act like an invisible hand allocating resources. Prices would be the main means to do this. Prices would rise when there was a shortage of something and fall when it was plentiful.

Ad valorem tax
A tax that is a percentage of the selling price. An example of an ad valorem tax would be VAT.

Actual output
Actual output refers to what we are producing at any given time. If our actual output is less than our potential, we call this an output gap.

Ad valorem
Ad valorem literally means value added. It is generally used to refer to a tax (an ad-valorem tax) that is a percentage of the price of the product. An example of an ad valorem tax would be VAT.

Acquired advantages
Location benefits which develop over time.

Activity rate
The percentage of the population of working age in the labour force.