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b
Оглавлениеback door the informal mechanism whereby the BANK OF ENGLAND buys back previously issued TREASURY BILLS in the DISCOUNT MARKET at their ruling market price in order to release money to help the DISCOUNT HOUSES overcome temporary liquidity shortages. This is done as a means of increasing the liquid funds available not only to the discount houses themselves but also to the COMMERCIAL BANKS at prevailing interest rates to enable them to maintain their lending. Compare FRONT DOOR.
back-to-back loan or parallel loan an arrangement under which two companies in different countries borrow each other’s currency and agree to repay the loans at a specified future date. At the expiry date of the loans, each company receives the full amount of its loan in its domestic currency without risk of losses from exchange-rate changes. In this way back-to-back loans serve to minimize EXCHANGE-RATE EXPOSURE.
backward integration the joining together in one firm of two or more successive stages in a vertically related production/distribution process, with a later stage (for example, bread making) being combined with an earlier stage (for example, flour milling) Backward integration is undertaken to cut costs and secure supplies of inputs. See VERTICAL INTEGRATION, FORWARD INTEGRATION.
BACS (Bank Automated Credit System) a money transmission system whereby a payer instructs a COMMERCIAL BANK to debit a specified sum of money from his or her account and transfer it to a named payee’s bank account. This obviates the need for the payer to issue and post a cheque to the payee and for the payee then to bank it, thus saving on time and expense. Many employers now use BACS to pay their employees’ monthly salaries, and many companies use the system to transfer dividend payments to shareholders.
bad debt an accounting term for money owed that is unlikely to be paid because, for example, a customer has become insolvent (see INSOLVENCY). Such bad debts are written off against the PROFITS of the trading period as a business cost. See CREDIT CONTROL.
balanced budget a situation where GOVERNMENT EXPENDITURE is equal to TAXATION and other receipts. In practice, most governments run unbalanced budgets as a means of regulating the level of economic activity.
Where the government spends more than it receives in taxation, then a BUDGET DEFICIT is incurred. Where the government spends less than it receives in taxation, then a BUDGET SURPLUS ensues. See BUDGET, FISCAL POLICY, PUBLIC SECTOR BORROWING REQUIREMENT.
balanced budget multiplier a change in AGGREGATE DEMAND brought about by a change in GOVERNMENT EXPENDITURE, which is exactly matched by a change in revenues received from TAXATION and other sources. The change in government expenditure has an immediate effect on aggregate demand and generates income of an equivalent size. By contrast, the change in taxation does not change aggregate demand by an equivalent amount because some of the increased/reduced DISPOSABLE INCOME will be offset by changes in SAVING. Consequently, an increase in government expenditure and taxation of equal amounts will have a net expansionary effect on aggregate demand and incomes, while a decrease in government expenditure and taxation of equal amounts will have a net contractionary effect. See BUDGET, FISCAL POLICY.
balance of payments
A statement of a country’s trade and financial transactions with the rest of the world over a particular time period, usually one year. Fig. 13 (a), shows a summary presentation of the UK balance of payments for 2003. The account is divided into two main parts:
(a) current account, and
(b) capital and financial account.
The current account shows the UK’s profit or loss in day-to-day dealings. It is made up under two headings. The ‘visible’ trade balance (BALANCE OF TRADE) indicates the difference between the value of merchandise EXPORTS and IMPORTS of goods (raw materials, foodstuffs, oil and fuels, semi-processed and finished manufactures). ‘Visibles’ are so called because they consist of tangible goods that can be seen directly and recorded by the country’s CUSTOMS AND EXCISE authorities as they move into or out of the country. The second group of transactions make up the ‘INVISIBLE’ TRADE BALANCE. These transactions include earnings from, and payments for, such services as banking, insurance, transport and tourism. It also includes interest, dividends and profits on investments and loans, and government receipts and payments relating to defence, upkeep of embassies, etc., and transfers to the European Union budget. (See Fig. 62 (a)).
‘Invisibles’ are so called because basically they represent transactions that cannot be seen directly and can be compiled only indirectly from company returns, government accounts, foreign currency purchases and sales data from banks. Traditionally, the UK has incurred deficits on ‘visibles’ largely because of the need to import basic foodstuffs, raw materials and (until the 1980s) oil. What are worrying to some economists, however, are the large deficits in manufactures, where seemingly the UK has been losing international competitiveness. (See DEINDUSTRIALIZATION.) The service sector has traditionally been in surplus thanks to the City of London’s banking and insurance business, which, together with proceeds from the UK’s position as a leading overseas investor, have been major foreign exchange earners. As can be seen in Fig. 13 (b), the UK has recently been in overall surplus on current account after previously chalking up large deficits.
Fig. 13 Balance of payments. (a) The UK Balance of Payments, 2003. (b) UK Balance of Payments, 1993–2003. Source: UK Balance of Payments, Office for National Statistics (Pink Book), 2004.
In addition to current account transactions, there are also currency flows into and out of the country related to capital items. The capital and financial account is made up of a number of elements including: receipts and payments related to FOREIGN DIRECT INVESTMENT (monies spent by companies on setting up or acquiring overseas manufacturing plants, sales offices, etc.); receipts and payments related to PORTFOLIO INVESTMENT (monies spent by mainly financial institutions in purchasing overseas stocks and shares, government bonds, etc.); and receipts and payments related to interbank transfers (for example, foreign currency deposits with UK commercial banks taking advantage of higher UK interest rates compared to other financial centres). Recently the UK has been a net exporter of capital after a number of years of capital account surpluses – see Fig. 13 (b).
The current balance and the capital and financial account, together with the ‘balancing item’ (which includes errors and omissions in recording transactions and leads and lags in currency payments and receipts), result in the balance for official financing. This figure shows whether the country has incurred an overall surplus or deficit. If the balance of payments is in surplus, the country can add to its INTERNATIONAL RESERVES and, if necessary, repay borrowings; if it is in deficit, this has to be covered by running down its international reserves or by borrowing (for example, from the INTERNATIONAL MONETARY FUND).
Maintaining BALANCE-OF-PAYMENTS EQUILIBRIUM over a run of years is usually one of the four major objectives of a government’s MACROECONOMIC POLICY. A balance of payments surplus or deficit can be remedied in a number of ways, including external price adjustments, internal price and income adjustments, and trade and currency restrictions.
balance-of-payments disequilibrium see BALANCE-OF-PAYMENTS EQUILIBRIUM.
balance-of-payments equilibrium a situation where, over a run of years, a country spends and invests abroad no more than other countries spend and invest in it. Thus, the country neither adds to its stock of INTERNATIONAL RESERVES, nor sees them reduced.
In an unregulated world it is highly unlikely that external balance will always prevail. Balance of payments deficits and surpluses will occur, but provided they are small, balance-of-payments disequilibrium can be readily accommodated. The main thing to avoid is a FUNDAMENTAL DISEQUILIBRIUM – a situation of chronic imbalance.
There are three main ways of restoring balance-of-payments equilibrium should an imbalance occur:
(a) external price adjustments. Alterations in the EXCHANGE RATE between currencies involving (depending upon the particular exchange-rate system in operation) the DEVALUATION/DEPRECIATION and REVALUATION/APPRECIATION of the currencies concerned to make exports cheaper/more expensive and imports dearer/less expensive in foreign currency terms. For example, with regard to exports, in Fig. 14 (a), if the pound-dollar exchange rate is devalued from $1.60 to $1.40 then this would allow British exporters to reduce their prices by a similar amount, thus increasing their price competitiveness in the American market.
(b) internal price and income adjustments. The use of deflationary and reflationary (see DEFLATION, REFLATION) monetary and fiscal policies to alter the prices of domestically produced goods and services vis-à-vis products supplied by other countries so as to make exports relatively cheaper/dearer and imports more expensive/cheaper in foreign currency terms. For example, again with regard to exports, if it were possible to reduce the domestic price of a British product, as shown in Fig. 14 (b), given an unchanged exchange rate, this would allow the dollar price of the product in the American market to be reduced, thereby improving its price competitiveness vis-à-vis similar American products. The same policies are used to alter the level of domestic income and spending, including expenditure on imports.
(c) trade and foreign exchange restrictions. The use of TARIFFS, QUOTAS, FOREIGN-EXCHANGE CONTROLS, etc., to affect the price and availability of goods and services, and of the currencies with which to purchase these products.
Under a FIXED EXCHANGE-RATE SYSTEM, minor payments imbalances are corrected by appropriate domestic adjustments (b), but fundamental disequilibriums require, in addition, a devaluation or revaluation of the currency (a). It must be emphasized, however, that a number of favourable conditions must be present to ensure the success of devaluations and revaluations (see DEPRECIATION 1 for details).
Fig. 14 Balance-of-payments equilibrium. (b) Internal price adjustment.
In theory, a FLOATING EXCHANGE-RATE SYSTEM provides an ‘automatic’ mechanism for removing payments imbalances in their incipiency (that is, before they reach ‘fundamental’ proportions): a deficit results in an immediate exchange-rate depreciation, and a surplus results in an immediate appreciation of the exchange rate (see PURCHASING-POWER PARITY THEORY). Again, however, a number of favourable conditions must be present to ensure the success of depreciations and appreciations. See also ADJUSTMENT MECHANISM, J-CURVE, INTERNAL-EXTERNAL BALANCE MODEL, MARSHALL-LERNER CONDITION, TERMS OF TRADE.
balance of trade a statement of a country’s trade in GOODS (visibles) with the rest of the world over a particular period of time. The term ‘balance of trade’ specifically excludes trade in services (invisibles) and concentrates on the foreign currency earnings and payments associated with trade in finished manufactures, intermediate products and raw materials, which can be seen and recorded by a country’s customs authorities as they cross national boundaries. See BALANCE OF PAYMENTS.
balance sheet an accounting statement of a firm’s ASSETS and LIABILITIES on the last day of a trading period. The balance sheet lists the assets that the firm owns and sets against these the balancing obligations or claims of those groups of people who provided the funds to acquire the assets. Assets take the form of FIXED ASSETS and CURRENT ASSETS, while obligations take the form of SHAREHOLDERS’ CAPITAL EMPLOYED, long-term loans and CURRENT LIABILITIES.
balances with the Bank of England deposits of money by the COMMERCIAL BANKS with the BANK OF ENGLAND. The Bank of England acts as the ‘bankers’ bank’ and commercial banks settle indebtedness between themselves by transferring ownership of these balances. Such balances are included as part of the commercial banks’ CASH RESERVES RATIO and RESERVE ASSET RATIO. In addition to the balances held for settling indebtedness, the banks may be required from time to time to make SPECIAL DEPOSITS with the Bank, which have the effect of reducing their reserve assets.
balancing item see BALANCE OF PAYMENTS.
bank a deposit-taking institution that is licensed by the monetary authorities of a country (the BANK OF ENGLAND in the UK) to act as a repository for money deposited by persons, companies and institutions, and which undertakes to repay such deposits either immediately on demand (CURRENT ACCOUNT 2) or subject to due notice being given (DEPOSIT ACCOUNTS). Banks perform various services for their customers (money transmission, investment advice, etc.) and lend out money deposited with them in the form of loans and overdrafts or use their funds to purchase financial securities in order to operate at a profit. There are many types of banks, including COMMERCIAL BANKS, MERCHANT BANKS, SAVINGS BANKS and INVESTMENT BANKS. In recent years many BUILDING SOCIETIES have also established a limited range of banking facilities. See BANKING SYSTEM, CENTRAL BANK, FINANCIAL SYSTEM.
bank deposit a sum of money held on deposit with a COMMERCIAL BANK (or SAVINGS BANK). Bank deposits are of two main types: sight deposits (CURRENT ACCOUNTS), which are withdrawable on demand; time deposits (DEPOSIT ACCOUNTS), which are withdrawable subject usually to some notice being given. Sight deposits represent instant LIQUIDITY: they are used to finance day-to-day transactions and regular payments either in the form of a CURRENCY withdrawal or a CHEQUE transfer. Time deposits are usually held for longer periods of time to meet irregular payments and as a form of savings.
Bank deposits constitute an important component of the MONEY SUPPLY. See BANK DEPOSIT CREATION, MONETARY POLICY.
bank deposit creation or credit creation or money multiplier the ability of the COMMERCIAL BANK system to create new bank deposits and hence increase the MONEY SUPPLY. Commercial banks accept deposits of CURRENCY from the general public. Some of this money is retained by the banks to meet day-to-day withdrawals (see RESERVE-ASSET RATIO). The remainder of the money is used to make loans or is invested. When a bank on-lends, it creates additional deposits in favour of borrowers. The amount of new deposits the banking system as a whole can create depends on the magnitude of the reserve-asset ratio. In the example set out in Fig. 15, the banks are assumed to operate with a 50% reserve-asset ratio: Bank 1 receives initial deposits of £100 million from the general public. It keeps £50 million for liquidity purposes and on-lends £50 million. This £50 million, when spent, is redeposited with Bank 2; Bank 2 keeps £25 million as part of its reserve assets and on-lends £25 million; and so on. Thus, as a result of an initial deposit of £100 million, the banking system has been able to ‘create’ an additional £100 million of new deposits.
Fig. 15 Bank deposit creation. Deposit creation operated with a 50% reserve-asset ratio in a multibank system.
Since bank deposits constitute a large part of the MONEY SUPPLY, the ability of the banking system to ‘create’ credit makes it a prime target for the application of MONETARY POLICY as a means of regulating the level of spending in the economy.
Bank for International Settlements (BIS) an international bank, situated in Basle and established in 1930, that originally acted as a coordinating agency for the central banks of Germany, France, Italy, Belgium and the UK in settling BALANCE-OF-PAYMENTS imbalances and for other intercentral bank dealings. Nowadays its membership comprises all western European central banks together with those of the USA, Canada and Japan. Although the INTERNATIONAL MONETARY FUND is the main institution responsible for the conduct of international monetary affairs, the BIS is still influential in providing a forum for discussion and surveillance of international banking practices.
banking system a network of COMMERCIAL BANKS and other more specialized BANKS (INVESTMENT BANKS, SAVINGS BANKS, MERCHANT BANKS) that accept deposits and savings from the general public, firms and other institutions, and provide money transmission and other financial services for customers, operate loan and credit facilities for borrowers, and invest in corporate and government securities. The banking system is part of a wider FINANCIAL SYSTEM and exerts a major influence on the functioning of the ‘money economy’ of a country. Bank deposits occupy a central position in the country’s MONEY SUPPLY and hence the banking system is closely regulated by the money authorities. See BANK OF ENGLAND, CENTRAL BANK, CLEARING HOUSE SYSTEM.
bank loan the advance of a specified sum of money to an individual or business (the borrower) by a COMMERCIAL BANK, SAVINGS BANK, etc. (the lender). A bank loan is a form of CREDIT that is often extended for a specified period of time, usually on fixed-interest terms related to the base INTEREST RATE, with the principal being repaid either on a regular instalment basis or in full on the appointed redemption date. Alternatively, a bank loan may take the form of overdraft facilities under which customers can borrow as much money as they require up to a pre-arranged total limit and are charged interest on outstanding balances.
In the case of business borrowers, bank loans are used to finance WORKING CAPITAL requirements and are often renegotiated shortly before expiring to provide the borrower with a ‘revolving’ line of credit.
Depending on the nature of the loan and the degree of risk involved, bank loans may be unsecured or secured, the latter requiring the borrower to deposit with the bank COLLATERAL SECURITY (e.g. title deeds to a house) to cover against default on the loan.
bank note the paper CURRENCY issued by a CENTRAL BANK which forms part of a country’s MONEY SUPPLY. Bank notes in the main constitute the ‘high value’ part of the money supply. See MINT, LEGAL TENDER, FIDUCIARY ISSUE, BANK OF ENGLAND.
Bank of England the CENTRAL BANK of the UK, which acts as banker to the government and the BANKING SYSTEM and acts as the authority responsible for implementing MONETARY POLICY. The Bank of England handles the government’s financial accounts in conjunction with the TREASURY, taking in receipts from taxation and the sale of government assets, and making disbursements to the various government departments to fund their activities. The bank acts as the government’s broker in its borrowing and lending operations, issuing and dealing in government BONDS and TREASURY BILLS to underpin its year-to-year budgetary position and management of the country’s NATIONAL DEBT.
COMMERCIAL BANKS hold accounts with the Bank of England and, in its role as banker to the banking system, the Bank makes it possible for banks to settle their indebtedness with one another by adjusting their accounts as appropriate (see CLEARING HOUSE SYSTEM).
The Bank of England and its satellite, the Royal Mint, are responsible for issuing the country’s basic stock of money – LEGAL TENDER, consisting of bank notes and coins (see MONEY SUPPLY). The Bank occupies a key role in the implementation of monetary policy through controls on the money supply, influencing the level of bank deposits and credit creation by the financial institutions, particularly commercial banks (see BANK DEPOSIT CREATION), while the MONETARY POLICY COMMITTEE has the responsibility for setting ‘official’ INTEREST RATES in the UK, which in turn determines all other short-term interest rates (BASE RATE, BILL DISCOUNTING INTEREST RATE, INTERBANK CLEARING INTEREST RATE).
The Bank is also responsible for managing the country’s EXCHANGE RATE and holding the country’s stock of INTERNATIONAL RESERVES to be used in the financing of balance-of-payments deficits. The Bank of England operates a ‘Foreign Exchange Equalization Account’ that it uses to intervene in the FOREIGN EXCHANGE MARKET, buying and selling currencies to support the exchange rate at a particular level or to ensure that it falls (depreciates) or rises (appreciates) in an ‘orderly’ manner. See LENDER OF LAST RESORT.
bank rate the former ‘official’ INTEREST RATE that was administered by the government as part of MONETARY POLICY in controlling the economy. Bank rate operated as the BASE RATE for the banking system, influencing interest rates charged on bank loans, mortgages and instalment credit. Bank rate was replaced in 1972 by the ‘minimum lending rate’, which itself was abolished in 1984. The ‘official’ interest rate is now set by the MONETARY POLICY COMMITTEE of the BANK OF ENGLAND. See Fig. 125.
bankruptcy see INSOLVENCY.
bank statement a periodic record of an individual’s or business’s transactions with a BANK (or BUILDING SOCIETY) which itemizes, on the one hand, cash deposits and cheques paid in, and, on the other hand, cash withdrawals and cheques drawn and presented against the account.
bar chart or histogram a chart that portrays data in pictorial form and shows the relative size of each category in a total by means of the relative height of its ‘bar’ or ‘block’.
bargaining see BARTER, COLLECTIVE BARGAINING.
barometric forecasts see FORECASTING.
barometric price leader see PRICE LEADER.
barriers to entry an element of MARKET STRUCTURE that refers to obstacles in the way of potential newcomers to a MARKET. These obstacles operate in a number of ways to discourage entry:
(a) lower cost advantages to established firms, arising from the possession of substantial market shares and the realization of ECONOMIES OF LARGE SCALE production and distribution;
(b) strong consumer preferences for the products of established firms, resulting from PRODUCT DIFFERENTIATION activities;
(c) the control of essential raw materials, technology and market outlets by established firms, either through direct ownership or through PATENTS, FRANCHISES and EXCLUSIVE DEALING CONTRACTS;
(d) large capital outlays required by entrants to set up production and to cover losses during the initial entry phase.
The economic significance of barriers to entry lies in their capacity for blocking MARKET ENTRY, thereby allowing established firms to earn ABOVE NORMAL PROFIT and affecting the RESOURCE ALLOCATION function of markets.
One, or some combination, of the above factors may pose particular problems for a small-scale, GREENFIELD type of entrant. However, they may be of little consequence to a large conglomerate firm possessing ample financial resources that chooses to effect entry by MERGER with, or TAKEOVER of, an established producer. Moreover, the basic assumption of much entry theory – that established firms invariably possess advantages over potential entrants – must also be challenged. In a dynamic market situation, entrants may be in a position to introduce new technology ahead of existing firms or to develop innovative new products, thereby giving them COMPETITIVE ADVANTAGES over established firms.
For example, the introduction of FLEXIBLE MANUFACTURING SYSTEMS has enabled small entrant firms to secure similar cost advantages to their larger established rivals’ exploitation of economies of scale, while giving them greater adaptability to rapid changes in customers demands. Changes in distribution channels likewise have provided firms with entry opportunities. For example, E-COMMERCE on the INTERNET has enabled small firms to tap into markets at low cost and to sell their products at lower prices directly to customers than rivals using traditional wholesaler-retailer networks (see DIRECT SELLING/MARKETING). See also CONDITION OF ENTRY, LIMIT PRICING, POTENTIAL ENTRANT, OLIGOPOLY, MONOPOLY, MOBILITY BARRIERS.
barriers to exit elements of MARKET STRUCTURE that refer to obstacles in the way of a firm contemplating leaving a MARKET which serve to keep the firm in the market despite falling sales and profitability. Exit barriers include: whether the firm owns the assets it uses or leases them; whether assets are special-purpose or can be redeployed to other uses; whether assets are resaleable in second-hand markets; the extent of market excess capacity and the extent of shared production and distribution facilities. Barriers to exit determine the ease with which firms can leave declining markets and thus affect both the profitability of firms and the smooth functioning of markets.
Exit barriers can limit the incentives for a firm to leave a market even when the returns from producing are less than the potential earnings from the company’s assets in their next best alternative use. Exit barriers arise when a firm has contractual obligations that it must meet whether or not it ceases production: for example, long-term contracts to purchase raw materials and components; or large redundancy pay obligations; or the presence of specific assets (see ASSET SPECIFICITY). See PRODUCT LIFE CYCLE, PRICE SYSTEM, CONTESTABLE MARKET.
barriers to imitation see MOBILITY BARRIERS.
barter the EXCHANGE of one economic good or service for another. Barter as an exchange mechanism, however, suffers from a number of serious disadvantages:
(a) for barter to take place, there must be a ‘coincidence of wants’, that is, each party to the barter must be able to offer something that the other wants. For example, an apple-grower wishing to obtain oranges must not only find an orange-grower but must particularly find an orange-grower wishing to acquire apples. Finding appropriate exchange partners can involve lengthy search activity, which reduces the time available for actually producing goods;
(b) even if the parties meet up, they then have to agree on an appropriate ‘rate of exchange’, for example, how many apples are to be exchanged for one orange? Haggling over exchange terms is again time-consuming, and where agreement cannot be reached between the two parties each will then have to seek out new exchange partners.
Overall, barter is a very inefficient means of organizing transactions in an economy and has been largely superseded by the PRICE SYSTEM in modern economies, using money as a medium of exchange. See COUNTERTRADE, BLACK ECONOMY.
base rate the INTEREST RATE that is used by the COMMERCIAL BANKS to calculate rates of interest to be charged on bank loans and overdrafts to their customers. For example, a large company might be charged, say, an interest rate of base rate plus 2% on a loan, whereas a smaller borrower might be charged, say, base rate plus 4%. Formerly, base rates were linked directly to BANK RATE but are now fixed by reference to the ‘official’ rate of interest set by the MONETARY POLICY COMMITTEE of the Bank of England. See PRIME RATE.
base year the initial period from which a system of INDEXATION proceeds. For example, the present UK Consumer Price Index has as the base period 1996 = 100, with the average price of a typical basket of goods in 1996 being taken as the basis for the index. The 2004 index number was 111 for all items in the basket of goods. Convention dictates that the base period always commences from the number 100. See PRICE INDEX.
basing point price system a form of pricing products, such as cement, that are bulky and expensive to transport, which involves charging different prices to customers based in different locations. Customers located near to the supply source (or ‘base point’) are charged a lower delivery price compared to customers farther afield. See PRICE DISCRIMINATION, DELIVERED PRICE.
batch production the manufacture of a product in small quantities using labour-intensive methods of production (see LABOUR-INTENSIVE FIRM/INDUSTRY). Batch production is typically employed in industries where the product supplied is nonstandardized, with consumers demanding a wide variety of product-choice. Batch production industries are usually characterized by low levels of SELLER CONCENTRATION, easy entry conditions and high unit costs of supply. See PRODUCTION, MASS PRODUCTION, CONDITION OF ENTRY, FLEXIBLE MANUFACTURING SYSTEM.
bear a person who expects future prices in a STOCK EXCHANGE or COMMODITY MARKET to fall and who seeks to make money by selling shares or commodities. Compare BULL. See SPOT MARKET, FUTURES MARKET, BEAR MARKET.
bearer bonds FINANCIAL SECURITIES that are not registered under the name of a particular holder but where possession serves as proof of ownership. Such securities are popular in the American financial system but fairly rare in Britain, where the names of holders of STOCKS and SHARES are recorded in a company’s share register.
bear market a situation where the prices of FINANCIAL SECURITIES (stocks, shares, etc.) or COMMODITIES (tin, wheat, etc.) are tending to fall as a result of persistent selling and only limited buying. See SPECULATOR. Compare BULL MARKET.
beggar-my-neighbour policy a course of action that is entered into by a country unilaterally in pursuit of its own self interest in INTERNATIONAL TRADE even though this might adversely affect the position of other countries. For example, country A might decide to impose TARIFFS or EXCHANGE CONTROLS on imports from other countries in order to protect certain domestic industries. The great danger with this type of policy, however, is that it can be self-defeating; that is, other countries may retaliate by imposing tariffs, etc., of their own on country A’s exports, with the result that everybody’s exports suffer. To avoid confrontation of this kind, various international organizations have been established to regulate the conduct of international trade and monetary dealings. See WORLD TRADE ORGANIZATION, INTERNATIONAL MONETARY FUND, EXPORT INCENTIVES, IMPORT RESTRICTIONS, DIRTY FLOAT, DUMPING.
behavioural theory of the firm an alternative to the traditional, profit-maximizing THEORY OF THE FIRM, which stresses the nature of large companies as complex organizations beset by problems of goal conflict and communications. The behavioural theory examines the inherent conflict between the goals of individuals and subgroups within the organization and suggests that organizational objectives grow out of the interaction among these individuals and subgroups.
Cyert and March, who helped develop the behavioural theory, suggested five major goals that are relevant to companies’ sales, output and pricing strategies:
(a) production goal;
(b) inventory goal;
(c) sales goal;
(d) market-share goal;
(e) profit goal.
Each of these goals will be the primary concern of certain managers in the organization, and these managers will press their particular goals. The goals become the subject of ‘bargaining’ among managers, and such overall goals as do emerge will be compromises, often stated as satisfactory-level targets (see SATISFACTORY THEORY). This intergroup conflict, however, rarely threatens the organization’s survival because ORGANIZATIONAL SLACK provides a pool of emergency resources that permit managers to meet their goals when the economic environment becomes hostile.
In order to achieve rational decision-making, it would be necessary to eradicate inconsistencies between goals and resolve conflicts between objectives. Traditional economic theory suggests that rationality can be achieved, painting a picture of ‘ECONOMIC MAN’, able to specify his objectives and take actions consistent with their achievement. By contrast, the behavioural theory argues that goals are imperfectly rationalized so that new goals are not always consistent with existing policies; and that goals are stated in the form of aspiration-level targets rather than maximizing goals, targets being raised or lowered in the light of experience. Consequently, not all objectives will receive attention at the same time and objectives will change with experience.
The behavioural theory also focuses attention on internal communications problems in large organizations, pointing out that decision-making is distributed throughout the firm rather than concentrated at the apex of the organization pyramid. This happens because lower-level managers do not just execute the orders of those at the top; they exercise initiative:
(a) in detailed planning within broad limits set by a top management;
(b) in summarizing information to be passed upwards as a basis for decision-making by their superiors. These communications problems make it difficult for senior managers to impose their objectives upon the organization.
Although the behavioural theory of the firm is somewhat descriptive, lacking the determinism necessary to generate tes table predictions, it has offered many useful insights into the objectives of large companies. See also MANAGERIAL THEORIES OF THE FIRM, PROFIT MAXIMIZATION, FIRM OBJECTIVES, PRINCIPAL-AGENT THEORY.
below-the-line promotion see ABOVE-THE-LINE PROMOTION.
benchmarking the process of measuring aspects of a firm’s performance and comparing this measured performance with that of other firms. Benchmarking can help a firm to discover where its performance is deficient and can suggest means of improving competitive performance.
benefit drivers elements of a firm’s operations that individually and collectively create ‘benefits’ for consumers who buy the firm’s product, e.g. quality, design, accessories, performance in use, guarantees and warranties. The ability to offer a product that is ‘perceived’ by customers to offer superior value to them is an important consideration where PRODUCT DIFFERENTIATION is the key basis of the firm’s COMPETITIVE ADVANTAGE over rival suppliers. See VALUE-CREATED MODEL.
Benefits Agency see DEPARTMENT FOR WORK AND PENSIONS.
benefits-received principle of taxation the principle that those who benefit most from government-supplied goods and services should pay the TAXES that finance them. The problem with this proposition, apart from the obvious difficulties of quantifying the benefits received by individuals, particularly as regards the provision of items such as national defence, fire service, etc., is that it cannot be reconciled with the wider responsibilities accepted by government in providing social services and welfare benefits, i.e. it would make no sense at all to tax an unemployed man in order to finance his unemployment pay. See ABILITY-TO-PAY PRINCIPLE OF TAXATION, REDISTRIBUTION-OF-INCOME PRINCIPLE OF TAXATION.
Bertrand duopoly see DUOPOLY.
bid 1 an offer by one company to purchase all or the majority of the SHARES of another company as a means of effecting a TAKEOVER. The bid price offered by the predator for the voting shares in the victim company must generally exceed the current market price of those shares, the difference being a premium that the predator must pay for control of the company. On occasions, however, the market price of the shares may subsequently rise to exceed the initial bid price where investors either feel that the bid price undervalues the company or where investors anticipate, for example, the possibility of a second party making a higher bid. The offer price could be paid solely in cash, or in a mix of cash and shares in the acquirer’s own company, or solely in terms of the acquirer’s shares (called a paper bid). In order to finance a takeover bid, a predator company may raise loans. See TAKEOVER BID (leveraged bid). 2 an indication of willingness to purchase an item that is for sale at the prevailing selling price. This may occur at auction when many purchasers bid for items on sale, the final sale going to the purchaser offering the highest price unless a predetermined reserve price has been set that was not reached. See AUCTION.
bid price the price at which a dealer in a FINANCIAL SECURITY (such as a STOCK or SHARE), FOREIGN CURRENCY or COMMODITY (tin, wheat, etc.) is prepared to buy a security, currency or commodity. Such dealers usually cite two prices to potential customers, the smaller bid price and a higher ‘offer price’ or ‘ask price’ at which they are prepared to sell a security, etc. The difference between the bid and offer price (referred to as the ‘spread’) represents the dealer’s profit margin on the transaction. See MARKET MAKER.
big bang see STOCK EXCHANGE.
bilateral flows movements of money between sectors of the economy to match opposite flows of goods and services. For example, income in return for factor inputs supplied and consumption expenditure in payment for goods and services consumed. Bilateral flows make it possible to ignore flows of goods and services in the economy and to concentrate on money movements in the CIRCULAR FLOW OF NATIONAL INCOME MODEL.
bilateral monopoly a market situation comprising one seller (like MONOPOLY) and one buyer (like MONOPSONY).
bilateral oligopoly a market situation with a significant degree of seller concentration (like OLIGOPOLY) and a significant degree of buyer concentration (like OLIGOPSONY). See COUNTERVAILING POWER.
bilateral trade the trade between two countries. Bilateral trade is a part of INTERNATIONAL TRADE, which is multilateral in scope. See MULTILATERAL TRADE, COUNTERTRADE.
bill 1 a financial instrument, such as a BILL OF EXCHANGE and TREASURY BILL, that is issued by a firm or government as a means of borrowing money.
2 the colloquial term used to describe an INVOICE (a request for payment for products or services received).
3 a draft of a particular piece of legislation that forms the basis of an Act of Parliament, such as the Fair Trading Act 1973.
bill-discounting interest rate the INTEREST RATE at which the BANK OF ENGLAND is prepared to lend money to the DISCOUNT HOUSES. This rate is fixed by reference to the ‘official’ rate of interest set by the MONETARY POLICY COMMITTEE of the Bank of England.
bill of exchange a FINANCIAL SECURITY representing an amount of CREDIT extended by one business to another for a short period of time (usually three months). The lender draws up a bill of exchange for a specified sum of money payable at a given future date, and the borrower signifies his agreement to pay the amount indicated by signing (accepting) the bill. Most bills are ‘discounted’ (i.e. bought from the drawer) by the DISCOUNT MARKET for an amount less than the face value of the bill (the difference between the two constitutes the interest charged). Bills are frequently purchased by the COMMERCIAL BANKS to be held as part of their RESERVE ASSET RATIO. See DISCOUNT, ACCEPTING HOUSE, DISCOUNT HOUSE.
biodiversity the variety of plant and animal life in a particular area. Envi-ronmentalists have expressed concern about the extent to which ECONOMIC GROWTH, in particular modern methods of farming, forestry and manufacturing, has reduced biodiversity, with some plant and animal species becoming rare or extinct. See POLLUTION.
birth rate the number of people born into a POPULATION per thousand per year. In 2004, for example, the UK birth rate was 11 people per 1,000 of the population. The difference between this rate and the DEATH RATE is used to calculate the rate of growth of the population of a country over time. The birth rate tends to decline as a country attains higher levels of economic development. See DEMOGRAPHIC TRANSITION.
black economy NONMARKETED ECONOMIC ACTIVITY that is not recorded in the NATIONAL INCOME ACCOUNTS, either because such activity does not pass through the market place or because it is illegal. Illegality is not the same as nonmarketed activity. Illegal economic activity may operate quite efficiently in the usual PRICE SYSTEM, which is determined by SUPPLY and DEMAND. Examples may be the purchase and sale of illegal drugs on the street, or alcohol in the US prohibition era of the 1920s, or foodstuffs in Britain during the Second World War when RATIONING was in force. Nonmarketed activity does not have a price determined by demand and supply. Certain nonmarketed activity may be undertaken for altruistic reasons, for example, the services of a housewife on behalf of her family and the work of charity volunteers. Other nonmarketed activity is done on a BARTER basis, for example, where a mechanic services the motor car of an electrician who in return installs new light fittings in the mechanic’s house. Money has not changed hands and the activity is not recorded. Most references to the black economy refer to the illegal situation of people working without declaring their income. See BLACK MARKET.
black knight see TAKEOVER BID.
black market an ‘unofficial’market that often arises when the government holds down the price of a product below its equilibrium rate and is then forced to operate a RATIONING system to allocate the available supply between buyers. Given that some buyers are prepared to pay a higher price, some dealers will be tempted to divert supplies away from the ‘official’ market by creating an under-the-counter secondary market. See BLACK ECONOMY.
board of directors the group responsible to the SHAREHOLDERS for running a JOINT-STOCK COMPANY. Often, boards of directors are made up of full-time salaried company executives (the executive directors) and part-time, nonexecutive directors. The board of directors meets periodically under the company chairman to decide on major policy matters within the company and the appointment of key managers. Directors are elected by rotation at the company ANNUAL GENERAL MEETING. See TWO-TIER BOARD, CORPORATE GOVERNANCE.
bond a FINANCIAL SECURITY issued by businesses and by the government as a means of BORROWING long-term funds. Bonds are typically issued for periods of several years; they are repayable on maturity and bear a fixed NOMINAL (COUPON) INTEREST RATE. Once a bond has been issued at its nominal value, then the market price at which it is sold subsequently will vary in order to keep the EFFECTIVE INTEREST RATE on the bond in line with current prevailing interest rates. For example, a £100 bond with a nominal 5% interest rate paying £5 per year would have to be priced at £50 if current market interest rates were 10%, so that a buyer could earn an effective return of £5/50 = 10% on his investment.
In addition to their role as a means of borrowing money, government bonds are used by the monetary authorities as a means of regulating the MONEY SUPPLY. For example, if the authorities wish to reduce the money supply, they can issue bonds to the general public, thereby reducing the liquidity of the banking system as customers draw cheques to pay for these bonds. See also OPEN MARKET OPERATION, BANK DEPOSIT CREATION, PUBLIC SECTOR BORROWING REQUIREMENT, SPECULATIVE DEMAND FOR MONEY, CONSOLS.
bonus scheme a form of INCENTIVE PAY SCHEME wherein an individual’s or group’s WAGES are based on achievement of individual or group output targets. Bonus schemes often provide for a guaranteed basic wage for employees. See PAY.
bonus shares SHARES issued to existing SHAREHOLDERS in a JOINT-STOCK COMPANY without further payment on their part. See CAPITALIZATION ISSUE.
boom a phase of the BUSINESS CYCLE characterized by FULL EMPLOYMENT levels of output (ACTUAL GROSS NATIONAL PRODUCT) and some upward pressure on the general PRICE LEVEL (see INFLATIONARY GAP). Boom conditions are dependent on there being a high level of AGGREGATE DEMAND, which may come about autonomously or be induced by expansionary FISCAL POLICY and MONETARY POLICY. See DEMAND MANAGEMENT.
borrower a person, firm or institution that obtains a LOAN from a LENDER in order to finance CONSUMPTION or INVESTMENT. Borrowers are frequently required to offer some COLLATERAL SECURITY to lenders, for example, property deeds, which lenders may retain in the event of borrowers failing to repay the loan. See DEBT, DEBTOR, FINANCIAL SYSTEM.
Boston matrix a matrix (developed by the Boston Consulting Group) for analysing product-development policy within a firm and the cash-flow implications of product development. Fig. 16 shows the matrix, which is used to identify products that are cash generators and products that are cash users. One axis of the matrix measures market growth rate: because the faster the growth rate for a product the greater will be the capital investment required and cash used. The other axis measures market share: because the larger the market share the greater will be the profit earned and cash generated. The market growth/share matrix encompasses four extreme product types:
(a) star products – those that have a high growth rate (so that they tend to use cash) and a high market share (so that they tend to generate cash). Star products are usually new products in the growth phase of the PRODUCT LIFE CYCLE.
(b) problem child products – those that have a high growth rate (and so tend to use cash) and a low market share (so that they tend to generate little cash). Problem products are frequently a cash drain but they have potential if their market share can be improved.
(c) cash cow products – those that have a low growth rate and a high market share (so that they tend to generate a lot of cash). Cash cows are usually mature products in the later phases of the product life cycle.
Fig. 16 Boston matrix. The matrix identifies cash generators and cash users.
(d) dog products – those that have a low growth rate and a low market share and tend to generate little cash. Dog products generally have little potential for future development.
It is important for any firm to have a balanced portfolio of mature ‘cash cow’ products, newer ‘stars’, etc., and to use the cash generated by cash cows to help the development of ‘problem children’ if its product development policy is to ensure the firm’s long-term survival. See PRODUCT PERFORMANCE, DIVERSIFICATION, PRODUCT-MARKET MATRIX.
bounded rationality limits on the capabilities of people to deal with complexity, process information and pursue rational aims. Bounded rationality prevents parties to a CONTRACT from contemplating or enumerating every contingency that might arise during a TRANSACTION, so preventing them from writing complete contracts.
boycott 1 the withholding of supplies of GOODS from a distributor by a producer or producers in order to force that distributor to resell those goods only on terms specified by the producer. In the past, boycotts were often used as a means of enforcing RESALE PRICE MAINTENANCE.
2 the prohibition of certain imports or exports, or a complete ban on INTERNATIONAL TRADE with a particular country by other countries.
brand the name, term or symbol given to a product by a supplier in order to distinguish his offering from that of similar products supplied by competitors. Brand names are used as a focal point of PRODUCT DIFFERENTIATION between suppliers.
In most countries, brand names and trade marks are required to be registered with a central authority so as to ensure that they are uniquely applied to a single, specific product. This makes it easier for consumers to identify the product when making a purchase and also protects suppliers against unscrupulous imitators. See INTELLECTUAL PROPERTY RIGHTS, BRAND TRANSFERENCE.
brand loyalty the continuing willingness of consumers to purchase and repurchase the brand of a particular supplier in preference to competitive products. Suppliers cultivate brand loyalty by PRODUCT-DIFFERENTIATION strategies aimed at emphasizing real and imaginary differences between competing brands. See ADVERTISING.
brand proliferation an increase in the number of brands of a particular product, each additional brand being very similar to those already available. Brand proliferation occurs mainly in oligopolistic markets (see OLIGOPOLY) where competitive rivalry is centred on PRODUCT-DIFFERENTIATION strategies, and is especially deployed as a means of MARKET SEGMENTATION. In the THEORY OF MARKETS, excessive brand proliferation is generally considered to be against consumers’ interests because it tends to result in higher prices by increasing total ADVERTISING and sales promotional expenses.
brand switching the decision by consumers to substitute an alternative BRAND for the one they currently consume. Brand switching may be induced by ADVERTISING designed to overcome BRAND LOYALTY to existing brands.
brand transference the use of an existing BRAND name for new or modified products. Brand transference or extension seeks to capitalize on consumers’ BRAND LOYALTY towards the firm’s established brands to gain rapid consumer acceptance of a new product.
brand value the money value of an established BRAND name. The valuation of a brand reflects the BRAND LOYALTY of consumers towards it, built up by cumulative ADVERTISING. See TAKEOVER.
Fig. 17 Break-even. A supplier’s typical short-run costs and revenues. Fixed costs do not vary with output and so are shown as the horizontal line FC. Total cost comprises both fixed costs and total variable costs and is shown by line TC. Total revenue rises as output and sales are expanded and is depicted by line TR. At low levels of output like Q1 total costs exceed total revenues and the supplier makes a loss equal to AB. At high levels of output like Q2 revenues exceed costs and the supplier makes a profit equal to DE. At output Q1 total revenues exactly match total costs (at C) and the supplier breaks even.
break-even the short-run rate of output and sales at which a supplier generates just enough revenue to cover his fixed and variable costs, earning neither a PROFIT nor a LOSS. If the selling price of a product exceeds its unit VARIABLE COST, then each unit of product sold will earn a CONTRIBUTION towards FIXED COSTS and profits. Once sufficient units are being sold so that their total contributions cover the supplier’s fixed costs, then the company breaks even. If less than the break-even sales volume is achieved, then total contributions will not meet fixed costs and the supplier will make a loss. If the sales volume achieved exceeds the break-even volume, total contributions will cover the fixed costs and leave a surplus that constitutes profit. See Fig. 17.
Bretton Woods System see INTERNATIONAL MONETARY FUND.
bridging loan a form of short-term LOAN used by a borrower as a continuing source of funds to ‘bridge’ the period until the borrower obtains a medium- or long-term loan to replace it. Bridging loans are used in particular in the housing market to finance the purchase of a new house while arranging long-term MORTGAGE finance and awaiting the proceeds from the sale of any existing property.
broad money see MONEY SUPPLY.
brownfield location a derelict industrial site or housing estate that has been demolished and redeveloped to accommodate new industrial premises, often as part of a regional industrial regeneration programme. Compare GREENFIELD LOCATION. See REGIONAL DEVELOPMENT AGENCY.
budget (firm) a firm’s planned revenues and expenditures for a given future period. Annual or monthly sales, production, cost and capital expenditure budgets provide a means for the firm to plan its future activities, and by collecting actual data about sales, product cost, etc., to compare with budget the firm can control these activities more effectively.
budget (government) a financial statement of the government’s planned revenues and expenditures for the fiscal year. The main sources of current revenues, as shown in Fig. 18 (a), are TAXATION, principally income and expenditure taxes, and NATIONAL INSURANCE CONTRIBUTIONS. The main current outgoings of GOVERNMENT EXPENDITURE are the provision of goods and services (principally wage payments to health, education, police and other public service employees), TRANSFER PAYMENTS (old-age pensions, interest payments on the NATIONAL DEBT, etc.) and social security benefits.
Fig. 18 Budget (government). (a) The UK budget for 2003/04. (b) UK budget deficits and surpluses, 1979–2004. Source: UK National Accounts, ONS (Blue Book), 2004.
The budget has two main uses: (a) it forms the basis of the government’s longer-term financial planning of its own economic and social commitments; (b) it is an instrument of FISCAL POLICY in regulating the level (and composition) of AGGREGATE DEMAND in the economy. A BUDGET SURPLUS (revenues greater than expenditures) reduces the level of aggregate demand. By contrast, a BUDGET DEFICIT (expenditure greater than revenues) increases aggregate demand. Fig. 18 (b) shows UK budget deficits (and surpluses) over the past two decades.
Recently (post 1997) the government has accepted that fiscal stability is an important element in the fight against INFLATION and UNEMPLOYMENT. To this end, fiscal ‘prudence’, specifically a current budget deficit within the European Union’s MAASTRICHT TREATY limits of no more than 3% of GDP (and an outstanding total debt limit of 60% of GDP), was endorsed as being a necessary adjunct to avoid excessive monetary creation of the kind that fuelled previous runaway inflation.
In fact, the government has gone further than this in adopting the so-called ‘golden rule’, which requires that the government should ‘aim for an overall budget surplus over the economic cycle’ (defined as 1998/99 to 2003/04, with some of the proceeds being used to pay off government debt to reduce outstanding debt eventually to 40% of GDP. Along the way it has introduced more rigorous standards for approving increases in public spending, in particular the ‘sustainable investment rule’, which stipulates that the government should borrow only to finance capital investment and not to pay for general spending. In addition, the government has announced it will ‘ring-fence’ increases in particular tax receipts to be used only for funding specific activities. For example, receipts from future increases in fuel taxes and tobacco taxes will be spent, respectively, only on road-building programmes and the National Health Service. See PUBLIC SECTOR BORROWING REQUIREMENT, PUBLIC SECTOR DEBT REPAYMENT, DEMAND MANAGEMENT, PUBLIC FINANCE.
budget (household) a household’s planned income and expenditure for a given time period. The household’s expenditure will depend upon its DISPOSABLE INCOME, and the THEORY OF CONSUMER BEHAVIOUR seeks to show how households, or consumers, allocate their income in spending on various goods and services. See CONSUMER EQUILIBRIUM.
budget deficit the excess of GOVERNMENT EXPENDITURE over government TAXATION and other receipts in any one fiscal year. See BUDGET (government). The operation of a budget deficit (deficit financing) is a tool of FISCAL POLICY to enable government to influence the level of AGGREGATE DEMAND and EMPLOYMENT in the economy. Such a policy was advocated by KEYNES in the 1930s to offset the DEPRESSION that occurred at that time. Opinion prior to this was that the government should operate a BALANCED BUDGET policy, allowing the economy to respond in its own way without government intervention. Keynes argued that government should intervene by deliberately imbalancing its budget in order to inject additional aggregate demand into a depressed economy and vice-versa.
Since the Second World War, most western governments have tended to operate a budget deficit to keep employment high and to promote long-term ECONOMIC GROWTH. This has been financed by increasing the PUBLIC SECTOR BORROWING REQUIREMENT (PSBR) through the issue of TREASURY BILLS and long-term bonds. This is acceptable as long as the economy is growing and the interest payments on such borrowings do not become disproportionate to the overall level of government expenditure. Government borrowing in excess of the amount required to promote long-term growth and effect counter-cyclical policies will ultimately result in INFLATION. Consequently, both the timing and magnitude of the expenditure over and above receipts is of crucial importance. In more recent times recognition that low inflation is necessary to secure low UNEMPLOYMENT has led to an acceptance of the need for ‘fiscal stability’. This has found expression, for example, within the European Union’s MAASTRICHT TREATY limits of a current budget deficit of no more than 3% of GDP and a total outstanding government debt limit of no more than 60% of GDP.
BUDGET SURPLUS is the opposite of the above whereby there is an excess of government receipts over expenditure. See AUTOMATIC (BUILT-IN) STABILIZERS, KEYNESIAN ECONOMICS, BUSINESS CYCLE, DEMAND MANAGEMENT.
budget line or consumption possibility line a line showing the alternative combinations of goods that can be purchased by a consumer with a given income facing given prices. See Fig. 19. See also CONSUMER EQUILIBRIUM, REVEALED PREFERENCE THEORY, PRICE EFFECT.
budget surplus a surplus of TAXATION receipts over GOVERNMENT EXPENDITURE. Budget surpluses are used as an instrument of FISCAL POLICY to reduce the level of AGGREGATE DEMAND in the economy. See BUDGET (government), BUDGET DEFICIT, PUBLIC SECTOR DEBT REPAYMENT.
buffer stock a stock of a COMMODITY (copper, wheat, etc.) that is held by a trade body or government as a means of regulating the price of that commodity. An ‘official’ price for the commodity is established, and if the open-market price falls below this because there is excess supply at the fixed price, then the authorities will buy the surplus and add it to the buffer stock in order to force the price back up. By contrast, if the open-market price rises above the fixed price because there is an excess demand at the fixed price, then the authorities will sell some of their buffer stock in order to bring the price down. Through this mechanism the price of the commodity can be stabilized over time, avoiding erratic, short-term fluctuations in price.
Thus this mechanism attempts to avoid erratic short-term fluctuations in price. If the official price is set at too high a level, however, this will encourage over-supply in the long term and expensively accumulating stocks; while if the official price is set at too low a level, this will discourage supply in the long term and lead to shortages. See INTERNATIONAL COMMODITY AGREEMENT, PRICE SUPPORT, COMMON AGRICULTURE POLICY.
Fig. 19 Budget line. If a consumer has an income of £10 and the price of good X is 50 pence and the price of good Y is £1, he can buy 20 units of X or 10 units of Y, or some combination of both, for example 10 units of X and 5 units of Y. The slope of the budget line measures the relative prices of the two goods.
Building Societies Act 1986 a UK Act that gave BUILDING SOCIETIES new powers to augment their traditional business MORTGAGES by providing a range of other financial services for their customers. These include money transmission facilities (via cheque books), arranging insurance cover, obtaining traveller’s cheques and foreign currencies, managing unit trust pension schemes, buying and selling stocks and shares, and the provision of estate agency facilities. The Act has thus served to increase competition in the provision of financial services as between building societies, the COMMERCIAL BANKS and other financial institutions.
The Act also permits building societies to increase their capital resources and growth potential by incorporating themselves as JOINT-STOCK COMPANIES (as have the Abbey National and the Halifax), issuing shares and securing a stock exchange listing.
building society a financial institution that offers a variety of savings accounts to attract deposits, mainly from the general public, and which specializes in the provision of long-term MORTGAGE loans used to purchase property. In recent years, many of the larger UK building societies have moved into the estate agency business. Additionally, they have entered into arrangements with other financial institutions that have enabled them to provide their depositors with limited banking facilities (the use of cheque books and credit cards, for instance) and other financial services, a development that has been given added impetus by the BUILDING SOCIETIES ACT 1986.
Most notably, major building societies, such as the Abbey National and Halifax, have taken advantage of changes introduced by the BUILDING SOCIETIES ACT 1986 and the FINANCIAL SERVICES ACT 1986 and have converted themselves into public JOINT-STOCK COMPANIES, setting themselves up as ‘financial supermarkets’ offering customers a banking service and a wide range of personal financial products, including insurance, personal pensions, unit trusts, individual savings accounts (ISAs), etc. This development has introduced a powerful new competitive impetus into the financial services industry, breaking down traditional ‘demarcation’ boundaries in respect of ‘who does what’, allowing former building societies to ‘cross-sell’ these services and products in competition with traditional providers such as the COMMERCIAL BANKS, INSURANCE COMPANIES, UNIT TRUSTS, etc.
Building society deposits constitute an important source of liquidity in the economy and count as ‘broad money’ in the specification of the MONEY SUPPLY. See FINANCIAL SYSTEM.
built-in stabilizers see AUTOMATIC (BUILT-IN) STABILIZERS.
bulk-buying the purchase of raw materials, components and finished products in large quantities, thereby enabling a BUYER to take advantage of DISCOUNTS off suppliers’ LIST PRICES. A supplier may offer a price discount to encourage the placement of large orders as a means of obtaining extra sales in order to exploit fully the ECONOMICS OF SCALE in production and distribution. In many cases, however, the initiative lies with buyers, with powerful retailing and wholesaling groups exacting favourable price concessions from suppliers by playing one supplier off against another. See CHAIN STORE, OLIGOPSONY, MONOPSONY.
bull a person who expects future prices in a STOCK EXCHANGE or COMMODITY MARKET to rise and who seeks to make money by buying shares or commodities. Compare BEAR. See SPOT MARKET, FUTURES MARKET, BULL MARKET.
bullion precious metals, such as GOLD, silver, platinum, etc., that are traded commercially in the form of bars and coins for investment purposes and are used to produce jewellery and as industrial base metals. Some items of bullion, gold in particular, are held by CENTRAL BANKS and are used as INTERNATIONAL RESERVES to finance balance of payments imbalances.
bullion market a MARKET engaged in the buying and selling of precious metals such as GOLD and silver and gold and silver coins such as ‘Krugerrands’ and ‘Sovereigns’. The London Bullion Market is a leading centre for such transactions.
bull market a situation where the prices of FINANCIAL SECURITIES (stocks, shares, etc.) or COMMODITIES (tin, wheat, etc.) are tending to rise as a result of persistent buying and only limited selling. Compare BEAR MARKET. See SPECULATOR.
Bundesbank the CENTRAL BANK of Germany.
burden of debt INTEREST charges on DEBT that arise as a result of BORROWING by individuals, firms and governments. In the case of governments, interest charges on the NATIONAL DEBT are paid for out of TAXATION and other receipts. The term ‘burden’ would seem to imply that government borrowing is a ‘bad’ thing insofar as it passes on financial obligations from present (overspending) generations to future generations. The fundamental point to emphasize, however, is that the interest paid on the national debt is a TRANSFER PAYMENT and does not represent a net reduction in the capacity of the economy to provide goods and services, provided that most of this debt is owed to domestic citizens.
INFLATION has the effect of eroding the real burden of debts, which are denominated in NOMINAL VALUES. See PUBLIC SECTOR BORROWING REQUIREMENT.
burden of dependency the non-economically active POPULATION of a country in relation to the employed and self-employed LABOUR FORCE. Dependants include very young, very old and disabled members of the community, their unpaid carers and the unemployed who must rely on the efforts of the labour force to provide them with goods and services. Countries with a proportionately large dependent population need to levy high taxes upon the labour force to finance the provision of TRANSFER PAYMENTS such as pensions, child benefit and unemployment benefit.
burden of taxation see TAX BURDEN.
business a supplier of goods and services. The term can also denote a FIRM. In economic theory, businesses perform two roles. On the one hand, they enter the market place as producers of goods and services bought by HOUSEHOLDS; on the other hand, they buy factor inputs from households in order to produce those goods and services. The term ‘businesses’ is used primarily in macro (national income) analysis, while the term ‘firms’ is used in micro (supply and demand) analysis. See also CIRCULAR FLOW OF NATIONAL INCOME MODEL.
business cycle or trade cycle fluctuations in the level of economic activity (ACTUAL GROSS NATIONAL PRODUCT), alternating between periods of depression and boom conditions.
The business cycle is characterized by four phases (see Fig. 20):
Fig. 20 Business cycle. Fluctuations in the level of economic activity.
(a) DEPRESSION, a period of rapidly falling AGGREGATE DEMAND accompanied by very low levels of output and heavy UNEMPLOYMENT, which eventually reaches the bottom of the trough;
(b) RECOVERY, an upturn in aggregate demand accompanied by rising output and a reduction in unemployment;
(c) BOOM, aggregate demand reaches and then exceeds sustainable output levels (POTENTIAL GROSS NATIONAL PRODUCT) as the peak of the cycle is reached. Full employment is reached and the emergence of excess demand causes the general price level to increase (see INFLATION);
(d) RECESSION, the boom comes to an end and is followed by recession. Aggregate demand falls, bringing with it, initially, modest falls in output and employment but then, as demand continues to contract, the onset of depression.
What causes the economy to fluctuate in this way? One prominent factor is the volatility of FIXED INVESTMENT and INVENTORY INVESTMENT expenditures (the investment cycle), which are themselves a function of businesses’ EXPECTATIONS about future demand. At the top of the cycle, income begins to level off and investment in new supply capacity finally ‘catches up’ with demand (see ACCELERATOR). This causes a reduction in INDUCED INVESTMENT and, via contracting MULTIPLIER effects, leads to a fall in national income, which reduces investment even further. At the bottom of the depression, investment may rise exogenously (because, for example, of the introduction of new technologies) or through the revival of REPLACEMENT INVESTMENT. In this case, the increase in investment spending will, via expansionary multiplier effects, lead to an increase in national income and a greater volume of induced investment. See also DEMAND MANAGEMENT, KONDRATIEF CYCLE, SECULAR STAGNATION.
Business Link a nationwide network of agencies that brings together the business support activities of many chambers of commerce, enterprise agencies, learning and skills councils and local authorities to provide a single local point of access for business information and advisory services to small and medium-sized businesses. The Business Link operates under the auspices of the SMALL BUSINESS SERVICE (SBS), an arm of the DEPARTMENT FOR TRADE AND INDUSTRY (DTI). See INDUSTRIAL POLICY.
business strategy the formulation of long-term plans and policies by a firm which interlock its various production and marketing activities in order to achieve its business objectives. See FIRM OBJECTIVES, COMPETITIVE STRATEGY, HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, DIVERSIFICATION.
buyer a purchaser of a GOOD or SERVICE. A broad distinction can be made between purchasers of items such as raw materials, components, plant and equipment that are used to produce other products (referred to as ‘industrial buyers’) and purchasers of products for personal consumption (referred to as ‘consumers’).
In general, industrial buyers (in the main purchasing/procurement officers) are involved in the purchase of ‘functional’ inputs to the production process, usually in large quantities and often involving the outlay of thousands of pounds. Their particular concern is to obtain input supplies that are of an appropriate quality and possess the technical attributes necessary to ensure that the production process goes ahead smoothly and efficiently. In selling to industrial buyers, personal contacts, the provision of technical advice and back-up services are important.
Buyers of consumer goods, by contrast, typically buy a much wider range of products, mainly in small quantities. Purchases are made to satisfy some ‘physical’ or ‘psychological’ need of the consumer. Thus, it is important for suppliers to understand the basis of these needs and to produce and promote BRANDS that satisfy identifiable consumer demands. In this context, ADVERTISING and SALES PROMOTION are important tools for shaping consumers’ perceptions of a brand and establishing BRAND LOYALTY. See PRODUCT DIFFERENTIATION.
buyer concentration an element of MARKET STRUCTURE that refers to the number and size distribution of buyers in a market. In most markets, buyers are numerous, each purchasing only a tiny fraction of total supply. In some markets, however, most notably in INTERMEDIATE GOODS industries, a few large buyers purchase a significant proportion of total supply. Such situations are described as OLIGOPSONY, or, in the case of a single buyer, MONOPSONY.
Market theory predicts that MARKET PERFORMANCE will differ according to whether there are many buyers in the market, each accounting for only a minute fraction of total purchases, (PERFECT COMPETITION), or only a few buyers, each accounting for a substantial proportion of total purchases (oligopsony), or a single buyer (monopsony). See COUNTERVAILING POWER, MARKET CONCENTRATION, SELLER CONCENTRATION, BULK-BUYING.
buyer’s market a SHORT-RUN market situation in which there is EXCESS SUPPLY of goods or services at current prices, which forces prices down to the advantage of the buyer. Compare SELLER’S MARKET.
buy-in see MANAGEMENT BUY-IN.
buy-out see MANAGEMENT BUY-OUT.
by-product a product that is secondary to the main product emerging from a production process. For example, the refining of crude oil to produce petroleum generates a range of by-products like bitumen, naptha and creosote.
