Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

back pay:	Back pay refers to wages due for past services. Usually, this is the difference between money already received by the worker and a higher amount resulting from a retroactive change in wage rates for that worker. Under the National Labor Relations Act, back pay is the amount an employee let go in a discriminatory manner or otherwise discriminated against would have earned if no discrimination had occurred, minus earnings during the discrimination period.
backdating:	Backdating entails identifying the date of issue of a financial instrument as at a point in time prior to its actual issuance, and is usually fraudulent. In 2006, many large corporations were discovered to have previously backdated stock options issued to corporate officers, and the dates chosen were dates when the stock was at a low point, so that the stock options were represented as having been less valuable than they truly were when issued. Thus, backdating enabled such corporate officers to receive higher incomes than were reported in corporate annual reports, and it illegally reduced the executives’ income tax burdens because options received as compensation would have had lower values as backdated than when actually issued. See also bezzle.
backstop resource:	A backstop resource is a sustainable and renewable natural resource that is used as a substitute for an exhausted finite resource. With a sustainable resource, the amount used today will not reduce the amount available tomorrow. An example is solar energy being used in place of fossil fuels.
backward bending labor supply curve:	A backward-bending labor supply curve is a supply curve illustrating the possibility that as the price of a resource rises, the quantity supplied may actually fall. For example a worker may use an increase in wage rates to work fewer hours and enjoy more leisure time. A backward bending supply of labor implies that a wage increase, which increases the price of leisure, may generate an income effect, boosting the demand for leisure. This income effect is more powerful than the substitution effect and it would cause workers to work more and take less leisure. Click on the link for more information on income and substitution effects and on the backward bending labor supply curve.
backward integration:	Backward integration occurs when a firm acquires and merges with another firm engaged in an earlier stage of the process for a particular good. See also vertical integration and horizontal integration.
backward shifting:	Backward shifting of a tax occurs when the party bearing the legal incidence of the tax (the obligation to write the check to the tax collector) reduces the prices paid to resource suppliers so that the economic burden of the tax falls on resource suppliers. For example, the legal incidence of the Social Security tax is split 50-50 between firms and their employees, but economists tend to agree that the full burden of all payroll taxes are borne by workers. See also forward shifting, payroll taxes, tax burden, and Social Security taxes.
backwardation:	Backwardation occurs when an item has a higher price when it will be delivered sooner than the price promised if the item will be delivered later. Most analysts consider backwardation to be abnormal. For example, a Treasury bond normally sells at a larger discount and yields a higher interest rate if it will mature at a later point in time. Thus, the current (spot market) price of a 10-year-bond that will mature in five years is less than the face value of the bond, which is the price that will be paid to redeem the bond at maturity. Positive interest rates combined with risk aversion by buyers normally yields a higher future price than the spot price for most goods and resources. Contango is the term applied to the normal structure of prices when delivery dates differ.
bad:	A bad is the opposite of a good, and the term applies to anything the consumption of which decreases human happiness. “Bads” include substances (e.g., toxic wastes) or activities (e.g., murder) for which reduction would increase human welfare. A “bad” is an antonym for a “good.” Excessive amounts can transform marginal units of certain goods into bads. For example, a dash of oregano can flavor spaghetti sauce in a good way, but a pound of oregano would spoil a large pot of sauce. The excess oregano would be a bad, not a good.
balance of payments:	The balance of payments accounts are a record of the payments between a country and all the countries with which it trades. International payments are made for (a) international trade in goods (the balance of trade account) and (b) services (the balance of trade plus payments for services are recorded in the current account), and for international financial investments (the capital account). Imbalances in the current account (exports of goods and services minus imports of goods and services) are necessarily offset by compensating imbalances in the capital account, which records outflows of financial capital for the purposes of investing abroad, minus inflows of financial capital when foreign firms invest in the domestic economy. Statistical discrepancies (which can be huge because data are not collected for many transactions) and some minor accounts (e.g., pensions paid to the residents of foreign countries) must also be taken into account. The total inflows of funds must be equal in value to the total outflows of funds, so overall; the balance of payments is always “balanced.”
balance of trade (deficit, surplus):	The relationship between a country’s annual exports and imports of commodities during some period. A deficit in the balance of trade exists when the dollar value of a country’s imports exceeds the value of its exports. A surplus in the balance of trade exists when the dollar value of a country’s exports exceeds the dollar value of its imports. Differs from balance of payments because foreign investment flows and loans, etc., affect payments.
balance sheet:	A balance sheet is an accounting record of the assets and liabilities of an individual or firm. See also income statement.
balanced budget:	A government budget is balanced when its tax (and any other) revenues equal its outlays (spending plus transfer payments). Many classically-oriented economists believe that governments at all levels (federal, state, or local) should balance their budgets annually. Other economists, primarily Keynesians, argue that balancing the government budget “every time the earth circles the sun” is an irrelevant and inappropriate goal, and that during recessions the federal government should run a deficit (spending more than its revenues) to boost Aggregate Demand, but when inflationary pressure builds, the government should run a surplus (spending less than revenues). In this Keynesian view, inasmuch as the federal government can legally print money at will and therefore does not need tax revenues to enable it to write checks, the macroeconomic purpose of taxation is to limit private spending, thereby containing inflationary pressure. See also fiscal federalism.
balanced budget amendment:	The “balanced budget amendment” is a proposed amendment to the U.S. Constitution that would require the federal government to balance its budget each year. Some variants of this proposal would allow exceptions during wartime, or in the event of other extraordinary circumstances.
balanced budget multiplier:	Early Keynesian theorists developed the balanced budget multiplier, which suggests that an equal increase in government spending and tax revenue will boost aggregate demand by precisely the increase in the amount spent. The mathematical equations that underpin the balanced budget theorem (linked here) rely on extremely strong assumptions and would hold only in the most extreme depression imaginable. Consequently, this theory is now widely regarded as inoperative. See also aggregate expenditures, crowding-out, and twin deficit.
balanced growth:	The growth of an economy is termed “balanced” if consumption, investment, and capital all grow at identical constant rates while per capita labor hours per period remains constant. An assumption that growth is balanced is commonly used in modern models of economic growth.
balloon:	A balloon payment is a requirement in some mortgages that the principle owed be fully paid prior to the maturity date used to calculate monthly payments.
bandwagon effect:	The bandwagon effect refers to a type of positive network externality that results from a consumer’s desire to possess a good because other, admired consumers possess the same good. Current fads, styles and trends largely determine the type of goods and to what extent these network externalities have on consumer behavior, such as in the selling of clothing when consumers seek a popular “image.” See also externality, network externality, positional good, snob effect, and Veblen good.
bank:	See commercial bank or investment banking.
bank capital:	Bank capital is the net worth of a bank; i.e. the bank’s assets (e.g., loans) minus its liabilities (deposits).
bank note	A bank note is paper money or currency issued by a bank. Bank notes are basically a promise to pay the owner on demand the amount stated on the face of the note. The Federal Reserve System is now the only institution authorized to issue bank notes in the United States
Bank of England:	The Bank of England is the central bank of England. The conservative policies of the Bank of England during the Great Depression caused John Maynard Keynes to describe its managers as “the little old ladies of Threadneedle Street.” See also central bank.
bank run:	A bank run is a symptom of financial panic, and occurs when numerous depositors become anxious about the stability of a bank and simultaneously try to withdraw their funds. Because the bank has made loans, even sound banks may be unable to immediately satisfy all the people who want immediate access and withdrawal of their demand deposits. See also fractional reserve banking system and financial panic.
banker’s acceptance:	A banker’s acceptance is a short-term security created when, for a fee, a bank accepts liability for payment of another firm’s financial obligations. Banker’s acceptances are frequently used in international payments, and have become widely traded in the secondary market, being purchased primarily by money-market funds.
bankers bank:	Central banks are sometimes described as “banker’s banks” because they provide bank-like services for commercial banks. For example, Federal Reserve System Banks can make “discount loans” to its member banks through the Fed’s discounting operations.
bankruptcy:	Bankruptcy is a legally declared inability or impairment of ability of lone individuals or organizations to pay their creditors. See also insolvency.
barrel:	A barrel is a standard unit of volume used to measure quantities of oil, and equals 42 gallons of petroleum. The international demand for oil is relatively price inelastic, so that fluctuations in the supply of oil have significant impact on global economic growth because of the resulting volatile price of oil.
barriers to entry:	Barriers to entry exist when potential competitors face significant cost disadvantages or other obstacles that make entry into an industry difficult or impossible. Some barriers to entry are natural, as when significant economies of scale favor the survival of only one or a few firms (e.g. public utility companies). Other barriers are legal (e.g., patents, copyrights, and trademarks), or strategic, as when a firm practices anti-competitive policies (e.g., violence from illegal drug suppliers who protect their territories).
barter:	Barter is the process of trading goods or resources for other goods or resources. In a barter system, money is not used as a medium of exchange and standards of living tend to be primitive. Barter is extremely inefficient because of the costs of surmounting the problem that trade requires a double coincidence of wants.
base rate:	The base rate is the lowest interest rate charged by a particular bank for a loan. Lenders often describe the highly publicized prime rate as the interest rate charged their best customers, but the prime rate is not actually the base rate.
base year:	When constructing an index of a variable, such as the Consumer Price Index, the base year is the year in which the value of the index is normalized, usually to 100.
basic economic problem:	The basic economic problem is scarcity, which means that fewer goods are freely available than people want to consume. Economics would not exist as an area of study if it were not for scarcity.
basic economic questions:	The basic economic questions are: (a) what economic goods will be produced, (b) how will resources be used for which types of production, and (c) who will get to use the goods? Some economists also consider as basic economic questions the issues of when will the goods be produced and consumed, and who will decide the answers to the other basic economic problems.
basket:	A basket is a collection of goods. A market basket is a collection of goods that consumers with certain demographic characteristics typically purchase. Such market baskets are frequently used in caluculating price indices. See also bundle.
basis point:	A basis point is on-one hundredth of one percent (0.01%), and usually refers to each .01% in an interest rate.
Bayesian inference:	Bayesian inference is a process of modifying the probabilities estimated about the truth or falsity of a given proposition based upon evidence or observations of data.
bear:	A bear is an investor who thinks that the price of an asset is going to fall, or that average prices for an entire market will fall.
bear market:	A bear market is a period during which prices for most stocks fall sharply, and is usually associated with the beginnings of a recession. Contrast with bull market.
bearer instrument:	A bearer instrument (bearer bond) is a financial security payable to the bearer without further proof of ownership.
bearishness:	Bearishness occurs when financial investors become pessimistic about the economic prospects of certain assets, and shift their funds into other markets, or seek more liquid assets, such as cash, thereby driving down the prices of the assets about which they have become bearish. Contrast with bullishness.
beggar-thy-neighbor policies:	Beggar-thy-neighbor policies are government policies intended to benefit a nation’s labor and producers at the expense of other nations’ producers and labor. Such policies commonly promote import substitution by boosting domestic demands for domestically-produced goods while reducing demands for imported goods. For example, the Smoot-Hawley Act of 1930 raised tariffs on import into the United State substantially, and was intended to boost domestic aggregate demand by reducing imports. Instead, Smoot-Hawley fueled a trade war with other nations in the form of retaliatory tariffs on U.S. exports. The consequent erosion of the normal gains from international trade significantly worsened and prolonged the worldwide Great Depression.
behavioral economics:	Behavioral economics is a subdiscipline that draws from the perspectives of anthropology, psychology, and sociology to identify and explain human behavior that seems inconsistent with the standard economic assumptions that decisionmaking is invariably efficient, rational, and grounded in self interest. Much of behavioral economics draws from recent research by cognitive psychologists indicating that behavior more commonly reflects bounded (limited) rationality, bounded self interest, and bounded will power. See also standard economic theory and prospect theory.
behavioral finance:	Behavioral finance is an emerging approach to the study of finance that tries to explain inefficiencies in the investment strategies of many financial investors as resulting from errors when potential investors process information. See prospect theory, bounded rationality, bounded self interest, and bounded will power for elaboration, and contrast with efficient markets theory.
bell curve:	A bell curve is often referred to as the normal distribution, with mean μ and variance σ². A bell curve is perfectly symmetric about the mean and its spread is measured by the standard deviation σ. This distribution sufficiently approximates probability distributions of several random variables. The bell curve link provides a graphic and more discussion.
benefit principle of taxation:	The benefit principle is the idea that individuals should be taxed in proportion to the marginal benefits that they receive from governmentally provided commodities and services. See also ability to pay.
benefit/cost (cost-benefit) analysis:	A benefit-cost analysis is a systematic evaluation of the economic costs and benefits (estimated in dollar terms) of a proposed policy or course of action.
benefits:	See fringe benefits.
benign libertarians:	People are sometimes labeled as benign libertarians if they believe that markets tend to work efficiently, but they also believe that systematic anomalies – mistakes in human decisionmaking – should be corrected, not through government edict, but rather, by structuring markets so that the default choices that confront people offset these biases. For example, most young people will not save adequately for their retirement, or they will not insure against disability. Benign libertarians might automatically enroll people in a Social Security system and then offer the individual a right to opt out, instead of offering an option of enrolling in Social Security, with the default being not in the Social Security system.
Bentham, Jeremy	Jeremy Bentham [1748-1832] was an eccentric English philosopher and legal reformer who bequeathed to economics the concept of utility, although the roots of utilitarianism [whose followers are sometimes called Benthamites] date back to Protagoras [circa 490BCE-420BCE] and Epicurus [341BCE-270BCE].
bequest motive:	The bequest motive underpins attempts to conserve resources or to generate income and then to save parts of that income so that wealth can be available to succeeding generations. From the perspective of society as a whole, the bequest motive explains the desire to leave future generations sufficient capital and some undisturbed natural resources. For individuals, the bequest motive is often an intent to leave a fortune for one’s heirs. See also sociobiology.
Bertrand competition:	In a Bertrand competition, each firm in a duopoly or oligopoly expects its rivals to keep their prices constant so that the rivals’ customers can be attracted by cutting prices. The ultimate result is a zero profit equilibrium. Bertrand competition is named for the French mathematician Joseph Louis François Bertrand (1822-1900), who rejected the quantity-adjusting model of Antoine Augustin Cournot (1801-1877). See also Cournot competition.
Bertrand duopoly game:	In a Bertrand duopoly game with differentiated products, the competition between rival firms is based on price, but also on product differentiation, which partially depends on cost functions and partially on the structure of consumer demands. Consequently, if products are differentiated, firms can make an economic profit in the long run. This result differs from that in the original Bertrand model, in which survival of both firms compels a price equivalent to pricing under perfect competition. This variant of the Bertrand model does not identify the type or cost of necessary differentiation. See also Bertrand competition, Cournot competition, and game theory.
beta coefficient:	A beta coefficient is an index of how a stock responds to swings in the overall market. The average beta is 1, which identifies a stock that moves perfectly synchronously with the average of all stocks on, e.g., the Standard and Poor 500. Regression analysis is used to calculate betas. A beta greater than one identifies a stock that is more volatile than the market, and a beta of less than one identifies a stock that is less volatile than the market. A portfolio comprising numerous stocks with a weighted average beta of one has been diversified so that, at least based on historical statistics, the holder is exposed to market risk, but not specific risk.
bezzle:	Bezzle is a term coined by John Kenneth Galbraith to describe the total dollar value of corporate chicanery at a given point in time. In his The Great Crash (1950), Galbraith hypothesized that bezzle grows during prosperity, when financial investors happily compute the increased values of their portfolios and corporate books are relatively unmonitored because legislators are urged to eliminate regulatory “red tape” that dampens the vigor of capitalism. However, bezzle shrinks during economic downturns because financial investors who have been clobbered pressure legislators to enact laws that will curb chicanery and fraud, thereby protecting investor wealth.
bid rigging:	Bid rigging is an illegal and fraudulent form of collusive price fixing in which one bidder in an auction is predetermined to win. Bid rigging is facilitated if colluding participants can “take turns” in winning auctions because the auctions are expected to be regular events. For example, bid rigging is facilitated if only a few construction companies are large enough to accomplish major highway projects and these projects are regularly let by auction and awarded to the lowest bidder. Alternatively, used car dealers might take turns submitting the highest bids for cars foreclosed by banks or seized by government agencies, or major oil companies might take turns in winning the rights to drill for oil when new areas are opened up for exploration.
Big Mac index:	The “Big Mac” index is based on the purchasing power parity theorem, and was developed by The Economist magazine to demonstrate that relative prices in various countries for “Big Macs” (and most other traded goods) reflect nominal exchange rates Though not a perfect indicator, the Big Mac index has become a popular way to explain nominal exchange rates to people learning about them for the first time.
bigotry:	Bigotry is a form of discrimination that is partially responsible for the lower average wages of women and members of some minority groups. Bigotry is often manifested in discrimination that, for example, fosters inequitable housing conditions; higher prices being charged, and reduced medical care. See also personal discrimination.
bilateral aid:	Bilateral aid is unreciprocated financial assistance or transfers of goods or resources from one country that promote national security or development in another country.
bilateral monopoly:	A bilateral monopoly exists when a monopoly supplier confronts a monopsonistic buyer.
bilateral trade:	Bilateral trade is international trade between two countries. Bilateral trade agreements usually offer favorable reductions of trade barriers between the two countries not extended to other countries. See also multilateral trade and World Trade Organization.
bimetallism:	Bimetallism is system of commodity money in which monetary values correspond to either a certain amount of gold or a certain amount of silver. The ratio of gold to silver is constant and fixed by law, and the government must obligate itself to redeem in either gold or silver all of the money it has issued. Bimetallism did not work very well when used in the United States in the 19^th century, in part because bimetallism requires stability in the relative production costs of the two metals.
bioeconomics:	Gary Becker defined bioeconomics as the study of how sociobiology [also known as evolutionary biology] explains economic behavior. According to Becker, self-interested competition and capitalism are compatible with our genetic structure, and the unselfish cooperation required for socialism to succeed is inconsistent with the genes that have enabled Homo sapiens to succeed as a species.
black economy:	The “black economy” is also known as the “underground economy,” the “unofficial” economy, the “informal” economy, the “grey economy”, and the “shadow economy.” See underground economy.
Black Friday:	The term Black Friday commonly refers to the Friday after Thanksgiving because it is a big retail selling day. Dramatic increases in sales are signals that boost production and employment, but weak sales are interpreted as symptoms of a slow economy.
black market:	Transactions are considered to be on the black market if they violate legal price ceilings or other laws and regulations.
Black Tuesday:	Huge numbers of stockholders attempted to sell their stocks on Black Tuesday,” October 29, 1929, but there was little interest in buying. The stock market crashed, marking the beginning of the Great Depression.
blacklisting:	Blacklisting was the once common circulation by employers of lists to bar hiring of union organizers or other “troublemakers,” a practice made illegal under the Wagner Act (1935).
Black-Scholes equation:	The Black Scholes equation is a mathematical formula used to calculate the efficient price of an option. Efficient pricing of options was first described in 1900 by the French statistician Louis Bachelier [1870-1946]. Bachelier’s equations were refined by Fisher Black [1938-1995] and Myron Scholes in 1973, and refined further to make the equations more dynamic by Robert Merton. The Black-Scholes equation is now used extensively by analysts and traders in financial markets, especially those who invest in options and other financial derivatives. Scholes and Merton shared the Nobel Prize in economics for this work in 1997. See also dynamic trading and option.
blanket injunctions:	Blanket injunctions prohibit future acts/violations by an employer or a union that have not been committed in the case presently before the court that issues the injunction.
bling:	Bling (shortened from bling-bling) is slang that refers to gaudy jewelry and other extravagant commodities intended to ostentatiously signal the wealth and power in the hip-hop culture of the individual. See also acquisitive society, conspicuous consumption, positional good, and Veblen good.
bliss point:	In welfare economics, a “bliss point” (sometimes called a maximum maximorum) is a global Pareto optimum in which it is impossible for any economic agent to gain unless another economic agent loses. See also optimum optimorum.
block pricing:	Block pricing is a technique based on second-degree price discrimination that is ideally intended to structure utility rates efficiently. Hook-up charges or maintenance charges result in higher prices for the first few units of the good or service than for subsequent “blocks” of the good or service. Open the block-pricing figure for more discussion.
block tariff:	A block tariff uses second-degree price discrimination so that the importer pays one import tariff (tax)