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.

baksheesh:

Baksheesh is a term commonly used in the Middle East to describe a bribe or other illicit payment. A synonym used in Hispanic countries is mordida, and in English speaking countries, baksheesh translates as bribe, or pay-for-play, or payola.

bailout:

A bailout is an infusion of financial capital, commonly a loan or other assistance from government, to forestall the threat of imminent bankruptcy to a firm in the hope that the firm’s assets will stabilize, restoring investor confidence. Bailouts entail an expectation that government will be repaid after economic prosperity is restored. Bailouts erupted in late 2008, when Congress passed the “Emergency Economic Stimulus Act of 2008”, authorizing the US Treasury Secretary to spend up to $700 billion to purchase “toxic” assets from the nation’s troubled banking and investment firms. The Federal Reserve System was also very active in providing funding for troubled firms during this period. See also liquidity.

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.

beauty premium:

A beauty premium seems to be generated in the form of relatively higher incomes for both men and women who, based on anonymous surveys by subjects who do not know whose pictures they are considering, are deemed more attractive because of facial symmetry, strong jawlines and chins, well defined eyes and vivid coloring, or other features thought more attractive. See also height premium and competent-looks premium, and contrast with queerness penalty.

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.

Beige Book:

The Beige Book, (or officially, the “Summary of Commentary on Current Economic Conditions by Federal Reserve District”) summarizes the data collected for each Federal Reserve Districtsand the views of the research staffs in the 12 districts. The Fed publishes the Beige Book eight times annually, but much of the data were introduced in earlier reports, so the Beige Book characterizes Fed interpretations of economic activity moreso than it provides rapid data updates.

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.

Bertrand paradox:

The Bertrand paradox, named after the French mathematician Joseph Bertrand [1822-1900], is a duopoly game that reaches Nash equilibrium when price charged equals marginal cost, and is paradoxical because most models in which equilibrium economic profict is zero and price equals marginal cost require the existence of many competitors. This paradox occurs because Bertrand assumed that each firm persistently tries to undercut its rival until each receives zero economic profits. Bertrand offered this model as a challenge to the quantity adjusting duopoly model created by Antoine Augustin Cournot. In actual markets, product differentiation commonly allows firms to set prices that exceed marginal cost. See also Cournot model, Bertrand competition, Bertrand duopoly game, monopolistic competition and oligopoly.

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 19th 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.

blackboard economics:

Ronald Coase used the term “blackboard economics” while referring to a tendency for mainstream economists to base their characterizations of equilibria on the analystical outcomes of comparative statics, and then to advocate policies (e.g., antitrust) based on these static equilibria. Coase instead favored a less mathematical but still logically rigorous approach that emphasized competition between rivals as a dynamic process that yields innovation, which is more in keeping with the Austrian-oriented views of Richard Cantillon and Joseph Schumpeter. See also pushbutton economics.

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 grant:

A block grant is relatively unrestricted funding from the federal government to a state government or congressional district, permitting the recipient governmental unit significant discretion about how the funds will be allocated, although these grants are frequently categorized as health, education, transportation, or income security.

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) for goods in the first block of imports, and different prices for any more imports of that good in the second or subsequent blocks.

blue chip stock:

A “blue chip” stock is common stock in a large and well established corporation with a relatively low debt-equity ratio and a reputation for reasonably stable earnings and prudent management. “Blue chip” stocks are usually expected to experience less than average price volatility..

blue-collar worker:

A blue-collar worker performs manual labor in direct production in a factory or is in a technical maintenance trade. Most blue collar workers have more skills than unskilled labor. See also white collar workers.

Board of Governors:

The governing body of the Federal Reserve System. Six regular board members are appointed to staggered 14-year terms of office; the Chair is appointed to a four year term.

boiler room:

A “boiler room” is a high pressure telemarketing firm from which con men hype stocks, providing investors with extremely dubious promises of high returns while downplaying risk. Potential investors are discouraged from personally doing any research. The Securities and Exchange Commission estimate that investors lose over $10 billion annually because of these illegal operations. See also Ponzi scheme.

bond indenture:

See indenture.

bonds:

Bonds are documents issued by government or corporations promising to pay certain amounts of money to the holder at specific future dates.

book value:

Book value is the net value of a firm according to its accounting records, and is calculated by subtracting the firm’s liabilities from its assets based on values from the firm’s balance sheet. Book value is based on historical costs, and contrasts with market value.

boom:

A boom is a prosperous period usually characterized by rapid investment in economic capital, steady expansions of output, significant technological innovation, and low rates of unemployment. See also depression, recession, peak, and trough.

boomerang effect:

Social psychologists cite as a boomerang effect the common tendency of people to adjust so that their behavior conforms to their perceptions of social norms or average behavior. For example, people might increase charitable donations if they learn that people in similar circumstances typically donate more to charity, or they might decrease donations upon learning that they had been more generous than other people with similar income and wealth. See also identity economics.

bootstrap banking:

Bootstrap banking refers to operating a financial institution devoted to extending microcredit to impoverished entrepreneurs. These loans are intended to empower people to lift themselves out of poverty by operating their own firms. See also microcredit.

Borda count:

The Borda count is a voting system intended to avoid possible instability or inconsistency associated with simple majority rule or plurality voting. Under a Borda rule, each voter might be allocated a specified total number of points across a number of issues or candidates. Winning candidates or issues depend on rankings by numbers of points received from voters. For example, voters in a school board election in which the five candidates with the highest point totals of votes might each have 100 points to allocate among, say, a dozen candidates. Each voter could allocate as many as 100 points to a single candidate, or as few as zero. The five candidates with the highest point totals would be the winners. The Borda count is intended to be a consensus-based voting method, rather than a majority rule system. Jean-Charles de Borda described the Borda count system in 1770, and argued that it would avoid intransitivies in outcomes and enable voters to indicate the intensities of their preferences. In the 1780s, the Marquis de Condorcet attempted to refute Borda by describing what is now known as the paradox of voting, which was more recently elaborated by Nobel Prize winner Kenneth Arrow.

bottleneck:

A bottleneck is a person or technological or institutional characteristic that hinders accomplishment of a desired activity.

bottleneck facility:

A bottleneck facility is a factory or center for production with capacity limits that reduce the capacity of downstream productive facilities in a supply chain because the downstream facilities have limited access to the intermediate goods produced by the bottleneck facility.

bottom billion:

The bottom billion are the billion poorestd citizens of this world. The majority have not benefitted from globalized modernization and, consequently, have very limited prospects for improving their lives. Most of the bottom billion are concentrated in about 60 countries in sub-Saharan Africa or isolated regions in Asia or South America, although almost all nations have scattered pockets of impoverished residents. See also absolute poverty and relative poverty.

bounded rationality:

Nobel-prize winner Herbert Simon proffered the term “bounded rationality” to describe limits to people’s ability to rationally solve complex problems. Conventional economic theory assumes that every agent (decisionmaker) possesses infinite amounts of infinitely rapid brainpower to optimally solve every problem. Simon observed that many people fail to understand probabilities, and that people universally lack the ability to process information with consistency, precision, and accuracy. Consequently, Simon asserted that consumers often fail to maximize their utility, and that business decisionmakers often fail to maximize profits, so that behavior should be assumed “satisficing” instead of maximizing per se. Simon pointed out that instead of the precise maximization assumed by economists, most people rely heavily on heuristics (cognitive shortcuts), e.g., they make lists, or develop “rules of thumb.” See also heuristics, prospect theory and behavioral economics.

bounded self interest:

Behavioral theorists use the phrase bounded self interest to describe the phenomenon of altruism.  Research indicates that individuals who believe themselves treated fairly in the marketplace tend to engage in charitable activities to benefit other people, contrary to the view that self interest as a motive is narrowly egoistic. (These findings hint that charitable giving is income elastic.) See also prospect theory.

bounded will power:

Behavioral economists have observed that individuals frequently exhibit bounded will power, in that people sometimes knowingly act in ways in the short run that they recognize as inconsistent with their long run self interests. For example, a person who smokes may be very aware of the long run consequences of smoking, but procrastinate on quitting despite knowledge of the likely long term consequences. Procrastination and addiction (to, e.g., gambling, drugs, or alcohol.) are among several categories of behavior that reflect problems associated with bounded will power. See also prospect theory.

boycott:

A boycott is a refusal to transact with an individual, firm, or nation, and usually reflects an attempt to force changes in the entity’s policies. For example, a labor union may urge sympathizers to boycott a firm’s products until the firm agrees to raise wages. In international trade, a boycott is a refusal to import goods from a certain nation, as occurred when an international boycott on trade with Iraq was used to try to change the policies of Saddam Hussein during 1993-2003.

bracket creep:

Bracket creep is the process by which inflation bumps the tax-paying public into higher tax brackets when a tax system is progressive. Bracket creep has largely been eliminated in the United States because the federal income tax system is indexed for changes in the consumer price index.

brain drain:

The term “brain drain” [or human capital flight] refers to a tendency among some of a country’s most skilled workers (e.g., doctors, engineers or academics) to emigrate to countries viewed as being more prosperous or better governed and offering greater opportunities for the skilled workers. Historically, brain drains have entailed massive movements from rural to urban areas and from Europe into North America during the 19th and 20th centuries. Flight by thousands of intellectuals, scientists, writers, artists, etc., from Nazi Germany to the United States in the 1930s was a very significant brain drain.

brand:

A brand is a marketing symbol or name used to distinguish a firm’s product from those produced by rivals. Firms attempt to establish that their brand-name goods have higher value in the minds of potential customers, thereby enabling the firm to gain market share and control over prices.

brand loyalty:

Brand loyalty refers to the tendency of many consumers to continue to buy a particular brand of a good because of brand image or previous satisfaction from a branded good, despite reduced prices or other incentives to switch to a rival brand or a substitute product.

break-even effect:

The break even-effect is operating when an investor who has been losing chooses riskier assets with potential outcomes that could potentially fully restore the investor to a predetermined target level instead of choosing less risky assets with more certain rates of return and higher expected values. The break-even effect is the flip-side of the house money effect and contrasts with the snake bit effect.

break-even point:

The break-even point is the point in an activity where the total value of the benefits received (e.g., revenue) exactly equals the total cost of the activity. In production, break-even occurs at the rate of output at which total revenue equals total cost, so that profit is zero. Also known as normal profits.

Bretton Woods:

The Treaty of Bretton Woods (1944) established both the International Monetary Fund and a fixed exchange rate system with the dollar as the world’s key currency. Other nations agreed to peg their currencies to the dollar. In 1971, the fixed (“pegged”) exchange rate system imploded when the United States rescinded its willingness to exchange gold for dollars proffered by foreign central banks. The International Monetary Fund still exists, however, to assist in settlements of disputes about international payments, and to foster “economic growth through international monetary cooperation and temporary financial assistance.”

bribe:

1) A bribe is an illegal or otherwise forbidden incentive proffered by an agent (buyer or supplier) to a decisionmaker to influence his/her decision in a manner that would be unacceptable to the employer of the bribed decisionmaker.

2) A bribe is an illicit payment to an agent intended to induce betrayal of the interest of the principal who has hired the agent. Bribery of such government agents as employees appears to be more common, or at least more publicized, that bribery of agents in the private sector. In Spanish speaking countries, a bribe is referred to asmordida, and in Arabic countries, the term is baksheesh. Pay-for-play or payola are common English jargon to refer to bribes or, depending on context, to bribery.

bridge loan:

A bridge loan is a loan intended to provide funds only until production is sold, or until a borrower can secure long term financing under more favorable terms. For example, construction loans to a home builder are bridge loans that enable a builder to build a home before a buyer begins paying for it, and farmers may finance planting and harvesting a crop with a bridge loan based on expectations that the lender will be paid when then crop is sold.

brute force:

As an allocative mechanism, brute force involves using violence or other measures to gain command over goods or resources. Brute force tends to be very inefficient relative to many other allocative mechanisms.

bubble:

A bubble is a deviation in the price of an asset from its discounted present value. See also animal spirits, Keynesian beauty contest, irrational exuberance, and present value. Contrast with efficient markets theory and random walk.

bubble approach to abatement:

The bubble approach to the abatement of pollution allows firms to transfer pollution rights between sources within a plant as long as a prescribed standard of environmental quality is met. See also abatement and offset policy. Click on the link for a look into U.S. Environmental Policy.

Buchanan, James

James Buchanan [1919 - ] won a Nobel Prize in Economics in 1986, primarily for pioneering, with Gordon Tullock, the public choice approach, which analyzes government policymaking through the lens of standard economic assumptions about human motives and behavior. Political scientists call this approach the rational choice model, or more simply, rat choice.

Buddhist economics:

Buddhist economics is the label that E.F. Schumacher applied to the notion that Small is Beautiful [the title of his bestselling book], which Schumacher based heavily on the economic ideas of Mohandas Gandhi. Buddhist economics views simplification and the minimization of wants as crucial to solving the problem of scarcity, and following Gandhi, favors self-sufficiency and small local industries with a minimal footprint on the Earth.

budget:

A budget summarizes constraints (e.g., income) on spending, or a budget may be a plan on what will be purchased, or a record of how much was spent.

budget constraint:

A budget constraint is the boundary that separates affordable from unaffordable purchases. See also budget line.

budget deficits:

A budget deficit exists when government revenue is less than its outlays, and may be financed by the federal government: (a) by having the Treasury issue bonds, which entails an increase in government debt, or (b) by printing new money (monetary base), whereby the central bank purchases the Treasury bonds. The budget equation for the federal government can be summarized as G = T + ΔB + ΔMB. In the United States, whether the budget deficit (G-T) is covered by net new national debt (Δ in Treasury bonds) or by printing monetary base (ΔMB) is determined by the open market operations of the Federal Reserve System. See also absorption problem, crowding out, fiscal policy, monetary policy, open market operations, and budget surplus.

budget line:

A budget line is a line connecting all combinations of goods that cost the same amount as the consumer’s income. See also opportunity set and isocost. Click on the link for indifference curves for a look into budget lines at work.

budget neutrality:

Budget neutrality is the concept that any new government policies or programs should not increase the federal deficit. Increases in spending in some areas must be offset by reductions in other spendings. See also revenue neutral.

Budget Reduction Act of 1993:

The 1993 Budget Reduction Act enacted at the urging of President Clinton was a centerpiece of “Rubinomics” that expanded tax brackets to five and raised marginal tax rates on high-income individuals. Brackets were: 15%, 28%, 31%, 36%, and 39.6%. “Supply-side oriented analysts opposed it, predicting that it would usher in a recession. Instead, capital markets flourished and the economy grew so strongly that by 1999, there was discussion that the federal debt might be retired. The recession that began in 2000 combined with tax cuts instituted in 2002 at the urging of President Bush reversed this trend. See also progressive taxes, marginal tax rates.

budget surplus:

The budget equation for the federal government can be summarized as G = T + ΔB + ΔMB, where G = government outlays, B = national debt, and MB = the monetary base. A budget surplus exists when government revenues exceed outlays, and this necessitates either (a) having the Treasury retire bonds, thereby reducing government debt or (b) reducing the monetary base. In the United States, whether a budget surplus (G-T < 0) is accommodated by retiring national debt (a negative Δ in Treasury bonds) or by reducing monetary base (ΔMB) is determined in part by the open market operations of the Federal Reserve System. See also absorption problem, crowding out, fiscal policy, monetary policy, open market operations, and budget deficits.

built-in inflation:

Built-in inflation is a term sometimes applied when inflationary momentum is sustained by past government policies and the expectations of household and business decisionmakers that inflation is likely to continue. Price changes thought to reflect transitory events in only such specific markets as food or energy are not included when analysts refer to built-in inflation. See also core rate of inflation.

bull:

A bull is an investor who thinks that the price of an asset is going to rise, or that average prices for an market will rise.

bull market:

A “bull market” is a period when the prices of most stocks are rising, and is usually associated with economic prosperity. See also bear market and speculative bubble.

bullionism:

Bullionism is an economic theory developed in Europe in the early eighteenth century as an extension of mercantilism, and suggests that a nation’s prosperity is measurable by the amounts of precious metals it possesses. See also mercantilism.

bullishness:

Bullishness occurs when financial investors become more optimistic about the economic prospects of certain assets, and shift their funds from other assets into these assets, thereby driving up the prices of the assets about which they have become bullish. Contrast with bearishness.

bundle:

1.      Economists often refer to a particular collection of goods as a bundle. The conventional theory of consumer preferences assumes that individuals can identify which of any two bundles (e.g., bundle A and bundle B) they prefer [A > B or B > A], or if they are indifferent between the two bundles [e.g., A ~ B].

2.      Alternatively, a bundle is a collection of somewhat disparate assets that have been grouped together so that a financial investor can purchase an overriding security that represents ownership of all the component assets, thereby reducing specific risk by providing “built-in” diversification for the investor.

bundling:

1. The practice of giving quantity discounts (buyers who purchase large quantities are charged a lower price) is sometimes referred to as bundling.

2. In financial markets, bundling is an aspect of securitization in which disparate assets are collected into a bundle, and a security is issued that relies for value on the income stream expected from such assets.

3. Bundling is also used to refer to cutting the price of a combination of several goods, where the bundled price is less than the amount buyers would pay if they bought the items separately. This practice is also known as product bundling.

burden of a tax:

See tax burden.

Bureau of Labor Statistics:

The Bureau of Labor Statistics (BLS) is the agency in the US Department of Labor that collects and publishes labor force data and price information that is used to compute the Consumer Price Index.

bureaucracy:

A bureaucracy is any large organization, whether private or public, with many employees, called bureaucrats. Bureaucracies tend to be governed by many rules and regulations, called red tape.

bureaucratic inertia:

Bureaucratic inertia refers to the tendency of complex organizations to resist changes in the environment in which the organizations operate. Decisionmakers and other employees tend to think that they will continue to be paid and to do the same types of tasks even if some aspects of the organization are severely endangered, or despite the emergence of new opportunities. This inertia characterizes both public and private bureaucracies.

burn rate:

The burn rate is the rate at which a fledgling firm spends its initial financial capital (e.g., funds from a venture capitalist or an initial public offering) for sunk costs (e.g., new economic capital or research and development expenses) before producing a positive cash flow.

business cycles:

Business cycles are alternating periods of expansion and contraction in economic activity.
See Business Cycle Theory

business firms:

Business firms are centers for production that sell goods in output markets and buy services in resource markets. See Business Organization Problems See Forms of Business

Buy American campaigns:

“Buy American” campaigns are pleas to purchase domestic products instead of imported goods that entail asking or requiring people to act against their own self interests. Such nationalistic policies reduce the gains from trade.

buy-and-hold:

Buy-and-hold refers to the investment strategy of minimizing transaction costs (e.g., brokerage fees) by buying financial assets when an individual wants to increase their total savings, and selling assets only when the individual chooses to spend from accumulated savings. The buy-and-hold strategy is the most efficient strategy for managing a portfolio, according to efficient markets theory.

buydown:

A buydown is a payment to a lender that exceeds the scheduled periodic payment, thereby reducing the principal owed by a debtor so that scheduled payments are reduced. For example, a homeowner may make a buydown payment to reduce subsequent monthly mortgage payments.

buyers’ market:

A buyer’s market exists when the prevailing market price lies above the equilibrium price, resulting in a surplus. Prices usually fall because at existing prices, firms would like to sell more goods or services than consumers want to buy.

bystander effect:

The bystander effect refers to a tendency for individuals to fail to act when in a crowd observing an emergency even if they would act if they were alone because they rely on other members of the crowd to somehow resolve the problem. The bystander effect is a form of free riding because bystanders apparently expect that someone else will probably bear any costs associated with intervention. See also free rider.