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Economic Terms

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Bad Good

Is a good that when consumed yields disutility i.e consumption is unpleasant or does not lead to satisfaction or positive utility. For example if a consumer consumed expired food that makes you ill, this would be an example of a bad good as after consumption the consumer will have less utility than before. In effect these goods ar just opposites of a normal good.

However, there is some subjective judgement over whether a good is beneficial to consume or in fact it leads to reduced utility. For instance, even though the health effects of smoking can make smoking a bad, smokers believe they enjoy smoking which make it a good at the time of consumption.


Balance of payments account

A financial document that measures a country’s economic activities with all other countries over a period of time. These documents are made up of two different accounts: Current Account and Financial Account.

The current account is a main measure of trade of goods and services between other countries and therefore is a sign of the relative competitiveness of a country to the rest of the world. The financial account is a measure of financial flows between countries such as trades of financial assets. These documents must balance and therefore if a country is running a large deficit on one of the accounts then they must have a similarly large surplus on the other account to make the balance of payments 'balance'.

The diagram below shows the UK's balance of payments position from the years 1946-2010. The most striking image from this diagram is that the UK have been continuing to finance a growing current account deficit with a growing financial account surplus i.e. selling financial assets to borrow money to finance the deficit on goods and services to live beyond ther means. 

 


Balance of trade in goods

The value of goods exported minus the value of goods imported.

Balance of trade in services

The value of services exported minus the value of services imported.

Balance Sheet

A financial account that reports a company's assets, liabilities and net worth position of a bank. This account provides a neat summary of the bank's performance levels over a given financial year for shareholders and investors alike.

Below is an example of some of the typical instruments that would appear on both sides of the balance sheet for a financial institution.


Balanced budget

When the amount of tax revenue forecast in the Government’s budget is equal to the cost of all planned expenditure.


Bank Failure

Occurs when a bank becomes technically insolvent (liabilities > assets) and all of the equity capital for the bank has been exhausted i.e. it no longer has any equity capital to act as a buffer stock and absorb losses that the bank makes.  

The process of a bank failure is as follows: The bank's assets fall in value on the balance sheet because of non-performing loans (NPLs) and this makes the bank a loss which the equity capital must cover, but as the equity capital shrinks the bank becomes more vulnerable on its balance sheet. Eventually (if these loses continue) they will become insolvent when the losses they have made on assets exceed the level of equity capital.

 

 

 


Bank of England

The UK’s central bank. Responsible for maintaining a stable banking system by:

  1. Managing the currency, money supply and interest rates.
  2. Supervising commercial banks.
  3. Providing liquidity in times of crisis (lender of last resort).

The Governor of the Bank of England is Mark Carney. He is a Canadian banker and chairs the Monetary Policy Committee which manages monetary policy on behalf of the Government.

 

 


Bank rate

The rate of interest at which the Bank of England charges banks for secured overnight lending (secured by gilt holdings). Banks can borrow from the Bank of England when they have an urgent need for finance because they are not able to borrow money at viable rates from other sources. This rate is also known as the Repo Rate

In theory there should be a correlation between the bank rate and other interest related variables such as the rate at which commercial banks decide to lend to businesses and consumers at. The idea is that if the bank rate falls it should create cheaper and easier credit for borrowers across the economy. The diagram below summarises the influence that changes in the bank rate have on the rest of the economy over time. 

 


Bank Run

When depositors have a rational marginal propensity to withdraw their money earlier than they would optimally like to do so. This is caused because of the fear that if a bank goes bankrupt the deposit they had placed in the bank will also disappear. Bank runs are prompted via a bad performance from the bank announced publically and thus prompting depositors to fear their deposit is no longer safe.


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