Definitions Flashcards
Aggregate Demand
- Total amount of effective demand in an economy
- AD = C + I + G + (X-M)
Consumption
Total spending by households on goods & services in the domestic economy
Investment
Firms spending on capital goods to improve productive capacity
Government Spending
When the government spend money to influence economic activity in the SR or LR
SR & LR stand for short-run and long-run
Net exports
Total value of a country’s exports, minus the total value of their imports
Marginal propensity to consume
The extent to which consumers are willing to spend any additional income earned on consumption
Marginal propensity to invest
The extent to which firms are willing to spend additional retained profit on purchasing capital goods, to improve productive capacity
Marginal propensity to import
The extent to which consumers are willing to spend any additional income earned on importing goods or services
Big-ticket purchase
A large purchase which usually involves borrowing money, (Ex: Buying a house or a car)
Retained profit
Refers to the amount of profit a business has left over after paying corporation tax
Current spending
Expenditure on day to day costs of running public services, (Ex: Paying public sector wages)
Capital spending
Expenditure by the government on infrastructure projects, for the future benefit of the economy, (Ex: HS2)
Aggregate supply
The total amount of goods and services produced in the economy
SRAS
- How much output firms will be willing to supply in short-run
- At any given price level
LRAS
How much output firms will be willing to produce when the economy is at full capacity
Red Tape
Administrative burdens revolving around business regulation
Can increase the cost of production
Macroeconomic equilibrium
AD = AS
YFE
- Point where LRAS curve becomes perfectly inelastic
- Represents full employment
Potential economic growth
An increase in the productive capacity of the economy
Shown by an outward shift in LRAS or an outward shift in an economy’s PPC
Actual economic growth
An increase in an a country’s RGDP measured over a period of time
Percentage change
%Δ = change/original x 100
Productivity
A measure of efficiency for a given factor of production
Causes of potential economic growth
A change in the quality or quantity of a factor of production
Causes of actual economic growth
Anything shifting AD outwards - [AD = C + I + G + (X-M)]
This is because RGDP which has to increase for actual growth to occur is on the X-axis of a ADAS diagram
Human capital
The economic value of a worker’s skills, experience and expertise
Can be increased by training/education
Physical capital
Man-made capital goods used to enhance the production process
Unemployment
When an individual who is economically active is currently not employed, but are seeking work
Working population
All people between the ages of 16 and 64
Workforce
All people who are economically active, whether in employment or not
Economically active
People of working age who are either in employment or are currently seeking work
Economically inactive
People of working age who are not employed or seeking work for a variety of reasons
Discouraged workers
People who have been unable to find a job and have become so discouraged, that they are no longer searching for employment
Unemployment rate formula
Unemployment rate = unemployed/workforce x 100
Claimant Count
- Measure of unemployment
- Based on how many people apply for benefits such as job seekers allowance, (JSA)
ILO Labourforce Survey
- Measure of unemployment
- Survey 80,000 houses across UK
- Asks whether anyone in household has been out of work for 4+ weeks
- Then they ask if someone has been out of work for 4+ weeks, would they be willing to start work in 2 weeks
- If the answer is no, then they are classed as unemployed
Demand-defficient unemployment
Unemployment caused by there not being enough demand in an economy
This can be shown on an ADAS diagram by an inward shift in aggregate demand - Negative output gap
If there is not enough demand for goods and services, then firms produce less, meaning they require less labour
Structural unemployment
Unemployment caused by the structure of an economy changing, (Ex: A country moves from primarily the primary sector towards offering tertiary services)
Occupational immobility
When workers do not have the skills to adapt to the restructured economy
Geographical immobility
When workers struggle to get jobs in restructured economy due to a change in location of employment
Ex: If you were a miner, up North and you become unemployed because the structure of the economy changes towards tertiary sector services. Even if you acquire the necessary skills to have a tertiary sector job, you may not be able to relocate to where these new jobs are, as the area may be too expensive, or you may have to look after family.
Frictional unemployment
When people are temporarily unemployed as they are searching for a new job
Technological unemployment
Occurs when technological advancement causes workers to lose their job
This is a type of structural unemployment
Seasonal unemployment
When people find themselves unemployed during certain seasons because their jobs are seasonal
Underemployment
This is when workers are employed but they are not working as many hours as they would like to, or they are not utilising their skillset
Ex: If someone studies medicine at the University of Cambridge and then they work in a coffee shop, they will be considered as underemployed, as they are not utilising their skillset by in a coffee shop - However, they would be if they worked for the NHS
Inflation
The general sustained upward motion in the price of goods and services in the economy over a given time period, specifically 2 quarters of the year, (6 months)
Consumer Price Index
A measure of the general price level
Deflation
General sustained downard motion in the price of goods and services in an economy over a given time period, causing a negative rate of inflation
Disinflation
Refers to when the price level is still rising but at a slower rate than previous years
Demand-pull inflation
Inflation which is caused by an increase in aggregate demand, (AD shifting outwards)
Cost-push inflation
Inflation caused by an increase in the cost of production for firms and therefore a decrease in AS, (AS shifting inwards)
Fiscal policy
Policy aiming to change taxation, and, or government spending, in order to influence economic activity
Expansionary fiscal policy
- Changes made to taxation or government spending, in order to try and increase aggregate demand
- Ex: Lowering taxation, as it would lead to consumers having more real disposable income to spend on consumption, (higher marginal propensity to consume)
Contractionary fiscal policy
- Changes made to taxation or government spending, in order to try and decrease aggregate demand
- Ex: Decreasing government spending, as it is a key component of aggregate demand
Monetary policy
Changes made by central bank in regards to interest rates, money supply and the exchange rate, in order to influence aggregate demand
Expansionary monetary policy
- Changes are made to interest rates, money supply or the exchange rate, in order to try and increase aggregate demand
- Ex: Reducing interest rates so consumers have a smaller marginal propensity to save, meaning that they are more likely to consume, leading to an increase in consumption and AD
Contractionary monetary policy
- Changes are made to interest rates, money supply or the exchange rate, in order to try and decrease aggregate demand
- Ex: Increasing interest rates so the cost of borrowing for firms is higher, meaning that they have a lower marginal propensity to invest, causing investment and AD to decrease
Supply-side policy
Policies aiming to increase the long-run productive potential of an economy
This means policies that would cause LRAS to shift outwards
Government budget
A document written by Government officials that estimates their expenditure and revenues for the next fiscal year
Government budget deficit
Also known as budget deficit
- This is when Government expenditure is greater than Government revenues
- Meaning that the Government are spending more than they are making
Government budget surplus
Also known as budget surplus
- This is when Government expenditure is lower than Government revenues
- Meaning that the Government are spending less money than they are making
Balanced Government budget
A situation in which Government expenditure equals Government revenues
Marginal propensity to save
The willingness of a consumer to save any additional income earned
This is the antithesis of marginal propensity to consume
Hyperinflation
A situation where inflation reachers extreme or excessive rates
National debt
The total amount of Government debt, based on the accumulation of defecits and surpluses over the years
Real values
Data that has been adjusted for inflation
Nominal values
Data that has not been adjusted for inflation
Direct tax
A tax imposed directly on income, (Ex: Income or corporation tax)
Progressive tax
A tax in which the marginal tax rate rises with income, (meaning the more income you earn, the higher % of tax you will pay, up until the highest tax bracket)
Regressive tax
A tax in which the marginal rate of tax falls with income, (meaning that the more income you earn, the less % of tax you will pay on your income earned)
Tax-free allowance
The amount of money an individual is capable of making before paying income tax
Proportional tax
A tax that is proportional to how much income you earn, being neither progressive or regressive
Transfer payments
Payments made by the Government that isn’t in exchange for goods, services or productive output, (Ex: Job seekers allowance - JSA)
Transmission mechanism of monetary policy
The process by which monetary policy affects aggregate demand
Ceteris paribus
‘All things remain equal’
Mainly used in evaluation to indicate that in order to come to the conclusion you have, you have had to isolate one variable as there are too many variables in play in order to factor all of them in
Inflation targeting
When the central bank is given independence to set interest rates in order to meet an inflation target
Subsidy
When the Government offer firms financial support so they can lower their cost of production
Meaning that they could pass on lower prices to consumers, (which may be beneficial - However, the extent to which it is depends on PED)
Protectionism
Refers to the act of guarding a country’s industries from foreign competition and restrict international trade
Tariff
When the Government places taxes on imports
This means that consumers have to use more disposable income to purchase goods internationally, which incentivises domestic consumption
Quota
Government-imposed trade restriction which limits the number of goods which can be imported
Domestic Subsidy - Protectionism
When the Government grant subsidies to domestic firms so that they can lower their cost of production and therefore pass on lower prices to consumers
This allows domestic firms to not only stop consumers from importing goods, (as it is becoming cheaper to buy domestically), but also allows these firms to be more competitive in international markets
Embargoes
Complete bans on trade with a particular country
Red tape - Protectionism
Excessive administrative burdens which increase the cost of production for firms and disincentivise them to import to that particular nation
Infant industries
- Firms in early stages of development
- Who need to be protected from international competition in the short-run, as they cannot compete with larger firms who can benefit through economies
- Protection of these firms may allow them to become more competitive, eventually being able, like their international rivals, to benefit from economies of scale
Sunset industries
Firms which have been around for a long time, who are coming to the end of their lives, and are less successful now than they once were
Dumping
When the Government purchases an excess supply of goods and sells them below their cost of production in other country’s
Absolute advantage
When a nation can produce a good or service using fewer factors of production than another nation
Comparative advantage
When a nation can produce a good or service with a lower opportunity cost than another nation
Law of comparative advantage
Theory that argues that there may be gains from trade, if countries specialise in the production of goods that they have comparative advantage in
Trade possibility curve
Shows the consumption possibilities under conditions of free trade
Terms of Trade - TOT
The ratio of a country’s export price index, relative to import price index
Terms of Trade Formula
TOT = Price export index/Price import index x 100
Favourable movement in TOT
Caused by:
* An increase in the price export index, relative to the price import index
* A decrease in the price import index, relative to the price export index
Unfavourable movement in TOT
Caused by:
* An increase in the price import index relative to the price export index
* A decrease in the price export index relative to the price import index
Trade Liberalisation
A process of moving towards freer trade by removing protectionist measures and restrictions on trade
Consumer Sovereignty
When consumers are free to make their own choices
Non-tariff barrier
An obstacle to free trade ofther than a tariff, (Ex: Quotas)
Balance of Payments
A record of all financial transactions made between one country and the rest of the world over a given period of time, (usually a year)
Current account
Component of balance of payments comprising of primary income, secondary income, exports of goods & services and imports of goods & services
Primary income
Net factor incomes from abroard
Secondary income
Remitance payments and aid
Exchange rate
The price of one currency in terms of another
Appreciation
When the value of a currency increases, compared to the value of other currencies - SPICED
Depreciation
When the value of a currency decreases, compared to the value of other currencies - WPIDEC
Cyclical cause of a current account deficit
Current account deficit caused by demand factors, (Ex: Strong exchange rates - SPICED)
Example given depends on PED
Structural cause of a current account deficit
Current account deficit caused by supply factors, (Ex: High unit labour costs - Higher prices passed onto consumers - This will cause export revenue to decrease as they will be less competitive - Assuming goods are price elastic)
Demand
The quantity of a good/service consumers are willing and able to buy at any given price level, in a given time period
Supply
The quantity that producers are willing and able to sell at any given price level, in a given time period
Price Elasticity of Demand - PED
- The extent to which changes in price influence the change in quantity demanded
- PED = %ΔQD/%ΔP
PED = 0
Perfectly inelastic
PED = 1
Unitary elasticity = Revenue stays the same
PED = Less than 1
Depending on how close it is to 0 or 1, it could be either relatively inelastic or relatively elastic
PED = Greater than 1
PED is elastic
Income Elasticity of Demand - YED
- Measures how responsive quantity demanded is to changes in income
- YED = %ΔQD/%ΔY
YED = Less than -1
Elastic inferior good
YED between -1 and 0
Inelastic inferior good
YED = 0
There is no relationship between income and quantity demanded
YED between 0 and 1
Inelastic normal good
YED greater than 1
Elastic normal good
YED of necessity
Between 0 and 1 - Inelastic normal good
If your real disposable income rises, the chances our your quantity demanded of tooth paste won’t increase by much as you already buy the amount you need - However, you may bulk buy it or store more of it, meaning your quantity demanded may go up slightly - Meaning that necessities are relatively inelastic normal good
Cross Elasticity of Demand - XED
- XED measures how the quantity demanded of one good is impacted by the price of another good
- XED = %ΔQD good X/%ΔP good Y
XED = Less than -1
Elastic complement, (Close complements) - QD of good X will be responsive to changes in P of good Y
XED = Between -1 and 0
Inelastic complement, (Weak complements) - QD of good X may still change, if the P of good Y changes, but it will be fairly unresponsive
XED = 0
There is no relationship between the QD of good X and the P of good Y
XED = Between 0 and 1
Inelastic substitute, (Weak substitute) - Consumers are reluctant to change their preferences, meaning QD of good X will be fairly unresponsive to changes in P of good Y
XED = Greater than 1
Elastic substitute, (Strong substitute) - Consumers are willing to change their preferences, meaning QD of good X will be responsive to changes in P of good Y
Complement
Goods which are commonly used together - (Ex: Milk and coffee powder)
Substitute
Two goods that could be used as alternative goods - (Ex: iPhones and Android phones)
Price Elasticity of Supply - PES
- How sensetive quantity supplied is to changes in price
- PES = %ΔQS/%ΔP
PES = Less than 1
QS is fairly unresponsive to changes in p
PES = Greater than 1
QS is fairly responsive to changes in P
Economic problem
Economic agents have unlimited wants and needs, but scarce resources to satisfy them
Scarcity
A situation which arises because people have unlimited wants and needs, but limited resources to satisfy them
Opportunity cost
The cost of the next best alternative forgone when making a choice
Positive statement
A statement that can be tested to see if it is true or false
These statements are fact-based and objective
Normative statement
A statement that cannot be tested and therefore requires a value judgement
Suceptible to human biases
Value judgement
A statement based on your own views and beliefs, rather than facts, (includes biases)
Capital
Man-made aid to production
Enterprise/Entrepreneurship
Risk-taking individual who organises the other factors of production
Land
Natural resources available to the wider economy
Labour
Human resources available to the wider economy
Reward: Capital
Interest/Rate of return
The return that the firm gains from using the capital good in it’s production process
Reward: Enterprise/Entrepreneurship
Profits made by the firm, which an entrepreneur will receive in the form of a divident
Reward: Land
Income generated by the land, in the form of rent or mortages generate
Reward: Labour
The wages they make for doing their job
Division of Labour
Process by which firms split their production process into smaller tasks and assign these to their workers, based on their strengths
Specialisation
When workers carry out a specifc task or tasks, based on their skillset
Free market economy
An economic system where market forces are allowed to guide the allocation of resources, within a society, (Price mechanism)
No government intervention is used in terms of allocating resources
Price mechanism
Centrally planned economy
An economic system where decisions on resource allocation are made by the Government
Mixed economy
An economic system where resources are allocated partially based on market forces, (supply and demand + price mechanism), and partially based on input from the Government
Transition economy
When a country moves from using a centrally planned economic system to a free market system
Information failure
When a participant in an economic exchange doesn’t have perfect information/knowledge, or they do not know as much as another participant in the exchange
Production Possibility Curve - PPC
- A graphical illustration of opportunity cost
- Shows the production combinations of two goods or services within an economy
- With a given amount of factors of production, (assuming they are used efficiently)
- It also shows an economy’s productive potential
Shift: PPC
A change in the quantity or quality of any given factor or production + Causes an increase in an economy’s productive potential
Moement: PPC
When resources have been reallocated in order to increase the supply of one good/service and decrease the supply of another good/service
Public good
A good which is both non-excludabale and non-rivalrous in nature, leading to the free-rider problem
Non-excludabale
- You cannot restrict someone from benefiting from the public good or service - Meaning you cannot charge for it
- Ex: A sea wall will stop flooding and protect everyone in that area, even if they haven’t contributed to paying for it
Non-rivalrous
- The good is available to all citizens
- One person consuming it doesn’t prevent another person from consuming it
- Ex: If someone walks past a street lamp at night, the light won’t become darker everytime a person walks past it
Free-rider problem
- When a consumer cannot be excluded from using a good as it is non-excludable and non-rivalrous
- This means they may overconsume it
- They therefore have no incentive to pay for the good to be provided
Quasi-public good
Private good
A good which is both excludable and rivalrous in nature
Excludable
- Private goods can be excluded based on price
- Ex: Someone could be excluded from purchasing a pair of shoes, because they have a budget of £50 and the shoes are £55
Rivalrous
- If someone consumes a private good, then it may prevent another consumer from consuming it
- Ex: If someone buys a bar of chocolate off a shelf, then there is one less chocolate bar - Meaning that for every consumer that buys a bar of chocolate, there will be less left over
Free good
A good which is not scarce and has no opportunity cost, (Ex: The air we breathe)
Merit good
- Goods or services which can offer private benefits and can have positive externalities on wider society
- Government’s believe that these goods are underconsumed in a free market economy - Potentially due to imperfect information
Demerit good
- Goods or services that can be harmful as well as addictive
- These goods are sadly often over-consumed due to information failure
- May offer negative private benefits and negative externalities to the wider economy
