Key Words Flashcards
Absolute advantage
a country has an absolute advantage if it can record of all the currency flows into and out
of a country in a particular time
Accelerator
a change in the level of investment in new capital goods induced by a change in national income or output. The size of the accelerator depends on the economy’s capital-output ratio.
Actual output
level of real output produced in the economy in a particular year - not to be confused with the trend level of output, which is what the economy is capable of producing when working at full capacity. Actual output differs from the trend level of output when there are output gaps;
AD
total planned spending on real output in the economy at different price levels.
AS
the level of real national output that producers are prepared to supply at different average price levels.
Aid
money, goods and services, and
‘soft loans given by the government of one country or a multilateral institution such as the World Bank to help another country. Non-government organisations (NGOs) such as Oxfam also provide aid.
Assets
a resource (physical or otherwise) that can be sold for money.
Automatic stabilisers
fiscal policy instruments (e.g. progressive taxes and income-related welfare benefits) that automatically stimulate aggregate demand in an economic downswing and depress aggregate demand in an upswing, thereby ‘smoothing’ the economic cycle,
Availability of credit
funds available for households and firms to borrow,
balance of payments
a record of all the currency flows into and out of a country in a particular time period.
Balance of payments equilibrium
a situation in which a deficit or surplus on the current account of the balance of payments is exactly matched by capital inflows or outflows in the other parts of the balance of payments.
Balance of Primary income
comprises inward income flowing into the economy in the current year, generated by UK-owned capital assets located overseas le.g. shares owned in foreign companies, or land owned overseas, and outward flows of income from the economy in the current year, generated by overseas-owned capital assets located in the UK.
Balance of secondary income
current transfers leg. gifts of money, international aid and transfers between the UK and the EU], flowing into or out of the UK economy in a particular year.
Balance of trade
the difference between the money value of a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments on current account.
balance of trade deficit
when the money value of a country’s imports exceeds the money value of its exports.
Balance of trade in goods
the part of the current account measuring payments for exports and imports of goods. The difference between the total value of exports and the total value of imports is sometimes called the ‘balance of visible trade’
Balance of trade in services
part of the current account, the difference between the payments for the exports of services and the payments for the imports of services,
Balance of trade surplus
when the money value of a country’s exports exceeds the money value of its imports
Balanced budget
achieved when government spending equals
government revenue (G = TI.
Bank rate
the rate of interest that the Bank of England pays to commercial banks on their deposits held at the Bank of England lit is also referred to as the base ratel
bonds
financial securities sold by companies (corporate bonds) or by governments (government bonds] which are a form of long-term borrowing. Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures).
broad money
the part of the stock of money (or money supply| made up of cash, other liquid assets such as bank and building society deposits, but also some illiquid assets. The measure of broad money used by the Bank of England is called M4.
budget deficit
occurs when government spending exceeds government revenue (G > T).
budget surplus
occurs when government spending is less than government revenue (G < T).
capital gain
the profit made on the buying and selling of financial and other assets (capital losses are the losses made in buying and selling assets).
capital markets
where securities such as shares and bonds are issued to raise medium- to long-term financing, and are traded on the ‘second-hand part of the market le.g. the London Stock Exchange and the New York Stock Exchange),
capital ratio
the amount of capital on a bank’s balance sheet as a proportion of its loans.
central bank
a national bank that provides financial and banking services for its country’s government and banking system, as well as implementing the government’s monetary policy and issuing currency. The Bank of England is the UK’s central bank.
The European Central Bank (ECB) implements monetary policy for countries using the euro as their official national currency.
claimant count
the method of measuring unemployment according to those people who are claiming unemployment-related benefits (Jobseeker’s Allowance).
closed economy
an economy with no international trade.
commercial bank (high street bank and retail bank)
or high street bank) a financial institution which aims to make profits by selling banking services to its customers.
Commercial bills
short-dated debt (usually three months to maturity)
issued by private businesses, which pays the holder a fixed rate of interest.
Comparative advantage
this is measured in terms of opportunity cost: the country with the least opportunity cost when producing a good possesses a comparative advantage in that good.
consumer price index
the official measure used to calculate the rate of consumer price inflation in the UK. It calculates the average price increase of a basket of 700 different consumer goods and services.
consumption
total planned spending by households on consumer goods and services produced within the economy,
contractionary fiscal policy
uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left.
contractionary monetary policy
uses higher interest rates to decrease aggregate demand and to shift the AD curve to the left.
corporate bonds
debt security issued by a company and sold as new issues to people who lend long term to the company. They can usually be resold second hand on a stock exchange.
corruption
a barrier holding back economic growth and development, especially in less developed economies.
cost push inflation
(also known as cost inflation) a rising price level caused by an increase in the costs of production, shown by a shift of the SRAS (or Keynesian AS) curve to the left.
coupon
the guaranteed fixed annual interest payment, often divided into two six-month payments, paid by the issuer of a bond to the owner of the bond.
credit
when a bank makes a loan, it creates credit. The loan results in the creation of an advance, which is an asset on the bank’s balance sheet, and a deposit, which is a liability of the bank.
credit crunch
occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain finance and leading to a rise in the cost of borrowing.
crowding out
a situation in which an increase in government or public-sector spending displaces private-sector spending, with little or no increase in aggregate demand,
Currency union
an agreement between a group of countries to share a common currency, and usually to have a single monetary and foreign exchange rate policy.
Current account deficit
when currency outflows in the current account exceed the currency inflows.
Current account
measures all the currency flows into and out of a country in a particular time period in payment for exports and imports of goods and services, together with primary and secondary income flows (previously known as ‘income flows and transfers’).
Current account surplus
when currency inflows in the current account exceed the currency outflows.
Customs unions
trading blocs in which member countries enjoy internal free trade in goods and possibly services, with all the member countries protected by a common external tariff barrier.
cyclical budget deficit
the part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle.
Cyclical U/P
(also known as Keynesian unemployment and demand-deficient unemployment)
unemployment caused by a lack of aggregate demand in the economy, occurring when the economy goes into a recession or depression.
dept
people’s financial liabilities, or money that they owe.
Deficit financing
deliberately running a budget deficit and then borrowing to finance the deficit.
Deflation
a continuing tendency for the average price level to fall.
demand side
relates to the impact of changes in aggregate demand on the economy; associated with Keynesian economics.
demand pull inflation
(also known as demand inflation) a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right.
demand side fiscal policy
used to increase or decrease the level of aggregate demand land to shift the AD curve right or left] through changes in government spending, taxation and the budget balance.
deregulation
involves removing previously imposed regulations. It is the opposite of regulation.
direct tax
a tax that cannot be shifted by the person legally liable to pay the tax onto someone else.
Direct taxes are levied on income and wealth.
discretionary fiscal policy
involves making discrete (separate) changes to G, T and the budget deficit to manage the level of aggregate demand.
distribution of income
the spread of different incomes among individuals and different income groups in the economy.
Disinflation
when the rate of inflation is falling, but still positive.
economic cycle
(also known as a business cycle or trade cycle) upswing and downswing in aggregate economic activity taking place over 4 to 12 years.
economic shocks
an unexpected event hitting the economy.
Economic shocks can be demand-side or supply-side shocks land sometimes both and unfavourable or favourable.
education and training
education develops individual knowledge and intellect, while training develops work skills. Both are necessary for economic growth and development.
equilibrium national income
the level of income at which withdrawals from the circular flow of income equal injections into the flow; also the level of output at which aggregate demand equals aggregate supply.
equilibrium unemployment
exists when the economy’s aggregate labour market is in equilibrium. It is the same as the natural level of unemployment.
equity
the assets that people own.
EU
an economic and partially political union established in 1993. It developed as a more closely integrated organisation from the European
Economic Community (EEC), originally formed in 1957. The EU has expanded to include (after the UK’s departure) 27 countries.
eurozone
(also known as the euro area) the name used for the group of EU countries that have replaced their national currencies with the euro. As of 2022, 19 of the
27 EU members have replaced their national currencies with the euro.
exchange rate
the external price of a currency, usually measured against another currency.
expansionary of fiscal policy
uses fiscal policy to increase aggregate demand and to shift the AD curve to the right.
expansionary monetary policy
uses lower interest rates to increase aggregate demand and to shift the AD curve to the right.
expenditure reducing policy
a government policy which aims to eliminate a current account deficit by reducing the demand for imports, by reducing the level of aggregate demand in the economy. Conversely, to reduce a current account surplus, aggregate demand would be increased and spending on imports would rise.
expenditure switching policy
a government policy which aims to reduce a current account deficit by switching domestic demand away from imports to domestically produced goods. Conversely, to reduce a current account surplus, the policy would aim to switch domestic demand away from domestically produced goods towards imports.
export subsidies
money given to domestic firms by the government to encourage firms to sell their products abroad and to help make their goods cheaper in export markets.
export led growth
in the short run, economic growth resulting from an increase in exports, which is one of the components of aggregate demand; in the long run, economic growth resulting from the growth and increased international competitiveness of exporting industries.
exports
domestically produced goods or services sold to residents of other countries.
financial account
the part of the balance of payments which records capital flows into and out of the economy.
financial conduct authority
aims to make sure that financial markets work well so that consumers get a fair deal, by ensuring that the financial industry is run with integrity and that consumers can trust that firms have their best interests at heart, and by providing consumers with appropriate financial products and services.
financial markets
markets in which financial assets or securities are traded.
Financial policy committee
the part of the Bank of England charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The committee’s secondary objective is to support the economic policy of the government.
fiscal policy
the use by the government of government spending and taxation to try to achieve the government’s policy objectives.
fixed exchange rate
an exchange rate fixed at a certain value and maintained at this value by the central bank’s intervention in the foreign exchange market.
FDI
investment in capital assets (e.g. manufacturing and service industry capacityl in a foreign country by a business with headquarters in another country.
Very often the overseas company establishes subsidiary companies in the countries in which it is investing.
foreign exchange markets
(also known as forex, FX or currency markets) global, decentralised markets for the trading of currencies
forward guidance
attempts to Send signals to financial markets, businesses and individuals, about the Bank of England’s interest rate policy in the months and is ahead, so that economic agents are not surprised by a sudden and unexpected change in
policy,
free trade area
in a free trade area member countries abolish larills an mutual trade, but each partner determines its own lacills on trade with non-member
countries
freely floating exchange rate
the exchange rate is determined solely by the interplay of demand for, and supply of, the currency.
frictional UP
also known as transitional unemployment) unemployment that is usually short term and occurs when a worker switches between jobs.
full employment
according to Beveridge’s definition, full employment means 3% or less of the labour force unemployed.
According to the free-market definition, it is the level of employment at the market-clearing real-wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work.
full employment income
the level of income when the economy is producing on its production possibility frontier, with no spare capacity.
globalisation
the process of increasing economic integration of the world’s economies.
government bonds q
debt security, in the UK known as gilt-edged securities or gilts, issued by a government and sold as new issues to people who lend long term to the government, They can be resold second hand on a stock exchange.
GDP
the sum of all goods and services, or level of output, produced in the economy over a period of time, e,g. one year.
hidden economy
also known as the informal economy, the underground economy and the black economy] all the economic transactions conducted in cash which are not recorded in the national income figures because ol tax evasion.
Human capital
the skills, knowledge and experience possessed by the population.
imports
goods or services produced in other countries and sold to residents of this country,
index number
a number used in an index (e.g. the consumer prices index] to enable accurate comparisons over time to be made.
indexation
the automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of a price index.
indicators of development
these include gross domestic product
(GDP) per head, information on the distribution of income, mortality rates and health statistics.
indirect tax
a tax that can be shifted by the person legally liable to pay the tax onto someone else le.g. through raising the price of a good being sold by the taxpayer).
Indirect taxes are levied on spending.
inflation
a persistent or continuing rise in the average price level,
infrastructure
for the most part, the result of past investment in buildings. roads, bridges, power supplies, fast broadband and other fixed capital goods that are needed for the economy to operate efficiently.
injection
spending entering the circular flow of income as a result of investment, government spending and exports.
institutional factors
examples include rules, laws, constitutions, the financial system and defined property rights.
interventionist policies
occur when the government intervenes in, and sometimes replaces, free markets. Interventionist supply-side policies include government funding of research and development
investment
total planned spending by lirms on capital goods produced within the economy
investment bank
a bank which does not generally accept deposits from ordinary members of the general public. Traditional investment banking refers to financial advisory work, such as advising private companies on how to become public companies by floating on the stock market making shares available for the public to buy or sell), or advising public companies on how to buy up other companies. Investment banks also deal directly in financial markets for their own account.
involuntary unemployment
occurs when workers are willing to work at current market wage rates but there are no jobs available.
Kenyan economics
followers of the economist John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy.
labour force survey
a quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on respondents* personal circumstances and their labour market status during a period of one to four weeks.
LDC
countries considered behind in terms of their economy, human capital, infrastructure and industrial base.
liability
an amount owed by a business - either a current lahort-term) or non-current long-term) liability
life cycle theory of consumption
theory that explains
Consumption and saving in lerms of how people expect their intomes to change over the whole
of their life cycles.
liquidity
measures the ease with Which an assel can be converted into cash without loss of value.
Cash is the most liquid of all assets.
liquidity ratio
the ratio of a bank’s cash and other liquid assets to its deposits.
long run AS
the real output that can be supplied when the economy is on its production possibility frontier.
This is when all the available factors of production are employed and producing at their normal capacity level of output.
long run economic growth
an increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier.
macroeconomic indicators
provide information from recent economic performance for judging the success or failure of a particular type of government policy le.g, fiscal policy or monetary policyl.
managed exchange rate
where the government intervenes in the foreign exchange market to influence its value.
marginal propensity to consume
the fraction of any increase in income which people plan to spend on the consumption of domestically produced goods and services.
Marginal propensity to save
fraction of any increase in income which people plan to save rather than spend.
Market based supply side policies
for non-interventionist supply-side policies) these policies free up markets, promote competition and greater efficiency, and reduce the economic role of the state.
Marketisation
laiso known as commercialisation) involves shifting provision of goods or services from the non-market sector to the market sector.
maturity date
the date on which the issuer of a dated security, such as a gilt-edged security (long-dated) or a Treasury bill (short-dated), pays the face value of the security to the security’s owner.
monetarism
narrow monetarism centres on increases in the money supply as the prime cause of inflation; broader monetarism focuses on the virtues of iree markets in resource allocation.
monertists
economists who argue that a prior increase in the money supply is the cause of inflation.
monetary policy
the use by the government and its agent, the Bank of England, of interest rates and other monetary instruments to try to achieve the government’s policy objectives.
Monetary policy committee
a group of Bank of England officials and independent experts who meet to set interest rates in the
UK eight times a year.v
monetary policy instruments
tools such as Bank Rate which are used to try to achieve monetary policy objectives.
money
primarily a medium of exchange or means of payment, but also a store of value.
money market
provide a means for lenders and borrowers to satisfy their short-term financial needs. The term ‘money market covers several markets, including those for Treasury bills and commercial bills.
money supply
the stock of financial assets which function as money.
moral hazard
the tendency of individuals and firms, once protected against some contingency, to behave so as to make that contingency more likety.
More developed countries
countries with a high degree of economic development, high average income per head, high standards of living, usually service industries dominating manufacturing, and investment having taken place over many years in human capital and infrastructure.
multinational corporations
enterprises operating in several countries but with their headquarters in one country.
multiplier
the relationship between a change in aggregate demand and the resulting generally larger change in national income,
narrow money
the part of the stock of money (or money supply) made up of cash and liguid bank and building society deposits.
national capital stock
the stock of capital goods leg. buildings and machinery] in the economy that has accumulated over time and is measured at a point in time
national dept
the stock of all past government borrowing that has not been paid back.
national income
the flow of new output produced by the economy in a particular period (e.g. a year). measured by the flow of factor incomes.
national product
lalso known as national outputi the flow of new output produced by different industries in a particular period le.a, a vaari.
national wealth
the stock of all goods that exist at a point in time that have value in the economy.
nautural rate of unemployment
the rate of unemployment when the aggregate labour market is in equilibrium.
negative output gap
the level of actual real outout in the econorny is lower than the trend outbut level.
nominal GDP
GDP measured at the current market prices, without removing the effects of inflation.
normal capacity level of output
the level of output at which the full production potential of the economy is being used.
office of budget responsibility
advisory public body that provides independent economic forecasts and analysis of the public finances as background to the preparation of the UK budget.
open economy
an economy open to international trade.
output gaps
show the levet of actual real output in the economy either higher or lower than the trend output level.
phillips curve
based on evidence from the economy, this shows the apparent relationship between the rate of inflation and the rate of unemployment; now known as the short-run Phillips curve.
policy conflict
when two policy objectives cannot both be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other.
policy objective
a target or goal that policy-makers aim to ‘hit.
portfolio investment
the purchase of one country’s securities (e.g. bonds and shares) by the residents or financial institutions of another country.
positive output gaps
the level of actual real output in the economy is greater than the trend output level.
price index
an index number showing the extent to which a price, or a ‘baskel’ of prices, has changed over a month, quarter or year in comparison with the pricels) in a base year.
principle of taxation
also known as a canon of taxation) a criterion used for judging whether a tax is good or bad,
privatisation
involves shifting ownership of state-owned assets to the private sector.
profitability
the state or condition of yielding a financial profit of gain.
pro free market economists
opponents of Keynesian economists, who dislike government intervention in the economy and who much prefer the operation of free markets.
proportional taxation
when the proportion of income paid in tax stays the same as income increases.
prudent regulation authority
the part of the Bank of England responsible for the microprudential regulation and supervision of banks. building societies, insurers and major investment firms.
purchasing power parity
the rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price levels between countries.
quantative easing
when the Bank of England buys assets, usually government bonds, with money that the Bank has created electronically.
quantity theory of money
the oldest theory of inflation, which states that inflation is caused by a persistent increase in the supply of money.
quotas
physical limits on the quantities of imported goods allowed into a country.
rate of interest
the reward for lending savings to somebody else leg. a bankl and the cost of borrowing
real GDP
a measure of all the goods and services produced in an economy, adjusted for price changes or inflation. The adjustment transforms changes in nominal GDP, which is measured in money terms, into a measure that reflects changes in the total output of the economy.
real wages
the purchasing power of the nominal (or money] wage; for example, real wages fall when inflation is higher than the rise in the nominal wage rate, and real wages rise when the nominal wage rate increases more rapidly than inflation.
real wage up
unemployment caused by real wages being stuck above the equilibrium market-clearing real wage.
recession
in the UK and many other countries, a recession is defined as six months or more of negative economic growth or declining real national output.
reflationary politcies
policies that increase aggregate demand with the intention of increasing real output and employment.
regressive taxation
when the proportion of income paid in tax falls as income increases.
retail price index
a measure formerly used to calculate the rate of consumer price inflation in the UK.
saving
income which is not spent.
seasonal unemployment
unemployment arising in different seasons of the year, caused by factors such as the weather.
security
secured loans, such as mortgage loans secured against the value of property, are less fisky for banks than unsecured
loans.
shares
undated financial assets, sold initially by a company to raise financial capital. Shares sold by public limited companies (PLCs) are marketable on a stock exchange, but shares sold by private limited companies (Ltds) are not marketable. Unlike a loan, a share signifies that the holder owns part of the enterprise.
short run economic growth
growth of real output resulting from using idle resources, including labour, thereby taking up the slack in the economy.
short term speculative capital
hot money
refers to flows of money across international borders, moving to find the greatest short-term return; it is usually very easy to move and will move quickly as returns and opportunities arise.
structural budget deficit
the part of the budget deficit which is not affected by the economic cycle but results from structural change in the economy affecting the government’s finances, and also from long-term government policy decisions.
structural UP
long-term unemployment occurring when some industries are declining, even though other industries may be growing. It also occurs within a growing industry if automation reduces the demand for labour, and when production requires new skills not possessed by the workers who lose their jobs. Structural unemployment is associated with the occupational and geographical immobility of labour.
supply side
relates to changes in the potential output of the economy. which is affected by the available factors of production (e.g. changes in the size of the labour force and the productivity of labour).
supply side economics
a branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets and, through this, the performance of the economy.
supply side fiscal policy
used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest and be entrepreneurial. Interventionist supply-side fiscal policies, such as the financing of retraining schemes for unemployed workers, are also designed to improve supply-side performance.
supply side improvements
reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive.
Supply-side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government.
supply side policies
government economic policies which aim to make markets more competitive and efficient, increase production potential and shift the LAS curve to the right. Supply-side fiscal policy is arguably the most important type of supply-side policy, but there are also non-fiscal supply-side policies.
systematic risk
in a financial context, the risk of a breakdown of the entire financial system, caused by inter-linkages in the financial system, rather than simply the failure of an individual bank or financial institution.
tariffs
(also known as import duties) taxes imposed on imports from other countries entering a country.
total managed expenditure
the total amount that the government spends. It splits into the amount that government departments (e.g. Defence) have been allocated to spend and spending that is not controlled by a government department, including welfare, pensions and national debt interest payments.
trade off between policy objectives
although it may be impossible to achieve two desirable objectives at the same time le.g. zero inflation and full employment), policy-makers may be able to choose an acceptable combination lying between the extremes, e.g. 2% inflation and 4% unemployment.
treasury bills
short-dated government debt usually three months to maturity), which pays the holder a fixed rate of interest until redemption.
trend growth rate
the rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy.
UN HDI
an index based on life expectancy, education and per capita income indicators, which ranks the world’s countries into four tiers of human development: (il very high human development;
(ill high human development;
(itil medium human development;
(iv) low human development.
voluntary unemployment
occurs when workers choose to remain unemployed and refuse job offers at current market wage rates.
withdrawal
a leakage of spending power out of the circular flow of income into savings, taxation or imports.
WTO
an international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers to trade. As such, it has become closely associated with globalisation.
yield
the annual interest on a bond expressed as a percentage of the bond’s current market price.
