Macroeconomic key terms Flashcards
AAA credit rating
The best credit rating that can be given to a corporation’s or a government’s bonds, effectively indicating that the risk of default is negligible
Accelerator effect
Where planned capital investment is linked positively to the past and expected growth of consumer demand or national income
Aggregate supply shock
Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce output and can increase the rate of inflation
Animal spirits
The state of confidence or pessimism held by consumers and businesses
Appreciation
A rise in the market value of one exchange rate against another
Austerity
Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be achieved through increases in government spending - primarily via tax rises and/or a reduction in government spending or future spending commitments
Automatic stabilisers
Automatic fiscal changes as the economy moves through stages of the business/trade/economic cycle
Bank run
When a large number of people suspect that a bank may go bankrupt and withdraw their deposits. Bank runs are rare, one happened with the Northern Rock in 2007
Bond
Both companies and governments can issue bonds. The issue of new government debt is done by the central bank and involves selling debt to capital markets
Brain drain
The movement of highly skilled people from their own country to another nation
BRIC economies
The BRIC grouping - Brazil, Russia, India, China - shorthand for the rise of emerging markets. The BRICs have a bigger share of world trade than the USA
Bubble
When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”)
Budget deficit
Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of economic growth which brings about a rise in direct and indirect tax revenues
Business confidence
Expectations about the future of the economy -vital in influencing business decisions about how much to spend on new capital goods
Capacity utilisation
Measures how much of the productive potential of the economy is being used. Utilisation falls during a recession leading to a rise in spare capacity
Capital market
A stock or bond market where firms can raise money for investment purposes
Capital stock
The value of the total stock of capital inputs in the economy
Capital-labour substitution
Replacing workers with machines in a bid to increase productivity and reduce the unit cost of production. This can lead to structural unemployment
Claimant Count
The number of people claiming unemployment-related benefits
Closed economy
An economy operating without imports and exports - i.e. closed to global trade
Comparative advantage
Refers to the relative advantage that one country or producer has over another. Countries can benefit from specialising in and exporting the product(s) for which it has the lowest opportunity cost of supply
Constant prices
Constant prices tells us that the data has been inflation adjusted
Consumer confidence
Expectations about the future including interest rates, incomes and jobs
Consumer durables
Products such as washing machines that are not used up immediately when consumed and which provide a flow of services over time
Consumer Price Index (CPI)
Is the government’s preferred measure of inflation
Corporation tax
A tax on the profits made by companies
Cost push inflation
An increase in the price level caused by a sustained increase in costs of production
Credit crunch
Where banks reduce lending due to falling confidence that loans will be repaid
Creeping inflation
Small rises in the general price level over a long period
Current Account
The overall balance of credits minus debits for trade in goods, trade in services, investment income and current transfers
Current Account deficit
The amount by which money relating to trade, investment etc. going out of a country is more than the amount coming in. A current account defict implies a net fall of demand in a country’s circular flow
Current Account surplus
The amount by which money relating to trade, investment etc. going into a country is more than the amount leaving. A current account surplus implies a net increase of demand in a country’s circular flow
Cyclical trade deficit
A trade deficit that arises purely due to changes in the economy’s cycle, for example, many countries run a trade deficit when their economy is growing strongly
Cyclical unemployment
Unemployment caused by a lack of aggregate demand for goods and services, where national output < potential output leading to a negative output gap
Default
Occurs when a borrower has broken the terms of a loan or other debt, for example, if a borrower misses a payment
Deflation
Where inflation falls below 0%
Depreciation
A fall in the market value of one exchange rate against another
Depression
Used to describe a severe recession which may become a prolonged downturn in the economy and where a nation’s GDP falls by at least 10 per cent
Deregulation
Reducing barriers to entry in order to make a market more competitive
Discouraged workers
People often out of work for a long time who give up on job search
Discretionary fiscal policy
Deliberate attempts to affect aggregate demand using changes in government spending, direct and indirect taxation and borrowing
Disinflation
A persistent fall in the general price level of goods and services
Disposable income
Gross income less income tax and national insurance contributions plus cash welfare benefits. Disposable income is the money that comes into a household from various sources, including welfare benefits but after taxes on income
Double-dip recession
When an economy goes into recession twice without a full recovery in between
Dumping
When a producer in one country exports a product to another at a price below the price that it charges in its home market or below the costs of supply
Economic cycle
Variations in the annual rate of growth of an economy over time
Economic growth
An increase in the real value of goods and services produced in a country or area as measured by the annual % change in real national output. Also a long-run increase in a country’s productive capacity
Economic shocks
Unpredictable events such as volatile prices for oil, gas and foodstuffs
Economic stability
When growth, prices and unemployment do not change much from year to year
Economically active
Those who are unemployed and actively seeking a new job
Economically inactive
Those who are of working age but are neither in work nor actively seeking work
Emerging markets
The financial markets of developing countries
Exchange rate
The rate at which one currency can be exchanged for another
Expansionary monetary policy
A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost aggregate demand, output and jobs - includes lower interest rates
Expectations
How we expect the future to unfold
Expenditure-switching policies
Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP
Export revenue
Sales from selling goods and services overseas, an injection of demand
Financial assets
For consumers, the main financial assets are property, pensions, equities, unit trusts and cash
Fine-tuning
Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates/taxation
Fiscal austerity or fiscal tightening
Fiscal austerity refers to decisions by a government to reduce the amount of government borrowing (i.e. cut the size of a fiscal deficit) over a period of years
Fiscal/budget deficit
When government expenditure is higher than tax revenue
Fiscal policy
A government’s policy regarding taxation and public spending. It can be expansionary/loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or contractionary/tight (with the emphasis on cutting spending and boosting tax revenue, resulting in slower economic activity)
Fiscal stability
Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending and revenue are equal
Fiscal stimulus
Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity
Forecast
A prediction made about the likely future performance of an economy
Foreign Direct Investment (FDI)
Is investment from one country into another (normally by companies rather than governments) that involves establishing operations or acquiring tangible assets, including stakes in other businesses
Free trade
When trade is allowed without any form of restriction such as a tariff
Full capacity output
A level of national output where all available factor inputs are fully employed - this is a factor influencing the underlying growth rate (LRAS)
Full employment
When there are enough job vacancies for all the unemployed to take work
Gross Domestic Product (GDP)
Is the total value of output in the UK and is used to measure changes in economic activity
Gini coefficient
A measure of the extent to which groups of households, from the bottom of the income distribution upwards, receive less than an equal share of income
Globalisation
The deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment
Gross National Income (GNI)
Income generated from the resources owned by inhabitants and businesses of a given country
Government debt
The total stock of unpaid debt issued by a government. A government will normally borrow money by issuing bonds or other securities
Gross Domestic Product per Capita (GDP per capita)
National income per head of population, a baseline measure of living standards
Hard landing
A full-scale recession shown by a decline in real national output
Hot Money
Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest
Household wealth
The value of assets - including property, shares, savings and pension fund assets
Human capital
Investment in education and training to increase the quality of the labour force and to make people more flexible in a changing world of work
Human Development Index
An index to assess comparative levels of development in countries, quantified in terms of literacy, life expectancy and purchasing power
Hysteresis
When a sustained period of low aggregate demand can lead to permanent damage to the supply side of the economy
Immobility of labour
Barriers to the movement of people between areas and between jobs
Inflation
A sustained increase in the general price level for goods and services
Inflation expectations
The rate of increase of consumer prices expected by consumers. Expectations can influence spending and saving decisions
Inflation target
The Bank of England has a CPI inflation target, which is currently 2%
Inflationary pressures
Demand and supply-side pressures that can cause a rise in the general price level.
Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap.
Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production
Infrastructure
The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy
Innovation
Changes to products or production processes - innovation is important in delivering improvements in dynamic efficiency and generating better goods and services
International Monetary Fund (IMF)
An organisation of over 180 countries, promoting global monetary cooperation, financial stability, international trade, employment and sustainable economic growth. It has provided help for several nations in the wake of the 2007-09 financial crises
International reserves
A nation’s stock of foreign currency and gold
Inventories
These consist of materials and supplies which are stored for use in production, work-in-progress, finished goods and goods for resale
Investment
Spending on capital goods including plant & machinery and infrastructure
Investment income
Interest, profits and dividends from assets owned and located overseas
Job search
The process by which workers find appropriate jobs given their tastes and skills
Keynesian economics
The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to fund public works projects like new roads, housing, schools and hospitals
Keynesian unemployment
Unemployment caused by a lack of aggregate demand in the economy - a deficiency of private-sector spending causes output and employment to contract
Labour shedding
Cut-backs in employment often seen in a slowdown or a recession
Labour shortages
When business find it difficult to recruit the workers they need
Labour supply
The number of people able, available and willing to work at prevailing wage rates
Lagging indicators
Indicators which tend to follow economic cycles e.g. unemployment
Leading indicators
Indicators which predict future economic trends e.g. consumer confidence
Leveraging
The use of borrowed funds to increase your capacity to spend or invest
Lidiquity
The ease with which something can be converted to cash with little loss of value
Liquidity trap
When very low-interest rates cease to have a strong effect on aggregate demand
Macroeconomic performance
The overall performance in terms of output, prices, jobs, trade and living standards
Propensity to consume
The proportion of any change in income that is spent rather than saved
Propensity to save
The change in total saving as a result of a change in income
Marginal rate of tax
The rate of tax on the next unit (£1) of income earned
Monetary Policy Committee (MPC)
Bank of England committee of 9 people meets every month to set interest rates
Monetary stimulus
Changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit
Money supply
The entire quantity of a country’s commercial bills, coins, loans and credit
Multiplier effect (positive)
If there is an initial injection into the economy then the final increase in aggregate demand and real GDP will be greater
Multiplier effect (negative)
If there is an initial withdrawal from the economy then the final decrease in aggregate demand and real GDP will be greater
North American Free Trade Agreement (NAFTA)
Signed in 1994 involving US, Canada and Mexico
National debt
A government’s total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time
Negative equity
When the value of an asset falls below the debt left to pay on that asset. Term is most commonly used in connection with property prices after a slump in prices
Negative interest rate
An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than the nominal interest rates
Net investment
Gross investment minus an estimate for capital depreciation
Net inward migration
When the number of migrants coming into a country is greater than those leaving
Net trade
The balance between the value of exports and imports
Nominal GDP
Monetary value of all goods and services produced expressed at current prices
Nominal wage growth
The annual growth of wages unadjusted for inflation
Non-inflationary growth
Sustained growth of real national output whilst maintaining price stability
Output gap
The difference between actual and potential national output. A negative output gap means that an economy has a large margin of spare productive capacity
Output measure GDP
Value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government
Overseas assets
Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of income which is a credit item on the current account
Paradox of thrift
If people save more in a recession, it will reduce consumption and thus AD will fall, impeding economic growth and, eventually, lowering the general level of savings
Patent box
A reduced rate of Corporation Tax applied to profits from patents - designed to stimulate research and innovation and improve the supply-side of the economy
Peak
The high point of the economic cycle beyond which a recession starts
Pension fund
Fund that pool employees’ pension benefits and holds them so that they can be paid at retirement. The money is invested in stocks, bonds and other assets to boost returns and ensure that there are sufficient funds to be paid out
Per capita incomes
Income per head of the population - a measure of average living standards
Phillips curve
A statistical relationship between unemployment and inflation
Precautionary saving
Saving because of fears of a loss of real income or unemployment
Price stability
Price stability occurs when there is low inflation and the price changes that do occur have little impact on day-to-day decisions of people
Productive potential
Productive capacity of the economy - boosted by high-quality investment
Productivity
A measure of efficiency e.g. output per person employed or output per person-hour
Propensity to import
Proportion of any change in income that is spent on overseas products
Propensity to save
Proportion of any change in income that is saved rather than spent
Protectionism
Restricting trade through tariffs and other forms of import controls
Purchasing power
The buying power of a unit of currency. It is inversely related to the rate of inflation
Quantitative Easing
The introduction of new money into the national supply by a central bank
Quota
A physical limit on the quantity of a good that can be imported into a country
Real disposable income
Income after taxes and welfare benefits, adjusted for the effects of inflation
Real income
Nominal income adjusted for price changes, expressed at constant prices
Real interest rate
Nominal rate of interest adjusted for inflation
Real wage
Nominal wage adjusted for the effects of inflation
Recession
A period of at least six months (two consecutive quarters) when an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidence
Recovery
A phase of the economic cycle, after a recession/depression, during which real GDP starts to increase and unemployment begins to fall
Redundancy
Making someone redundant is to end their employment
Relative deflation
An economy with an inflation rate, which is lower than comparable economies. Over time, a low relative rate of inflation can lead to improved competitiveness
Remittances
Sending of money to people in another country. For many lower-income nations, remittance income is now a big contribution to Gross National Income (GNI)
Risk-averse
Exhibiting a dislike of uncertainty, often seen in a recession
Saving ratio
The percentage of disposable income that is saved rather than spent
Slowdown
A fall in the rate of growth of an economy but not a full-scale recession
Slump
A sustained decrease in real GDP and a persistent rise in unemployment
Soft landing
A slowdown in economic activity but which does not result in a recession
Sovereign debt
Debt issued by or guaranteed by a government
Spare capacity
When a business is not making full use of its available capacity - there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short-run aggregate supply tends to be elastic
Stagflation
A combination of slow growth and rising inflation. The most notable recent period of stagflation occurred during the 1970s when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30%
Sterling exchange rate index
External value of the sterling calculated using a weighted index of a basket of currencies - weightings are based on the value of trade with different countries
Stimulus
Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rates cuts, quantitative easing, tax cuts and government spending increases
Structural budget deficit
The size of a fiscal (budget) deficit adjusted to take account of the effects of changes in the economic cycle
Structural trade deficit
A trade deficit that arises due to supply-side weaknesses rather than a change in GDP or currency -caused by poor competitiveness
Structural unemployment
Unemployment that results from the decline in an industry which leaves people unemployed because they do not have the skills needed by industries that are growing
Sustainable growth
Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Growth that can continue without damage to the environment, or the exhaustion of non-renewable resources
Target
A target is an objective of government policy e.g. low inflation
Tariff
A tax on imported products that may be ad valorem (%) or a specific tax (a set amount per unit imported)
Tight labour market
When demand for labour is high and there are shortages of labour. Businesses may have to offer higher wages to attract and keep the workers they need
Time lags
The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending
Trade deficit
A trade deficit occurs when a country imports a greater value of goods and services than it exports. A trade deficit is a net withdrawal from the circular flow of income
Trade-off
A trade-off implies that choices have to be made between different objectives of economic policy, for example, a trade-off between economic growth and inflation
Transmission mechanism
How a change in interest rates affects the various sectors of the economy
Trend growth
The long-run average growth rate - mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or PPF boundary)
Trough
The low point of the economic cycle beyond which a recovery starts
Twin deficits
Refer to a situation where an economy is running both a fiscal deficit and also a deficit on the current account of the balance of payments
Under-employment
Workers are underemployed when they are willing to supply more hours of work than their employees are prepared to offer
Unemployment trap
When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job - creates a disincentives problem
Unit wage costs
Labour costs per unit of output
Unsecured credit
Credit not secured by another asset - i.e. money borrowed on credit cards
Wage-price spiral
Where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation
Wealth effect
The supposed link between changes in wealth and household spending
World Bank
A source of financial and technical assistance to developing countries. It can provide loans and grants for a wide array of purposes that include investments in education, health, public administration, infrastructure, financial and private sector development, agriculture and environmental and natural resource management
World Trade Organisation
WTO overseas trade agreements, negotiations and disputes between member countries. The WTO is an organisation that was formed in 1995 to control trade agreements between countries and to set rules on international trade. It replaced GATT (the General Agreement on Tariffs and Trade)
Zero Hours Contract
An employment contract under which the employee is not guaranteed work and is paid only for work carried out
Zombie Companies
Weak and inefficient companies which are able to survive thanks to low-interest rates and a supposedly more tolerant attitude to corporate borrowers by banks
