Macroeconomic Performance Flashcards
Real GDP Growth
- A measure of total OUTPUT, EXPENDITURE or INCOME of an economy after adjusting for changes in the price level.
- The growth of real GDP is the percentage change in output during a particular time period, often measured over a year.
Inflation
- The sustained increase in the general level of prices, measured in the UK By changes in the cost of a basket of goods and services bought by a typical household (Consumer Price Index, or CPI) weighted according to the expenditure on each item in the basket.
Unemployment
- Arises when someone is out of work and actively seeking employment
Balance of Payments
Records money flows into and out of a country over a period of time
Current account (in balance of payments)
includes:
1) money flows due to trade (the trade balance = trade in goods + trade in services)
2) Transfers of interest
3) Profit and dividends (the investment income balance)
4) Transfers of money by governments and international organisations (the transfers balance)
Standard of living
A measure of the material well-being of a nation and its people
Short run economic growth
The actual annual percentage increase in an economy’s output, sometimes referred to as ‘actual economic growth’.
Long-run economic growth
the rate at which the economy’s potential output COULD grow, as a result of changes in the economy’s capacity to produce goods and services; sometimes referred to as ‘potential economic growth’.
Output gap
the difference between the actual and potential output of an economy.
(See: Negative / Positive output gap)
Negative output gap
A situation where actual output is below potential output
Positive output gap
A situation where, in the SHORT RUN, actual output exceeds the economy’s potential output.
Trend rate of growth
The average rate of economic growth measured over a period of time, normally over the course of the economic cycle (from peak to peak, or trough to trough).
Short Run Aggregate Supply
Shows the level of production for the economy at a given price level, assuming labour costs and other factor input costs are unchanged.
Economic cycle
Fluctuations in the level of economic activity as measured by GDP.
Typically there are 4 stages in the cycle: recession, recovery, boom and slowdown.
Human Capital
The knowledge and skills of the labour force.
MPS (Marg. Propensity to Save)
MPS is the proportion of additional national income that is saved = dS / dY, where S is savings, Y is national income
MPT (Marg. Propensity to Tax)
MPT is the proportion of additional national income that is taxed = dT/dY where T = taxation
MPM (Marg. Propensity to Import)
MPM is the proportion of additional national income that is spent on imports = dM/dY, where M is imports.
Accelerator
the theory of investment that states that the level of investment depends on the rate of change of national income
Stocks
the amount of finished goods that firms hold in order to be able to satisfy increases in demand
LRAS (Long run aggregate supply) curve
The relationship between total supply and the price level in the long run. LRAS curve represents the maximum possible output for the whole economy - its potential output.
Classical economists
economists who believe that markets will ‘clear’, that prices and quantities adjust to changes in the forces of supply and demand so that the economy produces its potential output in the long run.
Keynesian Economists
Economists who believe that market failures will result in price and quantity rigidities such that the economy’s equilibrium output in the long run may be less than its potential output.
Labour force
All the people of working age who are in employment or actively seeking work
Labour force participation ratio
A measure of the proportion of the population who are able to work and in employment or actively seeking employment.
Capital output ratio
The amount of capital needed to generate each unit of output
Capital account of the balance of payments
The section of the balance of payments that records long-term flow of capital into, and out of an economy.
It records purchases and sales of assets and is split into (1) long term capital flows (2) short term capital flows.
Long-term capital flows
Flows of money used for investment in assets.
(For example, direct investment by a company in setting up production facilities or portfolio investment through buying shares in companies).
Short term capital flows
Flows of money that occur to take advantage of differences in countries’ interest rates and changes in exchange rates, sometimes referred to as hot money flows.
Public Sector Net Cash Requirement (PSNCR)
- The difference between the spending of general government (central and local government) and their revenue.
- Budget surplus (+ve PSNCR)
- Budget deficit (-ve PSNCR)
Budget deficit
General government expenditure > revenues.
Requires government to borrow money to make up the shortfall in revenue over planned expenditure
Budget surplus
General government expenditure
Automatic Stabilisers
Changes in government expenditure and taxation receipts that take place automatically in response to the business cycle.
For example, expenditure on unemployment benefits rises during the recession phase of the business cycle.
Economic Stability
The avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates, in order to reduce uncertainty and promote business and consumer confidence and investment
Crowding out
When government borrowing reduces the funds available for private sector investment or raises the cost of investment by raising market interest rates.
Cyclical deficit
A budget deficit that arises because of the operation of automatic stabilisers.
Golden rule
A commitment by the UK government that, over the economic cycle, it will borrow only to invest and not for current expenditure.
Credibility (principle of fiscal policy)
A credible fiscal policy framework is one where the government’s commitment to economic stability is trusted by the public, businesses and financial markets.
Flexibility (principle of fiscal policy)
A flexible fiscal policy framework is one that has the versatility to deal with unexpected macroeconomic shocks such as sudden changes in AD and/or AS.
Legitimacy (principle of fiscal policy)
A legitimate fiscal policy framework is one that has widespread support and about which there is general agreement among the public, business and politicians.
Stability and Growth Pact (SGP)
An agreement about how member states of the EU should conduct fiscal policy in order to support the single currency (Euro).
- Requires Eurozone states to abide by:
1. Budget deficit
Monetary transmission mechanism
The way in which monetary policy affects the inflation rate through the impact it has on other macroeconomic variables.
Price stability
When the general price level does not change, or if it does change, the rate of change is low enough not to significantly affect the decisions of firms and households.
Purchasing power of money
What a unit of currency will buy in terms of goods and services
Signalling function of prices
Changes in demand and supply of goods and services are signalled to producers and consumers through changes in absolute and relative price levels.
Operational independence
When a central bank is given responsibility for the conduct of monetary policy independent of political interference. The target for inflation, however, is normally set by governments.
Symmetric inflation target
When deviations above and below the target are given equal weight in the inflation target.
Asymmetric inflation target
When deviations below the inflation target are seen to be less important than deviations above the target.
International competitiveness
The ability of an economy’s firms to compete on international markets and hence sustain increases in national output and income.
Unit labour costs
The cost of labour per unit of output produced (includes the social costs of employing labour as well as the wage costs).
Relative unit labour costs
The cost of labour per unit of output of one country relative to its major trading partners
