Macroeconomics Definitions Flashcards
macroeconomics
involves the study of the whole economy at the aggregate level
policy objective
a target or goal that policy-makers aim to ‘hit’
short run economic growth
Growth of real output resulting from using idle resources, including labour, thereby taking up the slack in the economy
long run economic growth
an increase in the economy’s potential level of real output, and an outward shift of the economy’s production possibility frontier
Gross Domestic Product (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
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
Nominal GDP
GDP measured at the current market prices, without removing the effects of inflation
recession
a fall in real GDP for 6 months or more
full employment
according to Beveridge’s definitions, full employment means 3% or less of the labour force unemployed. According to the free-market definition, it is the level of employment occurring 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
claimant count
The method of measuring unemployment according to those people who are claiming unemployment-related benefits (Jobseeker’s Allowance)
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 1-4 weeks.
Inflation
a persistent or continuing rise in the average price level
deflation
A persistent or continuing fall in the average price level
disinflation
When the rate of inflation is falling, but still positive
price index
an index number showing the extent to which a price, or a ‘basket’ of prices, has changed over a month, quarter or year, in comparison with the price(s) in a base year
consumer prices
The official measure used to calculate the rate of consumer price inflation in the UK. The CPI calculates the average price increase of a basket of 700 different consumer goods and services.
retail prices index (RPI)
the RPI is an older measure used to calculate the rate of consumer price inflation in the UK. Currently, the UK government uses the CPI for the indexation of state pensions and welfare benefits and for setting a monetary policy target, and the RPI for uprating each year the cost of TV and motor vehicle licences, together sometimes with taxes on goods such as alcoholic drinks.
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.
balance of payments
A record of all the currency flows into and out of a country in a particular time period
current account of the balance of payment
Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports, together with income and transfer flows
exports
domestically produced goods and services sold to residents of other countries
imports
Goods or services produced in other countries and sold to residents of this country
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 accounts.
balance of trace deficit
the money value of a country’s imports exceeds the money value of its exports
balance of trade surplus
The money value of a country’s exports exceeds the money value of its imports
balanced budget
when government spending equals government revenue, which is mostly tax revenue
budget deficit
When government spending is greater than government revenue
policy conflict
Occurs 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.
trade-off between policy objectives
Although it may be impossible to achieve two desirable objectives at the same time, e.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
recession
2 consecutive quarters of negative (real) GDP growth
Keynesian economists
Followers of the economist John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy.
pro-free market economists
opponents of Keynesian economists, who dislike government intervention in the economy and who much prefer the operation of free markets
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
fiscal policy
the use by the government of government spending and taxation to try to achieve the government’s policy objectives
performance indicator
Provides information for judging the success or failure of a particular type of government policy such as fiscal policy or monetary policy
index
a number used in an index, such as the consumer prices index, to enable accurate comparisons over time to be made. The base year index number is typically 100. In subsequent years, percentage increases cause the index number to rise above the index number recorded for the previous year, and percentage decreases cause the index number to fall below the index number recorded for the previous year.
national capital stock
the stock of capital goods, such as buildings and machinery, in the economy that has accumulated over time and is measured at a point in time
wealth
the stock of assets which have value at a point in time, as distinct from income which is a flow generated over a period of time
national wealth
the stock of all goods that exist at a point in time that have value in the economy
national income
the flow of new output produced by the economy in a particular period (e.g. a year)
national output
the same as national income, namely the flow of new output produced by the economy in a particular period (e.g. a year)
consumption
total planned spending by households on consumer goods and services produced within the economy
closed economy
an economy with no international trade
withdrawal
a leakage of spending power out of the circular flow of income into savings, taxation or imports
investment
total planned spending by firms on capital goods produced within the economy
Injection
spending entering the circular flow of income as a result of investment, government spending and exports
open economy
an economy open to international trade
reflationary policies
policies that increase aggregate demand with the intention of increasing real output and employment
equilibrium
the level of real output at which aggregate demand equals aggregate supply (AD = AS). Alternatively, it is the level of income at which withdrawals from the circular flow of income equal injections into the flow. Also known as macroeconomic equilibrium
Aggregate demand
the total planned spending on real output produced within the economy
economic shock
an unexpected event hitting the economy. Economic shocks can be demand-side or supply-side shocks (and sometimes both) and unfavourable or favourable
consumption
total planned spending by households on consumer goods and services produced within the economy
rate of interest
the reward for lending savings to somebody else (e.g. a bank) and the cost of borrowing
life-cycle theory of consumption
a theory that explains consumption and saving in terms of how people expect their incomes to change over the whole of their life cycles
availability of credit
funds available for households and firms to borrow
credit crunch
occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing, and leads to a rise in the cost of borrowing
Distribution of income
the spread of different incomes among individuals and different income groups in the economy
accelerator
a change in the level of investment in new capital goods is induced by a change in the rate of growth of national income or aggregate demand. The size of accelerator depends on the economy’s capital-output ratio.
multiplier
the relationship between a change in aggregate demand and the resulting usually larger change in national income
marginal propensity to consume
the fraction of an increase in disposable income (income after tax) that people plan to spend on domestically produced consumer goods
short-run aggregate supply (SRAS)
aggregate supply when the level of capital is fixed, though the utilisation of existing factors of production can be altered so as to change the level of real output
long run aggregate supply
aggregate supply when the economy is producing at its production potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right.
technical progress
new and better ways of doing things
economic performance
success or failure in achieving economic policy objectives
economic recovery
when short-run economic growth takes place after a recession
demand-side
relates to the impact of changes in aggregate demand on the economy. Associated with Keynesian economics
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 the economy
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
seasonal fluctuation
variation of economic activity resulting from seasonal changes in the economy
economic cycle
upswing and downside in aggregate economic activity taking place over 4 to 12 years. Also known as a business cycle or a trade cycle
actual output
level of real output produced in the economy in a particular year, not to be confused with the trend level of output. The trend level of output 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
output gap
the level of actual real output in the economy is greater or lower than the trend output level
positive output gap
the level of actual real output in the economy is greater than the trend output level
negative output gap
the level of actual real output in the economy is lower than the trend output level
frictional unemployment
unemployment that is usually short term and occurs when a worker switches between jobs. Also known as transitional unemployment
geographical immobility of labour
when workers are unwilling or unable to move from one area to another in search of work
occupational immobility of labour
when workers are unwilling or unable to move from one type of job to another, for example because different skills are needed
structural unemployment
long-term unemployment occurring when some industries are declining, even though over industries may be growing. 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
deindustrialisation
the decline of manufacturing industries, together with coal mining
cyclical unemployment
also known as Keynesian unemployment and demand-deficient unemployment. As the latter name suggests, it is unemployment caused by a lack of aggregate demand in the economy and occurs when the economy goes into a recession or depression
seasonal unemployment
unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period
real-wage
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 unemployment
unemployment caused by real wages being stuck above the equilibrium market-clearing real wage
voluntary employment
occurs when workers choose to remain unemployed and refuse job offers at current market wage rates
involuntary unemployment
when workers are willing to work at current market wage rates but there are no jobs available
equilibrium unemployment
exists when the economy’s aggregate labour market is in equilibrium. It is the same as the natural level of unemployment
demand pull inflation
a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right. Also known as demand inflation
cost push inflation
a rising price level caused by an increase in the costs of production, shown by a shift of the SRAS curve to the left. Also known as cost inflation
wage cost inflation
a rising price level caused by an increase in wages and salaries, shown by a shift of the SRAS curve to the left
emerging-market country
a country that is progressing towards becoming more economically advanced, by means of rapid growth and industrialisation
disinflation
When the rate of inflation is falling and the price level is rising more slowly than previously
monetarists
economists who argue that a prior increase in the money supply is the cause of inflation
quantity theory of money
oldest theory of inflation, which states that inflation is caused by a persistent increase in the supply of money
equation of exchange
the stock of money in the economy multiplied by the velocity of circulation on money equals the price level multiplied by the quantity of real output in the economy
current account deficit
occurs when currency outflows in the current account exceed currency inflows. It is often shortened to ‘exports less than imports’
current account surplus
occurs when currency inflows in the current account exceed currency outflows. It is often shorted to ‘exports greater than imports’.
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 of goods is sometimes called the ‘balance of visible trade’
balance of trade in services
a part of the current account and is the difference between the payments for the exports of services and the payments for the imports of services
net investment income
the difference between inward and outward flows of investment income. When net investment income is positive, the UK is earning more income generated by the direct and portfolio investments held abroad than it is paying to overseas owners of capital assets in the UK. Investment income is the main component of primary income flows in the current account of the balance of payments.
transfers
Payments flowing between countries in forms such as foreign aid, grants, private transfers and gifts. They are payments that are made without anything of economic value being received in return. Not to be confused in this context with the part of government spending in which tax revenues are paid to people such as pensioners, without any output being produced in return.
export-led growth
in the short run, economic growth resulting from the increase in exports as a component of aggregate demand. in the long run, economic growth resulting from the growth and increased international competitiveness of exporting industries
reindustrialise
Growth of manufacturing industries to replace industries which have disappeared or declined significantly in size. Reindustrialisation is the opposite of deindustrialisation.
Phillips curve
Based on evidence from the economy, showing the apparent relationship between the rate of inflation and the rate of unemployment. Now known as the short-run Phillips curve.
long-run Phillips curve
A vertical curve located at the natural rate of unemployment (NRU). It differs from the short-run Phillips curve in that its vertical shape takes account of the role of expectations in the inflationary process.
policy instrument
A tool or set of tools used to try to achieve a policy objective
Bank of England
the central bank in the UK economy which is in charge of monetary policy
central bank
a national bank that provides financial and banking services for its country’s government and commercial banking system, as well as implementing the government’s monetary policy and issuing currency. The Bank of England is the UK’s central bank
Money
an asset that can be used as a medium of exchange; it is used to buy things// primarily a medium of exchange or means of payment, but also a store of value
inflation rate target
the CPI inflation rate target set by the government for the Bank of England to try to achieve. The target is currently 3.4%
Monetary Policy Committee
nine economists, chaired by the governor of the Bank of England, who meet once a month to set Bank Rate, the Bank of England’s key interest rate, and also decide whether other aspects of monetary policy need changing // the part of the Bank of England which implements UK monetary policy. The UK government sets the monetary policy objectives or targets, currently a 3.4 CPI inflation rate target, with the MPC then implementing monetary policy to try to ‘hit’ the target(s)
Bank Rate
the rate of interest the Bank of England pays to commercial banks on their deposits held at the Bank of England
liquidity
measures the ease with which assets can be turned into cash quickly without a loss in value. Cash is the most liquid of all assets
money supply
the stock of money in the economy, made up of cash and bank deposits// the stock of financial assets which function as money
contractionary money policy
uses higher interest rates to decrease aggregate demand and to shift the AD curve to the left
exchange rate
the price of a currency, e.g. the pound, measured in terms of another currency such as the US dollar or the euro// the external price of a currency, usually measured against another currency
expansionary monetary policy
uses lower interest rates to increase aggregate demand and to shift the AD curve to the right
budget deficit
occurs when government spending exceeds government revenue (G > T). This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.
budget surplus
occurs when government spending is less than government revenue (G < T). This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary
public sector borrowing
borrowing by the government and other parts of the public sector to finance a budget deficit
demand-side fiscal policy
used to increase or decrease the level of aggregate demand (and to shift the AD curve right or left) through changes in government spending, taxation and the budget balance
deficit financing
deliberately running a budget deficit and borrowing to finance the deficit
expansionary fiscal policy
uses fiscal policy to increase aggregate demand and to shift the AD curve to the right
contractionary fiscal policy
uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left
discretionary fiscal policy
involves making discrete changes to G, T and the budget deficit to manage the level of aggregate demand
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.
sovereign debt problem
Sovereign debt is the part of the national debt owned by people or institutions outside the country that has sold the debt to them. The sovereign debt problem stems from the difficulties governments face when trying to finance budget deficits by borrowing on international financial markets.
Supply side fiscal policy
Used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest and to 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
national debt
the stock of all past central government borrowing that has not been paid back
cyclical budget surplus
if the structural deficit were zero, a cyclical surplus would probably emerge in the upswing of the economic cycle
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
progressive taxation
a tax is progressive if, as income rises, a larger proportion of income is paid in tax
principle of taxation
a criterion used for judging whether a tax is good or bad. Also known as a canon of taxation.
economy
the principle of taxation which requires a tax to be convenient for taxpayers to pay
certainty
one of the principles of taxation of taxation. Tax payers should be reasonably certain of the amount of tax they will be expected to pay.
Equity ( as a principle of taxation)
requires a tax to be fair
efficiency ( as a principle of taxation)
a tax should achieve its desired objective(s) with minimum unintended consequences
flexibility
the principle of taxation that requires a tax to be easy to change to meet new circumstances
proportional taxation
when the proportion of income paid in tax stays the same as income increases
tax threshold
the basic tax threshold is the level of income above which people pay income tax. Income below the basic tax threshold is untaxed
direct tax
A tax which cannot be shifted by the person legally liable to pay the tax onto someone else. Direct taxes are levied on income and wealth.
indirect tax
A tax which can be shifted by the person legally liable to pay the tax onto someone else, for example through raising the price of a good being sold by the taxpayer. Indirect taxes are levied on spending.
supply-side policies
Aim to improve national economic performance by creating competitive and more efficient markets and through interventionist policies such as government finance of labour retraining schemes.
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
interventionist policies
occur when the government intervenes in, and sometimes replaces, free markets. Interventionist supply-side policies include government funding of research and development
non- interventionist supply-side policies
Free up markets, promote competition and greater efficiency, and reduce the economic role of the state.
privatisation
involves shifting ownership of state-owned assets to the private sector
marketisation
involves shifting provision of goods or services from the non-market sector to the market sector. Also known as commercialisation
deregulation
involves removing previously imposed regulations. It is the opposite of regulation.
supply-side improvement
Reforms undertaken by the private sector to reduce costs to enable firms to become more productively efficient and competitive. Supply-side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government
eurozone
the name used for the group of EU countries that have replaced their national currencies with the euro. Before 2019, 19 of the then 28 EU countries were in the eurozone, though this may change in future years.
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
macroeconomic indicator
provides information from recent economic performance for judging the success or failure of a particular type of government policy, e.g. fiscal policy or monetary policy
human capital
the skills, knowledge and experience possessed by the population
hidden economy (informal economy, underground economy, black economy)
all the economic transactions conducted in cash which are not recorded in the national income figures because of tax evasion
purchasing power parity (PPP) exchange rates
the rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price levels between countries
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
full employment income
the level of income when the economy is producing on its production possibility frontier, with no spare capacity
aggregate supply
The level of real national output that producers are prepared to supply at different average price levels
normal capacity level of output
the level of output at which the full production potential of the economy is being used.
voluntary employment
occurs when workers choose to remain unemployed and refuse job offers at current market wage rates
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
natural rate of unemployment
the rate of unemployment when the aggregate labour market is in equilibrium
monetarism
narrow monetarism centres of increases in the money supply as the prime cause of inflation. Broader monetarism focuses on the virtues of free markets in resource allocation
assets
things which people or organisations own
liabilities
things which people or organisations owe
narrow money
the part of the stock of money (or money supply) made up of cash and liquid bank and building society deposits
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
shares
Undated financial assets, sold initially by a company to raise financial capital. Shares sold by public companies or PLCs are marketable on a stock exchange, but shares sold by private companies are not marketable. Unlike a loan, a share signifies that the holder owns part of the enterprise.
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
fiancial markets
markets in which financial assets or securities are traded
money markets
Provide a means for lenders and borrowers to satisfy their short-term financial needs. Assets that are bought and sold on money markets are short term, with maturities ranging from a day to a year, and are normally easily convertible into cash. The term ‘money market’ is an umbrella that covers several markets, including the markets for Treasury bills and commercial bills
capital markets
where securities such as shares and bonds are issued to raise medium- to long-term financing, and where shares and bonds are then traded on the ‘second-hand’ part of the market, e.g. the London Stock Exchange.
foreign exchange market
global, decentralised markets for the trading of currencies. The main participants in this market are large international commercial banks. Collectively, foreign exchange markets are the largest markets in the global economy
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
government bonds
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.
commercial bank
a financial institution which aims to make profits by selling banking services to its customers
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 a public company by floating on the stock market, or advising public companies on how to buy up another company. Investment banks also deal directly in financial markets for their own account.
systemic risk
in a financial context, this refers to the risk of a breakdown of the entire financial system, caused by inter-linkages within the financial system, rather than simply the failure of an individual bank or financial institution within the system
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 banks
monetary policy instruments
tools such as Bank Rate which are used to try to achieve monetary policy objectives
contractionary policy instruments
uses higher interest rates to decrease aggregate demand and to shift the AD curve to the left
quantitative easing
when the Bank of England buys assets, usually government bonds, with money that the Bank has created electronically
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 years ahead, so that economic agents are not surprised by a sudden and unexpected change in policy
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.
Prudential Regulation Authority
the part of the Bank of England responsible for the microprudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms
Fiancial 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
moral hazard
The tendency of individuals and firms, once protected against some contingency, to behave so as to make that contingency more likely.
liquidity ratio
the ratio of a bank’s cash and other liquid assets to its deposits
regressive taxation
when the proportion of income paid in tax falls as income increases
capital ratio
The amount of capital on a bank’s balance sheet as a proportion of its loans
automatic stabilisers
fiscal policy instruments, such as progressive taxes and income related welfare benefits, that automatically simulate aggregate demand in an economic downswing and depress aggregate demand in an upswing, thereby ‘smoothing’ the economic cycle
supply-side polices
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.
market-based supply-side policies
these policies free up markets, promote competition and greater efficiency, and reduce the economic role of the state
globalisation
the process of increasing economic integration of the world’s economies
World Trade organisation
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.
multinational corporations
Enterprises operating in several countries but with their headquarters in one country
less developed countries
Countries considered behind in terms of their economy, human capital, infrastructure and industrial base
more developed country
countries with a high degree of economic development, high average income per head, high standards of living, usually with service industries dominating manufacturing, and investment having taken place over many years in human capital and infrastructure
European Union
an economic and partially political union established in 1993 after the ratification of the Maastricht Treaty by members of the European Community and since expanded to include numerous central and eastern European nations
absolute advantage
A country has an absolute advantage if it can produce more of a good than other countries from the same amount of resources
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
quotas
physical limits on the quantities of imported goods allowed into a country
tariffs (import duties)
taxes imposed on imports from other countries entering a country
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
free trade area
in a free trade area, member countries abolish tariffs on mutual trade, but each partner determines its own tariffs on trade with non-member countries
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
current account
measures all the currency flows into an 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)
financial account
the part of the balance of payments which records capital flows into and out of the economy
balance of primary income
inward primary income flows comprising both inward-income flowing into the economy in the current year generated by UK-owned capital assets located overseas, and outward primary income flows comprising income flowing out of the economy in the current year generated by overseas-owned capital assets located in the UK
balance of secondary income
current transfers, e.g. 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
foreign direct investment
investment in capital assets, e.g. manufacturing and service industry capacity, 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
free floating exchange rate
the exchange rate is determined solely by the interplay of demand for, and supply of, the currency.
fixed exchange rate
an exchange rate fixed at a certain level by the country’s central bank and maintained by the central bank’s intervention in the foreign exchange market
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
indicators of development
these include gross domestic product (GDP) per head, information on the distribution of income, mortality rates and health statistics
