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