New macroeconomics key terms Flashcards
Nominal Value
_______V____ of an economic variable based on current prices taking no account of changing prices through time (not adjusted to inflation)
Real Value
_______ V____. Value of an economic variable taking account of changing prices through time
Index Number
A device for comparing the value of a variable in one period or location with a base observation (e.g. measuring the average level of prices relative to a base period)
Consumer Price Index (CPI)
A measure of the general price level in the UK adopted as the UK’s inflation target since December 2003
Inflation
The rate of change of the average price level e.g. the percentage annual rate of change of the CPI.
Retail Price Index (RPI)
A measure of the average level of prices in the UK. Tracks changes in the cost of a fixed basket of goods over time, and is produced by combining about 180,000 price quotes for over 650 representative items
Cost-Push Inflation
Inflation initiated by an increase in the costs faced by firms arising on the supply side of the economy
Demand Pull Inflation
Inflation initiated by an increase in AD
Deflation
a sustained decrease in the general price level
Economically Inactive
Those people of working age who are not looking for work, for a variety of reasons
Discouraged Workers
People who have been unable to find employment and who are no longer looking for work, seen as economically inactive.
Workforce
People who are economically active- either in employment or unemployed
Unemployed
People who are economically active but not in employment
Full Employment
A situation where people who are economically active in the workforce and are willing and able to work (at going wage rates) are able to find employment.
Claimant Count
Number of people claiming job seekers allowance each month
ILO Unemployment Rate
Measure of the percentage of the workforce who are without jobs, but are available for work and looking for work. Based heavily on Labour force survey.
Frictional Unemployment
Unemployment associated with the job search; people between jobs
Structural Unemployment
Unemployment arising because of the changes in the pattern of economic activity within an economy. unemployment due the loss/decline of entire industries e.g. coal mining
Cyclical Unemployment
Unemployment that arises from during the down turn of a economic cycle such as a recession
Demand Deficient Unemployment
Unemployment arising because of a deficiency of aggregate demand in an economy, so that the equilibrium level of output is below full employment
Seasonal Unemployment
Unemployment that arises in seasons of the year when demand of the good/service is relatively low
Voluntary Unemployment
A situation that arises when a individual decides not to accept a job at the going wage rate
Involuntary Unemployment
Situation arising when an individual who would like to accept a job at the going wage rate cannot find employment- rely on social security payments
Unemployment
Costs of ____________. Cannot achieve allocative or productive efficiency. The less workers the less efficient the economy
Human Capital
The stock of skills and expertise that contribute to a workers productivity; can be increased through education and training
Economic Growth
Can stem from a increase in the inputs of factors of production, or from an improvement in their productivity.
GDP
measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
GDP
measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country.
Reduction of trade barriers
Another factor that has contributed to globalisation. Implemented under WTO. Encourages firms to be more active in trade.
Balance of payments
a record of all the monetary transactions between residents of a country and the rest of the world over a given period of time.
The current account
The 3 main items appear here: Balance between imports and exports of goods and services
International transfers
Income
Balance between imports and exports (of goods and services)
If exports exceed imports then the country has a trade surplus and the trade balance is said to be positive. If imports exceed exports, the country or area has a trade deficit and its trade balance is said to be negative.
Income
One of the 3 main parts of the current account. Employment income from abroad→ major item of income is made up of profits, dividends, and interest receipts from overseas UK assets.
International transfers
One of the 3 main parts of the current account. Transfers trough the central government or transfers made or received by private individuals. This item includes transaction and grants from inside the EU
Financial account
The buying and selling of financial assets e.g. Bonds, shares
Capital account
The capital account in the balance of payments for a country includes the effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases and other transferable contracts across borders.
Exchange rate
the rate at which one currency can be exchanged for another.
Connection between BOP and Exchange rates
BOP itemises these transactions which entail the supply and demand for pounds
International Competitiveness
Competitiveness depends on both the exchange rate but also the movements in the price of the good over time. To find the overall competitiveness with another country real exchange rate calculated
Inflation targeting
An approach to macroeconomic policy whereby the central bank is charged with meeting a target for inflation
Bank rate
The interest rate that is set by the monetary committee of the bank of England in order to influence inflation
Quantitative Easing
A process by which the central bank purchases assets such as government and corporate bonds in order to release additional money into the financial system
Supply-side policies
measures governments take to increase the availability or affordability of goods and services
Absolute Advantage
A country’s ability to produce a good using less then resources than another country
Comparative advantage
A country’s ability to produce a good relatively more efficiently (i.e. at lower opportunity cost) than another country
Trading possibility curve
Shows the consumption possibilities under conditions of free trade
Law of comparative advantages
A theory arguing that there may be gains from trade arising when countries specialize in the production of goods or services in which they have a comparative advantages.
Terms of trade
The relative prices at which exchange takes place; the ratio of export prices to import prices
Globalization
A process by which the word’s economies are becoming more closely integrated
Multinational Corporation (MNC)
A company whose production activities are called out in more than one country
General Agreement on Tariffs and Trade (GATT)
The precursor of the WTO, which organized a series of ‘rounds’ of tariff reductions
World Trade Organization
A multinationals body now responsible for overseeing the conduct of international trade
Balance of Payments
A set of accounts showing the transactions between the residents of a country and the rest of the world
Current account and the Balance of Payments
Account identifying transitions in financial in (physical) capital between the residents of a country and the rest of the world
Visible trade
Trade in goods
Invisible trade
Trade in services
Exchange Rates
The price of one currency in terms of another
Real Exchange rate
The nominal exchange rate adjusted for differences in relative inflation rates between countries
Effective exchange rate
Exchange rate for a country relative to weighted average of currencies of its trading powers
Foreign exchange reserves
Stocks of foreign currency and gold owned by the central bank of a country to enable it to meet any mismatch between the demand and the supply of the countries currency
Devaluation
Process whereby government reduces the price of its currency relative to an agreed rate of its currency relative to an agreed rate in terms of a foreign currency
Revaluation
Process whereby a government raises the price of domestic currency in terms of foreign currency
Exchange Rate Mechanism
A system that was set up by a group of European countries in 1979 with the objective of keeping member countries currencies relatively stable against each other
Purchasing power parity theory of exchange rates
Theory stating that in the long run exchange rates are determined by relative inflation rates in different countries
Appreciation
A rise in the exchange rate within a floating exchange rate system
Depreciation
A fall in the exchange rate within a floating exchange rate system
Why is exchange rate important?
It influences the prices that domestic consumers must pay for imported goods, services, assets and so the price that foreigners pay for UK goods services etc.
International competitiveness
Dependant on not only the exchange rates but also on movements in the prices of goods over time. This can offset a change in exchange rate.
Real Exchange rate
Needed to calculate the overall competitiveness of goods in a country
Real exchange rate
A calculation for international competitiveness
International transactions (in financial assets)
Something other than the current account that has influence over and is influenced by the exchange rate
how is a stable current account a measurement of macroeconomic performance?
- Although governments do not have explicit targets for the current account –> try to improve their international competitiveness.
- Exports are promoted.
how is a sustainable fiscal deficit & national debt a measurement of macroeconomic performance?
- governments must borrow
- if interest payments on the national debt are high, this has a high opportunity cost
why is low income inequality/poverty a measure of macroeconomic performance?
- High inequality and poverty can lead to social unrest –> impact the standard of living
- Inequality can be measured in different ways (Gini Coeffiient)
why is low unemployment a measure of macroeconomic performance?
- governments aim to have low unemployment
- full employment is not 0% unemployment, because there will always be some people temporarily unemployed.
what is the international labour organisation measure of unemployment?
defines unemployment as someone who has been actively seeking work for the past 4 weeks - but ready and able to start in the next 2 weeks.
- calculated quarterly; internationally agreed and comparable measure.
- based on a survey.
how can short-run economic growth be measured?
by the annual percentage change in real GDP
- shown on an AD/AS diagram, by a rightward shift of AD.
what are the causes of short-run economic growth?
anything that causes AD to rise:
- lower interest rates, lower income/corporation tax, higher consumer/business confidence, higher government spending, weaker exchange rate.