Theme 2 Definitions Flashcards
Factor of production
An input to the production process (i.e. land, labour, capital and enterprise).
Gross Domestic Product (GDP)
The total market value of all goods and services produced in a country in one year and can be measured by adding up all of an economy’s incomes (wages, interest, profit and rents) or expenditures (consumption, investment, government spending and net-exports). It does not include earnings by its residents while outside of the country.
Real GDP
GDP adjusted for inflation; nominal GDP – inflation
Nominal GDP
GDP calculated at current prices; not adjusted for inflation (real GDP + inflation)
GDP per capital
GDP divided by the population
Gross National Income (GNI)
The value of all goods and services produced by a country in a year (GDP) plus net overseas interest payments and dividends (factor income).
Gross National Product (GNP)
The total market value of all goods and services produced by domestic residents (GDP) in a year, plus income that residents have received from abroad, subtract income claimed by non-residents.
Purchasing Power Parities (PPP)
An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.
GDP PPP
GDP converted to international dollars using purchasing power parity rates in order to adjust for differences in the cost of living between countries.
Standard of living
How well off is an individual, household, or economy, measured by a complex mix of variables such as income, health, the environment, participation in society and political freedoms.
Easterlin Paradox
Once a developed country passes a threshold average income, more growth doesn’t increase average reported happiness. For developed countries, higher levels of a countries GDP per capita did not relate to a higher level of happiness reported by citizens.
Inflation
A sustained increase in the average price level over time. It implies a falling value of money. As prices rise, the purchasing power of money decreases.
Deflation
A sustained fall in the average price level over time.
Disinflation
A fall in the rate of inflation; prices are still rising but at a slower rate.
Demand-pull inflation
Inflation which is caused by excess demand in the economy. Too much spending in the economy relative to limited production capacity bids up prices. If AD increases and there is no increase in AS, then DP inflation is likely to occur.
Cost-push inflation
Inflation caused by increases in the costs of production in the economy, which are passed on to consumers as higher prices.
Hyperinflation
When the prices of goods and services rise by over 50% a month.
Price-level
The average price of goods and services in the economy
Price index
A measure of average prices in one period relative to average prices in another period. It measures changes in the value of a basket of commonly consumed goods.
CPI
The CPI (consumer price index) is the official measure of inflation in the UK
RPI
A measure of the price level which has been calculated in the UK for over 60-years and used in a variety of contexts such as by the government to index welfare benefits.
Anticipated inflation
Increases in prices which economic actors are able to predict with accuracy.
Unanticipated inflation
Increases in prices which economic actors like consumers and firms fail to predict accurately and so their decisions are based on poor information.
Stagflation
A period of rising inflation but falling output and rising unemployment. Stagflation is often caused by a rise in the price of commodities, such as oil; it occurred in the 1970s following the tripling in the price of oil.
Active population
Those in work or actively seeking work; also known as the labour force.
Activity rate/participation rate
The number of those in work or unemployed divided by the population of working age expressed as a percentage.
Employed
The number of people in paid work.
Employees
Workers employed by another individual or firm.
Employment
Those in paid work
Employment rate
The number of those in work divided by the population of working age expressed as a percentage.
Full-time workers
Workers who work hours and the days which are the norm for a particular job.
Part-time workers
Workers who only work a fraction of the hours and the days which are the norm for a particular day.
Hidden unemployed
Partly those in the population who would take a job if offered, but are not in work and are currently not seeking work; and partly those who are unemployed.
Economically inactive
The number of those not in work and not unemployed.
Inactivity rate
The number of those not in work and not unemployed divided by the population of working age, expressed as a percentage.
Long-term unemployed
In the UK, those unemployed for more than 1-year.
Short-term unemployed
In the UK, those unemployed for less than a year.
Population of working-age
The total number of people aged between the statutory school leaving age and the state retirement age.
Self-employed
Workers who work on their own account and are not employees.
Underemployed
Those who would work more hours if available or in jobs which are below their skill level.
Unemployed
Without a job, have actively sought work in the last four weeks and are available to start work in the next two weeks, or out of work, have found a job and are waiting to start it in the next two weeks.
Unemployment rate
The number of those not in work, but seeking work, divided by the labour force, expressed as a percentage.
Natural rate of unemployment
The equilibrium rate of unemployment (i.e. the rate of unemployment where real wages have found their free market level and where the aggregate supply of labour is in balance with the aggregate demand for labour).
Cyclical unemployment
Cyclical unemployment occurs when there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job.
Frictional unemployment
When workers are unemployed for short lengths of time between jobs.
Seasonal unemployment (Demand-side)
When workers are unemployed at certain times of the year, such as construction workers or agricultural workers in the winter.
Structural unemployment (Demand-side
When the pattern of demand and production changes, leaving workers unemployed in labour markets where demand has shrunk.
Real-wage unemployment
Exists when real wages are stuck at a level above that needed to reduce unemployment any further.
Domestic economy
The economy of a single country
Aggregate Demand
The total demand for good and services produced within the economy over a period of time. C+I+G+(X-M).
Consumption
The total expenditure by households on goods and services over a period of time.
Disposable income
The income that an individual that an individual receives after any direct taxes and having received any transfer payments/benefits. There is a positive relationship between disposable income and consumption.
Investment
The addition to the capital stock of the economy
Gross investment
The addition of capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital.
Net investment
Gross investment minus depreciation
Retained profit
Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation, and can be used to fund investment.
Depreciation of capital stock
The value of capital stock which has been used up or worn out.
Short-run
The period of time when money wage rates and the prices of all other factor inputs in the economy are fixed.
SRAS curve
The upward sloping AS curve which assumes that money wage rates are fixed.
Supply-side shock
Factors such as changes in wage rates or commodity prices which cause the SRAS curve to shift.
LRAS curve
The long-run aggregate supply curve which assumes that wage rates are variable, both upwards and downwards.
Productive capacity
The maximum possible output of an economy.
Full-productive capacity
The level of output where no extra production can take place in the long-run with existing resources.
Indexation
Adjusting the value of economic wages such as wages or interest rates in line with inflation.
Shoe leather costs
The opportunity costs of time and effort that people expend by holding less cash in order to reduce the inflation tax they pay on cash holdings when there is high inflation.
Menu costs
The cost to a firm resulting from changing its prices
What percentage of goods used in the calculation of RPI are used in CPI?
87%
How many goods and services are measured for a ‘shopping basket’?
Approximately 700, the prices of most of these items collected from around 150 different locations each month.
How often is RPI and CPI calculated?
Monthly
What percentage of national income do wages and salaries account for?
50%
What is the Labour Force Survey (LFS)?
A survey produced by the International Labour Organisation (ILO) every 3 months of approximately 60,000 households.
Enterprise
The seeking out of profitable opportunities for production and taking risks in attempting to exploit them. Entrepreneurs organise the factors of production and take risks with their own money and the financial capital of others.
Hysterisis
A rise in unemployment caused by a recession may cause the natural rate of unemployment to increase.
This is because when workers are unemployed for a time period they become deskilled and demotivated and are less able to get new jobs.
In addition, studies have shown that employers have a tendency to screen out job candidates who’ve been out of work for long stretches of time.
Claimant count
The number of people claiming unemployment-related benefits (Jobseeker’s allowance since October 1996).
What is the cost to the Exchequer of one person being unemployed?
One study shows that the cost to the Exchequer for one person being unemployed is £6,243 a year in benefits and lost tax revenue.
What percentage of AD does consumption constitute?
60%
What percentage of AD does government spending constitute?
25%
What percentage of AD does investment constitute?
15%
What percentage of AD do net-exports constitute?
1%
Productivity
Output per unit of input employed.
So, labour productivity is output per worker. Capital productivity is output per unit of capital employed.
Classical LRAS curve
Perfectly inelastic because classical economists believe that in the long-run, all markets will clear, meaning that there can be no output gap in the long-run, and instead the economy will always return to producing at its maximum potential level of output.
Circular flow of income
A model of the economy depicting the flow of goods, services and factors and their payments around the economy.
National Output (O)
The value of the flow of goods and services from firms to households.
National Expenditure (E)
The value of spending by households on goods and services.
National Income (Y)
The value of income paid by firms (over a period of time) to households in return for land, labour and capital. It is equal to National Output and National Expenditure.
Households
Own the wealth of the nation. They own the stock of the land, labour, and capital used to produce goods and services. They supply the factors in return for income which are rents, wages, interest and profits (rewards to the factors of production). They then use this money to buy goods and services.
Firms
Produce goods and services by hiring factors of production from households, then selling them back to households.
Injections
Spending which does not come from households
Closed economy
An economy where there is no foreign trade.
Open economy
An economy where there is trade with other countries.
Wealth
A stock of assets which can be used to generate a flow of production or income. E.g. physical wealth such as factories and machines is used to make goods and services.
Withdrawals
Spending which does not flow back from households to firms
Income
Rent, interest, wages and profits earned from wealth owned by economic actors.
Multiplier ratio
The ratio of a change in equilibrium real income to the autonomous change (injection) that brought it about.
Multiplier effect
An increase in investment or other injection will lead to an even greater increase income (assuming that the injection is not determined by income).
It can be calculated from the marginal propensities to consumer, withdraw, save, tax and import. It will cause AD to increase by more than the initial increase in investment, government spending or exports.
Marginal Propensity to Import
The increase in imports, divided by the increase in income that caused them (ΔM/ΔY).
Marginal propensity to save (MPS)
The increase in saving divided by the increase in income that caused them (ΔS/ΔY).
Marginal propensity to tax (MPT)
The increase in tax revenues, divided by the increase in income that caused it (ΔT/ΔY).
Marginal propensity to withdraw (MPW)
The increase in withdrawals from the circular flow (S+T+M) divided by the increase in income that caused them. This is the same as the sum of the marginal propensity to save, tax, and imports (MPS+MPT+MPM).
Actual GDP growth
Measured as an increase in real GDP.
Potential GDP growth
Measured as an increase in the productive capacity of the economy.
Output gap
The difference between the actual level of GDP and the maximum productive potential real GDP of the economy.
Negative output gap
When actual GDP is less than the productive potential of the economy. This signifies that the economy is operating with spare capacity and unemployment is likely to be high.
Positive output gap
When actual GDP is greater than the productive potential of the economy; this is possible in the short-run. In this case, the economy is operating at over-capacity and inflationary pressures are likely to be increasing.
Trade cycle
Regular fluctuations in the level of economic activity around the productive potential of the economy. In business cycle, the economy veers from recession, when it is operating well below its productive potential, to booms when it is likely to be at or even above productive potential.
Recession
In the UK, a recession is defined as a period of 2 or more consecutive quarters of negative economic growth.
Demand-side policies
Instruments at the disposal of the government to help it influence aggregate demand to achieve its main macroeconomic objectives.
Fiscal policy
The use of government spending and/or taxation to manage the level of aggregate demand.
Expansionary fiscal policy
Fiscal policy which is used in a recession to boost aggregate demand. It involves increasing government spending, and decreasing tax, requiring the government to run a budget deficit.
Budget deficit
A budget deficit exists when government spending exceeds tax revenues. If a government does not have sufficient tax revenue to finance its expenditure, it may need to borrow in order to execute its plans.
Contractionary fiscal policy
Fiscal policy which is used in an economic boom to reduce aggregate demand. It involves increasing tax, and decreasing government spending, requiring the government to run a budget surplus.
Budget surplus
A government surplus arises from government spending being less than tax revenues.
Balanced budget
A statement of spending and income plans by the government where spending is equal to its receipts, mainly tax revenues.
Budget
The Budget is the yearly statement on government spending and taxation plans in the UK.
Direct tax
A tax levied directly on individuals or companies such as income tax or corporation tax.
Fiscal stance
Whether fiscal policy is expansionary, contractionary, or neutral.
Instruments of policy
An economic variable, such as the rate of interest, income tax rate, or government spending on education, which is used to achieve a target of government policy.
Discretionary fiscal policy
Deliberate changes to fiscal policy made by the government to influence the economic cycle. E.g. reductions in rates of income or corporation tax or large government spending plans.
National debt
The total accumulated borrowing of government which remains to be paid to lenders. If a government repeatedly runs a budget deficit, these debts will accumulate. The accumulated debt is known as the national debt.
What did the deficit rise to after 2008?
£175 billion (12.4% of GDP) in 2009-10, and a rise in the national debt above 80% of GDP at its peak.
Monetary policy
A type of demand-side policy which involves the use of monetary tools (the interest rate, the money supply, and the exchange rate) to influence the macroeconomy.
Interest rates
The cost of borrowing money and the reward for saving.
Contractionary monetary policy
The CB would increase IR to decrease AD, if inflation was predicted to rise above target.
Expansionary monetary policy
The CB would decrease IR to increase AD, if inflation was predicted to fall below target.
Quantitative easing
A form of expansionary monetary policy in which the central bank injects newly created electronic money into the financial system through the purchase of government bonds and other high-quality assets.
Banks of England’s Monetary Policy Committee
Committee which meets on a monthly basis to set the Bank Rate, and if applicable, the level of quantitative easing.
Hot-money
Money that flows freely and quickly around the world looking to earn the best rate of return.
Supply-side policies
Policies designed to improve the long-run capacity of the economy by improving the quantity and/or quality of the factors of production.
Deregulation
The process of removing government controls from markets.
Industrial policy
Government policy to promote and support individual firms which it considers important for the growth rate of the economy.
Interventionist policies
Active government involvement to correct market failures and develop the productive capacities of an economy. E.g. government infrastructure projects and policies to improve education and training.
Labour market flexibility
The degree to which demand and supply in a labour market respond to external changes (such as changes in demand for a product or in population size) to return the market to equilibrium.
Market-based policies
Policies which remove obstructions to the efficient functioning of the free market, aiming to promote entrepreneurship, incentives and competition. E.g. tackling labour market rigidities and reducing taxes to promote incentives.
Minimum wage
The least amount an employer can legally pay one of its workers, usually expressed as an hourly wage rate.
Poverty or earnings trap
Occurs when an individual is little better off or even worse off when gaining an increase in wages because of the combined effect of increased tax and benefit withdrawal.
Privatisation
The sale of government organisations or assets to the private sector.
Red-tape
Rules and regulations issued by government which must adhere to in order to operate legally.
Unemployment trap
Occurs when an individual is little better off or even worse off when getting a job after being unemployed because of the combined effect of increased tax and benefit withdrawal.
Supply-side
Refers to the ability of an economy to produce goods and services.
Example of negative interest rates
In 2009 and 2010, Sweden and, in 2012, Denmark used negative interest rates to stem hot money flows into their economies.
Example of interest rates
In 2008, interests rates in the UK fell from 5% to 0.5%, drawing the rate even closer to the zero-lower bound and ushering in a period of ultra-low interest rates.
How long has the MPC been independent for?
Since 1997
What is the MPC’s remit?
The MPC has just one remit: to maintain CPI inflation at 2%.
Fiscal policy response to the 2008 Financial Crisis (US)
In 2008, the US government instituted the Economic Stimulus Act of 2008, a $152 billion fiscal stimulus package. This was followed by the American Recovery and Reinvestment Act of 2009, a $787 billion bill which involved government spending over a period of several years.
Fiscal policy response to the 2008 Financial Crisis (UK)
In the UK, a number of fiscal measures were introduced throughout 2008, including a tax cut for basic rate tax payers, a temporary 2.5 percentage point cut in the VAT rate, £3 billion worth of investment spending brought forward from 2010 and a variety of other measures such as a £20 billion Small Enterprise Loan Guarantee Scheme.
Monetary policy response to the 2008 Financial Crisis
In 2008, interests rates in the UK fell from 5% to 0.5%, drawing the rate even closer to the zero-lower bound and ushering in a period of ultra-low interest rates.
Between March and November 2009, the MPC authorised the purchase of £200 billion worth of assets, mostly UK government debt or ‘gilts’. By July 2011, total assets purchases reached £375 billion.
Example of restrictions on trade unions
The Trade Union Act 2016 ensures that industrial action only ever goes ahead when there had been a ballot turnout of at least 50%.
In important public services, including health, education and transport, an additional threshold of 40% of support to take industrial action from all eligible members must be met for the action to be legal.
Example of tackling occupational immobility of labour
In January 2020, Qatar abolished the controversial ‘kafala’ labour system; a sponsorship system used in the Arab World in which employers will sponsor migrant worker so that they can come into a country and work. However, it significantly restricts the mobility of the worker unless approved by the sponsor, who can forbid them from leaving for better employment.
Example of minimum wage reform
As of April 2020, the new National Living Wage of £8.72 (6.2% increase) for workers over 25 will be introduced.
Example of general welfare and benefits reform
In April 2013, the Government introduced a cap on the total amount of benefit that working-age people can receive.
The cap is £350 for a single adult and £500 for a couple a week.
Reducing the amount of benefits that people can claim is designed to entice people back into the labour market, and therefore increase the supply of labour. The new regime is known as Universal Credit.
Example of general welfare and benefits reform failure
UC has been riddled with problems. A fifth of claimants’ payments were delayed and a quarter of new claimants are forced to wait up to 4 weeks before receiving their money.
Example of reduced levels of income tax
From April 2019, the standard Personal Allowance increased to £12,500, with the higher rate tax threshold increasing to £50,000.
Example of policies to improve education
Increased investment into STEM education may improve the number of science and technology graduates, improving the quality of the labour supply.
The Education and Skills Act 2005 raised the minimum age at which a person can exit education or training to 18 years of age.
Example of policies to improve training
UK Industrial Strategy White Paper: create a new National Retraining Scheme that supports people to re-skill, beginning with a £64 million investment for digital and construction training.
Example of policies to improve training failure
Government training schemes have been notoriously ineffective, as well as being very expensive on the government.
In addition, age discrimination is a major barrier to employment opportunities as well.
Example of policies to improve competition
The main competition regulator in the UK is the Competition and Markets Authority (CMA) which has the role of tackling banned anti-competitive practices by firms who hold a dominant market position, such as collusive price-fixing and predatory pricing, and exclusivity contracts.
Companies breaching EU and UK competition rules risk hefty fines of up to 10% of global turnover and senior executives risk jail-time.
Example of policies to improve competition (privatisation)
The British Telecommunications Act 1981 provided for the privatisation of British Telecom and enabled other operators to run telecommunications systems also, ending BT’s monopoly over the industry.
Example of policies to improve competition (de-regulation)
Enterprise Zones are designated areas across England that provide tax breaks and Government support and are part of the Government’s wider Industrial Strategy to support businesses and enable local economic growth.
Aerohub Cornwall; 2 investment-ready development sites dedicated to cutting-edge aerospace and space business.
Example of policies to promote entrepreneurship
Raise total research and development (R&D) investment to 2.4% of GDP by 2027.
Increase the rate of R&D tax credit to 12%.
Example of policies to promote infrastructure
Support electric vehicles through £400 million charging infrastructure investment and an extra £100 million to extend the plug-in care grant.
Boost digital infrastructure with over £1 billion of public investment, including £176m for 5G and £200m for local areas to encourage a roll-out of full-fibre networks.
Example of policies to promote infrastructure failure
HS2 is very long-term and will not completely finished until 2035-2040 and is also due to cost £106bn.
