Theme 2 Key Terms Flashcards
actual growth
economic growth measured by changes in real GDP
AD proportions
consumption: 60%
investment: 15-20%
govt spending: 18-20%
net trade: 5%
aggregate demand (AD)
the total level of demand in an economy at any given price at a moment in time
aggregate supply (AS)
the total amount of output in the economy at any given price at a moment in time
animal spirits
the level of confidence of business owners, and the feeling of whether their investment would be profitable
avg propensity to consume (APC)
(total consumption) / (total income)
balance of payments
a record of all financial dealings over a period of time between economic agents of one country and another
bank multiplier ↑↓
- make their money by taking in our deposits and lending money out @ int rates
- the person who receives the money the borrower has spent is likely to input it back into bank system.
- if keeping 10%, initial is £100m, keep £10m lendd out £90m. £90m deposited back, keep £9m lend out £81m. Re deposited £81m, keep £8.1, lend out £72.9m.
- by doing this, ↑ money supply
base year
- a year chosen as a good comparison in series of data when building an index
- it is automatically given an index figure of 100
boom
the peak of the business cycle, when growth is high
budget
where the government lays out their spending and taxation plans
budget deficit
when the govt spends more money than it receives
budget surplus
when the govt receives more money than it spends
capital / financial account
records flows of money associated with saving, investment, speculation and currency stabilisation
circular flow of income
a model of the economy which shows the flow of goods and services, the factors of production and money around the economy
what does the circular flow look like?
2 main components?
inputs / outputs?
injections / withdrawals?
claimant count
- a measure of unemployment
- the number of people receiving benefits for being unemployed
consumer price index (CPI)
official measure used to calculate the rate of inflation, using a weighted basket of goods
Consumption
consumer spending on goods and services
cost push inflation
inflation caused by a decrease in AS
current account
a record of the payments for the purchase and sale of goods and services, as well as income and transfers
current account deficit
when more money leaves the country than enters, so the current account is negative
cyclical/ demand deficient unemployment
unemployment caused by a lack of AD
- recession vs boom
deflation
a persistent fall in prices of goods and services
deflationary policy
fiscal or monetary policy which is aimed at reducing AD to control inflation
demand pull inflation
inflation caused by an increase in AD
depreciation
the reduction in the value of machinery overtime
direct tax
taxes paid straight to the govt by the individual taxpayer
disinflation
a reduction in the rate of inflation
disposable income
the money consumers have left to spend, after taxes have been taken away and benefits have been added
economic growth
- an increase in the long term productive potential in the economy
- an increase in the amount of goods and services which are produced, measure by an increase in real GDP
economic growth formula
Q²CELL
Quality / Quantity
Capital (investment -> tech/machines=prod up)
Enterprise (new business, jobs, more produce)
Land (land/resources)
Labour (size/quantity)
employed
- someone who does more than 1 hour of paid work a week, or is temporarily away from work, on a govt supported training scheme or does a minimum of 15 hours unpaid work for their business
- ILO definition
expansionary policy
- fiscal or monetary policy which is aimed at increasing AD (exports) to lead to growth
exports
goods or services sold to foreigners that bring income into the country
export-led growth
economic growth arising from an increase in exports
fiscal policy
the use of borrowing, govt spending, and taxation to manipulate the level of AD and improve macroeconomic performance
frictional unemployment
unemployment caused when people move between jobs and enter the job market
- short term
GDP
the value of goods and services produced in a country over a given period of time
GDP per capita
total GDP divided by the population
Gross investment
investment both to replace old machinery that has depreciated and to create/buy new ones
GNI
the value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends
- adds what a country earns from overseas investments
- removes what foreigners earn in a country and send home
(GDP + net income earned abroad)
GNP
the value of goods and services produced by citizens of a country, whether they live in the country or not, minus income earned by foreign residents
Govt spending
spending by the govt for the provision of goods and services
imports
goods and services bought from foreigners that takes income out of the country
inactive
- those neither employed nor unemployed
- those not participating in the job market
income
a flow of assets
index number
numbers allowing accurate comparisons over time to be made. the base year value is normally 100
indirect tax
tax where the person charged with paying the money to the govt is able to pass on the cost to someone else
inflation
the general rise in prices of goods and services that erodes the purchasing power of money
injection
spending power entering the circular flow of income resulting from investment, govt spending and exports
interventionist supply side policies
policies designed to correct market failure, where govt intervenes in the market
investment
addition of capital stock to the economy i.e. machines and factories used to produce other goods and services
Labour force survey
a measure of unemployment which surveys people to class them as unemployed, employed, or inactive under the international labour organisation definitions
living standards
the quality of life enjoyed by people in a country
long run
when all factors of production are variable
LR trend rate of growth
the avg sustainable rate of economic growth over a period of time. what tends to happen over a long time (the avg)
LRAS
the total output an economy can produce when operating at full output
LR trend growth rate
the avg sustainable rate of economic growth over a period of time
Marginal propensity to consume
the proportion of an increase in income spent on consumption
MPC formula
(△ in consumption) / (△ in income)
Marginal propensity to import
the proportion of an increase in income spent on imports
marginal propensity to save
the proportion of an increase in income that is saved
MPS formula
(△ in savings) / (△ in income)
marginal propensity to tax
the proportion of an increase in income that is taken away in tax
marginal propensity to withdraw
the proportion of an increase in income that is withdrawn from the circular flow
market based supply side policies
policies which are designed to remove anything which prevents the free market system working efficiently
monetary policy
the attempts of the central bank/regulatory authority to control the level of AD by altering base interest rates or the amount of money in the economy
Monetary policy committee
9 economists who meet monthly to set the bank rate as well as other monetary instruments
monetary supply
stock of money in the economy
multiplier process
an increase in an injection to the circular flow will lead to an even greater increase of national income
multiplier ratio
ratio of the final change in income to the initial change
multiplier formula
1 / (1-MPC) = 1 / MPW
national expenditure
the value of spending by households on goods and services
national income
the value of income paid by firms to households in return for land, labour, capital and enterprise
national output
the value of the flow of goods and services from firms to households
negative output gap
- when GDP is lower than predicted
- the economy is producing below full output
net exports
exports minus imports
net investment
- investment adjusted for depreciation
- gross investment minus depreciation
nominal GDP
- GDP which does not take inflation into account
- GDP at current prices
Macroeconomic objectives
- low unemployment (less than 5%)
- low and stable inflation (2%, +/- 1%)
- economic growth @ similar to other econs,
(strong, sustained, sustainable - 2.5%) - balanced
(BoP equilibrium, including current acc. bal)
output gap
the difference between the long term trend rate of growth and actual growth
positive output gap
- when GDP is higher than predicted
- the economy is producing above full output
potential growth
a change in the productive potential of the economy
purchasing power parity
exchange rate of one currency to another that compares cost of living in different countries by comparing cost of a typical basket of goods
- big mac index (globally)
quantitative easing
when the central banks buys assets in exchange for money in an attempt to increase the money supply
real GDP
GDP which strips out the effect of inflation
real wage unemployment
unemployment caused when wages are set above the equilibrium wage rate
recession
- the trough of the business cycle, when growth is low
- the govt defines it as where real GDP falls in at least 2 successive quarters
repo rate
- the rate the bank of England will charge for short-term loans to other banks / financial institutions
retail price index (RPI)
an old measure of inflation which has lost its national statistic status
Savings
the decision to postpone consumption
seasonal unemployment
unemployment caused when an industry only operates during certain times of the year
short run
when at least one factor of production is fixed
SRAS
aggregate supply when at least one factor of production Is fixed
short-run Phillips curve
- shows the relationship between unemployment and inflation
- higher levels of unemployment leads to lower levels of inflation
structural unemployment
unemployment caused by the long term decline of an industry
- when mismatch between skills and qualifications of available workers, and requirements of available jobs
supply-side policies
govt policies aimed at increasing the productive potential of the economy and shifting LRAS to the right
total GDP
the GDP of the whole country
Trade (business) cycle
the tendency of economic growth to rise and fall below the trend rate of economic growth, causing booms and busts
underemployment
those who are working part-time, on zero-hour contracts or on govt training schemes but would prefer to be full-time or those employed in areas under their skill level e.g. a graduate working at a bar
unemployed
those who are without work, able to start work in the next 2 weeks and have actively sought work for the last 4 weeks (ILO definition)
value of GDP
- nominal values of GDP
- GDP at current prices
Volume of GDP
- real values of GDP
- GDP at current prices
wealth
a stock of assets
wealth effect
- a change in consumption following a change in wealth
- i.e People with more wealth tend to greater levels of consumption (or vice versa)
withdrawal
spending power leaving the circular flow of income resulting from savings, taxation and imports
