Tutor2u Glossary Theme 2

Question 1

Big Mac Index

2.1 - Economic growth

Answer 1

The Big Mac index is a way of measuring Purchasing Power Parity (PPP) between different countries. By converting the average national Big Mac prices to U.S. dollars (S) the same goods can be informally compared. This can tell us something about whether a currency is under or overvalued in foreign exchange markets.

Question 2

BRICS economies

2.1 - Economic growth

Answer 2

The BRICS grouping – Brazil, Russia, India, China and South Africa –short-hand for the rise of emerging markets. The BRICs have a bigger share of world trade than the USA.

Question 3

Constant prices

2.1 - Economic growth

Answer 3

Constant prices tell us that the data has been inflation adjusted.

Question 4

Economic cycle

2.1 - Economic growth

Answer 4

Variations in the annual rate of growth of real national output (GDP) over time

Question 5

Economic development

2.1 - Economic growth

Answer 5

Long run improvements in broad measures of income per capita, education and health outcomes and reductions in extreme poverty, hardship and inequality.

Question 6

Economic growth

2.1 - Economic growth

Answer 6

An increase in the real value of goods and services produced as measured by the annual % change in real GDP. Also, a long-run increase in a country’s productive capacity.

Question 7

Economic shocks

2.1 - Economic growth

Answer 7

Unpredictable events such as volatile global prices for oil, gas and foodstuffs.

Question 8

Economic stability

2.1 - Economic growth

Answer 8

When growth, prices and unemployment do not change much from one year to another.

Question 9

Emerging markets

2.1 - Economic growth

Answer 9

Term commonly used to describe the financial markets of developing countries.

Question 10

Full capacity output

2.1 - Economic growth

Answer 10

Level of GDP where all available factor inputs are fully employed.

Question 11

Globalisation

2.1 - Economic growth

Answer 11

A process in which countries have become increasingly integrated and inter-dependent.

Question 12

GNI

2.1 - Economic growth

Answer 12

Income generated from resources owned by inhabitants and businesses of a country

Question 13

Green GDP

2.1 - Economic growth

Answer 13

A popular term for environmentally adjusted gross domestic product.

Question 14

Gross Domestic Product (GDP)

2.1 - Economic growth

Answer 14

Total monetary value of output, spending and factor incomes generated within the geographical boundaries of a country in a given time period.

Question 15

Gross Domestic Product per capita

2.1 - Economic growth

Answer 15

National income per head of population, used as a baseline measure of living standards, measured by total GDP/resident population.

Question 16

Human Development Index

2.1 - Economic growth

Answer 16

An index used to assess comparative levels of development in countries, quantified in terms of literacy, life expectancy and purchasing power as measured by real national income per capita (PPP adjusted).

Question 17

Infrastructure

2.1 - Economic growth

Answer 17

The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy.

Question 18

Lagging indicators

2.1 - Economic growth

Answer 18

Indicators which tend to follow economic cycles e.g. unemployment.

Question 19

Leading indicators

2.1 - Economic growth

Answer 19

Indicators which predict future economic trends e.g. consumer confidence.

Question 20

Macroeconomic performance

2.1 - Economic growth

Answer 20

The overall performance measured by changes in output, investment, prices, jobs, trade and living standards and also the distribution of income and wealth.

Question 21

Manufacturing

2.1 - Economic growth

Answer 21

Manufacturing is one of the production industries, which also include mining, electricity, water & waste management and oil & gas extraction. In 2019, the UK manufacturing sector accounted for 2.7 million jobs,11% of total UK GDP.

Question 22

National happiness

2.1 - Economic growth

Answer 22

Societal and personal well-being looking beyond what an economy produces, to areas such as health, relationships, education and skills, housing quality, finances and the environment.

Question 23

National income

2.1 - Economic growth

Answer 23

The total income earned by all factors of production in an economy in a given time frame.

Question 24

Nominal GDP

2.1 - Economic growth

Answer 24

Monetary value of all goods and services produced expressed at current prices (i.e. unadjusted for the effects of inflation).

Question 25

Nominal income

2.1 - Economic growth

Answer 25

The level of income in a given time period (e.g. a year) which is unadjusted for the effects of inflation, also known as money income.

Question 26

Per capita incomes

2.1 - Economic growth

Answer 26

Income per head of the population – a measure of average living standards e.g. Gross national income per capita = GNI/total population.

Question 27

Purchasing power

2.1 - Economic growth

Answer 27

The buying power of a unit of currency. It is inversely related to the rate of inflation.

Question 28

Purchasing power parity

2.1 - Economic growth

Answer 28

PPP is an economic theory that compares different countries’ currencies through a “basket of goods” approach. According to this concept, two currencies are in equilibrium—known as the currencies being at par—when a basket of goods is priced the same in both countries, taking into account the exchange rates. Your purchasing power is the same in this situation.

Question 29

Real disposable income

2.1 - Economic growth

Answer 29

Income after taxes and welfare benefits, adjusted for the effects of inflation.

Question 30

Real GDP

2.1 - Economic growth

Answer 30

Nominal GDP adjusted for price changes, expressed at constant prices.

Question 31

Real income

2.1 - Economic growth

Answer 31

Nominal income adjusted for price changes, expressed at constant prices.

Question 32

Real income per capita

2.1 - Economic growth

Answer 32

Real value of household income per head of population = real GDP divided by the resident population.

Question 33

Service industries

2.1 - Economic growth

Answer 33

The service industries include the retail sector, the financial sector, the public sector, business administration and cultural activities. In 2019, the service industries accounted for 80% of total UK GDP and accounted for 83% of jobs.

Question 34

Consumer price index (CPI)

2.1.2 - Inflation

Answer 34

The CPI is the UK government’s preferred measure of inflation, it measures changes in the average cost of living for a representative household and is a weighted price index.

Question 35

Cost push inflation

2.1.2 - Inflation

Answer 35

Inflation caused by rising costs of production either domestically or from importing raw materials at higher prices due to exchange rate depreciation.

Question 36

CPIH inflation

2.1.2 - Inflation

Answer 36

CPIH is a measure of UK inflation introduced in 2017 that includes owner occupiers’ housing costs). These are the costs of housing services associated with owning, maintaining and living in one’s own home.

Question 37

Creeping inflation

2.1.2 - Inflation

Answer 37

Small rises in the general price level over a long period, low positive rate of inflation.

Question 38

Deflation

2.1.2 - Inflation

Answer 38

A persistent fall in the general price level of goods and services shown by a negative rate of inflation.

Question 39

Demand pull inflation

2.1.2 - Inflation

Answer 39

Caused by an excess of AD over AS. “Too much money chasing too few goods”.

Question 40

Disinflation

2.1.2 - Inflation

Answer 40

A fall in the rate of inflation but not sufficient to bring about deflation. Prices are still rising but at a slower rate, for example a drop in the annual inflation rate from 6% to 2%.

Question 41

Inflation

2.1.2 - Inflation

Answer 41

A sustained increase in the general price level for goods and services.

Question 42

Inflation expectations

2.1.2 - Inflation

Answer 42

The rate of increase of consumer prices expected by consumers. Expectations can then influence spending and saving decisions and also wage bargaining.

Question 43

Inflation target

2.1.2 - Inflation

Answer 43

The Bank of England has a CPI inflation target, which is currently 2 per cent.

Question 44

Inflationary pressures

2.1.2 - Inflation

Answer 44

Demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.

Question 45

Money supply

2.1.2 - Inflation

Answer 45

The entire quantity of a country’s commercial bills, coins, loans and credit

Question 46

Price stability

2.1.2 - Inflation

Answer 46

Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses

Question 47

Purchasing power

2.1.2 - Inflation

Answer 47

The buying power of a unit of currency. It is inversely related to the rate of inflation.

Question 48

Relative deflation

2.1.2 - Inflation

Answer 48

An economy with an inflation rate which is lower than comparable economies. Over time, a low relative rate of inflation can lead to improved price competitiveness.

Question 49

Stagflation

2.1.2 - Inflation

Answer 49

A combination of slow growth and rising inflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent.

Question 50

Wage price spiral

2.1.2 - Inflation

Answer 50

Where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation

Question 51

Weights

2.1.2 - Inflation

Answer 51

Weights are used when calculating a weighted consumer price index. In the UK for example, the weights used are taken from the spending patterns revealed by data from the Family Expenditure Survey. Heavily weighted items such as transport costs, fuel bills and prices of foodstuffs have a bigger impact on the overall measure of CPI inflation

Question 52

Claimant Count

2.1.3 - Employment and unemployment

Answer 52

The number of people claiming unemployment-related benefits.

Question 53

Cyclical unemployment

2.1.3 - Employment and unemployment

Answer 53

Unemployment caused by a persistent lack of aggregate demand for goods and services, where national output < potential output leading to a negative output gap.

Question 54

Demand deficient unemployment

2.1.3 - Employment and unemployment

Answer 54

Also known as cyclical unemployment, occurs when planned demand is insufficient to generate a full-employment level of real national output, this is most likely to happen in a slowdown or recession.

Question 55

Discouraged workers

2.1.3 - Employment and unemployment

Answer 55

People often out of work for a long time who give up on job search and who become economically inactive in the labour market. A cause of hidden unemployment.

Question 56

Disguised unemployment

2.1.3 - Employment and unemployment

Answer 56

Also known as hidden unemployment, where part of the labour force is either left without work or is working in a redundant manner where worker productivity is essentially zero.

Question 57

Economically active

2.1.3 - Employment and unemployment

Answer 57

Those who are unemployed and actively seeking employment.

Question 58

Economically inactive

2.1.3 - Employment and unemployment

Answer 58

Those who are of working age but are neither in work nor actively seeking work.

Question 59

Frictional unemployment

2.1.3 - Employment and unemployment

Answer 59

Those moving between jobs. Typically lasts for up to six months.

Question 60

Full employment

2.1.3 - Employment and unemployment

Answer 60

When there enough job vacancies for all the unemployed to take work.

Question 61

Human capital

2.1.3 - Employment and unemployment

Answer 61

Human capital is a measure of individuals’ skills, knowledge, abilities, social attributes, personalities and health attributes. These factors enable individuals to work, and therefore produce something of economic value.

Question 62

Inactivity

2.1.3 - Employment and unemployment

Answer 62

The state of not producing an economic output.

Question 63

International Labour Organisation (ILO)

2.1.3 - Employment and unemployment

Answer 63

The ILO is a United Nations agency whose mandate is to advance social justice and promote decent work by setting international labour standards.

Question 64

Job search

2.1.3 - Employment and unemployment

Answer 64

Process by which workers find appropriate jobs given their tastes and skills.

Question 65

Labour Force Survey

2.1.3 - Employment and unemployment

Answer 65

The Labour Force Survey (LFS) is a study of the employment circumstances of the UK population. It is the largest household study in the UK and provides the official measures of employment and unemployment.

Question 66

Labour shortages

2.1.3 - Employment and unemployment

Answer 66

When businesses find it difficult to recruit the skilled workers they need.

Question 67

Labour supply

2.1.3 - Employment and unemployment

Answer 67

The number of people able, available and willing to work at prevailing wage rates.

Question 68

Migration

2.1.3 - Employment and unemployment

Answer 68

The movement of people from one geographical location to another with the intention of settling in the new region.

Question 69

Natural rate of unemployment

2.1.3 - Employment and unemployment

Answer 69

The equilibrium rate of unemployment = frictional + structural unemployment.

Question 70

NEETs

2.1.3 - Employment and unemployment

Answer 70

NEET’ stands for young people aged 16-24 Not in Education, Employment or Training (NEET). 788,000 people aged 16-24 in the UK were NEETs in 2019, representing 11.3% of the age group.

Question 71

Net inward migration

2.1.3 - Employment and unemployment

Answer 71

When the number of migrants coming into a country is higher than those leaving in a given time period – usually a year.

Question 72

Real wage

2.1.3 - Employment and unemployment

Answer 72

Nominal wage adjusted for the effects of inflation

Question 73

Redundancy

2.1.3 - Employment and unemployment

Answer 73

Making someone redundant is to end their paid employment

Question 74

Seasonal unemployment

2.1.3 - Employment and unemployment

Answer 74

This occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.

Question 75

Structural unemployment

2.1.3 - Employment and unemployment

Answer 75

Unemployment that results from the decline in an industry which leaves people unemployed because they do not have the skills needed by industries that are growing.

Question 76

Tight labour market

2.1.3 - Employment and unemployment

Answer 76

When demand for labour is high and there are shortages of labour. Businesses may have to offer higher wages to attract and keep the workers they need.

Question 77

Under-employment

2.1.3 - Employment and unemployment

Answer 77

Workers are underemployed when they are willing to supply more hours of work than their employers are prepared to offer.

Question 78

Unemployment rate

2.1.3 - Employment and unemployment

Answer 78

The unemployment rate is the proportion of the economically active population who are unemployed.

Question 79

Unemployment trap

2.1.3 - Employment and unemployment

Answer 79

When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – creates a disincentives problem.

Question 80

Unit wage costs

2.1.3 - Employment and unemployment

Answer 80

Labour costs per unit of output.

Question 81

Zero Hours Contract

2.1.3 - Employment and unemployment

Answer 81

An employment contract under which the employee is not guaranteed work and is paid only for work carried out.

Question 82

Balance of payments

2.1.4 - Balance of payments

Answer 82

A record of all financial transactions between an economy and the rest of the world.

Question 83

Balance of trade

2.1.4 - Balance of payments

Answer 83

The difference between the value of country’s exports and imports of goods and services combined

Question 84

Capital account

2.1.4 - Balance of payments

Answer 84

Formerly known as financial account, now a small section of the account which includes effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases and other transferable contracts across borders

Question 85

Current account

2.1.4 - Balance of payments

Answer 85

Measures the difference between money and credit going in and out of an economy (through exports, imports and income paid on assets both home and abroad).

Question 86

Current account deficit

2.1.4 - Balance of payments

Answer 86

When net external trade and income is negative leading to a net outflow of demand from the circular flow

Question 87

Current account surplus

2.1.4 - Balance of payments

Answer 87

When net external trade and income is positive, a net injection into the circular flow.

Question 88

Cyclical trade deficit

2.1.4 - Balance of payments

Answer 88

A trade deficit that arises purely due to changes in the business cycle, for example many countries run a trade deficit when strong growth increases demand for imports.

Question 89

Euro

2.1.4 - Balance of payments

Answer 89

The European single currency was created in 1999 and entered common ]circulation in 2002. As of 2019 there are 19 nations in the Euro Zone.

Question 90

Exchange rate

2.1.4 - Balance of payments

Answer 90

Exchange rates are the price of one country’s’ currency in relation to another.

Question 91

Export revenue

2.1.4 - Balance of payments

Answer 91

Sales from selling goods and services overseas, an injection of aggregate demand.

Question 92

External competitiveness

2.1.4 - Balance of payments

Answer 92

External competitiveness is the ability of businesses to sell their goods and services at competitive prices in a foreign country / overseas market.

Question 93

Hot Money

2.1.4 - Balance of payments

Answer 93

Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest.

Question 94

Net primary income

2.1.4 - Balance of payments

Answer 94

Part of the current account of the balance of payments, it measures the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers.

Question 95

Net secondary income

2.1.4 - Balance of payments

Answer 95

Part of the current account of the balance of payments, it includes overseas aid / debt relief, military grants and (for the UK) net payments to the European Union.

Question 96

Net trade

2.1.4 - Balance of payments

Answer 96

The balance between the monetary value of exports and imports.

Question 97

Overseas assets

2.1.4 - Balance of payments

Answer 97

Assets such as businesses, shares, property owned in overseas countries and which might generate a flow of primary income which is a credit item on the current account.

Question 98

Protectionism

2.1.4 - Balance of payments

Answer 98

Restricting trade through tariffs and other forms of import controls such as quotas.

Question 99

Purchasing power

2.1.4 - Balance of payments

Answer 99

The buying power of a unit of currency. It is inversely related to the rate of inflation

Question 100

Remittances

2.1.4 - Balance of payments

Answer 100

Sending money to people in another country. For many lower-income nations, remittance income is now a big contribution to their Gross National Income (GNI).

Question 101

Structural trade deficit

2.1.4 - Balance of payments

Answer 101

A trade deficit that arises due to supply-side weaknesses rather than a change in GDP or currency – usually caused by poor price and non-price competitiveness.

Question 102

Trade deficit

2.1.4 - Balance of payments

Answer 102

A trade deficit occurs when a country imports a greater value of goods and services than it exports. A trade deficit as a net withdrawal from the circular flow of income.

Question 103

Aggregate demand

2.2.1 - The characteristics of AD

Answer 103

Total amount of goods and services demanded in the economy at a given time and price level. It is the sum of consumption expenditure, investment expenditure, government expenditure and net exports

Question 104

Animal spirits

2.2.1 - The characteristics of AD

Answer 104

The state of confidence or pessimism held by consumers and businesses.

Question 105

Consumer confidence

2.2.2 - Consumption (C)

Answer 105

Expectations about the future including interest rates, incomes and jobs

Question 106

Consumer durables

2.2.2 - Consumption (C)

Answer 106

Products such as washing machines or computer screens that are not used up immediately when consumed and which provide a flow of services over time.

Question 107

Consumer spending

2.2.2 - Consumption (C)

Answer 107

Household spending on goods and services. In the UK, household consumption is the largest element of aggregate demand (GDP), accounting for 67% of the total in 2019.

Question 108

Disposable income

2.2.2 - Consumption (C)

Answer 108

Gross income less income tax and national insurance contributions plus welfare benefits.

Question 109

Household income

2.2.2 - Consumption (C)

Answer 109

The financial resources available to households to spend or save:
* Original income: Income from jobs, private pensions, interest from savings
* Gross income = original income + cash benefits
* Disposable income = gross income minus direct taxes
* Post-tax income = disposable income minus indirect taxes

Question 110

Household wealth

2.2.2 - Consumption (C)

Answer 110

The monetary value of assets – including property, shares, savings, pension fund assets.

Question 111

Income

2.2.2 - Consumption (C)

Answer 111

Income is a flow of money to factors of production such as wages and salaries paid to people in work, interest from savings and rental income from owning land/assets.

Question 112

Interest rate

2.2.2 - Consumption (C)

Answer 112

An interest rate is the cost or price of borrowing, or the gain from lending, normally expressed as an annual percentage amount.

Question 113

Negative equity

2.2.2 - Consumption (C)

Answer 113

When the value of an asset falls below the debt left to pay on that asset. Term is most commonly used in connection with property prices after a slump in house prices.

Question 114

Pension Fund

2.2.2 - Consumption (C)

Answer 114

Fund that pools employees’ pension benefits and holds them so that they can be paid at retirement. The money is invested in stocks, bonds and other assets to boost returns and ensure that there are sufficient funds to be paid out.

Question 115

Personal allowance

2.2.2 - Consumption (C)

Answer 115

The amount of income you can earn before you start paying income tax. It is £12,500 in 2019

Question 116

Precautionary saving

2.2.2 - Consumption (C)

Answer 116

Saving because of fears of a loss of real income or rising unemployment.

Question 117

Saving ratio

2.2.2 - Consumption (C)

Answer 117

The percentage of household disposable income that is saved rather than spent.

Question 118

Unsecured credit

2.2.2 - Consumption (C)

Answer 118

Credit not secured by another asset – i.e. money borrowed on credit cards.

Question 119

Wealth

2.2.2 - Consumption (C)

Answer 119

Wealth is a stock concept. Wealth can be held in different ways including savings held in commercial bank deposits, ownership of shares issued by stock-market listed companies and equity stakes in private businesses and ownership of property / real estate.

Question 120

Wealth effect

2.2.2 - Consumption (C)

Answer 120

The supposed link between changes in wealth and household spending.

Question 121

Access to credit

2.2.3 - Investment (I)

Answer 121

The willingness and ability of financial institutions to lend funds to producers and consumers.

Question 122

Animal spirits

2.2.3 - Investment (I)

Answer 122

The state of confidence or pessimism held by consumers and businesses.

Question 123

Business confidence

2.2.3 - Investment (I)

Answer 123

Expectations about the future of the economy – vital in influencing business decisions about how much to spend on new capital goods and employment intentions.

Question 124

Gross investment

2.2.3 - Investment (I)

Answer 124

Total investment calculated by adding new investment to replacement investment.

Question 125

Interest rate

2.2.3 - Investment (I)

Answer 125

An interest rate is the cost or price of borrowing, or the gain from lending, normally expressed as an annual percentage amount.

Question 126

Investment

2.2.3 - Investment (I)

Answer 126

Spending on capital goods including plant & machinery and infrastructure.

Question 127

Investment income

2.2.3 - Investment (I)

Answer 127

Interest, profits and dividends from assets owned and located overseas.

Question 128

Keynesian economics

2.2.3 - Investment (I)

Answer 128

The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to fund public works projects like new roads, housing, schools and hospitals

Question 129

Net investment

2.2.3 - Investment (I)

Answer 129

Total investment minus replacement investment

Question 130

Replacement investment

2.2.3 - Investment (I)

Answer 130

The purchase of capital goods by firms to replace existing, worn out capital. It does not add to the total capital stock of an economy.

Question 131

Fiscal policy

2.2.4 - Government Expenditure (G)

Answer 131

A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.

Question 132

Government borrowing

2.2.4 - Government Expenditure (G)

Answer 132

The amount the government must borrow each year to finance their spending.

Question 133

Government debt

2.2.4 - Government Expenditure (G)

Answer 133

The total stock of unpaid debt issued by a government. A government will normally borrow money by issuing bonds or other securities

Question 134

Government spending

2.2.4 - Government Expenditure (G)

Answer 134

Spending by government on education, health care and defence & other public services.

Question 135

Trade cycle

2.2.4 - Government Expenditure (G)

Answer 135

A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc.

Question 136

Exchange rate

2.2.5 - Net trade (X-M)

Answer 136

Exchange rates are the price of one country’s’ currency in relation to another.

Question 137

Net primary income

2.2.5 - Net trade (X-M)

Answer 137

Part of the current account of the balance of payments, it measures the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers.

Question 138

Net secondary income

2.2.5 - Net trade (X-M)

Answer 138

Part of the current account of the balance of payments, it includes overseas aid / debt relief, military grants and (for the UK) net payments to the European Union.

Question 139

Net trade

2.2.5 - Net trade (X-M)

Answer 139

The balance between the monetary value of exports and imports.

Question 140

Protectionism

2.2.5 - Net trade (X-M)

Answer 140

Restricting trade through tariffs and other forms of import controls such as quotas

Question 141

Aggregate supply

2.3.1 - The characteristics of AS

Answer 141

Total planned output of goods and services in an economy at a given time and price level.

Question 142

Aggregate supply shock

2.3.1 - The characteristics of AS

Answer 142

Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce real output and can increase the rate of inflation.

Question 143

Costs of production

2.3.2 - Short-run AS

Answer 143

Factor prices, including rent, wages and interest.

Question 144

Exchange rate

2.3.2 - Short-run AS

Answer 144

Exchange rates are the price of one country’s’ currency in relation to another.

Question 145

Classical LRAS

2.3.3 - Long-run AS

Answer 145

The Classical view is that LRAS is inelastic. This has important implications. The classical view suggests that real GDP is determined by supply-side factors – the level of investment, the level of capital and the productivity of labour etc. Classical economists suggest that in the long-term, an increase in aggregate demand (faster than growth in LRAS), will just cause inflation and will not increase real GDP.

Question 146

Competition Policy

2.3.3 - Long-run AS

Answer 146

Any policy which seeks to promote competition & efficiency in markets and industries.

Question 147

Demographic change

2.3.3 - Long-run AS

Answer 147

Any change in the population, for example in terms of average age, dependency ratios, life expectancy, family structures, birth rates etc.

Question 148

Innovation

2.3.3 - Long-run AS

Answer 148

The commercial development of exploiting new or improved goods and services.

Question 149

Invention

2.3.3 - Long-run AS

Answer 149

The creation of a new product, service or concept.

Question 150

Keynesian economics

2.3.3 - Long-run AS

Answer 150

The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to fund public works projects like new roads, housing, schools and hospitals

Question 151

Keynesian LRAS

2.3.3 - Long-run AS

Answer 151

The Keynesian LRAS assumes wages and prices are fixed until near full employment is reached. Whilst the economy has spare capacity, the LRAS is perfectly elastic, and only when near full employment is reached, does the price level start to rise. At full employment, the Keynesian LRAS becomes vertical as no further output can be produced.

Question 152

Keynesian unemployment

2.3.3 - Long-run AS

Answer 152

Unemployment caused by a lack of aggregate demand in the economy – a deficiency of private sector spending causes both output and employment to contract

Question 153

Long run aggregate supply (LRAS)

2.3.3 - Long-run AS

Answer 153

Long run aggregate supply is determined by the state of technology, productivity, factor mobility and incentives. The LRAS curve is assumed to be vertical (i.e. independent of prices) and represents the normal capacity level of output for the economy.

Question 154

Migration

2.3.3 - Long-run AS

Answer 154

The movement of people, especially workers, between countries.
* Immigration refers to people entering a country.
* Emigration refers to people leaving a country.
* Net migration refers to the difference between the number of people entering and leaving a country.

Question 155

Productivity

2.3.3 - Long-run AS

Answer 155

A measure of efficiency = output per unit of input or output per person employed.

Question 156

Circular flow of income

2.4.1 - National income

Answer 156

An economic model that shows flows of goods and services and factors of production between firms and households. The circular flow shows how national income or Gross Domestic Product is calculated.

Question 157

Income

2.4.1 - National income

Answer 157

Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.

Question 158

Wealth

2.4.1 - National income

Answer 158

The value of a stock of assets such as housing, personal pensions, savings and many different forms of marketable (sellable) assets such as antiques.

Question 159

Injections

2.4.2 - Injections and withdrawals

Answer 159

njections are variables in an economy that add to the circular flow of income and include investment (I), government spending (G) and exports (X).

Question 160

Withdrawals

2.4.2 - Injections and withdrawals

Answer 160

Withdrawals are variables in an economy that remove money flows from the circular flow of income and include saving (S), government taxation (T) and imports (M).

Question 161

Aggregate demand

2.4.3 - Equilibrium levels of real national output

Answer 161

Total amount of goods and services demanded in the economy at a given time and price level. It is the sum of consumption expenditure, investment expenditure, government expenditure and net exports.

Question 162

Aggregate supply

2.4.3 - Equilibrium levels of real national output

Answer 162

Total planned output of goods and services in an economy at a given time and price level.

Question 163

Equilibrium national output

2.4.3 - Equilibrium levels of real national output

Answer 163

Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change. At this point aggregate demand is exactly equal to aggregate supply.

Question 164

Real national output

2.4.3 - Equilibrium levels of real national output

Answer 164

Nominal national output adjusted for price changes, expressed at constant prices.

Question 165

Marginal propensity to consume (MPC)

2.4.4 - The multiplier

Answer 165

The proportion of any change in income that is spent rather than saved.

Question 166

Marginal propensity to import (MPM)

2.4.4 - The multiplier

Answer 166

The change in total spending on imported products following a change in income. The higher is the marginal propensity to import, the greater is the outflow of extra income in the circular flow model. A high MPM reduces the size of the multiplier effect.

Question 167

Marginal propensity to save (MPS)

2.4.4 - The multiplier

Answer 167

The change in total savings arising from a small change in household disposable income. If income rises by £100 and £30 is saved, then the marginal propensity to save = 0.3 (i.e. the change in saving/change in income)

Question 168

Marginal propensity to tax (MPT)

2.4.4 - The multiplier

Answer 168

The change in taxation following a change in income.

Question 169

Marginal propensity to withdraw (MPW)

2.4.4 - The multiplier

Answer 169

The sum of the marginal propensity to save + marginal propensity to tax + the marginal propensity to import.

Question 170

Multiplier

2.4.4 - The multiplier

Answer 170

A calculation of the degree to which injections into the circular flow of income cause changes in final national income. Multiplier (k) = change in real GDP (Y)/change in injections (J). The formula used to calculate the size of any change in final national income that results from an increase in injections. The formula is 1/1-mpw where mpw is the marginal propensity to withdraw, or alternatively the formula 1/1-mpc can be used.

Question 171

Multiplier process

2.4.4 - The multiplier

Answer 171

A description of the multiplier effect which comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income”. This can lead to a bigger eventual final effect on output and employment.

Question 172

Multiplier ratio

2.4.4 - The multiplier

Answer 172

This is the ratio of a change in equilibrium real income to the injection that has brought it about. For example if a £1m injection into the circular flow results in a £2.5m increase in national income, the value of the multiplier is 2.5.

Question 173

Actual growth

2.5.1 - Causes of growth

Answer 173

A rise in real GDP in a given time period. It is also known as short run growth and is depicted by the aggregate demand curve shifting to the right.

Question 174

Long run growth

2.5.1 - Causes of growth

Answer 174

The trend growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or PPF boundary).

Question 175

Net inward migration

2.5.1 - Causes of growth

Answer 175

When the number of migrants coming into a country is higher than those leaving in a given time period – usually a year.

Question 176

Output measure GDP

2.5.1 - Causes of growth

Answer 176

Value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government.

Question 177

Potential growth

2.5.1 - Causes of growth

Answer 177

This is a rise in the productive potential or the capacity of the economy. It is not yet actual growth until AD rises to use up that extra capacity.

Question 178

Production

2.5.1 - Causes of growth

Answer 178

Value of output of goods and services e.g. measured by GDP or an index of production in specific industry.

Question 179

Productive potential

2.5.1 - Causes of growth

Answer 179

Productive capacity of the economy – boosted by high quality capital investment

Question 180

Productivity

2.5.1 - Causes of growth

Answer 180

How much output is produced for a given input (such as an hour of work

Question 181

Seasonal adjustment

2.5.1 - Causes of growth

Answer 181

Estimates in which the element of variability due to seasonal influences, which may distort the data, has been removed. Affects data such as unemployment, retail sales and output from highly seasonal industries

Question 182

Shocks

2.5.1 - Causes of growth

Answer 182

Unexpected events that can affect both aggregate demand and supply e.g. unexpected changes in world oil prices, currency volatility and the effects of political instability

Question 183

Short run economic growth

2.5.1 - Causes of growth

Answer 183

Short run growth is cyclical; the growth of real GDP is determined by aggregate demand (C+I+G+X-M) and also factors affecting short run aggregate supply (SRAS).

Question 184

Sustainable growth

2.5.1 - Causes of growth

Answer 184

Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable growth can continue without damage to the environment, or the exhaustion of non renewable resources.

Question 185

Trend growth

2.5.1 - Causes of growth

Answer 185

The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or PPF boundary).

Question 186

Exogenous shock

2.5.1 - Causes of growth

Answer 186

An unexpected event beyond the control of the country’s officials that has a large negative impact on its economy.

Question 187

Negative output gap

2.5.2 - Output gaps

Answer 187

A negative output gap means that an economy has a large amount of spare productive capacity. When actual GDP is below estimated potential GDP.

Question 188

Output gap

2.5.2 - Output gaps

Answer 188

Difference between actual and potential national output. A negative output gap means that an economy has a large amount of spare productive capacity.

Question 189

Positive output gap

2.5.2 - Output gaps

Answer 189

A positive output gap means that an economy is working beyond its normal productive capacity, perhaps by workers working overtime and machines running long hours.

Question 190

Trend growth

2.5.2 - Output gaps

Answer 190

The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or PPF boundary).

Question 191

Boom

2.5.3 - Trade (business) cycle

Answer 191

A period of rapid economic expansion resulting in higher GDP, lower unemployment, rising inflation rates and rising asset prices.

Question 192

Depression

2.5.3 - Trade (business) cycle

Answer 192

Used to describe a severe recession which may become a prolonged downturn and where a nation’s real GDP falls by at least 10 per cent.

Question 193

Double dip recession

2.5.3 - Trade (business) cycle

Answer 193

When an economy goes into recession twice without a full recovery in between.

Question 194

Expectations

2.5.3 - Trade (business) cycle

Answer 194

How we expect the future to unfold – necessarily affected by the degree of uncertainty.

Question 195

Forecast

2.5.3 - Trade (business) cycle

Answer 195

A prediction made about the likely future performance of an economy.

Question 196

Hysteresis

2.5.3 - Trade (business) cycle

Answer 196

When a sustained period of low aggregate demand can lead to permanent damage to the supply side of the economy, for example because of high long-term unemployment.

Question 197

Peak

2.5.3 - Trade (business) cycle

Answer 197

The high point of the economic cycle beyond which a recession starts.

Question 198

Recession

2.5.3 - Trade (business) cycle

Answer 198

A period of at least six months when real GDP decline. Or defined as a broadly-based contraction in output, employment, investment and confidence

Question 199

Recovery

2.5.3 - Trade (business) cycle

Answer 199

A phase of the economic cycle, after a recession/depression, during which real GDP starts to increase and unemployment begins to fall.

Question 200

Shocks

2.5.3 - Trade (business) cycle

Answer 200

Unexpected events that can affect both aggregate demand and supply e.g. unexpected changes in world oil prices, currency volatility and the effects of political instability.

Question 201

Slowdown

2.5.3 - Trade (business) cycle

Answer 201

A fall in the rate of growth of an economy but not a full-scale recession.

Question 202

Slump

2.5.3 - Trade (business) cycle

Answer 202

A sustained decrease in real GDP and a persistent rise in unemployment

Question 203

Soft landing

2.5.3 - Trade (business) cycle

Answer 203

A slowdown in economic activity but which does not result in a recession.

Question 204

Trade cycle

2.5.3 - Trade (business) cycle

Answer 204

A trade cycle refers to fluctuations in economic activities specially in employment, output and income, prices, profits etc.

Question 205

Trough

2.5.3 - Trade (business) cycle

Answer 205

The low point of the economic cycle beyond which a recovery starts.

Question 206

Distribution of income

2.5.4 - The impact of growth

Answer 206

The distribution of income is how incomes are spread across households within the population. A common measure of income inequality is the Gini Coefficient.

Question 207

Economic development

2.5.4 - The impact of growth

Answer 207

Long run improvements in broad measures of income per capita, education and health outcomes and reductions in extreme poverty, hardship and inequality.

Question 208

Foreign direct investment

2.5.4 - The impact of growth

Answer 208

Inflows of capital from foreign multinationals (MNCs) including takeovers and tangible investment in new factories and technology

Question 209

Inflation

2.5.4 - The impact of growth

Answer 209

A sustained increase in the general price level for goods and services.

Question 210

Non-inflationary growth

2.5.4 - The impact of growth

Answer 210

Sustained growth of real national output whilst maintaining price stability.

Question 211

Per capita incomes

2.5.4 - The impact of growth

Answer 211

Income per head of the population – a measure of average living standards e.g. Gross national income per capita = GNI/total population.

Question 212

Balanced growth

2.6.1 - Possible macroeconomic objectives

Answer 212

In macroeconomics, balanced growth occurs when output and the capital stock grow at the same rate. Also refers to balanced expansion of components of aggregate demand.

Question 213

Budget balance

2.6.1 - Possible macroeconomic objectives

Answer 213

The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G<T, there is a budget surplus.

Question 214

Current account balance

2.6.1 - Possible macroeconomic objectives

Answer 214

When the outflows on the current account are exactly equal to the inflows.

Question 215

Environmental economics

2.6.1 - Possible macroeconomic objectives

Answer 215

Environmental economics studies the impact of environmental policies and devises solutions to problems resulting from them. The approach can either be prescriptive or incentive-based.

Question 216

Income distribution

2.6.1 - Possible macroeconomic objectives

Answer 216

Income distribution is how income is divided up among all the citizens in a country. The most common measure of income distribution is the Gini Coefficient.

Question 217

Income inequality

2.6.1 - Possible macroeconomic objectives

Answer 217

The degree to which income is distributed unequally in an economy or population; income inequality can be illustrated using a Lorenz Curve and measured using the Gini coefficient.

Question 218

Price stability

2.6.1 - Possible macroeconomic objectives

Answer 218

Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses.

Question 219

Sustainable growth

2.6.1 - Possible macroeconomic objectives

Answer 219

Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable growth can continue without damage to the environment, or the exhaustion of non renewable resources.

Question 220

Unemployment rate

2.6.1 - Possible macroeconomic objectives.

Answer 220

The unemployment rate is the proportion of the economically active population who are unemployed.

Question 221

Austerity

2.6.2 - Demand-side policies

Answer 221

Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be achieved through increases in government revenues -primarily via tax rises - and/or a reduction in government spending or future spending commitments.

Question 222

Automatic stabilisers

2.6.2 - Demand-side policies

Answer 222

Automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a recession.

Question 223

Budget balance

2.6.2 - Demand-side policies

Answer 223

The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G<T, there is a budget surplus.

Question 224

Budget deficit

2.6.2 - Demand-side policies

Answer 224

Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.

Question 225

Budget surplus

2.6.2 - Demand-side policies

Answer 225

Occurs when tax revenues exceed government spending. A surplus can be used to repay some of the national debt.

Question 226

Central bank policy interest rate

2.6.2 - Demand-side policies

Answer 226

Also known as the monetary policy rate, it is the official lending rate for loans set by a nation’s central bank e.g. the Bank of England or the European Central Bank.

Question 227

Corporation Tax

2.6.2 - Demand-side policies

Answer 227

A tax on the profits made by companies, in the UK the main rate of corporation tax is 19% and is expected to fall to 18% by 2020.

Question 228

Cyclical budget (fiscal) deficit

2.6.2 - Demand-side policies

Answer 228

The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low.

Question 229

Discretionary fiscal policy

2.6.2 - Demand-side policies

Answer 229

Deliberate attempts to affect the level and growth of aggregate demand using changes in government spending, direct and indirect taxation and borrowing.

Question 230

Direct taxation

2.6.2 - Demand-side policies

Answer 230

Taxes levied on streams of income and profits such as income tax and corporation tax.

Question 231

Exchange rate

2.6.2 - Demand-side policies

Answer 231

Exchange rates are the price of one country’s’ currency in relation to another.

Question 232

Exchange rate index

2.6.2 - Demand-side policies

Answer 232

The trade-weighted external value of a currency.

Question 233

Excise duties

2.6.2 - Demand-side policies

Answer 233

Indirect taxes levied on specific goods, typically alcoholic beverages, tobacco and fuels.

Question 234

Expansionary monetary policy

2.6.2 - Demand-side policies

Answer 234

A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost aggregate demand, output and jobs – includes lower interest rates.

Question 235

Expenditure-switching policies

2.6.2 - Demand-side policies

Answer 235

Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP

Question 236

Fine-tuning

2.6.2 - Demand-side policies

Answer 236

Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates / taxation.

Question 237

Fiscal austerity or fiscal tightening

2.6.2 - Demand-side policies

Answer 237

Fiscal austerity refers to decisions by a government to reduce the amount of borrowing (i.e. cut the size of a fiscal deficit) over time.

Question 238

Fiscal deficit

2.6.2 - Demand-side policies

Answer 238

When government expenditure is higher than the revenue from taxes in a given year

Question 239

Fiscal policy

2.6.2 - Demand-side policies

Answer 239

A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.

Question 240

Fiscal stability

2.6.2 - Demand-side policies

Answer 240

Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending equal revenue.

Question 241

Fiscal stimulus

2.6.2 - Demand-side policies

Answer 241

Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity.

Question 242

Global financial crisis

2.6.2 - Demand-side policies

Answer 242

A severe world-wide economic financial crisis beginning with the collapse of the investment bank Lehman Brothers on 15/9/2008 and resulting in bail outs and other fiscal measures to prevent the collapse of the world financial system. The crisis caused a global economic downturn and the greatest financial crisis since the Great Depression of the 1930s.

Question 243

Government spending

2.6.2 - Demand-side policies

Answer 243

Spending by government on education, health care and defence & other public services.

Question 244

Household benefits cap

2.6.2 - Demand-side policies

Answer 244

Welfare reform introduced by the UK government in 2013 – which limits total benefits at £500 per week for a family and £350 per week for a single person with no children.

Question 245

Import Tariff

2.6.2 - Demand-side policies

Answer 245

A tax on imports that may be ad valorem (%) or a specific tax (a set amount per unit imported).

Question 246

Indirect taxes

2.6.2 - Demand-side policies

Answer 246

Taxes on spending. Examples include excise duties on fuel, cigarettes and alcohol and Value Added Tax (VAT) on many different goods and services. Producers may be able to pass on an indirect tax – depending on price elasticity of demand and supply

Question 247

Inflation target

2.6.2 - Demand-side policies

Answer 247

The Bank of England has a CPI inflation target, which is currently 2 per cent.

Question 248

Interest rate

2.6.2 - Demand-side policies

Answer 248

An interest rate is the cost or price of borrowing, or the gain from lending, normally expressed as an annual percentage amount.

Question 249

Marginal rate of tax (MRT)

2.6.2 - Demand-side policies

Answer 249

The rate of tax on the next unit (£1) of income earned. In the UK for example, the basic rate of income tax is 20% on earned income up to the higher tax rate income limit.

Question 250

Monetary Policy

2.6.2 - Demand-side policies

Answer 250

Central bank policies govern the supply of money and the interest rate in an economy in order to influence output, employment and prices. In the UK the policy is administered by the Bank of England.

Question 251

Monetary Policy Committee (MPC)

2.6.2 - Demand-side policies

Answer 251

Bank of England committee of nine people (including the Governor) that meets every month to review the economy and set monetary policy interest rates for the UK.

Question 252

Monetary stimulus

2.6.2 - Demand-side policies

Answer 252

Changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit.

Question 253

Money supply

2.6.2 - Demand-side policies

Answer 253

The entire quantity of a country’s commercial bills, coins, loans and credit.

Question 254

Multiplier effect

2.6.2 - Demand-side policies

Answer 254

If there is an initial injection (e.g. a rise in exports), then the final increase in aggregate demand and real GDP will be greater. The size of the multiplier coefficient is affected by the marginal rate of withdrawal / leakage from the circular flow of income.

Question 255

National debt

2.6.2 - Demand-side policies

Answer 255

A government’s total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time

Question 256

Negative interest rate

2.6.2 - Demand-side policies

Answer 256

An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than the nominal interest rate.

Question 257

Office of Budget Responsibility

2.6.2 - Demand-side policies

Answer 257

The OBR is a non-departmental public body funded by the Treasury, that the UK government established to provide independent economic forecasts and independent analysis of the public finances.

Question 258

Patent box

2.6.2 - Demand-side policies

Answer 258

A reduced rate of Corporation Tax applied to profits from patents – designed to stimulate research and innovation and improve the supply-side of the economy.

Question 259

Personal allowance

2.6.2 - Demand-side policies

Answer 259

The amount of income you can earn before you start paying income tax. It is currently £12,500 in 2019.

Question 260

Progressive tax

2.6.2 - Demand-side policies

Answer 260

With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn more income, the rate of tax on each extra pound goes up. This causes a rise in the average rate of tax.

Question 261

Proportional tax

2.6.2 - Demand-side policies

Answer 261

When the marginal rate of tax is constant leading to a constant average rate of tax

Question 262

Quantitative easing (QE)

2.6.2 - Demand-side policies

Answer 262

The introduction of new money into the national supply by a central bank. In the UK the Bank of England creates new money to buy financial assets from financial institutions. Total planned QE in January 2017 totalled £445 billion.

Question 263

Real interest rate

2.6.2 - Demand-side policies

Answer 263

Nominal rate of interest adjusted for inflation.

Question 264

Redistribution

2.6.2 - Demand-side policies

Answer 264

Measures taken by government to transfer income from some individuals to others.

Question 265

Regressive tax

2.6.2 - Demand-side policies

Answer 265

With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes. Examples: Duties on tobacco and alcohol

Question 266

Stimulus

2.6.2 - Demand-side policies

Answer 266

Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rate cuts, quantitative easing (QE), direct and indirect tax cuts and government spending increases such as higher infrastructure investment.

Question 267

Structural budget deficit

2.6.2 - Demand-side policies

Answer 267

The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers.

Question 268

Subsidy

2.6.2 - Demand-side policies

Answer 268

Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.

Question 269

Target

2.6.2 - Demand-side policies

Answer 269

A target is an objective of government policy e.g. low inflation

Question 270

Taxation

2.6.2 - Demand-side policies

Answer 270

The imposition of taxes on streams of income, commercial activities and wealth by the government.

Question 271

Tax burden

2.6.2 - Demand-side policies

Answer 271

The tax burden measures total tax revenues as a % of GDP.

Question 272

Tax competition

2.6.2 - Demand-side policies

Answer 272

Tax competition happens when a national government uses reforms to the tax system as a supply-side strategy to attract investment and jobs into their economy.

Question 273

Time lags

2.6.2 - Demand-side policies

Answer 273

The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending

Question 274

Transmission mechanism

2.6.2 - Demand-side policies

Answer 274

How a change in interest rates affects the behaviour of economic agents and ultimately leads to changes in aggregate demand, employment and inflationary pressures.

Question 275

Unit tax

2.6.2 - Demand-side policies

Answer 275

A specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.

Question 276

Welfare cap

2.6.2 - Demand-side policies

Answer 276

The welfare cap is a limit on the amount that UK government can spend on certain social security benefits and tax credits - It excludes pensions and Jobseekers’ Allowance

Question 277

Competition policy

2.6.3 - Supply-side policies

Answer 277

Government policy directed at encouraging competition in the private sector: e.g. the investigation of takeovers or restrictive practices, regulation of monopoly power

Question 278

Competitive market

2.6.3 - Supply-side policies

Answer 278

Where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms.

Question 279

Ease of entry

2.6.3 - Supply-side policies

Answer 279

The ease with which a business can enter a market in search of a profit. When barriers to entry are low, a market can grow, increasing competition between firms and creating new jobs.

Question 280

Geographical immobility

2.6.3 - Supply-side policies

Answer 280

Barriers to people moving from one area to another to find work.

Question 281

Immobility of labour

2.6.3 - Supply-side policies

Answer 281

Barriers to the movement of people between areas and between jobs.

Question 282

Incentives

2.6.3 - Supply-side policies

Answer 282

Incentives can be used to make goods and services markets, as well as labour markets, work more efficiently and therefore creating greater productive capacity.

Question 283

Infrastructure

2.6.3 - Supply-side policies

Answer 283

The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy.

Question 284

Occupational immobility

2.6.3 - Supply-side policies

Answer 284

Workers having the wrong skills for available job vacancies. This can be overcome by giving labour transferable skills.

Question 285

Poverty trap

2.6.3 - Supply-side policies

Answer 285

The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system.

Question 286

Productive potential

2.6.3 - Supply-side policies

Answer 286

Productive capacity of the economy – boosted by high quality capital investment.

Question 287

Productivity

2.6.3 - Supply-side policies

Answer 287

How much output is produced for a given input (such as an hour of work).

Question 288

Pro-market supply-side policies

2.6.3 - Supply-side policies

Answer 288

These policies focus on reducing the size of the state and extending the role of market forces in allocating scarce resources. For example: Cutting government spending (including welfare) and borrowing, lower business taxes to stimulate capital investment spending, reducing income tax rates to improve work incentives

Question 289

Relative poverty

2.6.3 - Supply-side policies

Answer 289

Relative poverty measures the extent to which a household’s financial resources falls below an average income threshold for the economy.

Question 290

Spare capacity

2.6.3 - Supply-side policies

Answer 290

When a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply is elastic,and the output gap is negative.

Question 291

State-driven supply-side policies

2.6.3 - Supply-side policies

Answer 291

When a government believes that active intervention in markets can help achieve increased productive capacity and competitiveness. Examples include: State investment in public services and critical infrastructure, a commitment to a minimum wage and/or living wage to improve work incentives & productivity in the labour market, higher taxes on the wealthy to fund public and merit goods.

Question 292

Stimulus

2.6.3 - Supply-side policies

Answer 292

Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rate cuts, quantitative easing (QE), direct and indirect tax cuts and government spending increases such as higher infrastructure investment.

Question 293

Sustainable growth

2.6.3 - Supply-side policies

Answer 293

Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable growth can continue without damage to the environment, or the exhaustion of non-renewable resources.

Question 294

Phillips Curve

2.6.4 - Conflicts and trade-offs between objectives and policies

Answer 294

The Phillips Curve shows a trade-off between inflation and unemployment. A demand-side policy to reduce unemployment could conflict with price stability.

Question 295

Policy asymmetry

2.6.4 - Conflicts and trade-offs between objectives and policies

Answer 295

When a given change in interest rates affects different groups or different countries to a lesser or greater degree.

Question 296

Trade-off

2.6.4 - Conflicts and trade-offs between objectives and policies

Answer 296

A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.