Studied by 0 peopleNational Income
The monetary value of all the goods and services that are produced by an economy in a given period of time. It is also equal to total expenditure (C + I + G + X + M) and total income factors
GDP (gross domestic product)
A measure of national income. The monetary value of the total output of an economy over a given period of time.
Real GDP
The monetary value of the total output of an economy with the effects of inflation removed
Nominal (money) GDP
The monetary value of the total output of an economy that has not been adjusted for the effects of inflation
Real GDP per capita
The average, or mean, real GDP per person. Calculated by dividing a country’s real GDP by its population
Index number
A statistic, with a base value of 100, used to measure changes in a selection of related variables
Base year
The starting point for an index where its value is 100
Weight
Used to reflect the relative importance of each item in an index
Consumer prices index (CPI)
A measure of the price level and inflation based on a weighted basket of goods and services
Standard of living
The ability of people to satisfy their needs and wants, including health care and education
Circular flow of income
A model of the conomy that shows how money, goods and services flow between different sectors of an economy, including households, firms, the government and the foreign trade sector
Injections
Types of expenditure that add to and increase the circular flow of income in an economy. These are investment, government spending and exports
Withdrawals (leakages)
The part of household income that is not spent on goods and services produced by the economy. It is income that is not passed on around the circular flow of income. These include saving, taxation and imports.
Aggregate demand (AD)
Total planned spending on goods and services produced in the domestic economy.
AD = C + I + G + (X - M)
Aggregate demand curve
The relationship between the price level and total planned spending when other things that affect aggregate demand are held constant
Aggregate supply curve
The relationship between the price level and the total amount of goods and services firms are willing to produce when other things that affect aggregate supply are held constant
Macroeconomic equilibrium
The level of real GDP and price level when the planned level of aggregate demand equals aggregate supply
Demand-side shock
An event that leads to a sudden or unexpected change in aggregate demand
Supply-side shock
An event that leads to a sudden or unexpected change in aggregate supply
Consumption
Spending by households on goods and services to satisfy needs and wants
Investment
Spending that leads to an increase in the capital stock. It is an injection into the circular flow of income
Exports
Goods and services sold to other countries. They are an injection into the circular flow of income
Saving
Income that is not spent. This is a withdrawal from the circular flow of income.
Taxation
Money that individuals and firms must pay to the government. Helps to finance government spending and is a withdrawal from the circular flow of income
Imports
Goods and services brought from other countries. Imports are a withdrawal from the circular flow of income
Accelerator process
A theory that says investment depends on the rate of change in national income. The theory asserts that an increase in the rate of economic growth (national income) will lead to a proportionately larger increase in investment.
Multiplier
The extent to which a change in injections or withdrawals affects national income.
Normal capacity level of output
The maximum output that an economy can continue to produce in the long run. In the short run an economy may produce less than this level of output but can also produce more than its normal capacity level of output. Economic growth will lead to an increase in an economy’s normal capacity level of output.
Short-run economic growth
The rate at which the total output of the economy is increasing, usually measured by the annual percentage change in real GDP. Short-run economic growth is greater than long-run when the amount of spare capacity is falling, and is below long-run when spare capacity is increasing.
Long-run economic growth
The rate at which the productive capacity of the economy is increasing. This is determined primarily by supply-side factors.
Long-run (underlying) trend rate of economic growth
The average rate at which the productive capacity of the economy is increasing over a number of years (usually 10 or more)
The economic cycle
The fluctuations in economic activity around an economy’s long-run trend rate of economic growth. Its main phases are: recovery, boom, recession and depression (or slump).
Positive output gap
When a country’s equilibrium level of national income is greater than its normal capacity level of national income
Negative output gap
When a country’s equilibrium level of national income is below its normal capacity level of national income
Employment
The number of people who are working, usually in exchange for a wage or salary
Unemployment
The number of people who are willing and able to work but cannot find a job
Claimant count measure of unemployment
The number of people who are out of work and claiming Job Seekers Allowance
Labour Force Survey measure of unemployment
A measure of unemployment that is based on a sample of households, conducted by the Labour Force Survey, An individual is counted as unemployed if:
They do not have a job, they want to work, have actively sought work in the last four weeks, and are able to start work within the next two weeks
They are out of work, have found a job, and are waiting to start it in the next two weeks
Seasonal unemployment
When people are unemployed at particular times of the year
Frictional unemployment
Short-term unemployment when people are between jobs
Structural unemployment
Long-term unemployment that occurs when the skills and location of the unemployed workers do not match the jobs available. It persists due to the occupational and geographical immobility of labour.
Cyclical unemployment
Occurs when an economy goes into a recession and people cannot find work because aggregate demand is too low
Natural rate of unemployment
The rate of unemployment that exists when the labour market is in equilibrium. It includes frictional, structural and real wage unemployment
Price level
The average price of all goods and services in an economy
Inflation
Occurs when the price level is rising
Deflation
Occurs when the price level is falling
Disinflation
When an economy is experiencing inflation but the rate of inflation is falling
Demand-pull inflation
When the rise in the price level is caused by increasing aggregate demand
Cost-push inflation
When the rise in the price level is caused by increasing costs of production
Monetary Policy
The use of interest rates, the supply of money and credit, and the exchange rate to influence the economy and help the government achieve its objectives.
Fiscal policy
The use of government spending and taxation to influence the economy and help the government achieve its economic policy objectives
Budget balance
The different between government expenditure and taxation
Budget deficit
When government expenditure is greater than the revenue the government receives from taxation and other sources
Budget surplus
When government expenditure is less than the revenue the government receives from taxation and other sources
Pattern of economic activity
How an economy’s factors of production are allocated between different uses, reflecting the types of goods and services produced
Public expenditure
Spending by central and local government on goods, services and debt interest
Direct tax
A tax levied on income and wealth. The burden of a direct tax cannot be passed on to someone else
Indirect tax
A tax levied on spending. The burden of an indirect tax can be passed on to someone else, for example, by raising the price of the product on which the tax is levied
Progressive tax
Where the percentage of income paid in tax increases as income increases
Proportional tax
Where the percentage of income paid in tax is the same at all levels of income
Regressive tax
Where the percentage of income paid in tax falls as income increases
National debt
The accumulated total of past government borrowing. The total amount of money that the government owes at a point in time
Cyclical budget deficit
A budget deficit caused by a fall in economic activity and the economy going into recession
Cyclical budget surplus
A budget surplus caused by a rise in economic activity leading to higher tax revenues and a fall in government spending on welfare
Structural budget balance
The underlying budget deficit or surplus after the effects of cyclical fluctuations in economic activity upon government spending and taxation have been removed
Supply-side policies
Policies introduced by the government to increase economic incentives, make markets work better and increase the productive capacity of the economy, shifting the long-run aggregate supply curve to the right
Supply-side improvements
Increases in productivity and efficiency that lead to reductions in costs, increase productive capacity and improve competitiveness. Supply-side improvements often result from individuals and firms acting independently of the government
Free-market supply-side policies
Measures to make markets work better and increase incentives to work and enterprise by reducing government involvement in the economy. Such measures include: cutting tax, reducing spending on welfare, privatisation and deregulation
Interventionist supply-side policies
Measures taken by the government to compensate for weaknesses in the market mechanism and correct market failrues that may reduce the underlying rate of growth of the economy. Such measures include: industrial policy, spending on education and training, subsidising research and development
The balance of payments
A record of a country’s financial transactions with the rest of the world
The current account of the balance of payments
A record of a country’s trade in goods, trade in services, income flows (primary income) and transfers (secondary income)
Deficit on the current account of the balance of payments
When the imports of goods and services plus outflows of investment income and transfers are greater than exports of goods and services plus inflows of investment income and transfers
Surplus on the current account of the balance of payments
When the exports of goods and services plus inflows of investment income and transfers are greater than imports of goods and services plus outflows of investment income and transfers
Exchange rate
The price of one currency in terms of another currency
Note
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