AQA AS Macroeconomics Glossary

National Income

National 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