Studied by 9 peoplecircular 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
injections
spending power entering the circular flow of income resulting from investment, government spending and exports
leakages
spending power leaving the circular flow of income resulting from savings, taxation and imports
macroeconomic equilibrium
where the rate of withdrawals equals the rate of injections
monetary flows
the flow of money, for example from taxes or for consumption
physical flows
the flow of a good or service
aggregate demand (AD)
the total level of demand in an economy at any given price level at a moment in time
consumption
consumer spending on goods and services
exports
goods and services sold to foreign countries that provide an inflow of money
imports
goods and services bought from foreign countries that lead to an outflow of money
investment
spending by businesses on capital goods, which leads to the creation of real goods
government expenditure
spending by the government for the provision of goods and services
net exports
exports minus imports
aggregate supply (AS)
the total amount of output in the economy at any given price level at a moment in time
long run
when all factors of production are variable
long run aggregate supply
the total output an economy can produce when operating at full output
short run
when at least one factor of production is fixed
short run aggregate supply (SRAS)
aggregate supply when at least one factor of production is fixed
actual rate of growth
economic growth measured by changes in real GDP
economic cycle
the tendency of economic growth to rise and fall above and below the trend rate of economic growth, causing booms and busts
economic growth
an expansion of the productive potential of the economy
GDP per capita
total GDP divided by the population of the country
gross domestic product (GDP)
the value of goods and services produced in a country over a given period of time
long run growth
an increase in the productive capacity of the economy
nominal GDP
the value of GDP without being adjusted for inflation
real GDP
the value of GDP adjusted for inflation
short run growth
calculated annually by the percentage change in real GDP
trend rates of growth
the average sustainable rate of economic growth over a period of time
aid
when a country voluntarily transfers resources to another or gives loans on a concessionary basis
economic development
an increase in living standards, freedom and life expectancy
Genuine Progress Indicator (GPI)
a measure of development calculated from 26 different indicators looking at economic, environmental and social factors
Human Development Index (HDI)
measures an economy's development based on income, health and education
measuring National Wellbeing programme
a report which measures how lives are improving; asks four key questions about life satisfaction, anxiety, happiness and worthwhileness
primary sector
the part of the economy focused on raw materials, such as farming or mining
remittances
a sum of money sent back to the domestic economy of a migrant
secondary sector
the sector which transforms raw materials into goods for consumers, the manufacturing industry
structure of an economy
how the economy is made up in terms of what proportion of output comes from the different economic sectors
sustainable development
development that occurs to meet the needs of the people of today without preventing future generations from meeting their needs; development that occurs without depletion of natural resources
tertiary sector
the part of the economy concerned with the supply of services
claimant count
a measure of unemployment; the number of people receiving benefits for being unemployed
employment
those with a job
Labour Force Survey
a measure of unemployment which surveys people to class them as unemployed, employed or inactive under the International Labour Organisation (ILO) definitions
unemployment
those able and willing to work, but are not employed
Consumer Price Index (CPI)
official measure used to calculate the rate of inflation, using a weighted basket of goods
deflation
the opposite of inflation, where the average price level in the economy falls
disinflation
a falling rate of inflation; prices are still rising but by not as much
hyperinflation
when the rate of inflation is high and accelerating, to the extent that it is out of control
inflation
the general rise in prices of goods and services that erodes the purchasing power of money
Retail Price Index (RPI)
an old measure of inflation which has lost its national statistic status
balance of payments
a record of all financial dealings over a period of time between economic agents of one country and another
capital account
a part of the balance of payments; involves transfers of the ownership of fixed assets
current account
a record of the payments for the purchase and sale of goods and services, as well as income and transfers
financial account
a part of the balance of payments; records FDI, portfolio investment and the transfer of gold and currency reserves
income and current transfers
net earnings on foreign investment, net cash transfers and transfers that have no return, such as aid and grants
marginal propensity to import (MPM)
the proportion of an increase in income spent on imports
absolute poverty
when people are unable to afford sufficient necessities to maintain life; those on less than $1.90 a day
GINI coefficient
a measure of income inequality; the ratio of the area between the 45 degree line (the line of perfect equality) and the Lorenz curve and the whole area under the 45 degree line
income distribution
how the flow of assets is spread throughout the economy
income inequality
when income is unevenly distributed across a nation
Lorenz curve
the cumulative percentage of population plotted against the cumulative percentage of income that those people have
relative poverty
when income falls below an average income threshold; in the UK, this is those on less than 60% of median household income
wealth distribution
how the stock of assets is spread across the economy
wealth inequality
when wealth is unevenly distributed across the economy
natural (non-accelerating inflation) rate of unemployment
the unemployment rate when the labour market is at equilibrium, when there is no demand-deficient unemployment and unemployment is only caused by supply side factors
Phillips Curve
shows the trade-off between the level of unemployment and the inflation rate
automatic stabilisers
mechanisms which reduce the impact of changes in the economy on national income
average tax rates
the amount of tax paid as a proportion of income; expressed by: total tax / total income
balanced budget
when government spending equals tax revenue
budget deficit
when the government spends more money than it receives
budget position on current expenditure
the flow of cash during one period of time
budget position/fiscal stance
the impact that taxes and government spending has on the future economy
budget surplus
when the government receives more money than it spends
capital government expenditure
government spending on investment goods such as new roads, schools and hospitals, which will be consumed in over a year
crowding in
when government borrowing leads to an increase in private investment
crowding out
when government borrowing discourages private sector investment or when government provision of a good or service prevents it being provided by the private sector
current government expenditure
spending on goods and services which are consumed and last for a short time
cyclical budget position
a temporary budget position, which is related to the business cycle
direct tax
taxes imposed on income and paid straight to the government by the individual taxpayer
discretionary fiscal policy
deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary fiscal policy
fiscal policy
the use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance
fiscal rules
a long-term constraint on fiscal policy by putting numerical limits on the budget
government expenditure
spending by the government for the provision of goods and services
indirect tax
tax where the person charged with paying the money to the government is able to pass on the cost to someone else; a tax on consumption that increases costs for producers
Laffer curve
shows that a rise in tax rates does not necessarily lead to a rise in tax revenue, due to the impact on incentives and work
marginal rate of tax
the rate of tax applied to the next unit of currency of the income e.g. the rate of tax on the next pound earnt in the UK
national debt
the sum of government debts built up over many years
overall budget position
an accumulation of deficits and surpluses over time to give the overall budget
progressive taxation
where those on higher incomes pay a higher marginal rate of tax; those on higher incomes pay a higher percentage of their income on tax
proportional taxation
the proportion of income paid on the tax remains the same whilst the income of the taxpayer changes; everyone pays the same percentage of their income on tax
regressive taxation
there the proportion of income paid in tax falls whilst the income of the taxpayer increases; those on lower incomes pay a higher percentage of their income on tax
structural budget position
a temporary budget position, which is related to the business cycle
asymmetric inflation targeting
when the Central Bank only intervenes when inflation is too high, not when it is too low
interest rates
the price of borrowing money
liquidity trap
when a change in the money supply does not change the interest rate, which means monetary policy cannot be used to influence consumption and investment
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
money supply
stock of money in the economy
quantitative easing
when the central bank buys assets in exchange for money in an attempt to increase the money supply
symmetric inflation targeting
when the Central Bank intervenes when inflation is too high or too low
supply-side policies
government policies aimed at increasing the productive potential of the economy and shifting LRAS to the right
interventionist policies
seek to shift the LRAS curve to the right through government intervention in markets to improve their performance by correcting market failure
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