Macroeconomics Revision - A Levels

circular flow of income

circular flow of income

a model of the economy which shows the flow of goods and services, the factors of production and money around the economy

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