occurs when previous unemployed factors of production are put into use
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Circular Flow of Income
a simplified model of the economy which shows the economic flow of the economy
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Gross National Product (GNP)
the total money value of all final goods and services produced by an economy within a year, including net property from abroad
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Nominal GDP
the total money value of all final goods produced within an economy in a year, not adjusted for inflation
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Real GDP
the total money value of all final goods produced within an economy in a year, adjusted for inflation
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Per Capita GDP
the total money value of all final goods and services produced within an economy in a year per head
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How to calculate per capita GDP
= Real GDP / population
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Economic growth
the growth of real output in an economy over time, usually measured in real GDP per capita
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Economic Development
involving the improvement of the standard of living, reduction of poverty, and improved health and education
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Human Development Index
a composite index that brings together measurements of health, education, and living standards in order to attempt to measure relative development
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Aggregate Demand
the total spending in an economy by consumers at different prices
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Consumption
total spending by domestic households on goods and services
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Investment
the total spending of firms on capital equipment
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Government spending
the government’s expenditures on goods and services
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Net exports
total income earned from sales of exports to foreigners minus imports from other countries
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Inflationary Gap
the situation where total spending (AD) is less than the full employment level of output, thus causing inflation
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Deflationary Gap
the situation where total spending (AD) is more than the full employment level of output, thus causing unemployment
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Business Cycle
model showing the fluctuations in the level of economic activity in an economy over time
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Demand side policy
government policy designed to influence the aggregate demand in the economy, thus affecting average price level and real national output
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Fiscal Policy
a demand side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment
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Monetary Policy
a demand side policy using changes in money supply or interest rates to achieve economic objectives relating to inflation and unemployment
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Aggregate Supply
the quantity of goods and services that a country’s producers are willing and able to produce at a range of price levels over a period of time
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Short run aggregate supply (SRAS)
aggregate supply that varies with the level of demand for goods and services that is shifted by changes in costs of factors of production
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Long run aggregate supply (LRAS)
aggregate supply that is dependent upon the resources in the economy and can only be increased by improvements in the quality/quantity of factors of production
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Supply side policy
government policies designed to shift LRAS to the right, thus increasing potential output in the economy
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Unemployment
people of working age actively looking for a job
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Labour force
percentage of people able to work
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Underemployment
people working part-time who want to work full time or qualifications are not being used at full potential
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Full employment
exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work
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Unemployment rate
the number of unemployed workers expressed as a percentage of the labour force
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Structural Unemployment
equilibrium unemployment that exists when in the long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. There is a mismatch between skills and the jobs available.
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Frictional unemployment
equilibrium unemployment, that exists when people have left a job and are in the process of searching for another job
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Seasonal unemployment
equilibrium unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer
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Cyclical Unemployment
disequilibrium, when demand for all types of labour decreases and demand for nation’s goods and services decreases
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Natural rate of unemployment
combined experiences of frictional, seasonal and structural unemployment by an economy