Understanding GDP, Fiscal and Monetary Policies

Gross Domestic Product (GDP)

Total value of final goods/services produced annually.

Income Method

Measures total income earned in a country.

Output Method

Calculates total output, avoiding double counting.

Expenditure Method

Calculates GDP by total money spent in economy.

Net Exports

Exports minus imports, affecting GDP calculation.

Gross National Income (GNI)

GDP plus net property income from abroad.

Real GDP/GNI

GDP or GNI adjusted for inflation effects.

GDP/GNI per Capita

GDP or GNI divided by population size.

Aggregate Demand

Total spending in an economy: C + I + G + (X-M).

Private Consumption (C)

Household spending on domestic goods/services.

Government Spending (G)

Public sector expenditure on services and projects.

Investment (I)

Firms' expenditure on capital equipment.

Aggregate Supply

Total supply of goods/services in an economy.

Supply Shock

Unexpected event affecting product supply and prices.

Price Level

Average current prices of all goods/services.

Budget Deficit

When government expenditure exceeds its revenue.

Budget Surplus

When government revenue exceeds its expenditure.

Macroeconomic Equilibrium

Aggregate supply equals aggregate demand.

Inflationary Gap

Current equilibrium above full employment level.

Contractionary Gap

National output below full employment level.

Output Gap

Economy experiencing inflationary or contractionary gap.

Recession

GDP falls for two consecutive quarters.

Crowding Out

Excessive government spending reduces private sector spending.

Monetarist Economics

Money supply changes determine economic performance.

Keynesian Economics

Focuses on total spending and its economic effects.

Fiscal Policy

Government spending and tax policies influencing economy.

Budget balance

Government income equals total expenditure in a year.

Public debt

Cumulative level of debt at a specific time.

Direct taxation

Tax paid directly to the government by individuals.

Indirect taxation

Taxes collected by intermediaries from consumers.

Government expenditure

Public spending classified into various categories.

Transfer payments

Payments made without goods/services in return.

Fiscal policy

Government spending and tax policies to influence economy.

Expansionary fiscal policy

Decreasing taxes or increasing spending to stimulate economy.

Contractionary fiscal policy

Increasing taxes or reducing spending to combat inflation.

Spending multiplier

GDP change in response to government spending changes.

Automatic stabilisers

Economic stabilizers triggered without government action.

Leakages from circular flow

Savings, taxes, and imports reducing economic activity.

Injections into circular flow

Investment, government purchases, and exports boosting economy.

Marginal propensity to consume (MPC)

Proportion of additional income spent on domestic goods.

Marginal propensity to save (MPS)

Proportion of additional income saved rather than spent.

Marginal propensity to import (MPM)

Proportion of additional income spent on foreign goods.

Multiplier

Factor showing total output increase from spending change.

Monetary policy

Central Bank's actions affecting money supply and interest rates.

Central bank

Government's bank controlling money supply and interest rates.

Base rate

Interest rate charged by central bank to commercial banks.

Expansionary monetary policy

Increasing money supply to stimulate economic activity.

Contractionary monetary policy

Decreasing money supply to control inflation.

Quantitative easing

Central bank purchases securities to increase money supply.

Independent central bank

Central bank operating without government control.

Macroeconomic objectives

Goals like inflation control and economic growth maintenance.

Open market operations

Buying/selling government securities to influence money supply.

Minimum lending rate

Minimum interest rate charged by central bank on loans.

Minimum reserve requirements

Required reserves banks must maintain over a period.