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Gross Domestic Product (GDP)
the total monetary value of all final goods and services produced in an economy within a given period of time
Gross National Income (GNI)
the total income of nation’s people and businesses; GDP - net income from abroad
GDP per capita
GDP divided by the population number; gives the average income per citizen
Circular flow of income
a model that illustrates the interaction between the economic agents in an economy
the output method (of measuring GDP)
consists of counting the total output of firms in a certain period of time
the income method (of measuring GDP)
consists of adding up the incomes of all workers in a country
the expenditure method (of measuring GDP)
consists of adding up the total sales of goods and services in an economy: consumption expenditure + investment spending + government expenditure + net exports
business cycle
the boom-bust cyclical nature of the economy
World Happiness Report
an annual survey of the state of global happiness that ranks 156 countries based on where citizens place themselves on the Cantril ladder
OECD Better Life Index
a measure of 11 indicators (housing, income, jobs…) of 35 countries
Gross National Happiness
a measure of progress in a country considering ecological diversity, health, education, etc.
Happy Planet Index
a composite indicator that shows how well countries are doing at achieving a long, happy sustainable life through well-being, life expectancy, inequality of incomes and Ecological Footprint indicators.
Aggregate Demand
the total demand for goods and services produced in an economy; consists of consumer expenditure, investment spending, government expenditure and net exports.
determinants of aggregate demand: consumption
confidence, unemployment, interest rates, wealth, taxes, indebtedness
wealth
the asset accumulation that retains value and can change value; e.g. property and financial investment
determinants of aggregate demand: investment
confidence, interest rates, taxes, technology, indebtedness
investment
expenditure by firms on capital stock; it is planned investment for expansion.
determinants of aggregate demand: government
change in priorities, change in political parties, health of the economy
determinants of aggregate demand: net exports
income of trading partner, exchange rates, changes in trade policies (quotas and tariffs)
exchange rates
the value of a currency in terms of another
tariff
a tax on imports; it encourages consumers to purchase more domestic goods and move away from foreign goods.
quota
a physical limit to the volume of a particular good entering from abroad.
protectionism
a set of policies designed to protect domestic firms from the competition of foreign firms in the domestic market (quotas, tariffs, subsidies).
Aggregate Supply
the total quantity of goods and services produced in an economy over a specific period of time when resource prices stay relatively constant.
determinants of aggregate supply
resource prices, government intervention (regulation, subsidies, taxes), supply shocks
Monetarists
a school of thoughts that believes that money supply is the most effective and direct way of regulating the economy.
Keynesian
a school of thought that believes that government intervention and policies to manage aggregate demand is the best method of addressing the economy and preventing economic recessions.
Long-Run Aggregate Supply
a country’s potential capacity in terms of factors of production; determined by the quantity and quality of the factors of production.
determinants of LRAS
land, labour, capital, entrepreneurship, improvements in technology, efficiency and changes in institutions (degree of private and public ownership of resources, degree of competition, quantity and quality of government regulations, bureaucracy).
equilibrium in the short-term
intersection of the short-term aggregate supply curve and the aggregate demand curve
deflationary gap
where aggregate demand falls, creating a negative output gap, meaning that the output is below full employment level of output.
inflationary gap
when aggregate demand increases, the economy overheats and produces above full employment.
stagflation
when the economy experiences high unemployment, rising inflation and lower real GDP; this is caused by a fall in SRAS
equilibrium in the long-run
when all resources are being employed and the economy is operating at a natural rate of unemployment; LRAS, SRAS and AD intersect.
recessionary gap
where the economy slows down and operates below full employment; this creates unemployment
human capital
the skills, knowledge, and experience of the workforce
monetary policy
where the central bank uses money supply and interest rate to manage the economy.
money supply
the total amount of money in circulation
interest rates
the cost of borrowing money
minimum reserve requirement
a minimum amount of the deposits that commercial bank must keep in its vault; decided by the central bank
minimum lending rate
the rate at which the central bank charges commercial banks for charging money; it influences the interest rate offered by commercial banks.
quantitative easing
where the central bank creates digital money to buy bonds.
real interest rate
interest rate adjusted for inflation
demand for money
the ability and willingness to hold money at certain interest rates at a certain moment in time
MPC - marginal propensity to consume
the proportion of the addition to income that consumers spend
MPS - marginal propensity to save
the proportion of the addition to income saved
MPM - marginal propensity to import
the proportion of the addition to income that is spent on imports
MPT - marginal propensity to tax
the proportion of the addition to income that is taxed
economic growth
an increase in real GDP
short-term growth
an increase in the actual output of an economy
long-term growth
an increase in the quality or quantity of the factors of production; an increase in the production possibility of the economy
unemployment rate
percentage of people who are of working age, actively seeking for work and unemployed relative to the labour force (employed + unemployed)
cyclical/demand-deficient unemployment
when a lack of aggregate demand forces the economy to make workers redundant
real-wage unemployment
a gap between the people willing and able to work for a certain wage and the number of jobs available
natural rate of unemployment
the percentage of people who are unemployed because of a frictional, seasonal or structural reason
frictional unemployment
those who are between jobs or between schooling and a job and therefore unemployed
seasonal unemployment
those who are unemployed because their skills are needed only at certain times of the year
structural unemployment
a mismatch between the demand and supply for the labour caused by industrial changes or labour market rigidity
inflation
a sustained increase in the general price level over a period of time
deflation
a sustained decrease in the general price level over a period of time
disinflation
a decrease in the rate of inflation of a certain country
hyperinflation
when the inflation rate exceeds 50% a month
demand-pull inflation
inflation caused by a shift rightward of the AD curve
cost-push inflation
inflation caused by the shift leftward of the SRAS curve (usually increase in cost of production)
CPI - consumer price index
a weighted basket of goods and services that are bought in an economy by a typical family; used to measure inflation
Phillips curve
a diagram that plots the unemployment rate against the inflation rate in an economy
supply-side policies
policies aimed at supplying the supply side of the economy; they aim to increase the quantity and quality of the factors of production through increased efficiency and competition in the economy
market-based supply-side policies
policies that aim to increase the competition in the economy by encouraging the forces of the free market
interventionist supply-side policies
policies involving the government directly intervening in the economy to increase the quantity or quality of the factors of production
deregulation
removing rules and restrictions to production
privatization
the transfer of ownership from the public to the private sector
trade liberalization
the removal of trade barriers to increase trade with other nations
anti-monopoly regulation
regulation to increase competition in the economy by avoiding the dominance of one single firm
labour unions
an organized association of workers that aims to protect and further the rights and interests of workers
minimum wage
a price floor, where the government intervenes in the labour market and sets wages above equilibrium level
crowding out
when increased public sector borrowing and spending causes a decrease in loanable funds and an increase in interest rates; this can lead to lower investment in the economy
average tax rate
the share of income that a household pays in tax
marginal tax rate
the tax rate imposed on the last dollar earned by a household
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