Macroeconomics: Circular Flow, GDP, Inflation and Aggregate Supply

Disposable income

Cross income minus tax plus welfare benefits.

Government spending

Expenditure on education, healthcare, defense and public services.

Interest rate

The cost of borrowing or return on savings expressed as a percentage.

Investment

Spending on capital goods or human capital by firms.

Net trade

The value of exports minus imports.

Exchange rate

The value of one currency relative to another.

Saving

Portion of income not spent; kept for future use.

Saving ratio

Proportion of disposable income that is saved.

Wealth effect

The link between changes in wealth and changes in spending.

MPC (Marginal Propensity to Consume)

Proportion of additional income that is spent.

MPS (Marginal Propensity to Save)

Proportion of additional income that is saved.

Multiplier Effect

Occurs when an initial injection into the circular flow of income causes a bigger final increase in real national income.

Multiplier Equation

k = y - MPC

Short-Run Aggregate Supply (SRAS)

The total supply of goods at a given price level, assuming at least one factor of production is fixed.

Price level

General level of prices in an economy.

Long-Run Aggregate Supply (LRAS)

Represents an economy's total output when all factors of production are fully and efficiently employed.

Purchasing Power

The buying power of a unit of currency; inversely related to inflation.

Real disposable income

Income after taxes and benefits, adjusted for inflation.

Real GDP

Nominal GDP adjusted for inflation.

Real income

Nominal income adjusted for inflation.

Index Number

A figure reflecting price or quantity compared to a base value, with the base value having an index number of 100.

Base year

The reference year in index calculations, assigned an index value of 100.

National income

Total income earned by all factors of production in a given period.

Wealth

The stock of assets such as housing, pensions, savings, and valuables.

Circular Flow of Income

Model showing flows of goods/services and factor incomes between firms and households.

Injections

Additions to the circular flow: Investment (I), government spending (G), and exports (X).

Withdrawals

Leakages from the circular flow: Savings (S), taxation (T), and imports (M).

Aggregate Demand (AD)

Total demand for goods and services at a given time and price level (C + I + G + (X - M)).

Accelerator Effect

When an increase in GDP results in a proportionately larger rise in capital investment spending.

Consumer Confidence

Expectations about future incomes, jobs, and interest rates.

Consumption

Household expenditure on goods and services.

Economic Cycle

Variations in the annual growth of real national output (GDP) over time.

Economic Growth

An increase in the real value of goods and services produced as measured by the annual % change in real GDP.

Current Account

The difference between money flowing in and out of an economy.

Inflation

A rise in the general price level over time.

Deflation

A fall in the general price level over time.

Disinflation

A decrease in the rate of inflation over time.

Unemployment rate

The proportion of the economically active population who are unemployed.

Consumer Price Index (CPI)

The UK government's preferred measure of inflation; a weighted index of average living costs.

Retail Price Index (RPI)

An older UK inflation measure; no longer an official statistic since 2013.

Full capacity output

Level of GDP where all factors of production are fully employed.

Gross Domestic Product (GDP)

Total monetary value of goods and services produced by an economy in a given time period.

Nominal GDP

Monetary value of output at current prices (not adjusted for inflation).

Nominal Income

Income at current prices (not adjusted for inflation).

Productivity

Output per unit of input / per person employed.