macroeconomics

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Gross Domestic Product (GDP)

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