theme 2 : the UK economy - performance and policies

Actual growth

Economic growth measured by changes in real GDP

Aggregate demand (AD)

The total level of demand in an economy at any given price at a time period

AD = C + I + G + (X-M)

Aggregate supply (AS)

The total amount of output in the economy at any given price at a moment in time

Animal spirits

The level of confidence of business owners

Balance of payments

A record of all financial dealing over a period of time between economic agents of one country and another

Base year

A year chosen as a good comparison in series of data when building an index, it is automatically given an index figure of 100

Boom

The peak of the business cycle, when growth is high

Budget

Where the governemnt lays out their spending and taxation plans

Budget deficit

When the government spends more money than it receives

Budget surplus

When the government receives more money than it spends

Circular flow

A model of the economy which shows the flow of goods and services, the factors of production and money around the economy

Claimant count

A measure of unemployment, the number of people receiving benefits for being unemployed

Consumer price index (CPI)

Official measure used to calculate the rate of inflation, using a weighted basket of goods

Consumption

Consumer spending on goods and services

Cost push inflation

Inflation caused by a decrease in aggregate supply

Current account

A record of the payments for the purchase and sale of goods and services as well as income and transfers

Current account deficit

When more money leaves the country than enters, so the current account is negative

Current account surplus

When more money enters the country than leaves, so the current account is positive

Cyclical unemployment

Unemployment caused by a lack of aggregate demand

Deflation

A persistent fall in prices of goods and services

Deflationary policy

Fiscal or monetary policy which is aimed at reducing aggregate demand

Demand pull inflation

Inflation caused by an increase in AD

Depreciation

The reduction in the value of machinery overtime

Direct tax

Taxes paid straight to the government by the individual taxpayer

Disinflation

A reduction in the rate of inflation

Disposable income

The money consumers have left to spend, after taxes have been taken away and benefits added

Economic growth

An increase in the long term productivity potential in the economy, an increase in the amount of goods and services which are produced, measured by an increase in GDP

Employed

Someone who does more than 1 hour of paid work a week or is temporarily away from work, on a government supported training scheme or does a minimum of 15 hours unpaid work for their family business

Expansionary policy

Fiscal or monetary policy which is aimed at increasing AD

Exports

Goods or services sold to foreigners that bring income into the country

Export-led growth

Economic growth arising from an increase in exports

Fiscal policy

The use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance

Frictional unemployment

Unemployment caused when people move between jobs and enter the job market

Gross domestic product (GDP)

The value of goods and services produced in a country over a given period of time

GDP per capita

Total GDP divided by the population

Gross investment

Investment both to replace old machinery that has depreciated and to create / buy new ones

Gross national income (GNI)

The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends

Gross national product (GNP)

The value of goods and services produced by citizens of a country, whether they live in the country or not

Government spending

Spending by the government for the provision of goods and services

Imports

Goods and services bought from foreigners that takes income out of the country

Inactive

Those neither employed nor unemployed, those not participating in the job market

Income

A flow of assets

Index number

Numbers allowing accurate comparisons over time to be made. The base value is typically 100

Inflation

The general rise in prices of goods and services that erodes the purchasing power of money

Injection

Spending power entering the circular flow of income resulting from investment, government spending and exports

Interventionist supply side policies

Policies designed to correct market failure, where the government intervenes in the market

Investment

Spending by businesses on capital goods which leads to the creation of real goods

Labour force survey

A measure of unemployment which surveys people to class them as unemployed, employed or inactive under the intentional labour organisation

Living standards

The quality of life enjoyed by people in a country

Long run

When all factors of production are variable

Long run aggregate supply

The total output an economy can produce when operating at full output

Long run trend growth rate

The average sustainable rate of economic growth over a period of time

Marginal propensity to consume

The proration of an increase in income spent on consumption

Change in consumption / change in income

Marginal propensity to import

The proportion of an increase in income spent on imports

Marginal propensity to save

The proportion of an increase in income that is saved

Marginal propensity to tax

The proportion of an increase in income that is taken away in tax

Marginal propensity to withdraw

The proportion of an increase in income that is withdrawn from the circular flow

Market based supply-side policies

Policies which are designed to remove anything which prevents the free market system working efficiently

Monetary policy

The attempts of the central bank / regulatory authority to control the level of AD by altering base interest rates or the amount of money in the economy

Monetary policy committee (MPC)

9 economists who meet monthly to set the Bank rate as well as ther monetary instruments

Monetary supply

Sock of money in the economy

Multiplier

An increase in an injection will lead to an even greater increase of national income

1/(1-MPC) = 1 / MPW

National expenditure

The value of spending by households on goods and services

National income

The value of income paid by firms to households in return for land, labour, capital and enterprise

National output

The value of the flow of goods and services from firms to households

Negative output gap

When GDP is lower than predicted, the economy is produce below fuel output

Net exports

Exports minus imports

Net investment

Investment adjusted for depreciation, gross investment minus depreciation

Nominal GDP

GDP which does not take inflation into account, GDP at current prices

Output gap

The difference between the long term trend rate of growth and actual growth

Positive output gap

When GDP is higher than predicted, the economy is producing above full output

Potential growth

A change in the productive potential of the economy

Purchasing power parity

Exchange rate of one currency to another that compares the cost of living in different countries through comparing a typical basket of gods.

Quantitative easing

When the central banks buy assets n exchange for money in an attempt to increase the money supply

Real GDP

GDP which strips out the effect of inflation

Real wage unemployment

Unemployment caused when wages are set above the equilibrium wage rate

Recession

The trough of the business cycle when growth is lower. The governemnt defines it as where real GDP falls for 2 consecutive quarters

Retail price index (RPI)

An old measure of inflation which has lost its national statistic status

Savings

The decision by consumers to postpone consumption

Seasonal unemployment

Unemployment caused when an industry only operates during certain times of the year

Short run

When at least one factors of production if fixed

Short run aggregate supply (SRAS)

Aggregate supply when at least one factor of production is fixed

Short run Phillips curve

Shows the relatiosnhip between unemployment and inflation, higher levels of unemployment lead to lower levels of inflation

Structural unemployment

Unemployment caused by the long-term decline of an industry

Supply-side policies

Government policies aimed at increase the productive potential of the economy and shifting LRAS to the right

Total GDP

The GDP of the whole country

Trade (business) cycle

The tendency of economic growth to rise and fall above and below the trend rate of economic growth, causing booms and busts

Underemployment

Those who are working part time, on zero hour contracts or on governemnt training schemes but would prefer to be full time or those employed in areas under their skill level

Unemployed

Those who are without work, able to start work in the next 2 weeks and have actively sought to work for the last 4 weeks

Value of GDP

Nominal values of GDP, GDP at current prices

Volume of GDP

Real values of GDP, the size of the basket of goods

Wealth

A stock of assets

Withdrawal

Spending power leaving the circular flow of income resulting from savings, taxation and imports