Cambridge A levels economics chapter 6

Macroeconomy

the economy as a whole.

Aggregate demand (AD)

the total spending on an economy's goods and services at a given price level in a given time period.

Aggregate supply (AS)

the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period.

Short-run aggregate supply (SRAS)

the total output of an economy that will be supplied when there has not been enough time for the prices of factors of production to change.

Long-run aggregate supply (LRAS)

the total output of a country supplied in the period when prices of factors of production have fully adjusted.

Keynesians

followers of the economist John Maynard Keynes who maintain that government intervention is needed to achieve full employment.

New classical economists

economists who think that the LRAS curve is vertical and that the economy will move towards full employment without government intervention.

Macroeconomic equilibrium

the output and price level achieved where AD equals AS.

Inflation

a sustained increase in an economy's price level.

Creeping inflation

a low rate of inflation.

Hyperinflation

an exceptionally high rate of inflation, which may result in people losing confidence in the currency

Consumer price index

an index that shows the average change in the prices of a representative basket of products purchased by households.

Money values

values at the prices operating at the time.

Real values

values adjusted for inflation.

Cost-push inflation

inflation caused by increases in costs of production.

Demand-pull inflation

inflation caused by increases in aggregate demand not matched by equivalent increases in aggregate supply.

Monetarists

economists who consider that inflation is caused by an excessive growth in the money supply.

Menu costs

costs to firms of having to change prices due to inflation.

Shoe leather costs

costs of moving money around in search of the highest interest rate.

Fiscal drag

the income of people and firms being pushed into higher tax brackets as a result of inflation.

Inflationary noise

confusion over relative prices caused by inflation.

Deflation

a sustained fall in the price level.

Disinflation

a fall in the inflation rate.

Balance of payments

a record of a country's economic transactions with the rest of the world over a year.

Current account

within the balance of payments, a record of the trade in goods, trade in services, investment income and current transfers.

Capital account

within the balance of payments, a record of capital transfers and the acquisition and disposal of nonproduced, non-financial assets

Financial account

within the balance of payments, a record of the transfer of financial assets between the country and the rest of the world.

Net errors and omissions

a figure included to ensure the balance of payments balances.

Exchange rate

the price of one currency in terms of another currency.

Trade weighted exchange rate

the price of one currency against a basket of currencies.

Real effective exchange rate

a currency's value in terms of its real purchasing power.

Floating exchange rate

an exchange rate that is determined by the market forces of demand and supply.

Fixed exchange rate

an exchange rate set by the government and maintained by the central bank.

Hot money flows

flows of money moved around the world to take advantage of changes in interest rates and exchange rates

Managed float

where the exchange rate is influenced by state intervention.

Depreciation

a decrease in the international price of a currency caused by market forces.

Devaluation

a decision by the government to lower the international price of the currency.

Marshall-Lerner condition

the requirement that for a fall in the exchange rate to be successful in reducing a current account deficit, the sum of the price elasticities of demand for exports and imports must be greater than 1.

J-curve effect

a fall in the exchange rate causing an increase in a current account deficit before it reduces it due to the time it takes for demand to respond.

Appreciation

an increase in the international price of a currency caused by market forces.

Revaluation

a decision by the government to raise the international price of its currency.

Terms of trade

a numerical measure of the relationship between export and import prices.

Absolute advantage

used in the context of international trade, a situation where, for a given set of resources, one country can produce more of a particular product than another country.

Comparative advantage

used in the context of international trade, a situation where a country can produce a product at a lower opportunity cost than another country.

Free trade

international trade not restricted by tariff s and other protectionist measures.

Trading possibility curve

a diagram showing the effects of a country specialising and trading

Trade bloc

a regional group of countries that have entered into trade agreements.

Free trade area

a trade bloc where member governments agree to remove trade restrictions among themselves.

Customs union

a trade bloc where there is free trade between member countries and a common external tariff on imports from non-members.

Economic union

a trade bloc where there is free trade between member countries, a common external tariff and some common economic policies, which may include a common currency.

Trade creation

where high-cost domestic production is replaced by more eff iciently produced imports from within the customs union

Trade diversion

where trade with a low-cost country outside a customs union is influenced by higher-cost products supplied from within

Protectionism

protecting domestic producers from foreign competition.

Tariff

a tax imposed on imports or exports.

Quota

a limit on imports or exports.

Exchange control

restrictions on the purchases of foreign currency.

Embargo

a ban on imports and/or exports

Voluntary export restraint

a limit placed on imports reached with the agreement of the supplying country.

Infant industries

new industries that have a low output and a high average cost.

Dumping

selling products in a foreign market at below their cost of production.