Theme 2 Key words

2.1 Measures of Economic Performance

Economic growth

An increase in real GDP over time, showing an expansion of the economy’s productive capacity.

Gross Domestic Product (GDP)

The total value of all goods and services produced within a country in a given time period.

Real GDP

GDP adjusted for inflation, allowing for comparisons of living standards over time.

Nominal GDP

GDP measured at current prices, not adjusted for inflation.

GDP per capita

GDP divided by the population, used as an indicator of average living standards.

Gross National Income (GNI)

GDP plus net income from abroad.

Output gap

The difference between actual GDP and potential GDP.

Positive output gap

When actual GDP exceeds potential GDP, leading to inflationary pressure.

Negative output gap

When actual GDP is below potential GDP, indicating spare capacity.

Inflation

A sustained increase in the general price level, reducing the purchasing power of money.

Consumer Price Index (CPI)

The UK’s official measure of inflation, based on a weighted basket of goods and services.

Retail Price Index (RPI)

An alternative inflation measure that includes housing costs such as mortgage interest payments.

Deflation

A sustained fall in the general price level.

Disinflation

A fall in the rate of inflation, meaning prices rise more slowly.

Unemployment

When individuals are willing and able to work but cannot find employment.

Labour Force Survey (LFS)

A survey-based measure of unemployment using ILO definitions.

Claimant count

Measures the number of people claiming unemployment-related benefits.

Frictional unemployment

Short-term unemployment as workers move between jobs.

Structural unemployment

Unemployment caused by long-term changes in the structure of the economy.

Cyclical unemployment

Unemployment caused by downturns in the economic cycle.

Balance of payments

A record of all economic transactions between a country and the rest of the world.

Current account

Records trade in goods and services, primary income, and secondary income.

Current account deficit

When the value of imports exceeds the value of exports.

Current account surplus

When the value of exports exceeds the value of imports.

2.2 Aggregate Demand and Aggregate Supply

Aggregate demand (AD)

The total level of demand in the economy at any given price level.

Components of AD

Consumption (C), Investment (I), Government spending (G), and Net exports (X−M).

Consumption

Household spending on goods and services.

Investment

Spending on capital goods, including machinery and buildings.

Government spending

Expenditure by the government on public services and infrastructure.

Net exports

The value of exports minus imports.

Aggregate supply (AS)

The total level of output firms are willing and able to supply at a given price level.

Short-run aggregate supply (SRAS)

The relationship between price level and output when costs are variable.

Long-run aggregate supply (LRAS)

The level of output when the economy is operating at full capacity.

2.3 National Income

Circular flow of income

A model showing the flow of income between households and firms.

Injections

Additions to the circular flow, including investment, government spending, and exports.

Withdrawals

Leakages from the circular flow, including savings, taxation, and imports.

Multiplier

The ratio of the final change in national income to the initial change in injections.

2.4 Economic Growth

Actual growth

An increase in real GDP.

Potential growth

An increase in the economy’s productive capacity.

Productivity

Output per worker per unit of time.

Labour productivity

Output per worker or per hour worked.

2.5 Macroeconomic Objectives and Policies

Macroeconomic objectives

Key government goals: economic growth, low inflation, low unemployment, and balance of payments stability.

Fiscal policy

The use of taxation and government spending to influence aggregate demand.

Expansionary fiscal policy

Increased government spending or reduced taxation to boost AD.

Contractionary fiscal policy

Reduced government spending or increased taxation to reduce AD.

Monetary policy

The use of interest rates and money supply to control inflation and AD.

Bank of England

The UK’s central bank responsible for monetary policy.

Interest rates

The cost of borrowing money or the reward for saving.

Supply-side policies

Government policies aimed at increasing LRAS and productive potential.