Theme 2 definitions

Aggregate Demand

Total amount of expenditure on goods and services in sn economy. AD = C+I+G+(X-M)

Consumption

Total expenditure by households on goods and services over a period of time.

Disposable Income

Household income over a period of time (including state benefits) once tax has been deducted.

MPC

(Marginal Propensity to Consume) The proportion of a change in income which is spent on consumption. Calculated by ∆C/∆Y

Wealth Effect

The change in consumption following a change in wealth.

Investment

Addition to the capital stock of the economy.

Government Expenditure

Total expenditure by government on goods and services

Exports

Domestic goods and services sold to foreign agents

Imports

Foreign goods and services bought by domestic agents

Aggregate Supply

Total amount of supply of goods and services in an economy

Full Capacity

The level of output where no extra production can take place in the long run with existing resources. Shown by the classical long run AS curve.

Spare Capacity

An economy has spare capacity when some resources are unemployed.

Circular Flow of Income

A model of the economy which shows the flow of goods, services and factors and their payments around the economy. (households sell their labour to firms for an income and then use this income to buy goods and services produced by firms)

Injections

Money which is coming into the economy (investment, government spending, exports)

Withdrawals/leakages

Spending by households which does not flow back to domestic firms (savings, taxes, imports)

National Income

The value of the output, expenditure or income of an economy over a period of time

Multiplier effect

Any AD fluctuations are amplified by the multiplier through knock on AD effects. An initial change in AD has a larger final impact on real GDP due to the multiplier.

Multiplier = 1 / (1 - MPC)

Multiplier = 1 / MPW —> MPW (Marginal Propensity to Withdraw) = MPS + MPT + MPM

MPS

(Marginal Propensity to Save) The proportion of a change in income which is saved. It is calculated by ∆S/∆Y

MPM

(Marginal Propensity to Import) The proportion of a change in income which is spent on imports. It is calculated by ∆M/∆Y

MPT

(Marginal Propensity to Tax) The proportion of a change in income which is taxed. It is calculated by ∆T/∆Y

MPW

(Marginal Propensity to Withdraw) The proportion of a change in income which is withdrawn. It is calculated by ∆W/∆Y —> same as MPS+MPT+MPM

GDP

(Gross Domestic Product) Measures the monetary value of output produced by an economy during a given period of time

GNI

(Gross National Income) The value of goods and services produced by a country over a period of time (GDP) plus net overseas interest payments and dividends (factor incomes)

Purchasing Power Parities

An exchange rate of once currency for another which compares how much a typical basket of goods in one country costs compared to that of another country

Standard of Living

How well off an individual, household or economy is. Measured by a complex mix of variables such as income, health, the environment.

Economic Growth

A percentage change in RGDP over a given time period

Business cycle

Fluctuation of RGDP around a long-term trend growth rate. A pattern of booms and recession in an economy over a period of time.

Recession

When growth is negative for two consecutive quarters.

Actual Growth

Growth in RGDP

Potential Growth

Economic growth as measured by the changes in the productive potential of the economy over time.

Output Gap

The difference between the actual level of GDP and the productive potential of the economy

Export-led growth

A rise in AD caused by a rise in exports

Real

Adjusted for inflation

Inflation

A general rise in prices over a given period of time

Cost-Push Inflation

Inflation caused by increases in the costs of production in the economy

Demand-Pull Inflation

Inflation which is caused by excess demand in the economy

Hyper Inflation

Large increases in the price level

Deflation

A fall in the price level

CPI

(Consumer Price Index) A measure of the price level used across the EU and used by the Bank of England to measure inflation against its target

RPI

(Retail Price Index) A measure of the price level which has been calculated in the UK for over 60 years and is used in a variety of contexts such as by the government to index welfare benefits

Unemployment

Amount of people willing and able to work at the market wage but without a job

Frictional Unemployment

When workers are unemployed for short lengths of time between jobs

Structural Unemployment

When the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk

Seasonal Unemployment

When workers are unemployed during the off-season

Cyclical or Demand Deficient Unemployment

When there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job

Employment Rate

The number of those in work divided by the population of working age expressed as a percentage

Underemployed

Those who are willing to work more hours if available or those in job which are below their skill level

Claimant Count

A measure of unemployment, any claiming unemployment benefit (JSA) is defined as unemployed

ILO Unemployment

A measure of unemployment. The ONS carry out the Labour Force Survey (survey of 60,000 working age people interviewed 4 times a year) A person is defined as unemployed if they have been looking for work in the last four weeks and if they are ready to work within the next two weeks.

Balance of payments

A record of all financial dealings over a period of time between economic agents of one country and all other countries

Current Account

The part of the BoP account where payments for the purchase and sale of goods and services are recorded

Current Account Deficit

When value of imports > value of exports

Current Account Surplus

When value of imports < value of exports

Monetary Policy

The manipulation by government of monetary variables, eg interest rates and money supply, to achieve its objectives

Quantitative easing

A monetary policy instrument where the central bank buys financial assets in exchange for money in order to increase borrowing and lending in the economy

Rate of Interest

The price of money, determined by the demand and supply for funds in a money market where there are borrowers and lenders. Interest = cost for borrowing and reward for saving

Contractionary Monetary Policy

Tight monetary policy which leads to a fall in AD

Expansionary Monetary Policy

Loose monetary policy which leads to a rise in AD

Fiscal Policy

The use of taxes, government spending and government borrowing by government ot achieve its objectives

Contractionary Fiscal Policy

Fiscal policy which leads to a fall in AD

Expansionary Fiscal Policy

Fiscal policy which leads to an increase in AD

Indirect tax

A tax levied on goods and services such as VAT or excise duties

Direct tax

A tax levied directly on individuals or companies such as income tax or corporation tax

Macroeconomic Objectives

The government’s main macroeconomic objectives are; high economic growth, low unemployment, low and stable inflation and a current account surplus/low deficit

Supply Side Policies

Government policies designed to increase the productive potential of the economy and push the long run AS curve to the right

Deregulation

The process of removing government controls from markets

Privatisation

The sale of government organisations or assets to the private sector

Minimum Wage

the least amount an employer can pay one of its workers, usually expressed as an hourly wage rate