Section 4 : Government and the macroeconomy

Local government

A government organisation with the authority to administer a range of policies within an area of the country

Natural monopoly

An industry where a single firm can produce at a lower average cost than two or more firms because of the existence of significant economies of scale

Strategic industries

Industries that are important for the economic development and safety of the country — army force, education

National champions

Industries that are, or have the potential to be, world leaders

Trade bloc

A regional group of countries that remove trade restrictions between themselves

Free international trade

The exchange of goods and services between countries without any restrictions

Economic growth

An increase in the output of an economy and in the long run, an increase in the economy's productive potential

Actual economic growth

An increase in the output of an economy ( real GDP )

Potential economic growth

An increase in an economy's productive capacity

Aggregate demand ( C+I+G+(X-M))

The total demand for a country's goods and services at a given price level and in a given time period. — It consisted of consumer expenditure, investment, government spending and net exports ( exports - imports )

Aggregate supply

the total amount of goods and services that domestic firms are willing to supply at a given price level

Full employment

The lowest level of unemployment possible

Economically active

Being a member of the labour force

Unemployment rate

The percentage of the labour force who are willing and able to work but are without jobs — ( unemployment/labour force ) x 100%

Price stability

The price level in the economy not changing significantly over time

Inflation rate

The percentage rise in the price levels of goods and services over time

Balance of payments

The record of a country's economic transactions with other countries

Budget

The relationship between government revenue and government spending

Budget deficit

Government spending is higher than government revenue

Budget surplus

Government revenue is higher than government spending

National debt

The total amount of money the government has borrowed over time

Multiplier effect

The final impact on aggregate demand being greater than the initial change

Direct taxes

Taxes on income and wealth

Indirect taxes

Taxes on expenditure

Progressive tax

One which takes a larger percentage of the income or wealth of the rich

Proportional tax

One which takes the same percentage of the income or wealth of all taxpayers

Regressive tax

One which takes a larger percentage of the income or wealth of the poor

Automatic stabilisers

Forms of government expenditure and taxation that reduce fluctuations in economic activity, without any change in government policy

Inflation

The rise in the price level of goods and services over time

Informal economy

That part of the economy that is not regulated, protected or taxed by the government

Flat taxes

Taxes with a single rate

Fiscal policy

Decisions on government spending and taxation designed to influence aggregate demand

Expansionary fiscal policy

Rises in government expenditure and/or cuts in taxation designed to increase aggregate demand

Contractionary fiscal policy

Cuts in government expenditure and/or rises in taxation designed to reduce aggregate demand

Monetary policy — interest rates, exchange rates, money supply

Decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregate demand

Foreign exchange rate

The price of one currency in terms of another currency or currencies

Expansionary monetary policy

Increases in the money supply and/or the rate of interest designed to increase aggregate demand

Contractionary monetary policy

Cuts in the money supply or growth of the money supply and/or rises in the rate of interest designed to reduce aggregate demand

Supply-side policy

Measures designed to increase aggregate supply

Deregulation

The removal of rules and regulation that have been enforced by laws