Year 1 Macroeconomics

Flashcards for review.

Balance of Payments:

The record of flows of money in and out of a country.

Current Account Components:

Trade in goods and services, primary income, and secondary income.

CURRENT ACCOUNT SURPLUS:

More money is flowing into the current account than flowing out.

CURRENT ACCOUNT DEFICIT:

More money is flowing out of the current account than flowing in.

Inflation:

A sustained increase in the price level.

Common Inflation Measures:

Consumer Price Index and Retail Price Index.

Unemployment:

Governments aim to minimize this, wanting everyone of working age who wants a job to have one.

CLAIMANT COUNT (Unemployment Measure):

Counts people claiming unemployment-related benefits; updated monthly and cheap to collect.

LABOUR FORCE SURVEY (Unemployment Measure):

A sample of the population self-report via an ILO survey; includes those not receiving JSA and is better for international comparisons.

Unemployment Rate:

The proportion of the workforce that is unemployed.

UK Inflation Target:

The UK inflation target is a CPI of 2% ± 1%.

RPI (Retail Price Index):

Includes items such as Council Tax and Mortgage Interest Payments.

CPI (Consumer Price Index):

Uses a larger sample of the population and is often better for international comparisons.

Economic Growth:

The change in National Income over a given period of time.

Real GDP:

Adjustment for inflation.

Per Capita GDP:

Adjustment per person, comparing countries with different population sizes.

PPP (Purchasing Power Parity) GDP:

Adjusted for how much you can buy, comparing living standards across countries.

Index Numbers:

A method to compare values with a base value of 100.

Weighted Index Numbers:

Combine multiple variables, with some variables affecting the final value more than others.

Withdrawals:

Leakages of spending power from the circular flow of income.

Injections:

Additions to spending power in the circular flow of income.

Macroeconomic Equilibrium:

Where there is no tendency for National Income to change; injections equal withdrawals.

Full Employment Level of National Income:

The level of national income where all resources are being used efficiently.

Multiplier Process:

Describes how the effect of an injection/withdrawal can be bigger than the initial injection/withdrawal itself.

Marginal Propensity to Consume (MPC):

The proportion of additional income that would be spent.

Accelerator Process:

Describes how a high rate of GDP growth leads to a proportionately bigger increase in investment.

Aggregate Demand (AD):

The total planned spending in an economy over a period of time at any given price level.

Consumption:

Total spending by households.

Government Spending:

Spending by the government on goods and services.

Net Exports:

The value of exports minus the value of imports.

Aggregate Supply:

The total output produced in an economy at a given price level over a given period of time.

Long Run Aggregate Supply (LRAS):

The productive potential of the economy (perfectly inelastic).

Short Run Aggregate Supply (SRAS):

Upward sloping because firms need a higher price to make increasing output profitable in the short term.

Short Run Growth:

Where actual output increases (outward shift in AD or SRAS).

Long Run Growth:

Where productive capacity increases (outward shift in LRAS).

Sustainable Growth:

Growth which does not compromise future growth.

Voluntary Unemployed:

People who are unwilling to work at the current wage rate.

Unemployed:

People who want to work but do not have work.

Involuntary Unemployed:

People who are unable to find work at the current wage rate.

Underemployed:

People who are in work but want to work more hours.

Frictional Unemployment:

Unemployment caused by the time it takes to find a new job.

Seasonal Unemployment:

Unemployment in industries with varying labour demand throughout the year.

Structural Unemployment:

Unemployment caused by long run changes in the underlying economy.

Cyclical Unemployment:

Caused by low aggregate demand in the economy.

Real Wage Unemployment:

Where real wages are above equilibrium, causing a surplus of labour.

Natural Rate of Unemployment:

The rate of unemployment when the economy is in equilibrium (caused by supply-side factors).

Inflation:

An increase in the general price level.

Disinflation:

A fall in the rate of inflation (still positive).

Deflation:

A fall in the general price level.

Demand-Pull Inflation:

Occurs due to rising aggregate demand.

Cost-Push Inflation:

Occurs due to rises in costs of production.

Inflation Expectations:

Consumers and firms use expectations about future price levels to make decisions.

Benign Deflation:

Falling price level caused by an increasing AS.

Malignant Deflation:

Falling price level caused by falling AD.

Menu Costs:

Cost associated with changing prices.

Shoe Leather Costs:

Search costs associated with staying up to date with changing price information.

Fiscal Drag:

If tax bands are not adjusted, rising nominal income pulls taxpayers into higher bands, reducing disposable income.

Income Tax:

A tax on earnings from employment.

Corporation Tax:

A tax on profits.

Value Added Tax (VAT):

An indirect tax payable on the majority of goods or services.

Stamp Duty:

A tax payable on the purchase of property.

Excise Duties:

Taxes on demerit goods (fuel, alcohol, tobacco).

Direct Taxes:

Levied on incomes (wages, interest, rent, profit).

Indirect Taxes:

Levied on expenditure; the burden can be passed from producer to consumer.

Progressive Taxation:

Those on higher incomes pay a higher proportion of their income on tax.

Proportional Taxation:

Everyone pays the same proportion of income on their tax.

Regressive Taxation:

Those on lower incomes pay a higher proportion of their income on tax.

Horizontal Equity:

Those in similar circumstances should pay similar amounts.

Vertical Equity:

Those with higher ability to pay should pay more.

Budget Deficit:

Where government spending is greater than tax receipts.

Budget Surplus:

Where tax receipts are greater than government spending.

Cyclical Deficit:

Deficit due to effects of the economic cycle.

Structural Deficit:

Deficit which remains even after the effects of the economic cycle are removed.

National Debt:

The stock of all outstanding government debt yet to be repaid.

The Office for Budget Responsibility (OBR):

Provides independent and authoritative analysis of the UK’s public finances.

Expansionary Fiscal Policy:

Aims to increase AD (to improve growth and unemployment).

Contractionary/Deflationary Fiscal Policy:

Aims to decrease AD (to reduce inflation).

Monetary Policy:

The central bank taking action to influence interest rates, the money supply and credit, and the exchange rate.

Central Banks:

Aim to maintain macroeconomic and financial stability.

Bank of England:

The UK central bank.

Monetary Policy Committee (MPC):

Meet regularly to decide what, if any, action to take in order to ensure the target is met.

Exchange Rates:

Give the value of one currency in terms of another.

Quantitative Easing:

The electronic creation of new money so the Government can purchase bonds.

Bank Rate:

The minimum rate of interest charged to commercial banks when they borrow from the Bank of England.

Funding for Lending Scheme:

A scheme which allows lenders to swap illiquid assets for more liquid ones in order to increase the supply of credit in the economy.

Forward Guidance:

Where the MPC announces their intentions regarding future monetary policy changes in order to allow consumers and firms to plan.

Expansionary Monetary Policy:

Aims to increase AD (to improve growth and unemployment).

Contractionary/Deflationary Monetary Policy:

Aims to decrease AD (to reduce inflation).

Supply-Side Policies:

Actions taken by the government which aim to increase productive potential.

Supply-Side Improvements:

Can also happen without government intervention.

Free Market Policies:

Removing barriers to the efficient operation of markets in order to help them work better.

Interventionist Policies:

Correct failures in the market, usually meaning the government steps in to fix underproduction.

Phillips Curve

A trade off between inflation and unemployment is more likely in the short run than the long run

SRPC and AD

An outward shift of the AD curve slides an economy up its SRPC

SRPC and SRAS

An outward shift of the SRAS curve shifts the whole SRPC in

LRPC and LRAS

An outward shift of the LRAS curve shifts the whole LRPC in