A-level Economics – Themes 1 & 2 Key Vocabulary

Flashcards covering key vocabulary from Edexcel A-level Economics Themes 1 and 2. Each card presents a term with its concise definition to aid revision of macroeconomic performance, policies, market mechanisms, and market failure concepts.

Actual growth

Economic growth measured by changes in real GDP.

Aggregate demand (AD)

The total level of demand in an economy at any given price at a moment in time.

Aggregate supply (AS)

The total amount of output in the economy at any given price at a moment in time.

Animal spirits

The level of confidence of business owners.

Balance of payments

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

Base year

A chosen year in an index series used for comparison; automatically given an index figure of 100.

Boom

The peak of the business cycle when economic growth is high.

Budget

Where the government sets out its spending and taxation plans.

Budget deficit

When the government spends more money than it receives.

Budget surplus

When the government receives more money than it spends.

Circular flow

A model showing the flow of goods, services, factors of production and money around the economy.

Claimant count

A measure of unemployment based on the number of people receiving benefits for being unemployed.

Consumer Price Index (CPI)

Official measure used to calculate the rate of inflation, based on a weighted basket of goods.

Consumption

Consumer spending on goods and services.

Cost-push inflation

Inflation caused by a decrease in aggregate supply.

Current account

A record of payments for trade in goods and services plus income and transfers.

Current account deficit

When more money leaves the country than enters, making the current account negative.

Current account surplus

When more money enters the country than leaves, making the current account positive.

Cyclical unemployment

Unemployment caused by a lack of aggregate demand.

Deflation

A persistent fall in prices of goods and services.

Deflationary policy

Fiscal or monetary policy aimed at reducing aggregate demand.

Demand-pull inflation

Inflation caused by an increase in aggregate demand.

Depreciation (capital)

The reduction in the value of machinery over time.

Direct tax

Tax paid straight to the government by the individual taxpayer.

Disinflation

A reduction in the rate of inflation.

Disposable income

Income left to spend after taxes are paid and benefits added.

Economic growth

An increase in long-term productive potential; measured by a rise in real GDP.

Employed (ILO)

Person doing >1 hour paid work a week, temporarily away, on training, or 15+ hours unpaid in family business.

Expansionary policy

Fiscal or monetary policy aimed at increasing aggregate demand.

Exports

Goods or services sold to foreigners that bring income into the country.

Export-led growth

Economic growth arising from an increase in exports.

Fiscal policy

Use of borrowing, government spending and taxation to influence aggregate demand and macro performance.

Frictional unemployment

Unemployment occurring when people move between jobs or into the labour market.

Gross Domestic Product (GDP)

The value of goods and services produced in a country over a given period.

GDP per capita

Total GDP divided by the population.

Gross investment

Investment to replace depreciated capital and to buy/create new capital.

Gross National Income (GNI)

GDP plus net overseas interest payments and dividends.

Gross National Product (GNP)

Value of goods and services produced by a country’s citizens, regardless of residence.

Government spending

Spending by the government for the provision of goods and services.

Imports

Goods and services bought from foreigners that take income out of the country.

Inactive

Those neither employed nor unemployed; not participating in the labour market.

Income

A flow of assets received, e.g., wages, interest or rent.

Index number

Figure allowing accurate time comparisons; base year set to 100.

Indirect tax

Tax on expenditure where the payer can pass on the cost to others.

Inflation

General rise in prices that erodes the purchasing power of money.

Injection

Spending power entering the circular flow via investment, government spending and exports.

Interventionist supply-side policies

Government measures to correct market failure and boost productive capacity.

Investment

Business spending on capital goods, leading to creation of real assets.

Labour Force Survey

Survey measuring unemployment using ILO definitions of employed, unemployed and inactive.

Living standards

Quality of life enjoyed by people in a country.

Long run

Period where all factors of production are variable.

Long-run aggregate supply (LRAS)

Total output an economy can produce when operating at full capacity.

Long-run trend growth rate

Average sustainable rate of economic growth over time.

Marginal propensity to consume (MPC)

Proportion of extra income spent on consumption.

Marginal propensity to import (MPM)

Proportion of extra income spent on imports.

Marginal propensity to save (MPS)

Proportion of extra income saved.

Marginal propensity to tax (MPT)

Proportion of extra income taken in tax.

Marginal propensity to withdraw (MPW)

Proportion of extra income removed from the circular flow via S, T or M.

Market-based supply-side policies

Policies that remove obstacles to the efficient working of free markets.

Monetary policy

Central-bank action to influence aggregate demand via interest rates or money supply.

Monetary Policy Committee (MPC)

Nine economists who meet monthly to set the Bank Rate and other instruments.

Money supply

Total stock of money in the economy.

Multiplier

Process where an injection causes a greater increase in national income; 1 ÷ MPW or 1 ÷ (1-MPC).

National expenditure

Total household spending on goods and services.

National income

Income paid by firms to households for factor services.

National output

Flow of goods and services from firms to households.

Negative output gap

Actual GDP below potential; economy producing below full capacity.

Net exports

Exports minus imports.

Net investment

Gross investment minus depreciation.

Nominal GDP

GDP measured at current prices, not adjusted for inflation.

Output gap

Difference between long-term trend growth and actual growth.

Positive output gap

Actual GDP above potential; economy producing beyond full capacity.

Potential growth

Increase in the productive potential of the economy.

Purchasing power parity (PPP)

Exchange rate comparing cost of a basket of goods between currencies.

Quantitative easing

Central bank buys assets for money to increase money supply.

Real GDP

GDP adjusted for inflation.

Real wage unemployment

Unemployment when wages are above equilibrium wage rate.

Recession

Trough of the business cycle; defined as two consecutive quarters of falling real GDP.

Retail Price Index (RPI)

Former inflation measure that has lost National Statistic status.

Savings

Decision by consumers to postpone consumption.

Seasonal unemployment

Joblessness in industries operating only part of the year.

Short run

Period where at least one factor of production is fixed.

Short-run aggregate supply (SRAS)

Aggregate supply when at least one factor is fixed.

Short-run Phillips curve

Shows inverse relationship between inflation and unemployment.

Structural unemployment

Unemployment due to long-term decline of an industry.

Supply-side policies

Government measures aimed at increasing productive potential and shifting LRAS right.

Total GDP

GDP of the whole country.

Trade (business) cycle

Fluctuations of growth around trend rate causing booms and busts.

Underemployment

Workers in part-time/low-skill roles who want full-time or higher-skill work.

Unemployed (ILO)

People without work, available in 2 weeks, actively sought work in last 4 weeks.

Value of GDP

Nominal GDP; current-price measure.

Volume of GDP

Real GDP; size of the output basket.

Wealth

A stock of assets.

Withdrawal

Spending power leaving circular flow via savings, taxes or imports.

Ad valorem tax

Indirect tax whose value depends on the value of the good.

Asymmetric information

Situation where one party has more information than another, causing market failure.

Capital

Factor of production consisting of goods used to produce other goods.

Capital goods

Goods produced to aid future production of consumer goods.

Ceteris paribus

Latin: ‘all other things equal.’

Command economy

Economic system where the state allocates all resources.