Inflation, Growth & Circular Flow – Key Vocabulary

A comprehensive set of vocabulary flashcards covering concepts related to inflation, wages, interest, GDP, the business cycle, circular flow, and measurement of economic growth as discussed in the lecture notes.

Inflation

A sustained rise in the general price level of goods and services.

Purchasing Power

The quantity of goods and services that can be bought with a unit of income.

Nominal Wage

Income measured in current dollars without adjusting for prices.

Real Wage

The amount of goods and services that a nominal wage can buy; adjusted for inflation.

Real Wage Change

Change in nominal wage minus the inflation rate.

Nominal Interest Rate

The stated percentage return on savings or loans before inflation.

Real Interest Rate

Nominal interest rate minus the inflation rate.

Borrower

A person or firm that receives funds today and repays in the future; benefits when inflation is higher than expected.

Saver

A person or firm that sets aside income for future use; harmed when inflation erodes purchasing power.

Asset Inflation

An increase in the market value of assets such as houses during periods of general price rises.

Fiscal Drag

When inflation pushes taxpayers into higher brackets, raising their average tax rate.

Profit

Total revenue minus total costs of production.

Revenue

Price multiplied by quantity sold.

Costs of Production

All expenses a firm incurs to make and sell a product, including wages and materials.

Exporter

A New Zealand producer that sells goods or services overseas.

Importer

An NZ firm that brings overseas products into NZ for resale.

Government Operating Balance

Total crown revenue minus total crown expenses.

Quantity Theory of Money (QTOM)

MV = PQ; links money supply and velocity to the price level and real output.

Money Supply (M)

The total stock of money in the economy.

Velocity of Circulation (V)

Average number of times each dollar is spent per period.

Price Level (P)

The weighted average price of all goods and services produced.

Real Output (Q)

The economy’s quantity of goods and services (real GDP).

Business Cycle

Regular fluctuations in economic activity: expansion, peak, recession, trough.

Peak/Boom

The top of the cycle; output is high and idle resources are scarce.

Trough/Depression

The bottom of the cycle; output is low and idle resources plentiful.

Expansion/Recovery

Phase where GDP and confidence rise after a trough.

Recession/Downturn

Phase where GDP and confidence fall after a peak.

Aggregate Demand (AD)

Total planned spending: C + I + G + (X − M).

Aggregate Supply (AS)

Total output producers are willing to supply at each price level.

Demand-Pull Inflation

Price rise caused by an outward shift of AD.

Cost-Push Inflation

Price rise caused by an inward shift of AS from higher production costs.

Consumer Price Index (CPI)

Weighted index tracking price changes of a basket of goods and services.

Basket of Goods

Representative set of items used to calculate the CPI.

Deflation

A sustained fall in the general price level.

Disinflation

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

Nominal GDP

Money value of all goods and services produced measured in current prices.

Real GDP

Nominal GDP adjusted for inflation; reflects actual output changes.

Real GDP per Capita

Real GDP divided by population; output per person.

Net Social Welfare

Broad measure of wellbeing including economic, social, health and environmental factors.

Productive Capacity

Maximum possible output given current resources and technology.

Circular Flow Model

Diagram showing income and spending flows between households, firms, government, finance and overseas sectors.

Injection

Money entering the circular flow: investment, government spending, export receipts, transfer payments.

Withdrawal (Leakage)

Money leaving the circular flow: savings, taxes, import payments.

Savings

Portion of household income not spent; a withdrawal.

Investment

Spending by firms on capital goods; an injection.

Government Spending

Purchases of goods and services by the government sector; injection.

Direct Tax

Tax paid straight from income to government (e.g., income tax); withdrawal.

Indirect Tax

Tax on spending collected by producers (e.g., GST); withdrawal.

Transfer Payments

Government payments to households with no good or service supplied in return; injection.

Import Payments

Money paid to overseas producers for foreign goods; withdrawal.

Export Receipts

Money received from overseas buyers for NZ goods; injection.

Idle Resources

Unemployed labour or unused capital that can increase output without raising prices.

Capacity Constraints

Limits on output when resources are fully employed, typical at a peak.

Confidence (Business/Consumer)

Expectations about future economic conditions that influence spending and investment.

Fiscal Policy

Government adjustments to spending, transfers and taxation to influence AD.

Interest Rate

Cost of borrowing or return on saving, expressed as a percentage of the principal.

MV = PQ

Equation of exchange summarising the Quantity Theory of Money.

Capital-Intensive Production

Output produced mainly with machinery; wage pressures lessened during inflation.

Labour-Intensive Production

Output produced mainly with human labour, more exposed to wage-price pressures.

GST (Goods and Services Tax)

NZ’s 15 % indirect tax on most goods and services.