Economic Policy

Aggregate output (GDP)

The output of all producers in a country.

Gross Domestic Product (GDP)

Market value of all final goods and services produced in a country's territory in one year.

Gross National Product (GNP)

Market value of all final goods and services produced by members of one nation in one year.

Nominal GDP

Expressed in current market prices and not adjusted for price changes.

Real GDP

Expressed in constant market prices, adjusted for inflation.

Expenditure (Spending)

Total spent by households, firms, government, and residents on the home economy's products.

Output (Production)

Total produced by the industries operating in the home economy.

Income

The sum of all income received, including wages, profits, and government taxes.

Fiscal policy

Government policies on taxes, spending, and borrowing to mitigate economic fluctuations.

Multiplier effect

Total change in output can exceed the initial change in aggregate demand due to circular flow of income.

Paradox of thrift

Aggregate attempts to save more can lead to a fall in overall income.

Sovereign debt crisis

Situation where government bonds are considered risky due to default risk.

Debt-to-GDP ratio

Measured level of governmental indebtedness compared to the size of the economy.

Inflation

An increase in the general price level.

Deflation

A decrease in the general price level.

Phillips Curve

Graph showing the trade-offs between inflation and unemployment.

Expected inflation

The anticipated rate of inflation that influences economic behavior.

Inflation targeting

Monetary policy focused on keeping inflation at a specific target.

Quantitative easing

Central bank purchases of financial assets to increase the monetary base.

Marginal propensity to consume (MPC)

The fraction of additional income that households will consume.

Autonomous consumption

Fixed amount spent regardless of income.

Government spending

Consumption and investment purchases by the government excluding transfers.

Net exports (NX)

Exports minus imports; positive is trade surplus, negative is trade deficit.

Consumption function

Relationship showing total consumption based on disposable income.

Real interest rate

Nominal interest rate adjusted for inflation.

Austerity policy

Economic policy aimed at reducing government deficits through spending cuts.

Fiscal multiplier

Ratio of change in GDP to the change in government spending.

Ricardian Equivalence

Hypothesis that consumers are forward-looking and consider the government's budget constraint.

Supply shocks

Unexpected changes on the supply-side affecting the economy.

Labour market equilibrium

Condition where the bargaining gap is zero and price levels are stable.