Macro

Unemployment

The number of people willing and able to work but who cannot get a job.

Inflation

A sustained increase in the general price level in an economy.

Gross domestic Product

The total level of economic activity carried out in an economy in a given period of time.

Aggregate Demand

The total demand for goods and services produced in an economy at a given price level

and in any given time period

Marginal Propensity to Consume (MPC)

The proportion of additional income allocated to consumption. MPC=Change in consumption/change in income

Marginal Propensity to Save (MPS)

The proportion of additional income allocated to saving. MPS = change in savings/change in income

Short-Run Aggregate Supply (SRAS)

How much output firms would be prepared to supply in the short run at any given overall price level.

Long-Run Aggregate Supply (LRAS)

Output that an economy can produce when using all its factors of production. It is an indication of an economy’s productive capacity.

Output Gap

There is a difference between actual and potential GDP.

Multiplier Effect

A change in expenditure causes a greater final change in real GDP.

Marginal Propensity to Withdraw (MPW)

MPW is the proportion of the change in income that leaks out of the circular flow of income.

Average Propensity to Withdraw (APW)

Average Propensity to Withdraw measures the ratio of withdrawals to total income.

Unemployment

When people who are of working age who are willing and able to work are without jobs.

Employment

People who are either working for firms or other organisations, or self-employed

Labour force

People who are employed or unemployed (economically active)

Economically inactive

Those people of working age who are not looking for work, for a variety of reasons.

Full employment

Individuals who are willing and able to work (at going wage rates) are able to find employment.

Unemployment Rate

the % of the labour force which is unemployed

Labour Force Participation Rate

The % of the working age population that are in the labour force (employed or unemployed)

Underemployment

Where an individual is working, but their job does not fully utilise their skills or abilities, and/or does not provide sufficient hours or pay to meet their needs.

Inflation

A general increase in the price level.

Hyperinflation

A situation in which inflation reaches extreme or excessive rates

Deflation

A fall in the average level of prices (negative inflation).

Disinflation

A fall in the rate of inflation, with prices still increasing but at a slower rate.

Fiscal Policy

The use of taxation and government spending to influence the performance of the macroeconomy.

Average Rate of Taxation

Total amount of tax paid/ total income x 100

Marginal Rate of Taxation

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑇𝑎𝑥 𝑃𝑎𝑖𝑑/ 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 x 100 (The rate of tax on the next £1 of income)

Fiscal Drag

Inflation and earnings growth may push more taxpayers into higher tax brackets. The is a benefit of inflation for the government which receives higher tax revenues.

Transfer Payments

Welfare payments from the government.

Automatic Stabilisers

Automatic stabilisers are automatic changes to the government expenditure and revenue budget as the economy moves through stages of the business cycle which helps to stabilise the economy.

National Debt

The total amount of government debt, based on accumulated previous deficits and surpluses

Monetary Policy

Use of the interest rate, the money supply and exchange rate manipulation to influence the performance of the macroeconomy.

Symmetric Inflation Targeting

A target requiring action if inflation falls below target, as well as if rises above it.

Asymmetric Inflation Targeting

A target requiring action if inflation rises above target only.

Liquidity trap

A situation in an economy where interest rates can fall no further, and monetary policy cannot influence aggregate demand.

Quantitative Easing (QE)

Quantitative easing is when a central bank buys bonds to lower the interest rates on savings and loans.

Money Supply

The quantity of money that is in circulation in the economy

Supply-side Policies

Government policies to increase productivity and efficiency in the economy, resulting in an increase in the quality and quantity of factors of production and subsequently an increase in the productive capacity.

Trade-off

When a gain in one item must be accompanied by a loss in some other item.

Short Run Phillips Curve

There is a trade-off between unemployment and inflation (inversely correlation).

Adaptive Expectations

People form their expectation on the basis of the previous and present rate of inflation, and change or adapt their expectation only when it turns out to be different from expected one.

The Balance of Payments

A set of accounts showing the transactions conducted between a country and the rest of the world.

The Current Account

Account identifying transactions in goods and services between the residents of a country and the rest of the world, together with income payments and international transfers.

The Financial Account

Account identifying transactions in financial assets between the residents of a country and the rest of the world

The Capital Account

Account referring to the transfer of funds associated with buying fixed assets such as land

Globalisation

The process of increased global interconnectivity and interdependence as a result of trade, migration, financial flows and technology.

Absolute Advantage

When a country can produce a good or service more efficiently, using less resources and at a lower cost than another country.

Comparative advantage

When a country can produce a good at a lower opportunity cost than another country.

Terms of Trade

The ratio of export prices to import prices. It is usually expressed as an index number, so calculated as the index of export prices / index of import prices x 100.

Trade

The flow of goods and services across national borders

Protectionism

Actions taken to impose restrictions on trade in goods and services

Tariff

A tariff is a tax on imports designed to raise the price of imports.

Quota

A physical limit on the quantity of goods imported.

Economic Integration

An agreement among countries in a geographic region to reduce and ultimately

remove tariff and non-tariff barriers to the free flow of goods or services and factors of production between each other’s economies.

Free Trade Areas

A group of countries that agree not to use any protectionist measures between them.

Customs union

A group of countries that agree to remove restrictions on trade between member countries, and set a common set of restrictions (most commonly tariffs and embargoes) against non-member states.

Common markets

Where countries have free trade not just in goods and services but also in factor markets.

Monetary union

A set of trading arrangements the same as a common market, but with the additional step of using a single shared currency or a permanently fixed exchange rate.

Economic Union

Economies of member countries are as fully integrated as different regions within a country. Economic union implies that there is some degree of fiscal union, with a central body having some powers over taxation and spending, and monetary union, where all member countries share a common currency.

World Trade Organisation

Promotes free trade by encouraging the removal of protectionism, specifically tariffs.

Exchange Rates

The price of one currency in terms of another.

Floating exchange rate system

A system in which the exchange rate is permitted to find its own level in the market

Fixed exchange rate system

A system in which the government of a country agrees to fix the value of its currency in terms of another country.

J-Curve effect

A situation following a devaluation, in which the current account deficit moves further into deficit before improving.

Marshal - Lerner conditions

A devaluation will have a positive effect on the current account only if the sum of the elasticities of demand for exports and imports is greater than 1 (PEDX+PEDM>1)

Unit Labour Cost

Average cost of labour per unit of output, calculated by Total Labour Costs / Total Output.

Relative export price

This is the ratio of one country’s export prices relative to another country, and it is expressed as an index. The lower the relative export price, the more competitive the country.

HDI

A composite index of development between 0 and 1.

Income

A flow of money over a period of time.

Absolute poverty

Where individuals have insufficient income to afford the necessities essential for survival – food, water, warmth, shelter and clothing.

Relative poverty

Where household income is lower than 60% of median income in a country.

Wealth

A stock of assets that have a financial value.

Capitalism

Capitalism is where there is minimal government intervention and resources are distributed according to the market. In a capitalist society, entrepreneurs take risks and are driven by the profit motive.

Capital flight

When a large number of people in a country move capital and assets from one country to another.

Trade Liberalisation

Trading between nations without protectionist barriers, such as tariffs, quotas or regulations.

Micro Finance

Schemes that provide loans for small scale projects in developing countries.

Privatisation

Assets are transferred from the public sector to the private sector.

Managed Exchange Rate (Dirty Float)

Managed exchange rate systems combine the characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it does not float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.

Joint Ventured

When a partnership is formed between two firms based in multiple countries.

Buffer Stock Schemes

A scheme intended to stabilise the price of a commodity by buying excess supply in periods where supply is high and selling stock when supply is low.

Lewis model

How a developing country which focuses on agriculture could move towards manufacturing.

Fair trade scheme

Fairtrade schemes ensure that farmers can receive a fair price for their goods.

Aid

Economic assistance from one country to another.

HIPC

Heavily Indebted Poor Countries Initiative

Moral Hazard

Economic agents have an incentive to alter their behaviour when their risk is borne by others.

World bank

A multilateral organisation that provides financing for long term development projects, such as infrastructure.

International Monetary find

Promote global financial stability and provide short-term emergency loans to countries to avoid budget crises and balance of payments crises.

TNC’s

Companies that operate in more than one country.

Transfer Pricing

The practice of determining the price at which goods or services are bought and sold between related companies, such as subsidiaries of the same multinational corporation operating in different countries.

Universal banks

Banks that operate in both retail and wholesale markets.

Stress Test

Stress testing is used by the Bank of England to make sure the financial system, including banks and building societies, insurance companies and central counterparties, is strong enough to withstand severe scenarios such as a financial

Speculation

The practice of buying and selling assets or financial instruments with the primary goal of profiting from short-term price movements.

Market bubble

Where the price of a particular assets rises massively and then falls.

Market Rigging

Where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market.

Central Bank

A public institution that delivers monetary and financial stability. The exact responsibilities vary from country to country.