Theme 2 Defintions

This set of flashcards contains key economic terms and their definitions as outlined in the A-level Economics lecture notes.

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 year chosen as a good comparison in series of data when building an index; it is automatically given an index figure of 100.

Boom

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

Budget

Where the government lays out their 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 of the economy which shows the flow of goods and services, the factors of production and money around the economy.

Claimant count

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

Consumer Price Index (CPI)

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

Consumption

Consumer spending on goods and services.

Cost push inflation

Inflation caused by a decrease in AS.

Current account

A record of the payments for the purchase and sale of goods and services, as well as income and transfers.

Current account deficit

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

Current account surplus

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

Cyclical unemployment

Unemployment caused by a lack of AD.

Deflation

A persistent fall in prices of goods and services.

Deflationary policy

Fiscal or monetary policy which is aimed at reducing AD.

Demand pull inflation

Inflation caused by an increase in AD.

Depreciation

The reduction in the value of machinery over time.

Direct tax

Taxes paid straight to the government by the individual taxpayer.

Disinflation

A reduction in the rate of inflation.

Disposable income

The money consumers have left to spend, after taxes have been taken away and benefits added.

Economic growth

An increase in the long-term productive potential in the economy measured by an increase in real GDP.

Employed

Someone who does more than 1 hour of paid work a week or is temporarily away from work.

Expansionary policy

Fiscal or monetary policy which is aimed at increasing AD.

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

The use of borrowing, government spending and taxation to manipulate the level of AD.

Frictional unemployment

Unemployment caused when people move between jobs.

Gross Domestic Product (GDP)

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

GDP per capita

Total GDP divided by the population.

Gross investment

Investment to replace old machinery and to create or buy new ones.

Gross National Income (GNI)

The value of goods and services produced by a country plus net overseas interest payments and dividends.

Gross National Product (GNP)

The value of goods and services produced by citizens of a country, regardless of their location.

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; those not participating in the job market.

Income

A flow of assets.

Index number

Numbers allowing accurate comparisons over time to be made. The base year value is typically 100.

Indirect tax

Tax where the cost can be passed on to someone else.

Inflation

The general rise in prices of goods and services.

Injection

Spending power entering the circular flow of income.

Interventionist supply side policies

Policies designed to correct market failure involving government intervention.

Investment

Spending by businesses on capital goods to create real goods.

Labour Force Survey

A measure of unemployment which surveys people under ILO definitions.

Living standards

The quality of life enjoyed by people in a country.

Long run

When all factors of production are variable.

Long run aggregate supply (LRAS)

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

Long run trend growth rate

The average sustainable rate of economic growth.

Marginal propensity to consume

The proportion of an increase in income spent on consumption.

Marginal propensity to import

The proportion of an increase in income spent on imports.

Marginal propensity to save

The proportion of an increase in income that is saved.

Marginal propensity to tax

The proportion of an increase in income that is taken away in tax.

Marginal propensity to withdraw

The proportion of an increase in income that is withdrawn from the circular flow.

Market-based supply-side policies

Policies designed to eliminate barriers to the free market.

Monetary policy

Attempts to control the level of AD by altering interest rates or the money supply.

Monetary Policy Committee (MPC)

Group of economists meeting to set the Bank rate and monetary instruments.

Monetary supply

Stock of money in the economy.

Multiplier

An increase in injection leads to an even greater increase in national income.

National expenditure

The value of spending by households on goods and services.

National income

The value of income paid by firms to households.

National output

The value of the flow of goods and services from firms to households.

Negative output gap

When GDP is lower than predicted.

Net exports

Exports minus imports.

Net investment

Investment adjusted for depreciation.

Nominal GDP

GDP that does not take inflation into account.

Output gap

The difference between the long term trend rate of growth and actual growth.

Positive output gap

When GDP is higher than predicted.

Potential growth

A change in the productive potential of the economy.

Purchasing power parity

Exchange rate that compares the cost of living in different countries.

Quantitative easing

When central banks buy assets to increase the money supply.

Real GDP

GDP that strips out the effect of inflation.

Real wage unemployment

Unemployment caused when wages are set above equilibrium wage rate.

Recession

The trough of the business cycle when growth is low.

Retail Price Index (RPI)

An old measure of inflation which has lost national statistic status.

Savings

The decision by consumers to postpone consumption.

Seasonal unemployment

Unemployment caused when an industry operates only during certain times of the year.

Short run

When at least one factor of production is fixed.

Short run aggregate supply (SRAS)

Aggregate supply when at least one factor of production is fixed.

Short run Phillips curve

Shows the relationship between unemployment and inflation.

Structural unemployment

Unemployment caused by the long-term decline of an industry.

Supply-side policies

Government policies aimed at increasing the productive potential of the economy.

Total GDP

The GDP of the whole country.

Trade (business) cycle

The tendency of economic growth to rise and fall.

Underemployment

Those working part-time or in jobs below their skill level.

Unemployed

Those without work who have actively sought work.

Value of GDP

Nominal values of GDP.

Volume of GDP

Real values of GDP.

Wealth

A stock of assets.

Withdrawal

Spending power leaving the circular flow of income.