Macro-economics key terms/definitions

Actual economic growth

An increase in a country's real GDP over time.

Potential Economic Growth

An increase in the productive capacity of the economy, shown by an outward shift of the LRAS curve.

Trend growth rate

The long-run sustainable rate at which an economy can grow without causing inflationary pressure.

Sustainable Growth

Economic growth that can be maintained without creating excessive inflation, debt, or environmental damage.

Productive Capacity

The maximum output an economy can produce when all resources are fully employed.

Output Gap

The difference between actual GDP and potential GDP.

Positive Output Gap

Occurs when actual output exceeds productive capacity, creating inflationary pressure.

Negative Output Gap

Occurs when actual output is below productive capacity, indicating spare capacity.

Long-Run Aggregate Supply (LRAS)

The economy's maximum productive potential.

Short-Run Aggregate Supply (SRAS)

The total output firms are willing and able to produce at different price levels in the short run.

Demand-Pull Inflation

Inflation caused by excessive aggregate demand relative to aggregate supply.

Cost-Push Inflation

Inflation caused by rising production costs.

Stagflation

A combination of inflation, low economic growth, and high unemployment.

Reflation

Policies designed to increase aggregate demand and stimulate economic growth.

Deflationary Pressure

Downward pressure on prices caused by weak demand.

Consumer Price Index (CPI)

A measure of inflation by tracking the average change over time in the prices paid by consumers for a representative "basket" of everyday goods and services.

Disinflation

A fall in the rate of inflation.

Deflation

A sustained fall in the general price level.

Hyperinflation

Extremely rapid and uncontrollable inflation.

Real Income

Income adjusted for inflation.

Purchasing Power Parity

An economic theory that compares different currencies by looking at how much an identical set of goods costs in each country.

Unemployment

Individuals willing and able to work who cannot find employment.

Claimant count

Measures unemployment by calculating the total number of people actively claiming government benefits for being out of work.

Labour Force Survey

A household survey that measures unemployment by directly asking people if they are out of work, seeking a job or available to start.

Cyclical Unemployment

Unemployment caused by economic downturns.

Structural Unemployment

Unemployment caused by changes in the economy that make skills obsolete.

Frictional Unemployment

Short-term unemployment while workers move between jobs.

Seasonal Unemployment

Unemployment arising from seasonal fluctuations.

Real Wage Unemployment

Unemployment caused by wages remaining above market-clearing levels.

Hysteresis

When temporary unemployment becomes permanent because workers lose skills or motivation.

Fiscal Policy

Government manipulation of taxation and spending to influence economic activity.

Expansionary Fiscal Policy

Increasing spending or reducing taxation to boost aggregate demand.

Contractionary Fiscal Policy

Reducing spending or increasing taxation to reduce aggregate demand

Budget Deficit

Occurs when government expenditure exceeds tax revenue in a year.

Budget Surplus

Occurs when tax revenue exceeds government expenditure.

Automatic Stabilisers

Automatic Stabilisers

Monetary Policy

Actions by the central bank to influence interest rates and money supply.

Interest Rate

The cost of borrowing or reward for saving.

Expansionary Monetary Policy

Reducing interest rates to stimulate economic activity.

Contractionary Monetary Policy

Increasing interest rates to reduce inflation.

Quantitative Easing (QE)

When a central bank creates digital money to purchase financial assets like government bonds

Quantitative Tightening (QT)

Reduction of money supply through asset sales or non-replacement.

Current Account

Records trade in goods, services, income and transfers.

Current Account Deficit

Imports and other outflows exceed exports and inflows.

Current Account Surplus

Exports and inflows exceed imports and outflows.

Balance of Payments

Record of all transactions between residents and the rest of the world.

Trade Deficit

Imports exceed exports

Trade surplus

Exports exceed imports

Appreciation

An increase in a currency's value.

Depreciation

A decrease in a currency's value.

Hot Money Flows

Short-term international capital movements seeking higher returns.

Supply-Side Policy

Measures designed to increase productive potential and efficiency.

Market-Based Supply-Side Policies

Policies that improve incentives and market flexibility.

Flexibility

The economy's ability to adapt to changes.

Human Capital

The value of workers' education, skills and experience.

Full Employment

A situation where everyone willing and able to work can find employment.

Price Stability

Low and stable inflation.

Sustainable Economic Growth

Long-term growth without generating instability.

Balance of Payments Equilibrium

A sustainable balance between international inflows and outflows.

Multiplier Effect

The process by which an initial injection causes a greater final increase in national income.

Accelerator Effect

Rising demand encourages proportionately larger increases in investment.

Supply-Side Capacity

The productive potential of the economy.

Demand-Side Constraint

Limits on growth caused by insufficient aggregate demand.

Supply-Side Constraint

Limits on growth caused by inadequate productive capacity.

Inflationary Pressure

Forces likely to increase inflation.

Deflationary Pressure

Forces likely to reduce inflation.

Productivity Growth

Increases in output per worker.

Unit Labour Costs

Labour cost per unit of output produced.

Competitiveness

The ability to compete effectively in domestic and international markets.

Fiscal Drag

Tax revenues rise automatically as incomes increase, slowing growth.

Policy Lag

The delay between implementing a policy and seeing its effects.

Policy Trade-Off

When improving one macroeconomic objective worsens another.

Aggregate Demand Management

Use of fiscal and monetary policy to stabilise the economy.