Edexcel Economics Theme 2

Macroeconomics

The study of the economy as a whole, including inflation, growth and unemployment.

Aggregate demand

The total of all demands or expenditures in the economy at any given price.

Aggregate demand curve

Shows the relationship between the price level and equilibrium national income. As the price level rises the equilibrium level of national income falls.

Animal spirits

Business confidence: the mood of managers and owners of firms about the future of their industry and the wider economy.

Gross investment

The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital.

Investment

The addition to the capital stock of the economy.

Retained profit

Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation.

Net exports or the net trade balance

Exports minus imports.

Aggregate supply curve

The relationship between the average level of prices in the economy and the level of total output.

Full capacity

The level of output where no extra production can take place in the long run with existing resources. The full capacity level of output for an economy is shown by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply curve.

Short-run aggregate supply curve

The upward sloping aggregate supply curve which assumes that money wage rates are fixed.

Supply-side shocks

Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift.

Circular flow of income

A model of the economy which shows the flow of goods, services and factors and their payments around the economy.

Closed economy

An economy where there is no foreign trade.

Income

Rent, interest, wages and profits earned from wealth owned by economic actors.

Injections

In the circular flow of income, spending which is not generated by households including investment, government spending and exports.

National income

The value of the output, expenditure or income of an economy over a period of time.

Open economy

An economy where there is trade with other countries.

Wealth

A stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services.

Withdrawals or leakages

In the circular flow of income, spending by households which does not flow back to domestic firms. It includes savings, taxes and imports.

Marginal propensity to import (MPM)

The increase in imports divided by the increase in income that caused them (i.e. change in M / change in Y)

Marginal propensity to save (MPS)

The increase in saving divided by the increase in income that caused it (i.e. change in S / change in Y)

Marginal propensity to tax (MPT)

The increase in tax revenues divided by the increase in income that caused them (i.e. change in T / change in Y)

Marginal propensity to withdraw (MPW)

The increase in withdrawals from the circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W / change in Y); this is the same as the sum of the marginal propensity to save, tax and import (MPS + MPT + MPM).

Multiplier or national income multiplier or Keynesian multiplier or real multiplier

The figure used to multiply a change in an injection into the circular flow, such as investment, to find the final change in income (assuming the injection is not determined by income). It is the ratio of the final change in income to the initial change in an injection. It can be calculated as

1 \n ________ \n 1 - MPConsume \n \n or  \n \n 1 \n ___________________ \n MPSave + MPTax + MPiMport \n \n or  \n \n 1 \n ____ \n MPWithdraw

Multiplier effect or process

An increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income).

Gross domestic product (GDP)

A measure of the output or value added of an economy which does not include output or income from investments abroad or an allowance for the depreciation of the nation's capital stock.

Gross national income (GNI)

The value of goods and services produced by an economy over a period of time (GDP) plus net overseas interest payments and dividends (factor incomes).

Gross national product (GNP)

The market value of goods and services produced over a period of time through the labour or property supplied by citizens of a country both domestically (GDP) and overseas.

Hidden, black or informal economy

Economic activity where trade and exchange take place but which goes unreported to the tax authorities and those collecting national income statistics.

Net national income

A measure of national income which includes both net income from investments abroad and an allowance for depreciation of the nation's capital stock.

Per person or per head or per capita

Per individual in the population

Purchasing power parities

An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.

Standard of living

How well off is an individual, household or economy, measured by a complex mix of variables such as income, health, the environment, participation in society and political freedoms.

Transfer payments

Income for which there is no corresponding output, such as unemployment benefits or pension payments.

Value and volume of national income

The value of national income is its monetary value at the prices of the day; the volume is the national income adjusted for inflation and is expressed either as an index number or in money terms at the prices in a selected base year.

Actual growth

Economic growth as measured by recorded changes in real GDP over time.

Boom or peak

Period of time when the economy is growing strongly and is operating above its productive potential.

Demand-side shock

A sudden and large impact on aggregate demand.

Depression or slump

A period of the trade cycle when there is a particularly deep and long fall in output.

Downturn

A period of the trade cycle when either economic growth or GDP itself is falling.

Economic growth

The rise in output in an economy which can be either actual growth or potential growth.

Economic recovery

The movement back from where the economy is operating below its productive potential to a point where it is at is productive potential.

Export-led growth

A rise in aggregate demand caused by a rise in exports.

Hysteresis

The process whereby a variable does not return to its former value when changed. In terms of the trade cycle, it is used to describe the phenomenon of an economy failing to return to its former long term trend rate of growth after a severe recession.

Output gap

The difference between the actual level of GDP and the productive potential of the economy.

Positive output gap

When actual GDP is above the productive potential of the economy and it is in boom.

Negative output gap

When actual GDP is below the productive potential of the economy.

Potential growth

Economic growth as measured by the changes in the productive potential of the economy over time.

Recession

A period of the trade cycle when output or growth in output falls. The technical definition now used by the UK government is that a recession occurs when growth in output is negative for two consecutive quarters (i.e. two periods of three months).

Spare capacity

For a whole economy, this exists when long run aggregate supply is greater than aggregate demand and so there is a negative output gap.

Supply-side shock

A sudden and large impact on aggregate supply.

Trade or business or economic cycle

Regular fluctuations in the level of economic activity around the productive potential of the economy. In business cycles, the economy veers from recession, when it is operating well below its productive potential, to booms when it is likely to be at or even above its productive potential.

Sustainable growth

Growth in the productive potential of the economy today which does not lead to a fall in the productive potential of the economy for future generations.

Anticipated inflation

Increases in prices which economic actors are able to predict with accuracy.

Consumer Prices Index (CPI)

A measure of the price level used across the European Union and used by the Bank of England to measure inflation against its target.

Cost-push inflation

Inflation caused by increases in in the costs of production in the economy.

Deflation

A fall in the price level

Demand-pull inflation

Inflation which is caused by excess demand in the economy.

Disinflation

A fall in the rate of inflation.

Hyper-inflation

Large increases in the price level.

Inflation

A general rise in prices.

Price level

The average price of goods and services in the economy.

Retail Prices Index (RPI)

A measure of the price level which has been calculated in the UK for over 60 years and is used in a variety of contexts such as by the government to index welfare benefits.

Unanticipated inflation

Increases in prices which economic actors like consumers and firms fail to predict accurately and so their decisions are based on poor information.

Active population

Those in work or actively seeking work; also known as the labour force.

Activity rate or participation rate

The number of those in work or unemployed divided by the population of working age expressed as a percentage.

Cyclical or demand-deficient unemployment

When there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job.

Employed

The number of people in paid work.

Employees

Workers employed by another individual or firm.

Employment

Those in paid work.

Employment rate

The number of those in work divided by the population of working age expressed as a percentage.

Frictional unemployment

When workers are unemployed for short lengths of time between jobs.

Full-time workers

Workers who work the hours and the days which are the norm for a particular job.

Hidden unemployment

Partly those in the population who would take a job if offered, but are not in work and are not currently seeking work; and those who are underemployed.

Inactive

The number of those not in work and not unemployed.

Inactivity rate

The number of those not in work and not unemployed divided by the population of working age expressed as a percentage.

Labour force

Those in work or actively seeking work; also known as the active population

Long-term unemployed

In the UK, those unemployed for more than one year.

Part-time workers

Workers who only work a fraction of the hours and the days which are the norm for a particular job.

Population of working age

The total number of people aged between the statutory school leaving age and the state retirement age.

Real wage or classical unemployment

When workers are unemployed because real wages are too high and inflexible downwards, leading to insufficient demand for workers from employers.

Seasonal unemployment

When workers are unemployed at certain times of the year, such as building workers or agricultural workers in winter.

Structural unemployment

When the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk. Examples of structural unemployment are regional unemployment, sectoral unemployment or technological unemployment.

Underemployed

Those who would work more hours if available or are in jobs which are below their skill level.

Unemployed

Those not in work but seeking work.

Unemployment

Occurs when individuals are without a job but are actively seeking work.

Unemployment rate

The number of those not in work, but seeking work, divided by the labour force expresses as a percentage.

Balance of payments account

A record of all financial dealings over a period of time between economic agents of one country and all other countries.

Balance of trade

The value of exports minus imports.

Capital and financial accounts

That part of the balance of payments account where flows of savings, investments and currency are recorded.

Current account

That part of the balance of payments account where payments for the purchase and sale of goods and services are recorded plus primart and secondary incomes.

Current balance

The difference between the value of total exports and total imports including flows of primary and secondary incomes.

Current account deficit or surplus

A deficit exists when imports are greater than exports; a surplus exists when the value of exports are greater than imports.

Balanced budget

A statement of spending and income plans by government where spending is equal to its receipts, mainly tax revenues.

Bank of England base rate

A rate of interest charged by the Bank of England to banks to borrow money overnight. It is the most important interest rate in the UK financial system because it influences other interest rates in the UK such as savings rates and rates of interest on loans by banks.

Budget

A statement of the spending and income plans of an individual firm or government. The Budget is the yearly statement on government spending and taxation plans in the UK.

Budget deficit

A deficit which arises because government spending is greater than its receipts. Government therefore has to borrow money to finance the difference.

Budget surplus

A government surplus arising from government spending being less than its receipts. Government can use the difference to repay part of the National Debt.

Contractionary fiscal policy

Fiscal policy which leads to a fall in aggregate demand.