MACRO ECON DEFINTIONS

Circular flow of income

A model of the economy which shows the flow of goods and services, the factors of production and money around the economy

Injections

Spending power entering the circular flow of income resulting from investment, government spending and exports

Leakages

Spending power leaving the circular flow of income resulting from savings, taxation and imports

Macroeconomic equilibrium

Where the rate of withdrawals equals the rate of injections

Monetary flows

The flow of money, for example from taxes or from consumption

Physical flows

The flow of a good or service

Aggregate demand

The total level of demand in an economy at any given price level at a moment in time

Consumption

Consumer spending in goods and services

Exports

Goods and services sold to foreign countries that provide an inflow of money

Imports

Goods and services bought from foreign countries that lead to an outflow of money

Investment

Spending by businesses on capital goods, which leads to the creation of real goods

Government expenditure

Spending by the government for the provision of goods and services

Net exports

Exports minus imports

Aggregate supply

The total amount of output in the economy at any given price level at a moment in time

Long run

When all factors of production are variable

Long run aggregate supply

The total output an economy can produce when operating at full output

Short run

When at least one factor of production is fixed

Short run aggregate supply

Aggregate supply when at lease one factor of production is fixed

Accelerator theory

A change in consumption will cause a larger percentage change in investment; high consumption leads to high investment

Average propensity to consume

The percentage of income spent on goods and services

Average propensity to save

The percentage of income that is saved

Marginal propensity to consume

The proportion of an increase in income spent on consumption

Marginal propensity to save

The proportion of an increase in income that is saved

Marginal propensity to withdraw

The proportion of an increase in income that is withdrawn from the circular flow

Multiplier

An increase in an injection will lead to an even greater increase of national income

Negative output gap

When GDP is lower than predicted; the economy is producing below full output

Output gap

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

Positive output gap

When GDP is higher than predicted; the economy is producing above full output

Actual rate of growth

Economic growth measured by changes in real GDP

Economic cycle

The tendency of economic growth to rise and fall above and below the trend rate of economic growth, causing booms and busts

Economic growth

An expansion of the productive potential of the economy

GDP per capita

Total GDP divided by the population of a country

Gross domestic product (GDP)

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

Long run growth

An increase in the productive capacity of the economy

Nominal GDP

The value of GDP without being adjusted for inflation

Real GDP

The value of GDP adjusted for inflation

Short run growth

Calculated annually by the percentage change in real GDP

Trend rates of growth

The average sustainable rate of economic growth over a given period of time

Aid

When a country voluntarily transfers resources to another or gives loans on a concessionary basis

Economic development

An increase in living standards, freedom and life expectancy

Genuine progress indicator

A measure of development calculated from 26 different indicators looking at economic, environmental and social factors

Human development index (HDI)

Measures an economy’s development based in income, health and education

Measuring national wellbeing programme

A report which measures how lives are improving; ask four key questions about life satisfaction, anxiety, happiness and worthwhile news

Primary sector

The part of the economy focused on raw materials, such as farming or mining

Remittances

A sum of money sent back to the domestic economy of a migrant

Secondary sector

The sector which transforms raw materials into goods for consumers, the manufacturing industry

Structure of an economy

How the economy is made up in terms of what proportion of output comes from the different economic sectors

Sustainable development

Development that occurs to meet the needs of the people of today without preventing future generations from meeting their needs; development that occurs without depletion of natural resources

Tertiary sector

The part of the economy concerned with the supply of services

Claimant count

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

Employment

Those with a job

Labour force survey

A measure of unemployment which surveys people to class them as unemployed, employed or inactive under international labour organisation (ILO) definitions

Unemployment

Those able and willing to work, but are not employed

Consumer price index

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

Deflation

The opposite of inflation, where the average price level in the economy falls

Disinflation

A falling rate of inflation; prices are still rising buy by not as much

Hyperinflation

When the rate of inflation is high and accelerating, to the extent that its out of control

Inflation

The general rise in prices of goods and services that erodes the purchasing power of money

Balance of payments

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

Capital account

A part of the balance of payments; involves transfers of the ownership of fixed assets

Current account

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

Financial account

A part of the balance of payments; record FDI, portfolio investment and the transfer of gold and currency reserves

Income and current transfers

Net earnings on foreign investment, net cash transfers and transfers that have no return, such as aid and grants

Marginal propensity to import

The proportion of an increase in income spent on imports

Absolutely poverty

When people are unable to afford sufficient necessities to maintain life; those on less than $1.90 a day

Gini coefficient

A measure of income inequality; the ration of the are between the 45 degree line (the line of perfect equality) and the Lorenz curve and the whole area under the 45 degree line

Income distribution

How the flow of assets is spread throughout the economy

Income inequality

When income is unevenly distributed across a nation

Lorenz curve

The cumulative percentage of population plotted against the cumulative percentage of income that those people have

Relative poverty

When income falls below an average income threshold, in the UK this is those on less than 60% of median household income

Wealth distribution

How the stock of assets is spread across the economy

Wealth inequality

When wealth is unevenly distributed across the economy

Natural (non-accelerating inflation) rate of unemployment

The unemployment rate when the labour market is at equilibrium, when there is no demand-deficient unemployment and unemployment is only cause by supply side factors

Phillips curve

Shows the trade off between the level of unemployment and the inflation rate

Automatic stabilisers

Mechanisms which reduce the impact of changes in the economy on national income

Average tax rates

The amount of tax paid as a proportion of income

Balanced budget

When government spending equals tax revenue

Budget deficit

When the government spends more money than it receives

Budget position on current expenditure

The flow of cash during one period of time

Budget position/ fiscal stance

The impact that taxes and government spending has on the future economy

Budget surplus

When the government receives more money than it spends

Capital government expenditure

Government spending on investment goods such as new roads, schools and hospitals, which will be consumer in over a year

Crowding in

When government borrowing leads to an increase in private investment

Crowding out

When government borrowing discourages private sector investment or when government provision of a good or service prevents it being provided by the private sector

Current government expenditure

Spending on goods and services which are consumed and last for a short time

Cyclical budget position

A temporary budget position, which is related to the business cycle

Direct tax

Taxes imposed on income and paid straight to the government by the individual taxpayer

Discretionary fiscal policy

Deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary fiscal policy

Fiscal policy

The use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance

Fiscal rules

A long term constraint on fiscal policy by putting numerical limits on the budget

Government expenditure

Spending by the government for the provision of goods and services

Indirect tax

Tax where the person charged with paying the money to the government is able to pass on the cost to someone else; a tax on consumption that increases costs for producers

Laffer curve

Shows that a rise in tax rates does not necessarily lead to a rise in tax revenue, due to the impact on incentives and work

Marginal rate of tax

The rate of tax applied to the next unit of currency of income, the rate of tax on the next pound earnt

National debt

The sum of government debts build up over many years

Overall budget position

An accumulation of deficits and surpluses over time to give the overall budget

Progressive taxation

When those on higher incomes pay a higher marginal rate of tax; those on higher incomes pay a higher percentage of their income on tax

Proportional taxation

The proportion of income paid on the tax remains the same whilst the income of the taxpayer changes; everyone pays the same percentage of their income to tax

Regressive taxation

Where the proportion of income paid in tax falls whilst the income of the taxpayer changes payer increase; those on lower incomes pay a higher percentage of their income on tax

Structural budget position

A temporary budget position, which is related to the business cycle