Economics Definitions

Consumption

Total planned spending on goods and services in a household

Aggregate Demand

Total planned spending in the economy by households, firms, governments, and overseas

Production Possibility Boundary

Represents the combination of goods and services produced when all resources are fully employed and used efficiently

Increase in GPL

Contraction of aggregate demand

Decrease in GPL

Expansion of aggregate demand

Increase in RGDP

Outward shift of aggregate demand, INCREASE in aggregate demand

Decrease in RGDP

Leftward shift of aggregate demand, DECREASE IN AGGREGATE DEMAND

Claimant count

Number of people that claim benefits

Economy

an area in which goods and services are produced- can be local, national, global

Economics

the study of choices people make on what to produce, how to produce and for whom to produce, in a world in which most resources are limited or scarce.

Microeconomics

concerned with the economic behaviour in individuals and markets that make up the economy e.g., individual consumers, housing market, firms, markets, and industries.

Macroeconomics

concerned with the economy as a whole, the collection of all individuals, firms, markets, and industries.

Normative economics

about value judgements and opinions. People have and can have different opinions about what is wrong. These statements cannot be scientifically tested- they are just opinions.

Positive economics

can be scientifically proven as it can be tested to see if the theories are correct or even correct. This statement doesn’t have to be true- key point is that if it can be tested, it can be proven.

Gross Domestic Product (GDP)

the value of all newly produced final goods and services produced in an economy within a given time

Economic Growth

the increase in the real value of goods and services produced as measured by the annual percentage change in real GDP

Recession

2 consecutive quarters of declining/falling economic growth

RGDP per Capita

RGDP/population (real- doesn’t count the effect of inflation)

Nominal GDP

an assessment of economic production in an economy that includes current prices in its calculation (includes the effect of inflation).

Gross National Income (GNI)

GDP plus net income from abroad- includes remittances (where family from abroad sends income to the nation)- For poor countries, GDP is quite low, but GNI can be quite high.

Inflation

a sustained increase in the cost of living or the general price level leading to a fall in the average purchasing power of money.

Consumer Price Index (CPI)

measures inflation- survey, 700 goods and services, 150 locations, compare prices over time – weighted according to how much of a household’s income they spend on each item

Retail Price Index (RPI)

another measure of inflation- excludes top 4% due to atypical spending habits, includes council tax

Weighted Index

the weights are based on how much household spend on various items– e.g. gas given a high weighting

Labour Productivity

output per unit of input per period of time

Aggregate Demand Formula

AD = C + I + G + (X – M)

Consumption + Investment + Government spending + (Exports – Imports)

Consumption makes up 2/3 of GDP, Investment is quite low (15-20%), Imports are higher than exports- UK has a high marginal propensity to import (they love to import)

Circular Flow of Income

a fundamental concept in economics that illustrates how money and goods/services circulate within an economy between households, businesses, the government, and overseas.

Subsidy

payment by government to firms to lower their cost of production

Transfer Payments

benefits, pensions

Real income effect

As the price level falls, the real value of income rises, and consumers can buy more of what they want/need

Balance of trade effect

A fall in the relative price level of Country X could make foreign-produced goods and services more expensive, causing a rise in exports and a fall in imports (more domestic consumption). Exports are an injection, imports a withdrawal.

Interest rate effect

If price inflation is low it might lead to a reduction in interest rates (if the central bank has a given inflation target). Lower interest rates mean there is less incentive to save/more incentive to spend and a fall in interest rates may cause the exchange rate to depreciate and improve exports.

Autonomous consumption

the level of consumption expenditure by households that is independent of the level of income received.

Marginal propensity to consume

willingness of a household to spend any extra income that they earn

Marginal propensity to consume formula

Change in consumption/change in income

Negative Multiplier

A decrease in an injection (G, I, X) causes a more than proportionate decrease in national income

Positive Multiplier

An increase in an injection (G, I, X) causes a more than proportionate increase in national income

Accelerator Effect

the positive relationship between planned capital investment and the rate of change of national income

Investment

the addition to the capital stock of the economy through expenditure by firms OR the purchase of raw materials and components used in production

Capital Stock

includes property, machinery, vehicles, robots, artificial intelligence and other items used in production

Animal spirits

represents the emotions of confidence, hope, fear, and pessimism that can affect financial decision making, which in turn can fuel or hamper economic growth

Market

a location or a process that brings buyers and sellers together to exchange goods and services at an agreed price

Economic system

a network of organisation used to solve the economic problem; the problem of what, how much, how, and for whom to produce

Free-Market Economy

A market where activity is directed by entrepreneurs and private organisations rather than the state. There are no totally free market economies, but rather the private sector will be larger than the public sector in economies we might call Free Market economies

Command (Planned) Economy

relies on planners, directed by the government, to decide what to produce

Demand

the quantity of a good or service that consumers are willing and able to buy at any given price in a given period of time

Law of Demand

if a good’s price falls, more is demanded. If a good’s price increases, less is demanded

An outward shift in demand

At the existing price, a higher demand now exists

An inward shift in demand

At the existing price, a higher demand now exists

Normal goods

goods and services that will see an increase in demand when incomes rise

Inferior goods

goods and services that will see a fall in demand when incomes rise