Macro 2

Define economic growth

an increase in the productive capacity of the economy. measured in increase in real gdp

define gdp

total value of all goods and services produced in the economy in a year

define real gdp

the total value of the goods and services produced in the economy in a year minus the rate of inflation

formula for nominal gdp to real gdp

nominal gdp divided by price index

define gnp/gni

the total income earned by a country’s factors of production wherever those assets are located

formula for gnp/gni

gdp + net property income from abroad (income from assets abroad - income paid to foreign assets)

define inflation

sustained increases in the average price level over a period of time

target 2%

define deflation

sustained decrease in the average price level over time

define disinflation

fall in the rate of inflation

define cpi

index of consumer prices calculated by the office for national statistics (ONS)

define rpi

retail price index - alternative measure of inflation. calculated same way as CPI but also includes mortgage interest payments

define demand pull inflation

excessive growth in AD outstrips the economy’s ability to produce goods and services

AD shifts out without corresponding shift in AS

define cost push inflation

occurs due to increase in costs of factors of production

AS shifts outwards - higher price level

define employment

number of people who are in a job and working. includes self employed

define participation rate

percentage of population in work or actively looking for work

claimant court measure of unemployment

number of people without a job and claiming out-of-work benefits e.g. JSA

define unemployment rate

number of people unemployed as a percentage of the active labour force

define under-employment

those who are employed in second choice occupations

define inactivity

people of working age without a job but not looking for work

types of unemployment

cyclical

structural

frictional

season

real wage inflexibility

cyclical unemployment define and solve

insufficient AD so workers unemployed

increase AD with expansionary fiscal policy

structural unemployment define and solve

unemployed lack appropriate skills

use supply side policies to provide retraining and education

frictional unemployment define and solve

temporary unemployment as job exists but hasnt been found

supply side policy to improve info in market

seasonal unemployment define and solve

business has low levels of demand at certain time of year

supply side policy to encourage good balance of jobs in area

real wage inflexibility unemployment define and solve

classicals argue that wage rates too high so firms dont wanna hire workers

supply side policies e.g. reduce power of trade unions, prevent strikes, change minimum wage

define balance of payments

record of the financial transactions between one country and the rest of the world over a period of a year

capital, current and financial account

define current account of the balance of payments

a record of a country’s trade in exports, imports and income with the rest of the world

define current account deficit

net outflow of money from the current account

overall leakage from the circular flow, decrease in AD

define current account surplus + consequences

net inflow of money into the current account

overall net injection of income into circular flow

increase in AD

define aggregate demand

sum of all planned spending in the economy over a period of time

equivalent to expenditure method of calculating GDP

define consumption

the total spending of UK households on goods and services for their own private use

define saving

proportion of income not spent on consumption, imports or taken in taxation

define the savings ratio and how does it vary with economic cycle

the level of household saving as a percentage of household disposable income

higher during recession due to fear of unemployment

fall during boom due to high confidence

define the accelerator effect

the proportionately bigger effect on investment that is likely to be caused by a change in aggregate demand

define government spending

spending by the government on capital goods and services

how often can government spending be like changed

spending plans are only changed once a year in the budget and must be approved by a vote of all MPs in parliament

define net exports

value of exports minus value of imports

define aggregate supply

total of all planned production in the economy at each price level

define the circular flow of income model

a model of the economy showing the flow of income between households and firms

what is national income/output/gdp made up of

all the transactions in circular flow of income model

define injections into economy

additions to the circular flow of income that increase national income

what are the 3 injections

exports

investment spending by firms on new capital

government spending

define leakages from economy

reductions to the circular flow that decrease national income

what are the 3 leakages

imports, savings, taxation

national income expansion and contraction

expand when injections higher

contract when leakages higher

define positive multiplier effect

when an initial injection into the circular flow leads to a proportionately greater increase in aggregate demand and gdp

define negative multiplier effect

leakage from circular flow leads to proportionately greater decrease in aggregate demand/gdp

what does the size of the multiplier depend on

mpc, mps, mpt, mpm

define marginal propensity to consume

proportion of additional income that is spent

define marginal propensity to save

proportion of additional income that is saved

define marginal propensity to tax

proportion of additional income that is taxed

define marginal propensity to import

proportion of additional income spent on imports

what makes up marginal propensity to withdraw

mps +mpt +mpm

multiplier formulas

1/MPW or 1/1-MPC

define actual economic growth

increase in real gdp of an economy

define potential economic growth

an increase in the productive capacity of an economy (LRAS shift right)

define export-led growth

economic growth caused by an increase in exports

define output gap

the difference between an economy’s current output and its potential output

pos and neg output gap

pos - actual output above long run potential output

neg - actual output below potential output

define and explain rule of 70 for economic growth

predicts number of years to double size of an economy

economy doubles in 70/(GDP % increase per year) years

define trade cycle

the way economies suffer from severe fluctuations in real gdp (booms and slumps)

output gaps and trade cycle

pos - actual output growing faster than trend of rate of growth the economy has. boom

neg - actual output below trend rate of growth. recession

four stages of trade cycle

boom recession slump recovery

how is unemployment measured

by the claimant count and the labour force survey

why may uk use demand side policies

to achieve the macroeconomic objectives

two types of demand-side policy

monetary policy and fiscal

define monetary policy

the use of interest rates and the money supply to manipulate the level of aggregate demand in the economy

define interest rates

cost of borrowing and reward for saving

who controls monetary policy in uk

central bank - bank of england

define base rate of interest

minimum rate of borrowing in the economy and the rate at which high street banks can borrow from the bank of england

define the monetary transmission mechanism

the process by which interest rate changes will have an impact on AD and inflation

two types of monetary policy

interest rates

money supply

define quantitative easing

purchasing assets to increase the money supply and pumping money directly into economy to promote economic growth and recovery from recession

define fiscal policy

the use of T and G to manipulate the level of AD in the economy

controlled by government

whos in charge of gov fiscal policy

chancellor of the exchequer

top 2 most important jobs in british politics

prime minister

chancellor of the exchequer

how are uk spending and taxation plans announced

by the chancellor on budget day, usually in november

define crowding out

when increased government spending leads to a reduction in private sector spending or investment

significance of public expenditure as a proportion of gdp on equality

generally countries with higher public spending have more equality (lowest Gini coefficient)

define direct taxes

taxes levied on the income of an individual or an organisation

define indirect taxes

taxes levied on expenditure by consumers

examples of direct taxes

income tax

national insurance contributions

corporation tax

whats corporation tax

tax paid by firms as a percentage of their profits

examples of indirect taxes

VAT

duties

climate change levy

landfill tax

define progressive taxes and examples

the proportion of income paid in tax increases as income rises

income tax, national insurance contributions

define regressive taxes and examples

the proportion of income paid in tax decreases as income rises

flat rate taxes on cigarettes

define proportional taxes

the proportion of income paid in tax remains constant as income changes

four parts of current account

trade in goods

trade in services

primary income (UK earnings on overseas assets - payments to foreign owners of UK assets)

secondary income (money transfers between governments e.g. foreign aid, disaster relief)

examples of primary income

uk earnings on overseas assets such as interest, profits and dividends

examples of secondary income

international transfers and money transfers between governments such as foreign aid, disaster relief

what does the laffer curve illustrate

the relationship between marginal tax rates and tax revenue

how does tax system work in mixed economy

by taking more income from highest earners in form of progressive tax and redistributing it in the form of means-tested benefits to lower earners

define budget/fiscal deficit and effect on AD

when government spending is greater than tax revenue

increase in AD

define budget/fiscal surplus and effect on AD

when government spending is less than tax revenue

decrease in AD

define cyclical fiscal deficit

takes into account the changes to government tax revenues and spending that occur as part of the economic cycle

define structural fiscal deficit

fiscal deficit when the economy is at full employment

compare cyclical and structural fiscal deficit

cyclical tend to correct itself over economic cycle

structural more serious - only reduced by less G or more T (austerity measures)

define national debt

the total accumulated government borrowing over time

define expansionary fiscal policy

policy designed to increase AD to promote economic growth and lower unemployment

more G less T

define contractionary fiscal policy and its aim

policy designed to reduce AD, usually to lower level of inflation or reduce level of government debt

less G more T