Key Economic Terms and Concepts

Bank rate (Base rate)

Rate set by the Bank of England that influences all other rates of interest in the economy

Consumer Price Index (CPI)

Method used to calculate the rate of inflation

Cost of living

The price level of goods and services bought (by the average family)

Direct tax

A tax on income or wealth

Disposable income

Income available after the effect of direct taxes and benefits (often called net income)

Economic sustainability

The best use of resources in order to create responsible development or growth, now and for the future

Environmental sustainability

The impact of development or growth where the effect on the environment is small and possible to manage, currently and into the future

Government

A political authority that decides how a country is run and manages its operation

Income

The reward for the service provided by a factor of production, including labour

Inflation

A sustained rise in the general price level over time

Interest rate

The price of borrowing money and the reward for saving money

Investment

The purchase of capital goods that are used to produce future goods and services. It is ALSO an asset purchased to provide an income in the future and/or to be sold at a profit

Labour force (or workforce)

The number of people who work in the country

National Insurance

A contribution paid by workers, and their employers, towards the cost of state benefits

Price stability

When the general level of prices stays constant over time, or grows at an acceptably low rate

Private enterprise

See private sector

Private sector

Part of the economy that is run by individuals, firms and organisations and not by the government. Private sector organisations are called private enterprises

Rate of interest/interest rate

The cost of borrowing money and the reward for saving money

Savings

The part of a person's (disposable) income which is not spent on consumption.

Savings

Savings are done by savers

Subsidy

An amount of money the government gives directly to firms to encourage production (and therefore consumption)

Tax

A compulsory payment to government

Balance of payments

The record of all financial transactions between one country and the rest of the world

Balance of payments on current account

The total of net trade in goods and services, income flows and transfers between one country and the rest of the world

Balanced current account

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers

Balanced government budget

When tax revenue is equal to government spending

Boom

A period of high economics activity and high levels of employment

Budget deficit

When government spending is greater than tax revenue

Budget surplus

When tax revenue is greater than government spending

Claimant Count

The method of measuring unemployment according to the number of people who are claiming unemployment benefits

Currency

The system of money used in a country or group of countries

Current account

The record of trade in goods and services, income flows and transfers between one country and the rest of the world

Current account deficit

Where the sum of exports, plus the inflow of income and transfers is LESS than the sum of imports plus the outflow of income and transfers

Current account surplus

Where the sum of exports, plus the inflow of income and transfers is GREATER than the sum of imports plus the outflow of income and transfers

Cyclical unemployment

Unemployment caused by a lack of demand in the economy

Demerit good

Goods which produce a negative externality when consumed or produced

Developed country

A country with high GDP per capita and developed industry and service sectors

Development

The process of increasing people's standard of living and wellbeing over time

Distribution of income

How incomes are shared out between individuals and households

Distribution of wealth

How wealth is shared out between individuals and households

Economic growth

Growth in GDP (value of output) over time

Employment

The use of labour in the economy to produce good and services

European Union (EU)

An economic and political group of countries in Europe that have free trade with each other

Exchange rate

The price of one currency in terms of another currency

Exports

Goods and services sold abroad

External benefit

Beneficial effect of an economic activity on third parties, also known as a positive externality

External cost

Harmful effect of an economic activity on third parties, also known as a negative externality

Externality

An effect of an economic activity on a third party

Fiscal policy

A policy that uses government spending and taxation to affect the economy as a whole

Free trade agreement

Free movement of goods and services between countries without any restrictions

Frictional unemployment

Unemployment caused by time lags where workers move between jobs

GDP per capita

GDP divided by the population, often used as an indicator of living standards within an economy

Globalisation

The expansion of world trade in goods and services, together with capital flows, leading to greater international interdependence

Government revenue

The source of finance for government spending

Gross Domestic Product (GDP)

The total value added of goods and services produced in the country in a year

Imports

Goods and services bought from abroad

Income and wealth redistribution

Government action, using mainly taxation and benefits, to reduce inequalities of income and wealth

Indirect tax

A tax on spending, often defined as a tax on goods and services

International trade

The exchange of goods and services between countries

Less developed country

A country with a developing economy that has lower GDP per capita, lower levels of industrialisation and weaker indicators of wellbeing

Level of unemployment

The amount of people in the working population who are unemployed

Market failure

When the market (through supply and demand) fails to allocate resources in the best interests of society as a whole

Merit goods

Goods which produce a positive externality when consumed or produced

Monetary policy

A policy which aims to control the total supply of money in the economy to try to achieve the government's economic objectives, particularly price stability

Multinational corporation (MNC)

A firm that has its head office in one country, buts its operations in a number of other countries

National living wage (NLW)

Higher than the NMW for workers over 25. It is a legal requirement for employers

National minimum wage (NMW)

The minimum pay per hour to which workers are entitled

Negative externality

Harmful effect of an economic activity on third parties, also known as an external cost

Nominal income

Income in terms of its money value

Positive externality

Beneficial effect of an economic activity on third parties, also known as an external benefit

Privatisation

The transfer of assets such as businesses from the public sector to the private sector

Purchasing power

The amount of goods and services that a given amount of money will buy

Rate of inflation

The percentage rise in the general price level over time (measured using the CPI)

Rate of unemployment

The percentage of the country's workforce that is unemployed

Real income

Income taking the effects of inflation into account, so it is the purchasing power of the money income

Real wage rate

The level of wages adjusted for inflation i.e. the purchasing power of the money wage

Recession

A period where the country's GDP falls for two (or more) consecutive quarters

Seasonal unemployment

Unemployment caused by a fall in demand during a particular season

Social sustainability

The impact of development or growth that promotes an improvement in quality of life for all, currently and into the future

Standard of living

The social and economic wellbeing of residents in a country. Often measured by GDP per capita

Structural unemployment

Unemployment caused by a permanent decline of an industry or industries

Supply-side policy

Policy that increases the productive potential, which is the ability of the economy to supply more good and services

Unemployment

Occurs when workers able and willing to work at the current wages rates are unable to find employment

Types of supply side policies

Education and training, Reducing Income and Corporation Taxes, Reducing Benefits, Privatisation, Improving Infrastructure etc