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The circular flow income model
a macroeconomic tool used to explain how economic activity and national income are determined
Households
individuals with effective demand for goods and services
Firms
businesses that produce goods and services
Withdrawals
savings, taxation and import expenditure as money leaves the circular flow
Injections
government spending, investment expenditure and export earnings as money enters the circular flow diagram
Closed economy
the circular flow diagram with only households and firms
Open economy
the circular flow diagram with a government sector, financial markets and foreign trade
The output method
adds up the final value of newly produced goods and services during the year
The expenditure method
adds up the total spending on newly produced goods and services during the year
The income method
adds up the total value of all factor incomes earned during the year
Gross domestic product
the value of all final output of goods and services produced by firms within a country, in a year
Gross national product
the value of all final output of goods and services produced by a country's citizens. both domestically and abroad
Nominal GDP
GDP measured current market prices
Real GDP
GDP adjusted for inflation
GDP per capita
GDP per head of population
Price deflator
used to convert nominal GDP to real GDP
Green GDP
a measure of GDP that takes environmental costs into account
The business cycle
describes the fluctuations in economic activity in a country over time
Economic growth
an increase in the level of economic activity over time
Recession
a fall in GDP for two consecutive quarters
Aggregate demand
the total demand for final goods and services in an economy at a given time
The wealth effect
a lower price level gives consumers greater purchasing power, resulting in greater levels of consumption
The interest rate effect
a fall in general price level results in a drop in IR, this results in greater AD as consumption, investment and gov't spending increases
The exchange rate effect
a fall in general price level results in a drop in IR, resulting in a depreciation of the exchange rate which tends to increase demand for net exports
Consumption
the total spending on goods and services by households
Investment
the capital expenditure of firms in the economy
Government expenditure
the total expenditure on goods and services by the government
Net exports
the difference between the value of export earnings and import expenditure
Disposable income
income after taxes have been accounted for, the income workers are actually able to spend
Aggregate supply
the total supply of goods and services that firms in an economy plan on selling during a specific time period
Spare capacity
when actual production is less than what is achievable or optimal for a firm
Equilibrium
when aggregate demand is equal to aggregate supply
The full employment level of output
an economy that is operating with an ideal and efficient level of employment, where economic output is at its highest potential
Inflationary gap
when an increase in AD along the vertical section of the LRAS curve causes an increase in the average price levels
Deflationary gap
when the real national output equilibrium is below the full employment level of output
The Keynesian multiplier
shows that any increase in the value of injections result in a even greater increase in the value of national income.
The marginal propensity to consume
measures the proportion of each extra dollar of household income that is spent by consumers
Unemployment
occurs when people are willing and able to work and actively seeking employment but are unable to find work
Unemployment rate
the percentage of the labor force that is unemployed
The labor force
all those in work and those that are actively seeking employment
Hidden unemployment
people that escape the official measure of unemployment
Discouraged workers
workers that are not willing to work
Overstaffin
when firms employ workers who are not fully utilized
Underemployment
exists when workers that are highly skilled work in low-skilled jobs
Frictional unemployment
when people are in transitions between jobs due to the time delay between leaving a job and finding/starting a new one
Structural unemployment
occurs when the demand for products in a particular industry continually falls, resulting in a decrease for labor in that industry
Seasonal unemployment
unemployment caused by regular and periodical changed in demand for certain products
Cyclical unemployment
unemployment caused by lack of aggregate demand in the economy as a whole
Inflation
the sustained increase in average price levels in an economy over time
Deflation
the sustained decrease in average price levels in an economy over time
Disinflation
when there is a fall in the rate of inflation
Consumer price index
measures changes in the price level of a market basket of consumer goods and services purchased by households
Demand-pull inflation
inflation triggered by higher levels of aggregate demand in the economy
Supply-push inflation
inflation triggered by higher costs of production, shifting the AS curve to the left
Philips curve
shows a potential trade-off between inflation and unemployment
The natural rate of unemployment
the unemployment rate that exists at full employment level of output
Stagflation
when unemployment rises with with inflation occurring in the economy
Factor endowments
refers to the quantity and quality of a country's factors of production
Equity
fairness in the distribution of income
Equality
when everyone is paid equally
The lorenz curve
a graphical representation of income distribution in a country
The gini coefficient
a statistical tool that measures income inequality in a country
Relative poverty
income and consumption below the social norm within a country
Absolute poverty
when people are deprived of basic human needs for survival
Progressive taxation
when those with a higher income pays a greater proportion of their income in tax
Regressive taxation
a tax that charges a greater proportion of tax on low-income earners
Proportional taxation
when the same flat rate percentage tax is charges, irrespective of an individuals income
Budget deficit
when government spending is greater than government revenue
Budget surplus
when government revenue exceeds government spending
Fiscal policy
the use of taxation and government expenditure to influence the level of economic activity
The automatic stabilizer
a fart of FP that automatically influences national income
Interest rates
the price of borrowing money or the return to lenders
Monetary policy
the government use of interest rates and the money supply to influence AD and economic activity
Money supply
the quantity of money available in an economy
Central bank
the monetary authority of a country that oversees the entire banking system by managing the money supply, the nation's currency and interest rates
Supply-side policies
government strategies aimed at boosting the productive capacity of the economy by improving the quality/quantity of the factors of production
Potential output
the maximum possible output if all factors of production are used efficiently
The institutional framework
established systems, structures and contexts that shape the economic behavior in a country
Human capital
the stock of knowledge, skills, expertise and experiences of the workforce
Infrastructure
the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society
Interventionist supply-side policies
attempts by the government to deal with market imperfections in the economy
Market/based supply-side policies
policies that focus on allowing the free market to operate with minimal government intervention by improving market incentives to increase investment and prodcutivity
Privatization
the sale or transfer of state owned assets and operations to the private sector
Deregulation
the reduction or removal of barriers to entry into a certain industry to make markets more efficient and competitive
Anti-monopoly regulation
competition law that controls the restrictive practices of monopolists
Trade liberalization
the reduction or removal of trade barriers to encourage competition and efficiency
Labor market reforms
government policies used to create greater flexibility and efficiency in the labor market
Trade union
an organization that represents the common interest of its members in the work related matters
