IB Economics HL Macroeconomics Definitions

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