AS Level Macroeconomics Notes Book 2 Flashcards

Flashcards covering key macroeconomic concepts from AS Level Macroeconomics Notes Book 2.

Gross Domestic Product (GDP)

The monetary value of all final goods and services produced within the geographical boundaries of a country, irrespective of who is producing it, in one year.

Gross National Product (GNP)

The monetary value of all goods and services produced by the citizens of a nation, irrespective of where they are living in the world, in one year.

Disposable income (Yd)

The income left after paying income tax (direct tax).

Nominal GDP

The GDP figure measured at the current year prices and is not yet adjusted for inflation.

Real GDP

The GDP figure measured at constant or base year price level and has been adjusted for inflation.

Aggregate Demand (AD)

The total spending on an economy's goods and services at a given price level in a given time period.

Aggregate Supply (AS)

The total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period.

Short-run Aggregate Supply (SRAS)

The total output of an economy that will be supplied when there has not been enough time for the prices of factors of production to change.

Long-run Aggregate Supply (LRAS)

Shows the relationship between real GDP and changes in the price level when there has been time for input prices to adjust to changes in aggregate demand.

Business (Trade) Cycle

The periodic fluctuation of national output around its long term trend.

Money

Anything that is generally acceptable as a means of payment.

Double coincidence of wants

Means both parties in a transaction actually have the goods or services that the other wants.

Legal tender

Notes and coins issued by the central bank must be accepted as the medium of exchange (as it is regulated by law).

Liquidity

The extent to which there is an adequate supply of assets that can be turned into cash.

Near money

Is quite liquid but not totally liquid, i.e., non-cash assets that can be quickly turned into cash.

Inflation

A sustained increase in an economy's price level.

Hyperinflation

An extreme form of inflation in which the price level rises by 100s, 1000s and million times in a year.

Consumer Price Index (CPI)

An index that shows the average change in the prices of a representative basket of products purchased by households.

Cost of living

Means how much it costs to live in a country.

Demand-pull inflation

If there is too much demand in the economy relative to the supply of goods and services, prices will rise.

Cost-push inflation

Describes a situation where the process of rising prices is initiated and sustained by rising costs which push the prices up.

Deflation

Is a sustained fall in the price level.

Good deflation

Occurs as a result of an increase in aggregate supply.

Bad deflation

Takes place when the price level is driven down by a fall in aggregate demand.

International trade

Involves the exchange of goods and services across international boundaries.

Theory of absolute advantage

A country has an absolute advantage in producing a product if it can produce more of a product with the same quantity of resources than another country.

Comparative advantage

Exists when a country can produce a good at a lower opportunity cost, meaning it has to give up less of another good compared to the other country.

Trading possibility curve (TPC)

A curve that shows maximum possible quantities of imports a country can trade with given volume of exports at given mutually beneficial rate of exchange.

Protectionism

Refers to a trade policy which restricts imports and promotes domestic industries in order to give competitive advantage to domestic industry of an economy.

Red tape

Means making import process more complex and slow by bureaucratic delay tactics.

Voluntary export restraints (VER)

Is an agreement between two countries where the government of the exporting country agrees to restrict the volume of its exports of a certain good or services.

Trade creation

Occurs where high-cost domestic production is replaced by more efficiently produced imports from within the trading bloc.

Trade diversion

Means where trade with a low-cost country outside a customs union is influenced by higher-cost products supplied from within.

Nominal exchange rate

Is the price of one currency in terms of another currency

Trade-weighted exchange rate

is a measure, in index form, of the value of a currency against a basket of currencies

Real effective exchange rate

is a currency's value in terms of its real purchasing power.

Fixed exchange rate

is a system in which exchange rate is kept fixed by the constant intervention of central bank in the foreign exchange market

Devaluation

A reduction in the value of a fixed exchange rate to a lower level

Revaluation

occurs when the government raises the exchange rate to a new, higher fixed rate.

Managed floating system

combines the fixed exchange rate and the floating exchange rate.

Terms of Trade

is often defined as the ratio of export prices to import prices.

Capital account

government debt forgiveness, money brought into and taken out of the country by migrants etc

Financial account

The flows of funds into the country (credits) and out of the country (debits)

Balance of payments

A record of a country's economic transactions with the rest of the world over a year.

BOP Equilibrium

Where manageable deficits are cancelled out by modest surpluses over a period of time

BOP Disequilibrium

Where, over a particular period of time, a country is recording persistent deficits or surpluses in its balance of payments.

Macroeconomic policy

Any attempt to achieve macroeconomic objectives is

Fiscal policy

Is the use of taxation and government spending to manage aggregate demand in order to achieve the government's macroeconomic aims.

Automatic stabilizers

Are forms of government welfare spending and taxation that change, without any deliberate government action, to offset fluctuations in GDP.

Budget Surplus

A budget arises when tax revenue exceeds government spending.

Budget deficit

occurs when government spending exceeds tax revenue

Balanced budget

when government spending matches tax revenue

discretionary fiscal policy

deliberate changes in government spending and taxation

Monetary policy

refers to any policy measures or instruments to influence the price or quantity of money.

Expenditure-switching policies

Is any action taken by a government that is designed to persuade domestic households and firms to buy domestically produced goods and services rather than imports.

Expenditure-dampening policies

Is any action taken by a government that is designed to reduce the total level of spending in an economy.