Macroeconomic Aims and Issues Flashcards

A complete set of vocabulary flashcards covering macroeconomic aims, growth, unemployment, inflation, deflation, and exchange rates based on the Raffles Institution H2 Economics lecture notes.

Economic Growth

An increase in the real value of the goods and services produced by an economy over time, aiming for sustained, sustainable, and inclusive growth to better standards of living.

Actual Economic Growth

The increase in national output produced in an economy over a given period of time, commonly measured by the percentage annual increase in real $GDP$.

Potential Economic Growth

The long run expansion of a country’s productive capacity, reflecting the increase in the maximum output the economy can achieve at full employment.

Sustained Economic Growth

A situation where both actual and potential output are increasing over time without generating inflationary pressure.

Inclusive Economic Growth

A rate of growth that is sustained over time, broad-based across economic sectors, and creates productive employment opportunities for the majority of the population without worsening income inequality.

Sustainable Economic Growth

A positive and stable rate of growth that can be maintained over the long run without creating significant economic problems like resource depletion or environmental degradation.

Production Possibility Curve ($PPC$)

A model showing all the maximum attainable combinations of two goods that a country can produce within a specified period with all its resources fully and efficiently employed at a given state of technology.

Full Employment

A situation where all factors of production—land, labour, capital, and entrepreneurship—are fully and efficiently utilised, typically achieved at the natural rate of unemployment.

Unemployment

A situation where people who are available for work and are actively seeking work cannot find jobs.

Demand-deficient (Cyclical) Unemployment

Unemployment caused by a fall in aggregate demand ($AD$), typically associated with economic recessions and the cyclical nature of business cycles.

Structural Unemployment

Unemployment occurring due to a mismatch of skills between the unemployed and the skills demanded by employers, often caused by technological advancement or economic restructuring.

Frictional Unemployment

Short-term unemployment that occurs when workers take time to search for jobs or are between jobs due to imperfect information in the labour market.

Occupational Immobility

The inability or unwillingness of workers to switch occupations because they lack the necessary skills for different jobs.

Geographic Immobility

The inability or unwillingness of workers to relocate to different areas where job opportunities are available.

Hysteresis

A condition where unemployment persists even after the initial demand deficiency has been resolved, often due to the erosion of skills during prolonged unemployment.

Inflation

A sustained increase in the general price level ($GPL$), generally calculated as the percentage change in the Consumer Price Index ($CPI$).

Inflation Rate Formula

$$\text{Inflation rate}_{\text{current year}} = \frac{\text{CPI}_{\text{current year}} - \text{CPI}_{\text{previous year}}}{\text{CPI}_{\text{previous year}}} \times 100\%$$

Disinflation

A situation characterized by a slowing rate of price increases or a falling inflation rate.

Deflation

A sustained decrease in the general price level, representing a negative inflation rate.

Stagflation

A period of rising prices coupled with no or negative growth in real $GDP$ and high or rising unemployment.

Demand-pull Inflation

A sustained increase in general price level caused by persistent rises in aggregate demand ($AD$), often occurring during a booming economy.

Cost-push Inflation

A sustained increase in general price level caused by persistent falls in aggregate supply ($AS$), independent of the level of $AD$.

Wage-price Spiral

A process where wage increases lead to higher prices as firms protect profits, which then triggers further wage demands to maintain purchasing power.

Menu Costs

The costs incurred by firms to constantly revise and reprint price lists during periods of high inflation.

Shoe Leather Costs

The opportunity cost of time and effort individuals spend trying to minimize cash holdings to counteract the effects of inflation.

Exchange Rate

The price of one country’s currency in terms of another currency or a basket of foreign currencies.

Free-floating Exchange Rate System

A system where the market exchange rate is determined solely by the interaction of demand and supply in the forex market without central bank intervention.

Fixed Exchange Rate System

A regime where the central bank intervenes in the forex market to maintain the exchange rate at a specific level using foreign reserves.

Managed-float Exchange Rate System

A system of flexible exchange rates where the Central Bank intervenes to prevent excessive fluctuations outside a specified target band.

Balance of Trade ($BOT$)

The difference between a country’s total export revenue and its total import expenditure over a given period.

Balance of Payments ($BOP$)

The record of all international transactions involving money flows between residents of a country and the rest of the world.

Marshall-Lerner Condition

The condition stating that a currency depreciation will improve the trade balance only if the sum of the price elasticities of demand for exports and imports is greater than one ($|\text{PED}_X + \text{PED}_M| > 1$).

Dutch Disease

The decline of a country's manufacturing sector as a result of currency appreciation caused by a booming natural resource export sector.