Economic Theme 2 definitions

What is actual growth?

Economic growth measured by changes in real GDP

What does aggregate demand (AD) represent?

The total level of demand in an economy at any given price at a moment in time

Define aggregate supply (AS).

The total amount of output in the economy at any given price at a moment in time

What are animal spirits in economics?

The level of confidence of business owners

What is the balance of payments?

A record of all financial dealings over a period of time between economic agents of one country and another

What is the base year?

A year chosen as a good comparison in a series of data when building an index, automatically given an index figure of 100

Describe a boom in the business cycle.

The peak of the business cycle, when growth is high

What is a budget in economic terms?

Where the government lays out their spending and taxation plans

Define budget deficit.

When the government spends more money than it receives

What is a budget surplus?

When the government receives more money than it spends

What does the circular flow model represent?

A model of the economy which shows the flow of goods and services, the factors of production, and money around the economy

What does the claimant count measure?

Unemployment; the number of people receiving benefits for being unemployed

How is the Consumer Price Index (CPI) used?

It is an official measure used to calculate the rate of inflation, using a weighted basket of goods.

What is consumption in economics?

Consumer spending on goods and services

Define cost push inflation.

Inflation caused by a decrease in Aggregate Supply (AS)

What does the current account record?

The payments for the purchase and sale of goods and services, as well as income and transfers

What is a current account deficit?

When more money leaves the country than enters, causing the current account to be negative

What is a current account surplus?

When more money enters the country than leaves, causing the current account to be positive

What is cyclical unemployment?

Unemployment caused by a lack of aggregate demand (AD)

Define deflation.

A persistent fall in prices of goods and services

What is a deflationary policy?

Fiscal or monetary policy aimed at reducing aggregate demand (AD)

Describe demand pull inflation.

Inflation caused by an increase in aggregate demand (AD)

What does depreciation mean in economic terms?

The reduction in the value of machinery over time

What is a direct tax?

Taxes paid straight to the government by the individual taxpayer

Define disinflation.

A reduction in the rate of inflation

What is disposable income?

The money consumers have left to spend after taxes have been taken away and benefits added

What constitutes economic growth?

An increase in the long-term productive potential in the economy, measured by an increase in real GDP

What does it mean to be employed according to the ILO definition?

Someone who does more than 1 hour of paid work a week or is temporarily away from work on a government supported training scheme or does a minimum of 15 hours unpaid work for their family business.

What is an expansionary policy?

Fiscal or monetary policy aimed at increasing aggregate demand (AD)

What are exports?

Goods or services sold to foreigners that bring income into the country

Define export-led growth.

Economic growth arising from an increase in exports

What does fiscal policy involve?

The use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance

What causes frictional unemployment?

Unemployment caused when people move between jobs and enter the job market

Define Gross Domestic Product (GDP).

The value of goods and services produced in a country over a given period of time

What is GDP per capita?

Total GDP divided by the population

Define gross investment.

Investment both to replace old machinery that has depreciated and to create or buy new ones

What is Gross National Income (GNI)?

The value of goods and services produced by a country over a period of time plus net overseas interest payments and dividends

What is Gross National Product (GNP)?

The value of goods and services produced by citizens of a country, whether they live in the country or not.

What is government spending?

Spending by the government for the provision of goods and services

Define imports.

Goods and services bought from foreigners that take income out of the country

What does it mean to be inactive in the job market?

Those neither employed nor unemployed; those not participating in the job market

What is income in economic terms?

A flow of assets

What is an index number?

Numbers allowing accurate comparisons over time to be made; the base year value is typically 100.

Define indirect tax.

Tax where the person charged with paying the money to the government can pass on the cost to someone else

What is inflation?

The general rise in prices of goods and services that erodes the purchasing power of money

What are injections in economics?

Spending power entering the circular flow of income resulting from investment, government spending and exports

What are interventionist supply side policies?

Policies designed to correct market failure, where the government intervenes in the market

What is investment in economic terms?

Spending by businesses on capital goods, which leads to the creation of real goods

What is the Labour Force Survey?

A measure of unemployment which surveys people to classify them as unemployed, employed or inactive under ILO definitions

Define living standards.

The quality of life enjoyed by people in a country

What does long run mean in economics?

When all factors of production are variable

What is Long run aggregate supply (LRAS)?

The total output an economy can produce when operating at full output

Define long run trend growth rate.

The average sustainable rate of economic growth over a period of time

What is marginal propensity to consume?

The proportion of an increase in income spent on consumption

What does marginal propensity to import refer to?

The proportion of an increase in income spent on imports

What is marginal propensity to save?

The proportion of an increase in income that is saved

Define marginal propensity to tax.

The proportion of an increase in income that is taken away in tax

What is marginal propensity to withdraw?

The proportion of an increase in income that is withdrawn from the circular flow

What are market-based supply-side policies?

Policies designed to remove anything which prevents the free market system from working efficiently

What is monetary policy?

The attempts of the central bank/regulatory authority to control the level of aggregate demand by altering base interest rates or the money supply.

What is the Monetary Policy Committee (MPC)?

A group of 9 economists who meet monthly to set the Bank rate and other monetary instruments.

Define monetary supply.

Stock of money in the economy

What is the multiplier effect?

An increase in an injection will lead to an even greater increase of national income.

What is national expenditure?

The value of spending by households on goods and services

Define national income.

The value of income paid by firms to households in return for land, labour, capital and enterprise

What is national output?

The value of the flow of goods and services from firms to households

What does a negative output gap indicate?

When GDP is lower than predicted; the economy is producing below full output

What are net exports?

Exports minus imports

Define net investment.

Investment adjusted for depreciation; gross investment minus depreciation

What is nominal GDP?

GDP which does not take inflation into account; GDP at current prices

What is the output gap?

The difference between the long term trend rate of growth and actual growth

What is a positive output gap?

When GDP is higher than predicted; the economy is producing above full output

Define potential growth.

A change in the productive potential of the economy

What does purchasing power parity mean?

Exchange rate of one currency to another that compares the cost of living in different countries by comparing a typical basket of goods.

What is quantitative easing?

When the central banks buy assets in exchange for money to attempt to increase the money supply.

What is real GDP?

GDP which strips out the effect of inflation

What is real wage unemployment?

Unemployment caused when wages are set above the equilibrium wage rate

Define recession in economic terms.

The trough of the business cycle, when growth is low; defined as where real GDP falls in at least two successive quarters.

What is the Retail Price Index (RPI)?

An old measure of inflation which has lost its national statistic status.

What are savings in economics?

The decision by consumers to postpone consumption

What causes seasonal unemployment?

Unemployment caused when an industry only operates during certain times of the year

What does short run mean in economics?

When at least one factor of production is fixed

What is short run aggregate supply (SRAS)?

Aggregate supply when at least one factor of production is fixed

What does the short run Phillips curve show?

The relationship between unemployment and inflation: higher levels of unemployment lead to lower levels of inflation.

Define structural unemployment.

Unemployment caused by the long-term decline of an industry.

What are supply-side policies?

Government policies aimed at increasing the productive potential of the economy and shifting LRAS to the right.

What is total GDP?

The GDP of the whole country.

What is the trade (business) cycle?

The tendency of economic growth to rise and fall above and below the trend rate of growth, causing booms and busts.

What is underemployment?

Those who are working part time or in positions below their skill level, preferring full-time work.

What does it mean to be unemployed according to ILO standards?

Those who are without work, able to start work in the next 2 weeks and have actively sought work for the last 4 weeks.

What does the value of GDP refer to?

Nominal values of GDP; GDP at current prices.

What is volume of GDP?

Real values of GDP; the size of the basket of goods.

Define wealth in economic terms.

A stock of assets.

What does withdrawal mean in the circular flow model?

Spending power leaving the circular flow of income resulting from savings, taxation, and imports.