OCR Econ
Gross Domestic Product
total value of final goods and services produced within a country in a given period of time (usually a year).
GDP per capita
measures the total GDP of a country divided by its population
Economic Growth
change in a country's level of real GDP* over time (can be annual or quarterly).
Rate of economic growth formula
π ππ‘π ππ ππππ€π‘β ππ πΊπ·π = πΆβππππ ππ πΊπ·π/ππππππππ πΊπ·π Γ 100
Real GDP
is nominal GDP adjusted for inflation
Short run economic growth
refers to growth in actual real GDP. It usually arises from increases in aggregate spending in the economy.
Long run economic growth
an increase in the productive capacity of the economy (caused by an increase in the quantity and quality of factors of production)
Working age population
those aged between 16 and 64
Economically active (labour force / workforce)
those of working age who are willing and able to work.
Economically inactive
people of working age who are not able, and/or not willing, to work.
For example: people in full-time education and training, stay-at-home parents, those who have taken early retirement, those who are severely disabled.
Unemployed
the part of the labour force without paid work, available for work, and actively seeking employment at the going wage rate.
Level of unemployment
refers to the number of people in the working population or labour force who are unemployed.
Unemployment rate
refers to the percentage of the working population or labour force who are unemployed.
Unemployment rate formula
π ππ‘π ππ π’πππππππ¦ππππ‘ (%) = πΏππ£ππ ππ π’πππππππ¦ππππ‘/πππππππππ x 100
Cyclical unemployment
caused by a lack of aggregate spending in the economy.
It is also known as demand-deficient unemployment and it occurs when there is a downturn in economic activity.
Structural unemployment
caused by a change in the structure of the economy which leads to a decline in certain industries.
For example, due to falling demand for those specific products or due to cheaper labour overseas. UK examples: coal, steel, textiles.
Frictional unemployment
short-term type of unemployment which occurs when workers are 'between jobs' and searching for a new position which would be more suitable for them.
Seasonal unemployment
caused by the seasonal variation of demand in certain industries or sectors of the economy; for example, in construction, tourism and agriculture.
Occupational mobility of labour
willingness or ability of workers to move to a job in a different industry, which are likely to require a different set of skills.
This may require workers to re-train.
Geographical mobility of labour
willingness or ability of workers to move to a job in a different region.
This is likely to be influenced by factors such as the transport system or house prices (or language barriers in case of moving across countries).
Income
all payments received by an individual or a household over time
for example, factor payments such as wages, bonuses, rent, interest and dividend payments, and in some cases, state benefit payments. Income is a flow variable.
Wealth
the market value of the total stock of assets owned by an individual or household at a specific point in time
for example, property (house, car, jewellery), financial assets (stocks and bonds), savings (in a bank or a pension scheme).
Income distribution
measures how the total income of the economy is shared out among its people
It is usually shown as the share of national income going to different groups e.g., the poorest 10% of households or the richest 5%.
Income inequality
when income is distributed in an uneven way between households.
Gross income
income from all sources (wages, rent, interest and dividends, pensions) before any taxes are paid or transfer payments (state benefits) are added.
Net income (disposable income)
income after direct taxes (e.g., income tax) and benefits are taken into account.
Absolute poverty
a severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities and shelter.
The international poverty line is set at $2.15 a day at 2017 prices, but countries also set their own poverty lines.
Relative poverty
In the UK, this is a measure of the percentage of the population living on less than 60% of median income.
Inflation
a sustained increase in the average price level of an economy over a given period of time.
Inflation means that the purchasing power of money falls over time and the cost of living increases over time.
Disinflation
a fall in the rate of inflation
The price level is increasing over time, but at a slower rate.
Deflation
a sustained decrease in the average price level of an economy over a given period of time.
Deflation means that the purchasing power of money rises over time.
Hyperinflation
means a very high rate of inflation (over 50% per month)
Prices increase so fast that there is a severe loss of confidence in the value of money.
Price Stability
means that the general price level stays fairly constant over time.
This implies that there is a low rate of inflation in the economy.
Rate of inflation
percentage change in the average price level over a period of time.
Nominal value
something's value in money terms.
Real value
amount of goods and services that can be bought with a nominal amount.
Demand-pull inflation
occurs when aggregate demand in the economy rises, but the aggregate supply of goods and services does not increase to match the increase in demand.
Cost-push inflation
is caused by an increase in the costs of production. When firms face rising costs of production, they raise the price of their products in order to maintain their profits. This leads to a rise in the general price level.
Fiscal Policy
the use of taxation and government spending to influence the level of economic activity.
Budget Balance
difference between government expenditure and tax revenue over a period of time.
Government (public) debt
represents the total amount of money owed by the government at a given point in time
The government has to finance a budget deficit through borrowing. Debt is a stock, while deficit is a flow.
Direct tax
a tax on income (for individuals - income tax) and profits (for firms - corporation tax).
Indirect tax
a tax on spending; for example, VAT or excise duties.
Progressive tax
takes a larger proportion of the total income of high-income earners than low-income earners
for example, income tax.
Regressive tax
takes the same amount from the taxpayer, regardless of income.
It thus places a greater burden on low-income earners because the tax amount is a greater percentage of their income.
Monetary Policy
the manipulation of the money supply or interest rates by the central bank in order to influence economic activity.
Expansionary monetary policy
lowering of interest rate or a rise in the money supply.
Contractionary monetary policy
increase in the interest rate or a fall in the money supply.
Supply-side Policies
aimed at increasing the ability of the economy to supply more goods and services.
Market failure
when a free market leads to an equilibrium quantity above or below the 'socially efficient' level
Externality
A cost or benefit to a 'third party' outside the economic activity being considered.
Consumption externalities
arise when the consumer does not take into account the external costs or benefits to third parties of their consumption decision
for example, driving leads to congestion and worse air quality.
Production externalities
arise when a producer does not take into account the external costs or benefits to third parties of their production decision
for example, waste from a factory causing air/water pollution.
Demerit Goods
goods that would be over-produced and over-consumed in a free market due to associated information failure, and may result in negative externalities.
Examples:gambling,addictivesugarydrinks,excessivelyfattyfoods
Merit Goods
goods that would be underproduced and under-consumed in a free market due to an associated information failure, and may result in positive externalities.
Examples:education,healthcareservices,fitnessactivitiesandthearts
International Trade
The exchange of goods and services between countries
Exports
Goods and services produced domestically and sold to foreigners
Imports
Goods and services produced externally bought from foreign countries
Trade balance
The difference between the total value of exports sold and the total value of imports bought
Absolute advantage
if it can prdouce a product at a lower average cost than another country
The theory of absolute advantage says that both trading partners will benefit by specialising in the production and trade of those products in which they have an absolute advantage.
Free Trade Agreement
agreement allowing the free movement of goods and services between countries without restrictions
This means that the receiving country does not impose any restrictions (such as tariffs, quotas or other protectionist measures) on either imports or exports.
Balance of Payments
a record of all financial transactions between a country and the rest of the world in a given time period.
The BOP is divided into the Current Account and Financial Account (and Capital Account)
Current Account
The current account records money flows between the UK and the rest of the world arising from:
1. Trade in goods (exports are a positive, while imports are a negative on the current account)
2. Trade in services
3. Net factor income from abroad (rent, interest payments, dividends, profit)
4. Net overseas transfers (remittances, foreign aid)
Current Account Deficit
The sum of the value of exports, inflow of income and transfers is less than the sum of the value of imports, outflow of income and transfers
outflows > inflows
Current Account Surplus
The sum of the value of exports, inflow of income and transfers is more than the sum of the value of imports, out flow of income and transfers
inflows > outflows
Financial Account
deals with financial assets that will give rise to income flows in the future;
e.g., the purchase of foreign stocks and shares, foreign direct investment (FDI), foreign debt, central bank holdings of foreign currency.
Exchange Rates
The exchange rate is the price of one currency in terms of another.
It is usually determined by the demand and supply of the currency.
Depreciation
Depreciation means that the price of a currency decreases in terms of another.
If the pound depreciates against the dollar, it will take fewer dollars to buy Β£1.
Appreciation
Appreciation means that the price of a currency increases in terms of another.
If the pound appreciates against the dollar, it will take more dollars to buy Β£1.
Globalisation
the increasing integration of the world economy through the expansion of trade in goods and services and the flow of labour and capital across borders.
Globalisation causes countries to become more interdependent through international trade, free movement of labour and capital and the spread of technology and ideas across countries.
FDI (Foreign Direct Investment)
refers to firms purchasing physical capital in a foreign country
for example, Nissan (a Japanese company) builds a factory in the UK.
MNC (Multinational Corporation)
is a corporation or enterprise that operates in at least two countries.
It is typically headquartered in one particular 'home' country. For example, Apple or Starbucks.
Development
the process of increasing people's standard of living and wellbeing over time.
Economic development includes growth in GDP but also requires measurement of other indicators, such as life expectancy, literacy rate, access to education, healthcare and technology.
HDI (Human Development Index)
The HDI is a measure of economic development and economic welfare.
It uses 3 criteria: life expectancy, mean years of schooling and income per capita (measured by GNI).
Developed economy
is one with a high GDP per capita and well-developed industrial and service sectors.
It is also likely to have high levels of life expectancy, education and healthcare.
Less developed economy
is one that has lower GDP per capita, lower levels of industrialisation and one that has weaker indicators of wellbeing.