Macroeconomics definitions

Consumption

Consumption is the total expenditure by households when they purchase goods and services.

Expansionary fiscal policy

Expansionary fiscal policy is a programme of increased spending and/or reduced taxation by the government, with the aim of increasing aggregate demand.

Stagflation

Stagflation refers to an economy that experiences both high unemployment and high inflation. This is caused by a fall in short-run aggregate supply.

Supply-side policies

Supply-side policies are government policies that are either able to lower costs of production and increase production in the short run or able to increase the quality and/or quantity of the factors of production in the long run.

The circular flow of income

The circular flow of income shows the exchanges that take place when goods and services or factors of production are sold.

Equilibrium level of output

The equilibrium level of output is the level of output produced at the intersection of aggregate demand and short-run aggregate supply, and may be at, below or above the full employment level.

full employment

The full employment level of output is produced when all factors of production are fully employed by the economy.

Labour force

The labour force consists of everybody in work plus all people who are of working age but out of work and actively seeking employment. Working age for most countries tends to be between 16-18 and 60-65 years.

Marginal propensity to consume

The marginal propensity to consume refers to the proportion of additional income that is spent on consumer goods and services. (also on taxation, savings and imports)

Natural rate of unemployment

The natural rate of unemployment refers to the percentage of people who are unemployed for structural, seasonal and frictional reasons. This is irrespective of the level of GDP of the economy or its position in the business cycle.

Transfer payments

Transfer payments are transfers of money usually from the government to low-income households, but not in exchange for a good or service.

Budget surplus and deficit

A budget surplus occurs when a government spends less than it receives in tax in a single financial year. A budget deficit is the opposite, and the excess spending has to be borrowed.

Unemployed

A person is considered unemployed when they are part of the labour force and are actively seeking work but cannot find a job.

Output gap (negative or positive)

A positive output gap occurs when GDP rises above the trend level of GDP or potential. A negative output gap occurs when GDP falls below potential.

Recession

A recession is negative economic growth occurring over two or more quarters.

recessionary gap

A recessionary or deflationary gap occurs when aggregate demand falls and creates a negative output gap (i.e. when output is below the full employment level). During this period, there can be downward pressure on the price level, hence the use of the word deflationary in the term.

Absolute and relative poverty

Absolute poverty refers to people earning below internationally defined levels of income, such as below $1.90 per day. Relative poverty refers to a low level of income that is country-specific and relative to average earnings in that country.

Aggregate demand

Aggregate demand is the total value of goods and services demanded by different groups at a given price level in an economy. It is the sum of the expenditure categories that make up GDP at a specific price level.

Aggregate supply

Aggregate supply refers to the total output that all firms in a country are able to produce at any given price level.

Inflationary gap

An inflationary gap occurs when actual output exceeds potential, or economic growth exceeds trend growth, and results in inflation.

Capital expenditure

Capital expenditure is the spending on large projects that add to the capital stock of the country.

Contractionary fiscal policy

Contractionary fiscal policy is a programme of reduced spending and/or increased taxation by the government. The aim can be either to reduce demand-pull inflation in the economy or to reduce a budget deficit.

Cost-push inflation

Cost-push inflation occurs when the costs of production rise for a country, or when short-run aggregate supply falls.

Current expenditure

Current expenditure is the day-to-day spending by the government.

cyclical unemployment

Cyclical unemployment, also known as demand-deficient unemployment, occurs when a lack of or reduced aggregate demand in the economy forces firms to make workers redundant.

Deflation

Deflation is defined as a negative rate of inflation (i.e. where prices are falling).

Demand-pull inflation

Demand-pull inflation occurs when aggregate demand rises at a faster pace than aggregate supply.

Disequilibruim unemployment

Disequilibrium unemployment occurs when there is a fall in demand for labour in the economy, but sticky wages prevent the market from reaching equilibrium.

Disinflation

Disinflation occurs when the rate of inflation reduces, for example, from 4% to 2%.

Economic growth

Economic growth is defined as an increase in real output over time. It is measured by changes in real GDP.

Green GDP

Green GDP is gross domestic product that has been corrected for loss of biodiversity as a result of economic activity, and the monetary costs of pollution and climate change.

GDP

Gross domestic product (GDP) is the total monetary value of all final goods and services produced in an economy in a given period of time.

Inflation

Inflation is a sustained increase in the average price level in the economy. It is measured every month and also on an annual basis.

Infrastructure

Infrastructure is the capital stock of a country that facilitates economic activity

Injection

Injections are the flows of money that come into the circular flow of income from outside and include investment, government spending and exports.

Interventionist supply-side policies

Interventionist supply-side policies are policies involving a strong government presence in the economy or particular markets, with the aim of increasing the quality/quantity of the factors of production and of enabling economic growth.

Investment

Investment is the expenditure by firms on capital stock, such as building factories and purchasing machinery. It is the planned investment for expansion.

Leakages

Leakages are flows of money that leave the economy and include savings, taxation and imports.

Market-based supply-side policies

Market-based supply-side policies are policies that intend to increase the quality/quantity of the factors of production by allowing market forces to operate more freely.

Monetary policy

Monetary policy refers to the use of interest rates and the money supply to influence the level of aggregate demand and economic activity in a country. Interest rates can be defined as the cost of borrowing.

National income

National income is a measure of the total economic activity that takes place within an economy.

Progressive taxation

Progressive taxation is a system that taxes people higher rates the more they earn. This is not to be confused with just paying more tax, but the percentage paid rises too. (regressive opposite)

Propotional taxation

Proportional taxation is a fixed rate of tax levied on all individuals. Thus, people pay the same percentage but not the same total amount.

Public dept

Public debt is the total amount borrowed over the years that has not been repaid.