Macroeconomics Definitions

A change in the level of investment in new capital goods is induced by a change in the rate of growth of national income or aggregate demand

Accelerator

A theory that explains consumption and saving in terms of how people expect their incomes to change over the whole of their life cycles

Life-cycle Theory of Consumption

Measures the ease with which assets can be turned into cash quickly without a loss in value. Cash is the most liquid of all assets

Liquidity

An increase in the economy's potential level of real output, and an outward movement of the economy's production possibility frontier

Long-run Economic Growth

A vertical curve located at the natural rate of unemployment. It differs from the short-run Phillip's curve in that its vertical shape takes account of the role of expectations in the inflationary process

Long-run Phillips Curve

A record of all the currency flows into and out of a country in a particular time period

Balance of Payments

An economy with no international trade

Closed Economy

A leakage of spending power out of the circular flow of income into savings, taxation or imports

Withdrawl

The difference between the money value of a country's imports and its exports. The Balance of Trade is the largest component of a country's balance of payments on current account.

Balance of Trade

The money value of a country's imports exceeds the money value of its exports

Balance of Trade Deficit

The money value of a country's exports exceeds the money value of its imports

Balance of Trade Surplus

The part of the current account measuring payments for exports and imports of goods. The difference between the total value of exports and the total value of imports of goods is sometimes called the 'balance of visible trade'

Balance of Trade in Goods

Is part of the current account and is the difference between the payments for the exports of services and the payments for the imports of services

Balance of Trade in Services

A tax which cannot be shifted by the person legally liable to pay the tax onto someone else. They are levied on income and wealth

Direct Tax

Involves making discrete changes to G, T and the budget deficit to manage the level of AD.

Discretionary Fiscal Policy

When the rate of inflation is falling, but still positive, and price level is rising more slowly than previously

Disinflation

The spread of different incomes among individuals and different income groups in the economy

Distribution of Income

GDP measured at the current market prices, without removing the effects of inflation

Nominal GDP

In the short run, economic growth resulting from the increase in exports as a component of AD. In the long run, economic growth resulting form the growth and increased international competitiveness of exporting industries.

Export-led Growth

Free up markets, promote competition and greater efficiency, and reduce the economic role of the state

Non-interventionist Supply-side Policies

Goods or services produced in other countries and sold to residents of this country

Imports

A number used in an index, such as the CPI, to enable accurate comparisons over time to be made. The base year index no is typically 100. In subsequent years, percentage increases cause the index no to rise above the index no used for the previous year, and percentage decreases cause the index no to fall below the index no for the previous year

Index Number

The automatic adjustment of items, such as pensions and welfare benefits, to changes in price level, through the use of a price index

Indexation

A tax which can shifted by the person legally liable to pay the tax onto someone else, for example through raising the price of a good being sold by the taxpayer. They are levied on spending

Indirect Tax

A sustained rise in general price level

Inflation

The CPI inflation rate target set by the government for the Bank of England to try to achieve. Current target is 2%.

Inflation Rate Target

Spending entering the circular flow of income as a result of investment, government spending or imports

Injection

Occur when the government intervenes in, and sometimes replaces, free-markets. Interventionist supply-side policies include government funding of research and development

Interventionist Policies

Total planned spending by firms on capital goods produced within the economy

Investment

Involves the study of the whole economy at the aggregate level

Macroeconomics

The fraction of an increase in disposable income that people plan to spend on domestically produced consumer goods

Marginal Propensity to Consume

Involves shifting provision of goods or services from the non-market sector to the market sector

Marketisation / Commercialisation

Economists who argue that a prior increase in the money supply is caused by inflation

Monetarists

The use by the government and its agent, the Bank of England, of interest rates and other monetary instruments to try to achieve the government's policy objectives

Monetary Policy

9 economists, chaired by the Bank of England, who meet once a month to set Bank Rate, the Bank of England's key interest rate, and also decide whether other aspects of monetary policy need changing

Monetary Policy Committee (MPC)

When workers are unwilling or unable to move from one type of a job to another, for example because different skills are needed

Occupational Immobility of Labour

An asset that can be used as a medium of change; it is used to buy things

Money

The stock of money in the economy, made up of cash and bank deposits

Money Supply

The relationship between a change in AD and the resulting usually larger change in national income

Multiplier

The stock of capital goods, such as buildings and machinery, in the economy that has accumulated over time and is measured at a point in time

National Capital Stock

The stock of all past central government borrowing that has not been paid back

National Dept

The flow of new output produced by the economy in a particular period

National Income

The flow of new output produced by the economy in a particular time period

National Output

Another nam for national income and national output

National Product

The stock of all goods that exist at a point in time that have value in the economy

National Wealth

The rate of unemployment when the aggregate labour market is in equilibrium

Natural Rate of Unemployment

The level of actual real output in the economy is lower than the trend output level

Negative Output Gap

The difference between inward and outward flows of investment income. When net investment income is positive, the UK is earning more income generated by the direct and portfolio investments half abroad than it is paying to overseas owners of capital assets in the UK. Investment income is the main component of primary income flows in the current account of the balance of payments

Net Investment Income

An economy open to international trade

Open Economy

The level of actual real output in the economy is greater or lower than the trend output level

Output Gap

Provides information for judging the success or failure of a particular type of government policy, such as fiscal policy or monetary policy

Performance Indicator

Based on evidence of the economy, showing the apparent relationship between the rate of inflation and the rate of unemployment

Phillips Curve (Short-run)

Occurs when 2 policy objectives cannot be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other

Policy Conflict

A tool or set of tools used to try to achieve a policy objective

Policy Instrument

A target or goal that policy-makers aim to 'hit'

Policy Objective

The level of actual real output in the economy is greater than the trend output level

Positive Output Gap

An index number showing the extent to which a price, or 'basket' of prices, has changed over a month, quarter or year, in comparison with the price in a base year

Price Index

A criterion used for judging whether a tax is good or bad

Principle of Taxation

Involves shifting ownership of state-owned assets to the private sector

Privatisation

Opponents of Keynesian economists, who dislike government intervention in the economy and who much prefer the operation of free markets

Pro-free Market Economists

A tax is progressive if, as income rises, a larger proportion of income is paid in tax

Progressive Taxation

When the proportion of income paid in tax stays the same as income increases

Proportional Taxation

Borrowing by the government and other parts of the public sector to finance a budget deficit

Public Sector Borrowing

Oldest theory of inflation, incorporated into monetarism, which states that inflation is caused by a persistent increase in the supply of money

Quantity Theory of Money

The reward for lending savings to somebody else, e.g. a bank, and the cost of borrowing

Rate of Interest

A measure of all the goods and services produced in an economy, adjusted for price changes and inflation. The adjustment transforms changes in nominal GDP, which is measured in money terms, into a measure that reflects changes in the total output of the economy

Real GDP

The purchasing power of the nominal wage, for example real wages fall when inflation is higher that the rise in the nominal wage rate and real wages rise when the nominal wage rate increases more rapidly than inflation

Real Wage

Unemployment caused by real wages being stuck above the equilibrium real wage

Real-wage Unemployment

A fall in real GDP for 6 months or more

Recession

Policies that increase AD with the intention of increasing real output and unemployment

Reflationary Policies

When the proportion of income paid in tax falls as income increases

Regressive Taxation

Growth of manufacturing industries to replace industries which have disappeared or declined significantly in size

Reindustrialise

A branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets, through this, the performance of the economy

Supply-side Economics

The RPI is an older measure used to calculate the rate of consumer price inflation in the UK. Currently, the UK government uses the CPI for the indexation of state pensions and welfare benefits and for setting a monetary policy target, and the RPI for uprating each year the cost of TV and motor vehicle licenses, together sometimes with taxes on goods such as alcoholic drinks

Retail Price Index (RPI)

AS when the level of capital is fixed, though the utilisation of existing factors of production can be altered so as to change the level of real output

SRAS

Income which is not spent

Saving

Variation of economic activity resulting from seasonal changes in the economy

Seasonal Fluctuation

Unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period

Seasonal Unemployment

Growth of real output resulting from using idle resources, including labour, thereby taking up the slack in the economy

Short-run Economic Growth

Sovereign dept is the part of the national dept owned by people or institutions outside the country that has sold the dept to them. The sovereign dept problem stem from the difficulties governments face when trying to finance budget deficits by borrowing on international financial markets

Sovereign Dept Problem

The part of the budget deficit which is not affected by the economic cycle but results from structural change in the economy affecting the government's finances, and also from long-term government policy decisions

Structural Budget Deficit

Long-term unemployment occurring when some industries are declining, even though other industries may be growing, e.g. mining or ship building

Structural Unemployment

Relates to changes in the potential output of the economy which is affected by the available factors of production, e.g. changes in the size of the labour force, and the productivity of the economy

Supply-side

Used to increase the economy's ability to produce and supply goods, through creating incentives to work, save, invest, and be entrepreneurial. Interventionist supply-side fiscal policies, such as the financing of retraining schemes for unemployed workers, are also designed to improve supply-side performance

Supply-side Fiscal Policy

Reforms undertaken by the private sector to reduce costs to enable firms to become more productively efficient and competitiveness. Supply-side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government

Supply-side Improvement

Aim to improve national economic performance by creating competitive and more efficient markets and through interventionist policies, such as government finance of labour retraining schemes

Supply-side Policies

The basic tax threshold is the level of income above which people pay income tax. Income below the basic tax threshold is untaxed

Tax Threshold

New and better ways of doing things

Technical Progress

The extent to which one policy objective has to be sacrificed in order to achieve another objective

Trade-off Between Policy Objectives

Payments flowing between countries in forms such as foreign aid, grants, private transfers and gifts and payments to and from the EU budget. They are payments that are made without anything of economic value being received in return

Transfers

The rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average price increase in the productive capacity of the economy

Trend Growth Rate

Occurs when workers choose to remain unemployed and refuse job offers at current market wage rates

Voluntary Unemployment

A rising price level caused by an increase in wages and salaries, shown by a shift in the SRAS curve to the left

Wage-cost Inflation

The stock of assets which have value at a point in time, as distinct from income which is a flow generated over a period of time

Wealth

- economic growth - Inflation - unemployment - current account

What are the key performance indicators

The level of real output produced in the economy in a particular year, not to be confused with the trend level of output. The trend level of output is what the economy is capable of producing when working at full capacity. Actual output differs from trend level of output when there are output gaps

Actual Output

The total planned spending on real output produced within the economy

Aggregate Demand

The level of real national output that producers are prepared to supply at different average price levels

Aggregate Supply

Funds available for households and firms to borrow

Availability of Credit

achieved when government spending equals government revenue (G=T)

Balanced Budget

The rate of interest the Bank of England pays to commercial banks on their deposits held at the Bank of England

Bank Rate

The central bank in the UK which is in charge of monetary policy

Bank of England

Occurs when government spending exceeds government revenue (G>T). This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.

Budget Deficit

Occurs when G<T. Represents a net withdrawal from the circular flow of income and hence it is contractionary

Budget Surplus

Controls the banking system and implements monetary policy on behalf of the government

Central Bank

One of the principles of taxation. Tax payers should be reasonably certain of the amount of tax they will be expected to pay

Certainty

The method of measuring unemployment according to those people who are claiming Jobseeker's Allowance.

Claimant Count

The official measure used to calculate the rate of consumer price inflation in the UK. The CPI calculates the average price increase of a basket of 700 different consumer goods and services.

Consumer Price Index

Total planned spending by households on consumer goods and services produced within the economy.

Consumption

Uses fiscal policy to decrease AD and to shift the AD curve to the left

Contractionary Fiscal Policy

Uses higher interest rates and other monetary tools to decrease AD and shift the AD curve to the left

Contractionary Monetary Policy

The principle of taxation which requires a tax to be convenient for taxpayers to pay.

Convenience

A rising price level caused by an increase in costs of production, shown by a shift in the SRAS curve to the left.

Cost-push Inflation

Occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing, and leads to arise in the cost of borrowing.

Credit Crunch

A situation in which an increase in government or public sector spending, with little or no increase in AD.

Crowding Out

Occurs when currency outflows in the current account exceed currency inflows. It is often shortened to 'exports less than imports'.

Current Account Deficit

Occurs when the current account more or less balances over a period of years

Current Account Equilibrium

Occurs when currency inflows in the current account exceed currency outflows. It is often shortened to 'exports greater than imports'.

Current Account Surplus

Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports, together with income and transfer flows (primary income and secondary income flows).

Current Account of the Balance of Payments

Unemployment caused by a lack of aggregate demand in the economy and occurs when the economy goes into a recession or depression.

Cyclical / Keynesian / demand-deficient unemployment

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle.

Cyclical Budget Deficit

If the structural deficit were 0, a cyclical surplus would probably emerge in the upswing of the economic cycle.

Cyclical Budget Surplus

A quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on the respondents' personal circumstances and their labour market status during a period of 1-4 weeks

Labour Force Survey

Deliberately running a budget deficit and borrowing to finance the deficit.

Deficit Financing

A sustained fall in the general price level

Deflation

The decline of manufacturing industries, together with coal mining

Deindustrialisation

A rising price level caused by an increase in AD - shown by a shift of the AD curve to the right

Demand-pull Inflation

Relates to the impact of changes in aggregate demand on the economy - associated with Keynesian economics

Demand-side

Used to increase or decrease the level of AD through changes in government spending, taxation and the budget balance

Demand-side Fiscal Policy

Involves removing previously imposed regulations - opposite of regulation

Deregulation

Upswing and downside in aggregate economic activity taking place over 4 to 12 years

Economic Cycle

Success or failure in achieving economic objectives

Economic Performance

When short-run economic growth takes place after a recession

Economic Recovery

An unexpected event hitting the economy. They can be demand-side and supply-side shocks and are unpredictable or unfavourable

Economic Shock

The principle of taxation which requires a tax to be cheap to collect in relation to the revenue it yields

Economy

A tax should achieve its desired objective with minimum unintended consequences

Efficiency

A country that is progressing towards becoming economically advanced, by means of rapid growth and industrialisation

Emerging-market Country

The stock of money in the economy multiplied by the velocity of money equals the price level multiplied by the quantity of real output in the economy (MV=PQ)

Equation of Exchange

The level of real output at which AD=AS. Alternatively, it is the level of income at which withdrawals from the circular flow of income equal injections into the flow. Also known as macroeconomic equilibrium.

Equilibrium National Income

Exists when the economy's aggregate labour market is in equilibrium. It is the same as the natural level of unemployment.

Equilibrium Unemployment

Requires a tax to be fair

Equity

The price of a currency, e.g. the pound, measured in terms of another currency, e.g. Euro

Exchange Rate

Uses fiscal policy to increase AD and to shift the AD curve to the right

Expansionary Fiscal Policy

Uses lower interest rates and other monetary instruments, such as QE, to increase AD and shift the AD curve to the right

Expansionary Monetary Policy

Domestically produced goods or services sold to residents of other countries

Exports

The use by the government of government spending and taxation to try to achieve the government's policy objectives

Fiscal Policy

The principle of taxation that requires a tax to be easy to change to meet new circumstances

Flexibility

Unemployment that is usually short-term and occurs when a worker switches between jobs. AKA transitional unemployment

Frictional Unemployment

Beveridge's Def: 3% or less of the labour force is unemployed. Free-market definition: level of employment occurring at the market-clearing real-wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work

Full employment

Where workers are unwilling or unable to mover from one location to another in search of work

Geographical Immobility of Labour

The sum of all goods and services, or level of output, produced in the economy over a period of time

Gross Domestic Product

A rising price level caused by an increase in the cost of imported energy, foods, raw materials and manufactured goods, shown by a shift in the SRAS curve to the left

Import-cost Inflation

When workers are willing to work at current market wage rates but there are no jobs available

Involuntary Unemployment

Followers of the economist, John Maynard Keynes, who generally believe that governments should manage the economy, particularly through the use of fiscal policy

Keynesian Economists

AS when the economy is producing at its productive potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right

LRAS