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