Theme 2 Economic Definitions
Theme 2 Economic Definitions
THEME 2 – A LEVEL – DEFINITIONS
Aggregate Demand
The total demand for goods and services within an economy
It consists of the economy’s total levels of consumption, investment, government spending and net exports
Approximately 60% of Aggregate Demand is made up of consumption
Aggregate Supply
The total amount of goods / services that firms are willing to supply at various price levels and throughout a period of time
Actual Growth
Changes in Real GDP are used to measure Economic Growth
Animal Spirits
The level of confidence in which business owners possess
Balance of Payments
A record of payments from one country to another, throughout a period of time
Base Year
Used when conducting index calculations and refers to the year chosen for comparison when measuring economic activity. The ‘Base Year’ is automatically given an index of 100
Boom
When Economic Growth is high and is at the peak of the business cycle
Budget Deficit
When government spending exceeds government revenue (tax revenue)
Balanced Budget
When government spending in the economy is equal to government revenue
Budget Surplus
When government revenue (tax revenue) exceeds government spending
Circular Flow of Income
A model showing the flow of goods / services, the factors of production, and money around the economy
Claimant Count
This is a measure of unemployment and is the number of people receiving unemployment related welfare benefits
Consumer Price Index (CPI)
This uses a weighted basket of good to calculate the rate of inflation
Consumption
The amount of money spent on goods / services in the economy
Cost Push Inflation
This occurs due to an increase in the cost of production causing aggregate supply curve to shift to the left.
As firms are imposed with higher costs, they will decrease their supply of goods / services, causing a subsequent rise in the price levels
Current Account
The Balance of Payments in relation to the purchase and payments of goods / services, as well as income and transfers
Current Account Deficit
A negative Current Account as more payment outflows exceeds payment inflows
Current Account Surplus
A positive Current Account as payment inflows exceeds payment outflows
Cyclical Unemployment
A lack of demand for goods / services causing unemployment
Deflation
A persistent fall in the price of goods / services
Disinflation
A fall in the rate of inflation – inflation is still occurring but at a slower rate
Hyperinflation
This occurs when inflation is out of control and rapidly accelerating to uncontrollable levels
Demand Pull Inflation
This occurs due to an increase in aggregate demand. The demand for goods / services in the economy increases, leading to a rise in the price levels
Deflationary Policy
Using the Fiscal or Monetary Policy to reduce Aggregate Demand in the economy
Disposable Income
The money consumers have to spend once taxes have been deducted from their income and benefits have been added
Economic Growth
A rise in the productive potential of the economy and can be shown through an increase in the production possibility frontier, or an increase in aggregate demand / aggregate supply
Expansionary Policy
The use of Fiscal or Monetary policies to increase aggregate demand
Exports
Goods / services which are sold to other countries and therefore generate income for the country selling the product
Fiscal Policy
The manipulation of government spending and taxation by the government to improve macroeconomic performance and change levels of aggregate demand
Frictional Unemployment
The time in between switching jobs when people are not working
Structural Unemployment
This occurs when the skills of those looking for jobs do not meet the skills required for the jobs available
Seasonal Unemployment
This occurs due to certain industries requiring labour at particular times of the year
Gross Domestic Product
The value of goods / services in an economy over a period of time
GDP per capita
The total GDP divided by the population
Gross National Income
Measures a country’s domestic and foreign income
Gross National Product
The value of goods / services produced by citizens of a country regardless of it they live in it or not
Government Spending
Money spent by the government for the provision of goods / services
Imports
Goods / services which a country buys from another country and therefore reduces the income of the country importing
Index Numbers
These allow for comparisons to be made between different years and measure the magnitude of change over time
Inflation
A sustained rise in price levels of goods / services
Injections
This is money spent into the circular flow of income and therefore the economy, contributing to a positive multiplier effect
Injections include: investment, government spending, and exports
Supply Side Policies
These aim to shift the aggregate supply curve to the right and are controlled by the government to increase the productive potential of a country
Market Based Policies are aim to remove anything acting as a barrier towards the efficient operation of the free market
Interventionist Policies aim to correct market failure aim to correct market failure with the use of government intervention
Investment
The creation of real goods through businesses spending on capital goods
Labour Force Survey
A measure of unemployment which asks people to identify whether they are unemployed, employed, or inactive under the International Labour Organisation
Living Standards
The quality of life and satisfaction enjoyed by people
Long Run
All factors of production are variable
Long Run Aggregate Supply
The total output an economy can produce when operating at full output
Long Run Trend Growth Rate
The sustainable rate of economy growth (on average) throughout a period of time
Marginal Propensity to Consume
The change in consumption divided by the change in time
Marginal Propensity to Import
The amount imports increase or decrease as a result of a one unit change in income
Marginal Propensity to Save
The proportion of income a consumer saves rather than spends
Marginal Propensity to Withdraw
The extra income withdrawn from the circular flow and consists of tax, savings, imports
Marginal Propensity to Tax
The change in tax divided by the change in income
Monetary Policy
The manipulation of interest rates and money supply to improve economic activity and change levels of aggregate demand
Monetary Policy Committee
Nine members who meet on a monthly basis to discuss whether interest rates should be increased or decreased
They also set the Bank Rate and other monetary instruments
Monetary Supply
Stock of money in the economy
Multiplier
A greater increase in National Income arising due to an initial increase in an injection and aggregate demand in the economy
(1- / (1-MPC)) = 1/ MPW
National Expenditure
The value of spending on goods / services by households
National Income
The value of income paid to households by firms in return for the factors of production
National Output
The value of goods and services from firms to households
Negative Output Gap
The economy is producing below its full output and therefore GDP is lower than predicted
Net Exports
Exports minus Imports
Nominal GDP
GDP at current prices and without the consideration of inflation
Positive Output Gap
Economy is producing above full output and hence GDP is higher than predicted
Output Gap
The difference between actual output and potential output; it is an indicator that the country is not using its resources effectively
Potential Growth
A change in the productive potential of the economy
Purchasing Power Parity
This relates to how much the exchange rate needs to be adjusted so that each currency’s purchasing power is equal between countries
Quantitative Easing
This is used when the standard monetary policy is no longer effective so banks use this method to help stimulate the economy
It involves increasing the money supply, which can cause inflationary pressures and potentially reduce the value of the currency
Real GDP
The value of goods / services produced by an economy after being adjusted for inflation
Real Wage Unemployment
When wages are set far above the equilibrium wage rate, causing unemployment
Recession
Economic growth is low (the trough of the business cycle) and is defined as a fall in Real GDP in at least two successive quarters
Real Price Index
An old measure of inflation
Savings
Consumers choose to postpone spending their money and instead keep it
Short Run
At least one factor of production is fixed
Short Run Aggregate Supply
The aggregate supply when at least one factor of production is fixed
Short Run Phillips Curve
Shows the relationship between unemployment and inflation
There is a tradeoff between the two as higher levels of unemployment lead to lower levels of inflation
Trade Cycle
The business cycle explaining how an economy rises and falls above / beyond the trend rate of economy growth
Underemployment
Those who are working part time / in zero-hour contracts / government training schemes but would prefer to be in full time employment
Unemployed
Those who are without work but actively seeking employment and able to start work in the next two weeks
Wealth
A stock of assets
Withdrawal
Leakages out of the circular flow of income and is money not being spent in the economy
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