Economics Macro Key Terms Tutor2U

Main key terms for Macro AQA economics

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  • Created on: 24-05-11 09:29

Negative output gap

Negative output gap –

downward pressure on inflation

How much spare capacity does an economy have to meet a rise in demand? How close is an economy to operating at its productive potential? Has the recession damaged the economy’s productive potential? These sorts of questions all link to an important concept – the output gap. The output gap is the difference between the actual level of national output and its potential level and is usually expressed as a percentage of the level of potential output.

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• The actual level of real GDP is given by the intersection of AD & SRAS – the short run equilibrium.
• If actual GDP is less than potential GDP there is a negative output gap. Some factor resources such as labour and capital machinery are under-utilized and the main problem is likely to be higher than average unemployment.
• A rising number of people out of work indicate an excess supply of labour, which causes pressure on real wage rates.
• In the next time period, a fall in real wage rates shifts SRAS downwards until actual and potential GDP are identical – assuming labour markets are flexible.

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Positive output gap

Positive output gap

– upward pressure on inflation

How much spare capacity does an economy have to meet a rise in demand? How close is an economy to operating at its productive potential? Has the recession damaged the economy’s productive potential? These sorts of questions all link to an important concept – the output gap. The output gap is the difference between the actual level of national output and its potential level and is usually expressed as a percentage of the level of potential output.

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• If actual GDP is greater than potential GDP then there is a positive output gap.
• Some resources including labour are likely to be working beyond their normal capacity e.g. making extra use of shift work and overtime.
• The main problem is likely to be an acceleration of demand-pull and cost-push inflation.
Shortages of labour put upward pressure on wage rates, and in the next time period, a rise in wage rates shifts
SRAS upwards until actual and potential GDP are identical – assuming labour markets are flexible.

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Balance of Payments

Balance of Payments

What is happening to a country’s current account can tell us a lot about the macroeconomic performance and competitiveness of a nation and in particular whether businesses and industries are competing successfully in the world economy.

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The Balance of Payments provides data on how an economy is doing in international trade and investment with other countries. There are a variety of different items that together make up the balance of payments.

What goes into the current account – namely:

* The trade balance in goods and services (i.e. the value of exports – value of imports)
* Transfer balance – cash transactions which do not form payments for goods or services such as foreign aid or payments to the EU budget
* Investment income balance – measures earnings on foreign investments minus the earnings paid to foreigners on their investments in this country. Income can come in the form of interest, profits and dividends.

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Bubble

Bubble


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A bubble is said to happen when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts").

Typically this is seen in property markets where housing valuations can rise to unsustainable levels relative to income or long-run average prices.

Speculative demand driven by positive price expectations has the effect of amplifying market demand and driving prices higher - especially when supply is restricted and unresponsive to short-term price movements.

Bubbles are common in other asset markets such as for stocks and bonds. And increasingly we find that world commodity prices exhibit bubble tendencies with high levels of volatility in the prices of foodstuffs, oil and natural gas and metals.

The bursting of a bubble - such as a collapse in property prices - can have important demand-side effects on wealth, confidence and aggregate demand

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