Macro definitions

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  • Created on: 03-05-15 19:00


Real GDP growth: a measure of the total output, expenditure or income of an economy after adjusting for changes in the price level. The growth of real GDP is the % change in output during a particular period, often measured over a year.

Inflation: the sustained increase in the general level of prices, measured in the UK by changes in the cost of a basket of goods and services bought by a typical household (CPI), weighted according to the expenditure on each item in the basket.

Unemployment: arises when someone is out of work and actively seeking employment. Measured as the total number of people unemployed (the level of unemployment) or as a % of the workforce (the rate of unemployment). Comparisons of unemployment internationally use a standardised measure of unemployment found from a survey of the labour force. Measuring unemployment in the UK by the number of people claiming JSA tends to underestimate true levels of unemplyoyment.

Balance of payments: records of money flows into and out of a country over a period of time. Current account (in BofP): includes the trade balance (money flows due to trade); income balance (transfers of interest, profit and dividends); and transfer balance (transfers of money by government and international organisations).

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Economic growth

Standard of living: a measure of the material well-being of a nation and its people.

Short-run economic growth: the actual annual % increase in an economy's output - actual economic growth.

Long-run economic growth: the rate at which the economy's potential output could grow as a result of changes in the economy's capacity to produce goods and services - potential economic growth.

Output gap: the difference betweeen the actual and potential output of an economy. 

Negative output gap: where actual output is below potential output.

Positive output: SR actual output exceeds the economy's potential output.

Spare capacity: exists when firms in the economy are capable of producing more output than they are actually producing.

Trade rate of growth: the average rate of economic growth measured over a period of time, normally over the course of an economic cycle (peak to peak/ trough to trough).

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Economic growth

Short-run AS: shows the level of production for the economy at a given price level, assuming labour costs and other factor input costs are unchanged.

Economic cycle: fluctuations in the level of economic activity as measured by GDP. Typically, there are four stages: recession, recovery; boom; slowdown.

Human capital: the knowledge and skills of the labour force.

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Multiplier, accelerator

Multiplier effect: the process by which any change in a component of AD results in a greater final change in rGDP.

Leakages make up the marginal propensity to withdraw.

Marginal propensity to save: the proportion of additional income saved.

Marginal propensity to tax: the proportion of additional of national income that is taxed.

Marginal propensity to import: the proportion of additional national income that is spent on imports.

Accelerator: the theory of investment that states that the level of investment depends on the rate of change of national income.

Stocks: the amount of finished goods that firms hold in order to be able to satisfy increases in demand.

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Long run economic growth

Long run AS curve: the relationship between total supply and the price level in the long run. The LRAS curve represents the maximum possible output for the whole economy - its potential output.

Classical economists: economists who believe that markets will 'clear' that prices and quantities adjust to changes in the forces of supply and demand so that the economy produces its potential output in the LR.

Keynesian economists: economists who believe that market failures will result in price and quantity rigidities such that the economy's equilibrium output in the LR may be less than its potential output. 

Labour force: all those people of working age who are in employment or actively seeking work.

Labour force participation rate: a measure of the proportion of the population able to work who are in employment or who are actively seeking work.

Capital output ratio: the amount of capital needed to generate each unit of output.

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Balance of payments

Capital account of the balance of payments: the section of the balance account of payments that records long-term flow of capital into and out of an economy. It records purchases and sales of assets and is split into two sections - long-term capital flows and short-term capital flows.

Long term capital flows: flows of money used for investment in assets e.g. direct investment by a firm setting up production facilities or portfolio investment through buying shares in firms.

Short-term capital flows: flows of money that occur to take advantage of differences in countries' interest rates and changes in exchange rates - hot money,

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Fiscal position

Public sector net cash requirement (PSNCR): the difference betweeen the spending of general government (central and local) and their revenue. If expenditure exceeds revenue, there is a budget deficit. If expenditure is smaller than revenue, there is a budget surplus. A budget deficit requires government to borrow money to make up the shortfall of revenue over planned expenditure.

Automatic stabilisers: changes in government expenditure and taxation receipts that take place automatically in response to the economic cycle. E.g. expenditure on unemployment benefits rises during a recession.

Economic stability: the avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates, in order to reduce uncertainty and promote business confidence and consumer confidence and investment. 

Stability and Growth Pact: an agreement by members of the EU about the way in which fiscal policy should be conducted to support Europe's single currency. It requires those countries adopting the € to:

  • have a budget deficit of 3% of GDP or less
  • government debt of 60% of GDP or less
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Fiscal policy issues

Crowding out: when government borrowing reduces funds available for private sector investment or raises the cost of investment by raising market interest rates.

Cyclical deficit: a budget deficit that arises because of the operation of automatic stabilisers.

Golden rule: a commitment by the UK government that, over the economic cycle, it will borrow only to invest and not for current expenditure. 

Credibilty: a credible fiscal policy framework is one where the government's commitment to economic stability is trusted by the public, business and financial markets.

Flexibility: a flexible fiscal policy framework is one that has the flexibility to deal with macroeconomic shocks, e.g. sudden and unexpected changes in AD and/or AS.

Legitimacy: a legitimate fiscal policy framework is one that has widespread support and about which there is general agreement among the public, business and politicians.

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Monetary policy issues

Monetary transmission mechanism: the way in which monetary policy affects the inflation rate through the impact it has on other macroeconomic variables.

Price stability: when the general price level does not change or, if it does change, the rate of change is low enough not to significantly affect the decisions of firms and households.

Purchasing power of money: what a unit of currency will buy in terms of goods and services.

Signalling function: changes in demand and supply of goods and services are signalled to producers and consumers through changes in absolute and relative price levels.

Operational independence: when a central bank is given responsibility for the conduct of monetary policy independent of political interference. The target for inflation, however, is normally set by governments.

Symmetric inflation target: when deviations above and below he target are given equal weight in inflation target.

Asymmetric inflation target: when deviations below the inflation target are seen to be less important than deviations above the target.

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International competitiveness: the ability of an economy's firms to compete in international markets and thereby sustain increases in national output and income.

Unit labour costs: the cost of labour per unit of output (including the social costs of employing labour as well as the wage costs).

Relative unit labour costs: the cost of labour per unit of output of one country relative to its major trading partners.

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