Econ 2 Macroeconomic Definitions

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Circular Flow of Income
Macroeconomic cycle whereby output generates income, which generates expenditure.
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Gross Domestic Product
Total UK output of goods and services, which is equivalent to total incomes earned in making UK output and total expenditure on buying UK output.
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Nominal GDP
Uses the prices of goods and services in the year that the output is produced. Also known as Money GDP or GDP at Current Prices. Approx £1,400bn
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Real GDP
Measures value of GDP over time excluding any effect of general price inflation. An increase in this over time represents an increase in quantity of goods and services. Also known as GDP at Constant Prices.
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NICE Decade
Period between mid-1990s and mid-00s where the UK experienced Non-Inflationary Continuous Expansion. Inflation was close to target and 63 consecutive quarters of positive growth.
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Aggregate Demand
Total value of expenditure on UK goods and services. Consumption + Investment + Government Spending + (Exports - Imports)
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Multiplier Effect
Initial change in component of AD generates further changes in AD. Because "one man's spending is another man's income", overall impact on AD greater that initial change.
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Consumption
Total value of expenditure on goods and services by UK households
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Consumer Disposable Income
Total household gross income (wages and salaries, benefits, interest, rent and dividends) minus income tax deductions and national insurance contributions. Represents net income available to spend.
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Consumer Confidence
Measured regularly by surveys, reflecting their views about future and general economic outlook. Rising confidence linked with rising consumption (and visa versa)
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Consumer Savings Ratio
Savings part of disposable income that isn't spent. Ratio of total savings to total disposable income. Savings used to accumulate financial wealth or to pay off debt.
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Precautionary Saving
Saving motivated from anxiety about the future. Results from falling consumer confidence. Strongly linked to anxieties of future unemployment.
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Wealth Effect
Impact on consumption on rising/falling household wealth (value of houses, shares, bonds). +ive occurs when value is rising, households may remortgage through equity withdrawal schemes. -ive occurs when house value is less than outstanding mortgage
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Credit Crunch
Financial losses and stresses in the banking system causing reduced levels of lending to households and firms, so reducing consumption and investment.
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Interest Rate
Financial reward for saving and price that borrowers have to pay for credit. Affects the incentive to save and borrow.
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Investment
Expenditure by firms on various types of capital equipment - buildings, machinery, ICT, vehicles, furniture..
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Accelerator Theory
Investment is positively related to rate of economic growth, growing most strongly when rate of economic growth is fastest
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Animal Spirits
Phrase of Keynes, describes how entrepreneurs and firms are affected by waves of optimism and pessimism about the future health of the economy.
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Government Expenditure
Expenditure by national and local government on goods/services, investment projects and benefits.
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Exports
Expenditure by foreigners on goods and services produced in the UK
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Imports
Expenditure by UK households/firms on goods and services produced abroad.
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Current Account Surplus
Total value of exports > total value of imports
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Current Account Deficit
Total value of imports > total value of exports
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Long Run Aggregate Supply
Measures UK full capacity output of goods and services, full productive potential. Equivalent to shift in PPC
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Short Run Aggregate Supply
Measures how general price level changes as level of real GDP changes. Shifts in SRAS occur when costs of production changes.
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Positive Output Gap
Actual GDP > the full productive potential of the economy due to excess Aggregate Demand. Operating at abnormal, unsustainably high levels of overtime and capacity utilisation.
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Negative Output Gap
Actual GDP < full productive potential of economy due to deficient Aggregate Demand
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Long Run Economic Growth
Rate at which UKs full productive potential expands in an average year. Also know as the underlying, trend rate of growth.
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Productivity
Output per unit of factor of production per unit of time. High labour productivity (output per employee per hour) generates high real GDP per capita.
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Short Run Economic Growth
Rate at which the actual level of real GDP fluctuates from year to year, Fluctuations known as the Trade Cycle
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Inflation
Sustained increase in the general price level. Government set target for a 2% annual increase in the Consumer Price Index
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Demand-pull Inflation
Inflation caused by AD growing too fast relative to UK's productive potential. Economy is overheating, with positive output gap.
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Cost-push Inflaton
Inflation caused by leftward shift in SRAS, with rising costs of production pushing prices upwards as firms protect profit margins.
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Wage-Price Spirals
Wages rise as employees/trade unions try to protect their real income -> raises cost of production and price -> further pressures on wages. "money illusion" "second round effects"
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Inflationary Expectations
Rate of inflation households believe will occur. Rising inflationary expectations can generate wage-price spirals.
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Bank of England Independence
Monetary Policy Committee sets base rate of interest for financial system. No government agreement needed.
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Deflation
A sustained decrease in the general price level.
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Benign Deflation
Caused by higher productivity or lower import prices, generates rightward shift in SRAS, lower costs of production and higher household real income.
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Malevolent Deflation
Caused by falling AD and emergence of negative output gap.
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Stagflation
Economy experiences simultaneously negligible/negative economic growth and inflationary pressure.
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Unemployment
People who are actively looking for work and don't currently have employment
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Demand-Deficient Unemployment
Economy suffering from negative output gap, inadequate demand for goods and services generating inadequate derived demand for labour. Also known as Keynesian, Cyclical, Involuntary
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Structural Unemployment
Caused by change in structure of economy, change in pattern of demand or more capital intensive production. Suffer from occupational/geographical immobility.
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Frictional Unemployment
Caused by individuals taking time to search for work. Unemployment Trap arises when tax and benefit system fails to incentivise employment.
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Current Account of the Balance of Payments
BoP is record of UK's economic transactions with the rest of the world, Current Account records exports and imports of goods, services, investment income and transfers.
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Exchange Rate
Value of £ in terms of foreign currencies. Rising exchange rate makes £ worth more in terms of foreign currencies (visa versa)
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Globalisation
Integration of world economies, more international trade.
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Demand Management
Government policies designed to 'fine tune' the level of AD in order to achieve its macroeconomic objectives.
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Fiscal Policy
Manipulation of levels of Taxation and Government Spending through the Budget to achieve macroeconomic objectives. Impact both AD and Supply Side
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Budget Deficit
Government Expenditure > Taxation Revenue. Finance this through borrowing, increasing national debt.
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Automatic Stabilisers
Size of budget deficit/ surplus fluctuates as trade cycle does, as structure of tax and benefit system automatically generates changes level in Tax Rev and Government Spending. AD boosted if negative output gap (vice versa)
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Monetary Policy
Manipulation of short term interest rates by Bank of England. Can refer to Quantitative Easing, growth of lending and influencing the exchange rate.
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Supply-Side Policies
Aimed at increasing productive potential of the economy, shifting LRAS to the right. Should help achieve all 4 macroeconomic objectives
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Policy Trade-Offs
Extent to which the government is unable to achieve objectives simultaneously. Promotion of one policy objective carries opportunity cost in terms of another policy objective
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Rebalancing
Need for an economy to move away from dependence on growth of consumption and government spending, especially with excessive debt. Future AD should come from investment and new exports.
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Other cards in this set

Card 2

Front

Total UK output of goods and services, which is equivalent to total incomes earned in making UK output and total expenditure on buying UK output.

Back

Gross Domestic Product

Card 3

Front

Uses the prices of goods and services in the year that the output is produced. Also known as Money GDP or GDP at Current Prices. Approx £1,400bn

Back

Preview of the back of card 3

Card 4

Front

Measures value of GDP over time excluding any effect of general price inflation. An increase in this over time represents an increase in quantity of goods and services. Also known as GDP at Constant Prices.

Back

Preview of the back of card 4

Card 5

Front

Period between mid-1990s and mid-00s where the UK experienced Non-Inflationary Continuous Expansion. Inflation was close to target and 63 consecutive quarters of positive growth.

Back

Preview of the back of card 5
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