MACROECONOMIC KEY TERMS

Accelerator

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

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Actual Output

Level of real output produced in an economy in a particular year. Trend level of output is what the economy is capable of producing. Actual output differs from trend level of output when there are output gaps.

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Aggregate Demand

The total planned spending on real output produced within the economy.

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Aggregate Supply

The level of real national output that producers are prepared to supply at different average price levels

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Availability of Credit

Funds available for households and firms to borrow

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Balance of Payments

A record of all currency flows into and out of a country in a particular time period

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Balance of Payments Equilibrium (Current Account Equilibrium)

Occurs when the current account more or less balances over a period of years

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Balance of Trade

The difference between the money value of a country's imports and its exports. Balance of trade is a country's largest component of a country's balance of payments on current account

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Balance of Trade Deficit

The money value of a country's imports exceeds the money value of its exports

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Balance of Trade in Goods

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'.

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Balance of Trade in Services

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.

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Balance of Trade Surplus

The movey value of a country's exports exceeds the money value of its imports

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Balanced Budget

Achieved when government spending equals government revenue

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Bank of England

The central bank in the UK economy which is in charge of monetary policy

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Bank Rate

The rate of interest the Bank of England Pays to commercial banks on their deposits held at the Bank of England

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Budget Deficit

Occurs when goveernment spending exceeds government revenue. this represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.

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Budget Surplus

Occurs when government spending is less than government revenue. this represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary.

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Central Bank

Conrtols the banking system and implements monetary policy on behalf of the government.

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Certainty

One of the principles of taxation. Tax payers should be reasonably certain of the amount of tax they will be expected to pay.

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Claimant Count

The method of measuring unemployment according to those people who are claiming unemployment-related benefits (Jobseeker's Allowance)

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Closed Economy

An economy with no international trade

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Consumer Prices Index (CPI)

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.

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Consumption

Total planned spending by households on consumer goods and services produced within the economy.

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Contractionary Fiscal Policy

Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left.

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Contractionary Monetary Policy

Uses higher interest rates and other monetary tools to decrease aggregate demand and to shift AD curve to the left

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Convenience

The principle of taxation which requires a tax to be convenient for taxpayers to pay.

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Cost-Push Inflation

A rising price level caused by an increase in the costs of production, shown by a shift of the SRAS curve to the left.

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Credit Crunch

Occurs when here is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing, and leads to a rise in the cost of borrowing.

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Crowding Out

A situation in which an increase in government or public sector spending displaces private sector spending, with little or no increase in aggregate demand.

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Current Account Deficit

Occurs when currency outflows in the current account exceed currency inflows.

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Current Account of the Balance of Payments

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

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Current Account Surplus

When currency inflows in the current account exceed currency outflows (exporter greater than imports)

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Cyclical Budget Deficit

Part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle

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Cyclical Budget Surplus

If the structural deficit were zero, a cyclical surplus would probably emerge in the upswing of the economic cycle

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Cyclical Unemployment (Keynesian or Demand-Deficient Unemployment)

Unemployment caused by a lack of aggregate demand in the economy and occurs when the economy goes into a recession or a depression

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Deficit Financing

Deliberately running a budget deficit and borrowing to finance the deficit

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Deflation

A persistent fall in the average price levels

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Deindustrialisation

The decline iof manufacturing industries, together with coal mining

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Demand-Side

The impact of changes in aggregate demand on the economy (Keynesian economics)

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Demand-Pull Inflation

A rising price level caused by an increase in aggregate demand

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Demand-Side Fiscal Policy

Used to increase or decrease the level of aggregate demand through changes in government spending, taxation and the budget balance

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Deregulation

Removing previously imposed regulations.

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Direct Tax

A tax which cannot be shifted by he person legally liable to pay the tax onto someone else, they are levied on income and wealth

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Discretionary Fiscal Policy

Making discrete changes to G, T and the budget deficit to manage the level of aggregate demand

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Disinflation

When the rate of inflation is falling, but still positive and the price level is rising more slowly than previously

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Distribution of Income

The spread of different incomes among individuals and the different income groups in the economy

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Economic Cycle

Upswing and downside in aggregate economic activity taking place over 4 to 12 years

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Economic Performance

Success or failure in achieving economic policy objectives

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Economic Recovery

When short-run economic growth takes place after a recession

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Economic Shock

An unexpected event hitting the economy

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Economy

The principle of taxation which requires a tax to be cheap to collect in relation to the revenue it yields

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Efficiency (As Principle of Taxation)

A tax should achieve its desired objectives with minimum unintended consequences

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Emerging-Market Country

A country that is progressing towrads becoming more economically advanced, by means or rapid growth and industrialisation

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Equation of Exchange

The stock of money in the economy multiplies by the velocity of circulation of money equals the price kevel multiplied by the quantity of real output in the economy (MV = PQ)

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Equilibrium Unemployment

Exists when the economy's aggregate labour market is in equilibrium. it is the same as the natural level of unemployment

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Equilibrium National Income

The level of real output at which aggregate demand equals aggregate supply. altrnatively, it is rhe level of income at which withdrawals from the circular flow of income equal injections into the flow.

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Equity (As a Principle of Taxation)

Requires a tac to be fair.

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Exchange Rate

The price of a currency measured ain terms of another cuurency

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Expansionary Fiscal Policy

Uses fiscal policy to increase aggregate demand

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Expansionary Monetary Policy

Lower interest rates and other monetary instruments to increase aggregate demand

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Export-Led Growth

In the short run, economic growth resulting from the increase in exports as a components of aggregate demand. In the long run, economic growth resulting from the growth and increased international competitiveness of exporting industries

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Exports

Domestically produced goods or services sold to residents of other countries

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Fiscal Policy

The use by the government of government spending and taxation to try to achieve the government's policy objectives

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Flexibility

The principle of taxation that requires a tax to be easy to change to meet new circumstances

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Frictional Unemployment

Unemployment that is usually short term and occurs when workers switch between jobs

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Full Employment

(Beveridge Definition) 3% or less of tf the labour force unemployed. (Free Market) the level of employment occurring at real-wage rate, where the number of workers whom employers wish to higher equals the number of workers wanting to work

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Geographical Immobility of Labour

When workers are unwilling or unable to move from one area to another in search for work

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Gross Domestic Product

The sum of all the goods and services produced in the economy over a period of time

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Import-Cost Inflation

A rising price level caused by an increase in the cost of imported goods

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Imports

Goods or services produced in other countries and sold to residents in this country

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Index Number

A number used in an index to enable accurate compasions over time to be made.

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Indexation

The automatic adjustment of items to changes in the price level, through the use of a price index

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Indirect Tax

A tax which can be shifted by the person legally liable to pay the tax onto someone else. These are levied on spending

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Inflation

A persistent rise in the average price level

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Inflation Rate Target

The CPI inflation rate target set by the government for the Bank of England to try to achieve. The target is currently 2%

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Injection

Spending entering the circular flow of income as a result of investment, government spending and exports

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Interventionist Policies

When the government intervenes in free markets

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Investment

Total planned spending by firms on capital goods produced in the economy

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Involuntary Unemployment

When workers are willing to work at current market rates but there are no jobs available

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Keynesian Economists

Followers of the economist John Maynard Keynes, who generally believe that governments should manage the economy

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Labour Force Survey

A quaterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks informationon respondants' personal circumstances and their labour market status during a period of 1-4 weeks

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Life-Cycle Theory of Consumption

A theory that explains consumption and saving in terms of how people expect their incomes to change over the whole of their life cycles

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Liquidity

Measures the ease with which assets can be turned into cash quickly without loss in value. Cash is most liquid of all assets

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Long Run Aggregate Supply

Aggregate Supply when the eonomy is producing at its production potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right

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Long Run Economic Growth

An increase in the economy's potential level of real output, and an outward moment of the economy's PPF

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Long-Run Phillips Curve

A vertical curve located at the natural rate of unemployment. Its vertical shape takes account of the role of expectations in the inflationary process

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Macroeconomics

The study of the whole economt at the aggregate level

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Marginal Propensity to Consume

The fraction of an increase in disposable income that people plan to spend on domestically produced consumer goods

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Marketisation (Commercialisation)

Involves shifting provision of goods or services from the non-market sector to the market sector

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Monetarists

Economists who argue that a prior increase in the money supply is the cause of inflation

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Monetary Policy

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

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Monetary Policy Committee

Nine economists, chaired by the governer of the Bank of England, who meet once a ,onth to set the Bank Rate, the Bank of England's key interest rate, and also decide whether other aspects of monetary policy need changing

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Money

An asset that can be used as a medium of exchange

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Money Supply

The stock of money in the economy, made up of cash and bank deposits

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Multplier

The relationship between a change in Aggregate Demand and the resulting usually larger change in national income

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National Capital Stock

The stock of capital goods in the economy that has accumulated over time and is meaured at a point in time

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National Debt

The stock of all past central government borrowing that has not been paid back

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National Income/Output/Product

The flow of new output produced by the economy in a particular period

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National Wealth

The stock of all goods that exist at a point in time that have value in the economy

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Natural Rate of Unemployment

The rate of unemployment when aggregate labour market is in equilibrium

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Negative Output Gap

The level of actual real output in the economy is lower than the trend output level

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Net Investment Income

The difference between Inward and Outward flows of investment income. When net investment is positive, the UK is earning more income generated by the direct and portfolio investments held abroad than paying to overseas owners of capital assets in UK

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Nominal GDP

GDP measured at the current market prices, without removing the effects of inflation

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Non-Interventionist Supply-Side Policies

Free up markets, promote comptition ad greater efficiency, and reduce the economic roloe of the state

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Occupational Immobility of Labour

When workers are unwilling or unable to move from one type of job to another because different skills are needed

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Open Economy

An economy open to international trade

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Output Gap

The level of actual real output in the economy is greater or lower than the trend output level

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Performance Indicator

Provides information for judging the succes or failure of a particular type of government policy

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Phillips Curve (Short Run)

Based on evidence from the economy, showing the apparent relationship between the rate of inflation and the rate of unemployment

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Policy Conflict

Occurs when two policy objectives cannot both be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other

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Policy Instrument

A tool used to try to achieve a policy objective

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Policy Objective

A target that policy makers aim to 'hit'

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Positive Output Gap

The level of actual real output in the economy is greater than the trend output level

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Price Index

An index number showing the extent to which as price has changed over a mont, quarter or years, in comparison with the price in a base year

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Principle of Taxation

A Criterion used for judging whether a tax is good or bad

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Privatisation

Involves shifting ownership of state-owned assets to the private-sector

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Pro-Free Market Economists

Dislike government intervention in the economy and who much prefer the operation of free markets

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Progressive Taxation

As income rises, a larger proportion of income is paid in tax

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Proportional Taxation

When the proportion of income paid in tax stays the same as income increases

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Public Sector Borrowing

Borrowing by the government and other parts of the public sector to finance a budget

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Quantity Theory of Money

Oldest theory of inflation, incorporated into monetarism, which states that inflation is caused by a persistent increase in the supply of money

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Rate of Interest

The reward for lending savings to somebody else and the cost of borrowing

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Real GDP

A measure of all the goods and services produced in an economy, adjusted for price changes or inflation. This reflects changes in the total output of the economy

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Real Wage

The purchasing power of the nominal wage; for example, real wages will fall when inflation is higher than the rise in the nominal wage rate and real wages rise when the nominal wag rate increases more rapidly than inflation.

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Reak-Wage Unemployment

Unemployment caused by real wages being stuck above the equilibrium real wage.

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Recession

A fall in Real GDP for 6 months or more

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Reflationary Policies

Policies that increase aggregate demand with the intention of increasing real output and employment

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Regressive Taxation

When the proportion of income paid in tax falls as income increases

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Reindustrialise

Growth of manufacturing industries to replace industries which have disappeared or declined significantly in size.

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Retail Price Index

The RPI is an older measure used to calculate the rate of consumer price in flation in the UK. Currently, the UK uses the RPI for uprating each year the cost of TV and motor vehicle licenses, together sometimes with taxes on goods

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Saving

Income which is not spent

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Seasonal Fluctuation

Variation of economic activity resulting from seasonal changes in the economy

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Seasonal Unemployment

Unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period

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Short-Run Aggregate Supply

Aggregate supply 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

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Short-Run Economic Growth

Growth of real output resulting from using idle resources, thereby taking up the slack in the economy

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Sovereign Debt Problem

Part of the National debt owned by people or institutions outside the country that has sold the debt to them. This stems from the difficulties governments face when trying to finance budget deficits by borrowing on financial markets

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Structural Budget Deficit

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 long-term government policy decisions

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Structural Unemployment

Long-term unemployment occurring when some industries are declining. Also occurs within a growing industry if automation reduces rge demand for labour, and when production requires new skills not posessed by the workers who lose their jobs

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Supply-Side

Relates to changes in the potential output of the economy which is affected by the available factors of production and the productivity of the economy

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Supply-Side Economics

A branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets and, through this, the performance of the economy

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Supply-Side Fiscal Policy

Used to increase the economy's ability to produce and supply goods, through creating incentives to work, save, invest and be entrepeneurial. Intervetionist supply-side fiscal policies are also designed to improve supply-side performance.

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Supply-Side Improvement

Reforms undertaken by the private sector to reduce costs to enable firms to become more productively efficient and competitive. Supply-side improvement often results from more investment and innovation, often without prompting from the government

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Supply-Side Policies

Aim to improve national economic performance by creating competitive and more efficient markets and through interventionist policies

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Tax Threshold

The level of income above which people pay income tax. Income below the basic tax threshold is untaxed

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Technical Progress

New and better was of doing things

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Trade-Off Between Policy Objectives

The extent to which one policy objective has to be sacrificed in order to achieve another objective.

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Transfers

Payments flowing between countries in forms such as foreign aid, grants, private transfers and gifts and payments to or from the EU budget. They are payments made without anything of economic value being received in return

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Trend Growth Rate

The rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy.

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Voluntary Unemployment

Occurs when workers choose to remain unemployed and refuse job offers at current market wage rates

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Wage-Cost Inflation

A rising price level caused by an increase in wages and salaries

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Wealth

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

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Withdrawal

A leakage of spending power out of the circular flow of income into savings, taxation or imports

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MACROECONOMIC KEY TERMS

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