Macro Definitions

The 'Economic Problem'

The allocation of scarce resources to consumers with unlimited wants and needs and how this can be done efficiently.

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The Factors of Production and their returns to the land

1) Land - Rent 2)Labour - Wages 3) Capital - Interest 4)Entrepreneurship - Profit/loss

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Macroeconomics

The study of the economy as a whole and the relationship between one country and others

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Gross Domestic Product (GDP)

The total value of Goods and Services produced by an economy in a year.

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Real GDP and Nominal GDP

REAL GDP= The total value of goods and services produced by an economy in a year as adjusted by inflation and NOMINAL GDP=The total value of goods and services produced by an economy in a year in monetary terms.

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ways of measuring GDP

1)National income method 2)national output method 3)national expenditure method

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difficulties in measuring GDP

1)risk of double counting 2)need to exclude transfer payments 3) Identifying undeclared economic activity (black market) 4)measuring inflation accurately

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economic growth

In the short run an increase in real GDP and in the long run and increase in the productive capacity of the economy

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causes of economic growth

1)an increase in investment 2) increased government expenditure 3)Improved education/training 4)an increased size in the labour force 4)an increase in exports

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Benefits of Economic growth

1)increased living standards 2)increased employment/reduced unemployment 3)increased provision of public services 4)reduction in poverty

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The output gap

The difference between the actual level of GDP and the potential level of GDP of an economy

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Circular flow of income

The flow of money around an economy between firms and households measuring income/expenditure/output

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consumer expenditure

spending by households on consumer products

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Interest rate

The charge for borrowing money and the return to savers

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causes of an increase in consumer expenditure

1)a reduction in income tax 2)a fall in the interest rate 3)an increase in consumer confidence 4)a rise in wealth 5)a general increase in income

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causes of a decrease in consumer expenditure

1)an increase in income tax 2)a rise in the interest rate 3)an decrease in consumer confidence 4)a rise in wealth 5)a general decrease in income 6)high/persistent price inflation above the rate of wage inflation

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leakages of the circular flow of income

S - savings T - taxation M - imports

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injections of the circular flow of income

I - investment G - government expenditure X - exports

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the multiplier effect

the process by which a change in any component of GDP results in a final greater change in real GDP

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causes for an increase in investement

1)a rise in consumer expenditure 2)a rise in business confidence 3)a fall in corporation tax 4)a fall in interest rates 5) advances in technology

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unemployment

Individuals who are willing, able and actively seeking work but who do not have a job

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Unemployment rate

percentage of the labour force who are out of work but willing and able to work

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Causes of unemployment

1) A lack of aggregate demand 2)A switch in demand between industries 3) Changes in technology in an industry requiring less labour

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ways of measuring unemployment

CLAIMANT COUNT=number of people claiming job seeker's allowance THE LABOUR FORCE SURVEY=the number of people who say they are seeking work

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Structural unemployment

unemployment that is caused by a difference between the skills available in the work force and the skills required by businesses

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Cyclical unemplyment

people out of work and unable to find work due to a lack of aggregate demand

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seasonal unemployment

unemployment that is caused by there being different levels of demand for workers by industries at different times of the year.

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Frictional unemployment

unemployment that is caused by people being out of work in the short term as they move between jobs

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costs of unemployment

1)loss of potential output 2)lower potential living standard 3)lower tax revenue and increased spending on benefits 4)a worsening of the government budget position 5)increases in NHS costs 6)Increase in policing costs due to increases in crime

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the inflation rate and deflation

INFLATION=a sustained rise in the general price level measured in percentage terms DEFLATION= a sustained decrease in the general price level

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two types of inflation

COST-PUSH INFLATION=an increase in the general price level due to an increase in the costs of production DEMAND -PULL INFLATION= an increase i the general price level due to an increase in the level of aggregate demand

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economic costs of inflation

1)menu costs 2)shoe leather costs 3)administrative costs 4)random redistribution of income 5)fiscal drag 6)discouragement of investment 7)inflationary noise 8)loss of international competitiveness

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Balance of Payments (BoP)

A record of the money flows into and out of a country i.e. the total value of imports and exports

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Exports and Imports

EXPORTS=goods and services sold abroad IMPORTS=goods and services bought from abroad

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the current account and the capital account

CURRENT ACCOUNT=the net value of exports and imports of goods(visibles) and services(invisibles) by an economy. THE CAPITAL ACCOUNT=the net flow of money into an economy from savings and investement

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a current account defecit

where more money is leaving the economy than entering it as a result of imports being greater than exports

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government macroeconomic policy objectives

1)low inflation; CPI 2% 2)Full employment: UK non-inflationary level of unemployment - 4-5% 3)Economic Growth: UK trend growth rate - 2.5-3% 4)BoP: equilibrium 5)Income redistribution: fair redistribution from rich to poor 6)Economic Stability:low l

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Aggregate Demand

The total value of goods and services demanded by households and firms in an economy made up of - concumption, investment, government expenditure and exports-imports (C+I+G+(X-M))

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Aggregate Supply

The total value of goods and servicesthat producers in an economy are willing and able to supply at a given price level in a given period of time

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factors causing an increase in AS

1)advances in technology 2)net increase in investment 3)improved training and education 4)a rise in the age of retirement 5)an increase in the size of the labour force 6)falls in the costs of production 7)supply-side policies

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macroeconomic equilibrium

A situation where there is no pressure for price level of an economy to change as aggregate demand equals aggregate supply

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Budget deficit

government expenditure being greater than income from taxation over a year

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Fiscal ploicy

Government control of taxation and spending

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Deflationary fiscal policiy

tax and spending policy that looks to reduce the rate of inflation through reducing the level of aggregate demand

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reflationary fiscal policy

tax and spending policy that looks to increase the level of aggregate demand and hence will result in an increased rate of inflation

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Monetary Policy

Government control/management of the money supply, interest rates and the exchange rate

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Supply-side policiy

Government policy focused on increasing the productive capacity of the economy

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Some supply-side policies

1)education and training 2) Increased expenditure on infrastructure 3)reduction in income/business taxes 4)encourage enterprise 5)privatisation 6)removing employment laws 7)reducing employment laws 8)reduce the powers of trade unions 9)reduce benefit

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the exchange rate

The price of one currency in terms of another

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factors that could cause a fall in the exchange rate

1)a rise in inflation 2)a cut in interest rates 3)a fall in the quantity of products/competitiveness 4)a current account deficit 5)government intervention with the money supply 6)speculation

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free trade

trade between countries with no arificial barriers such as tariffs or quotas

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protectionism

trade between countries that is restricted through the use of tariffs or quotas

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benefits of international trade

higher living standards, more choice of goods and services, lowere prices/inflation, higher quality products and raw materials, improved productivity: increased GDP through increased net exports via specialisation and comparative advantage

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Tariff and Quota

TARIFF=a tax on imports into an economy QUOTA=a limit on the quantity of goods imported into an economy

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reasons why a country's exports might decline

1)a strengthening of domestic currency 2)the imposition of trade restrictions by foreign countries 3)a fall in foreign/world income 4)a rise in the competitiveness of foreign producers

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reasons why a countries imports may decline

1)a fall in the exchange rate 2)the imposition of trade restrictions 3)a fall in domestic income 4)a rise in the competitiveness of domestic producers

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ways of reducing protectionism

1)reduction of tariffs 2)increase in quota levels or abolition of quotas 3)removal of embargoes 4)removal of subsidies 5)joining an international trading block

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Macro Definitions

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