Economics Unit 2 (Macro) Key Term Glossary


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Economics Unit 2 (Macro) Key Term Glossary

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Economics Unit 2 (Macro) Key Term Glossary

  1. 1. AS Macro Unit 2 Key Term Glossary (Tutor2u) AAA credit rating The best credit rating that can be given to a corporation's or a government’s bonds, effectively indicating that the risk of default is negligible Accelerator effect Where planned capital investment is linked positively to the past and expected growth of consumer demand or national income Aggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce output and can increase the rate of inflation Animal spirits The state of confidence or pessimism held by consumers and businesses Appreciation A rise in the market value of one exchange rate against another Austerity Economic policy aimed at reducing a government's deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments. Automatic stabilisers Automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a recession. Bank run When a large number of people suspect that a bank may go bankrupt and withdraw their deposits. Bank runs are rare, one happened with the Northern Rock in 2007. Bond Both companies and governments can issue bonds. The issue of new government debt is done by the central bank and involves selling debt to capital markets Brain drain The movement of highly skilled people from their own country to another nation BRIC economies The BRIC grouping – Brazil, Russia, India and China – short hand for the rise of emerging markets. The BRICs have a bigger share of world trade than the USA Bubble 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") Budget deficit Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of economic growth which brings about a rise in direct and indirect tax revenues Business confidence Expectations about the future of the economy – vital in influencing business decisions about how much to spend on new capital goods Capacity utilisation Measures how much of the productive potential of the economy is being used. Utilisation falls during a recession leading to a rise in spare capacity Capital market A stock or a bond market where firms can raise money for investment purposes Capital stock The value of the total stock of capital inputs in the economy Capital-labour substitution Replacing workers with machines in a bid to increase productivity and reduce the unit cost of production. This can lead to structural unemployment Catch-up effect This occurs when countries that start off poor tend to grow more rapidly than countries that start off rich. The result is some convergence in the standard of living as measured by per capita GDP Claimant Count The number of people claiming unemployment-related benefits Classical LRAS The classical LRAS curve is drawn as vertical because classical economists argue that a country’s productive capacity is determined by factors other than price and demand such as investment and innovation Closed economy An economy operating without imports and exports – i.e. closed to global trade
  2. 2. Comparative advantage Comparative advantage refers to the relative advantage that one country or producer has over another. Countries can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supply Constant prices Constant prices tells us that the data has been inflation adjusted Consumer confidence Expectations about the future including interest rates, incomes and jobs Consumer durables Products such as washing machines that are not used up immediately when consumed and which provide a flow of services over time Consumer price index The consumer price index (CPI) is the government's preferred measure of inflation Corporation Tax A tax on the profits made by companies Cost push inflation An increase in the price level caused by a sustained increase in firms’ costs of production Credit crunch Where banks reduce lending to each other due to falling confidence that loans will be repaid. This results in less credit being available for consumers and businesses, resulting in an increase in the cost of borrowing money Credit rating The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint - based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted Creeping inflation Small rises in the general price level over a long period Creeping protectionism A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital Current account The overall balance of credits minus debits for trade in goods, trade in services, investment income and transfers Current account deficit The amount by which money relating to trade, investment etc going out of a country is more than the amount coming in. A current account deficit implies a net reduction of demand in a country’s circular flow Cyclical trade deficit A trade deficit that arises purely due to changes in the economy’s cycle, for example many countries run a deficit when their economy is growing strongly Cyclical unemployment Unemployment caused by a lack of aggregate demand for goods and services, where national output < potential output leading to a negative output gap Default A default occurs when a borrower has broken the terms of a loan or other debt, for example if a borrower misses a payment. The term is also used to mean any situation when borrower can no longer repay its debts in full, such as bankruptcy or a debt restructuring Deflation A persistent fall in the general price level of goods and services De-industrialization A decline in the share of national income from manufacturing industries Depreciation A fall in the market value of one exchange rate against another Depression Used to describe a severe recession which may become a prolonged downturn in the economy and where a nation’s GDP falls by at least 10 per cent Deregulation Reducing barriers to entry in order to make a market more competitive Developing country Countries generally lacking a high degree of industrialisation and/or other measures of development Discouraged workers People often out of work for a long time who give up on job search Discretionary fiscal policy Deliberate attempts to affect aggregate demand using changes in government spending, direct and indirect taxation and borrowing
  3. 3. Discretionary income Disposable income adjusted for spending on essential bills such as fuel Disposable income Gross income less income tax and national insurance contributions plus cash welfare benefits. Disposable income is the money that comes into a household from various sources, including welfare benefits but after taxes on income Double dip recession When an economy goes into recession twice without having undergone a full recovery in between Dumping When a producer in one country exports a product to another at a price below the price it charges in its home market or below the costs of supply Ecological debt Ecological debt is the concept that people’s demands have exceeded the Earth’s ability to cope with the rising consumption of its resources Economic cycle Variations in the annual rate of growth of an economy over time Economic growth An increase in the real value of goods and services produced in a country or area as measured by the annual % change in real national output. Also a long-run increase in a country’s productive capacity. Economic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffs Economic stability When indicators such as growth, prices and unemployment do not change much from one year to another Economically active Those who are unemployed and actively seeking employment Economically inactive Those who are of working age but are neither in work nor actively seeking work Emerging markets The financial markets of developing countries Exchange rate The rate at which one currency can be exchanged for another. Expansionary monetary policy A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost aggregate demand, output and jobs – includes lower interest rates Expectations How we expect the future to unfold – this can have powerful effects on the spending decisions of households, businesses and the government Expenditure measure of GDP The value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports. Calculation is as follows: AD=C+I+G+X-M Expenditure-switching policies Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP Export revenue Sales from selling goods and services overseas, an injection of demand Financial assets For consumers the main financial assets are property, pensions, equities, unit trusts and cash Fine-tuning Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates Fiscal austerity or fiscal tightening Fiscal austerity refers to decisions by a government to reduce the amount of government borrowing (i.e. cut the size of a fiscal deficit) over a period of years Fiscal deficit This happen when government expenditure is higher than the revenue from tax receipts in a particular year Fiscal policy A government's policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and boosting tax revenue, resulting in a slower economy Fiscal stability Many governments seek to maintain a degree of balance between tax revenues and
  4. 4. public sector spending. A balanced budget is one in which spending equal revenue Fiscal stimulus Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity Forecast A prediction made about the likely future performance of an economy Foreign direct investment FDI stands for Foreign Direct Investment. FDI is investment from one country into another (normally by companies rather than governments) that involves establishing operations or acquiring tangible assets, including stakes in other businesses Free trade When trade is allowed to occur without any form of restriction such as a tariff Full capacity output A level of national output where all available factor inputs are fully employed – this is a factor influencing the underlying growth rate (LRAS) Full employment When there enough job vacancies for all the unemployed to take work G20 A group of finance ministers and central bank governors from 20 economies G7 A group of seven major industrialized countries: Canada, France, Germany, Italy, Japan, the UK and the USA GDP Gross domestic product (GDP) is the total value of output in the UK and is used to measure change in economic activity Gini Coefficient A measure of the extent to which groups of households, from the bottom of the income distribution upwards, receive less than an equal share of income. Globalisation The deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment GNI Gross National Income – income generated from the resources owned by inhabitants and businesses of a given country Golden Rule A rule introduced by the former Labour government which says that borrowing on state provided goods and services should be zero over the course of one economic cycle. Borrowing is allowed when it finances capital investment Government debt The total stock of unpaid debt issued by a government. A government will normally borrow money by issuing bonds or other securities Gross Domestic Product per capita National income per head of population, a baseline measure of living standards Gross National Income (GNI) This is broadly the same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home. GNI is affected for example by profits from businesses owned overseas and also remittances sent home by migrant workers Haircut A reduction in the value of a troubled borrower's debts, imposed on, or agreed with, its lenders as part of a debt restructuring Hard landing A full-scale recession shown by a decline in real national output Hot Money Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest. Household wealth The value of assets – including property, shares, savings and pension fund assets Human capital Investment in education and training to increase the quality of the labour force and to make people more flexible in a changing world of work Human Development Index An index to assess comparative levels of development in countries, quantified in terms of literacy, life expectancy and purchasing power Hysteresis When a sustained period of low aggregate demand can lead to permanent damage to the
  5. 5. supply side of the economy Immobility of labour Barriers to the movement of people between areas and between jobs Income elasticity Responsiveness of demand to a change in the real income of consumers Inflation expectations The rate of increase of consumer prices expected by consumers. Expectations can influence spending and saving decisions. Inflation A sustained increase in the general price level for goods and services Inflation target The Bank of England has a CPI inflation target, which is currently 2 per cent Inflationary pressures Demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production Infrastructure The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy Innovation Changes to products or production processes – innovation is important in delivering improvements in dynamic efficiency and generating better goods and services International Monetary Fund (IMF) An organisation of 186 countries, promoting global monetary cooperation, financial stability, international trade, employment and sustainable economic growth. It has provided help for several nations in the wake of the 2007-09 financial crises. International reserves A nation’s stock of foreign currency and gold Inventories These consist of materials and supplies which are stored for use in production, work-in progress, finished goods and goods for re-sale Investment Spending on capital goods including plant & machinery and infrastructure Investment income Interest, profits and dividends from assets owned and located overseas Job search The process by which workers find appropriate jobs given their tastes and skills Keynesian economics The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to spend on public works projects like roads, housing, schools and hospitals Keynesian unemployment Unemployment caused by a lack of aggregate demand in the economy – a deficiency of private sector spending causes output and employment to contract Labour shedding Cut backs in employment often seen in a slowdown or a recession Labour shortages When businesses find it difficult to recruit the workers they need Labour supply The number of people able, available and willing to work at prevailing wage rates Lagging indicators Indicators which tend to follow economic cycles e.g. unemployment Leading indicators Indicators which predict future economic trends e.g. consumer confidence Leveraging The use of borrowed funds to increase your capacity to spend or invest LIBOR Libor stands for the London Interbank Offered Rate and is used by banks world-wide to determine the rate at which they lend to each other - whether that’s receiving or giving loans (including 24 hour - 5 year loans). Libor rates are set daily and released at the same time everyday - 11am London time Life-cycle model A theory that says that savings rates depend on how old someone is Liquidity The ease with which something can be converted to cash with little loss of value Liquidity trap When very low interest rates cease to have a strong effect on aggregate demand
  6. 6. Macroeconomic performance The overall performance in terms of output, prices, jobs, trade and living standards. Marginal propensity to consume The proportion of any change in income that is spent rather than saved Marginal propensity to save The change in total saving as a result of a change in income Marginal rate of tax The rate of tax on the next unit (£1) of income earned Misery index Calculated by adding together the unemployment rate and the rate of inflation Monetary Policy Committee (MPC) Bank of England committee of 9 people meets every month to set interest rates. Money supply The entire quantity of a country's commercial bills, coins, loans and credit Monetary stimulus Changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit Moral hazard When an insured party decides to take higher risks because they perceive their losses will be covered Multiplier effect If there is an initial injection (e.g. a rise in exports) into the economy then the final increase in aggregate demand and real GDP will be greater. NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US, Canada and Mexico National debt A government's total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time Nationalisation Bringing a privately owned asset such as a company under state control Negative equity When the value of an asset falls below the debt left to pay on that asset. Term is most commonly used in connection with property prices after a slump in prices Net investment Gross investment minus an estimate for capital depreciation Net inward migration When the number of migrants coming into a country is greater than those leaving Net trade The balance between the value of exports and imports Nominal GDP Monetary value of all goods and services produced expressed at current prices Nominal wage growth The annual growth of wages unadjusted for inflation Non-inflationary growth Sustained growth of real national output whilst maintaining price stability Output gap Difference between actual and potential national output. A negative output gap means that an economy has a large margin of spare productive capacity Output measure GDP Value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government Overseas assets Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of income which is a credit item on the current account of the balance of payments Paradox of thrift If people save more in a recession, it will reduce consumption and thus AD will fall, impeding economic growth and, eventually, lowering the general level of savings Patent box A reduced rate of Corporation Tax applied to profits from patents – designed to stimulate research and innovation and improve the supply-side of the economy Peak The high point of the economic cycle beyond which a recession starts
  7. 7. Pension Fund Fund that pools employees' pension benefits and holds them so that they can be paid at retirement. The money is invested in stocks, bonds and other assets to boost returns and ensure that there are sufficient funds to be paid out Per capita incomes Income per head of the population – a measure of average living standards Phillips Curve A statistical relationship between unemployment and inflation Policy asymmetry When a given change in interest rates affects different groups or different countries to a lesser or greater degree Precautionary saving Saving because of fears of a loss of real income or employment Price stability Price stability occurs when there is low inflation and the price changes that do occur have little impact on day-to-day decisions of people Productive potential Productive capacity of the economy – boosted by high quality investment Productivity A measure of efficiency e.g. output per person employed or output per person-hour Propensity to import Proportion of any change in income that is spent on overseas products Propensity to save Proportion of any change in income that is saved rather than spent Protectionism Restricting trade through tariffs and other forms of import controls Purchasing power The buying power of a unit of currency. It is inversely related to the rate of inflation Quantitative easing (QE) The introduction of new money into the national supply by a central bank. The idea is to add more money into the system to lower the risk of depression and deflation and encourage banks/people to borrow and spend Quota A physical limit on the quantity of a good that can be imported into a country Real disposable income Income after taxes and welfare benefits, adjusted for the effects of inflation Real income Nominal income adjusted for price changes, expressed at constant prices Real interest rate The nominal rate of interest adjusted for inflation Real wage The nominal wage adjusted for the effects of inflation Recession A period of at least six months when an economy suffers a fall in output. Or a broadly- based contraction in output, employment, investment and confidence Recovery A phase of the economic cycle, after a recession/depression, during which real GDP starts to increase and unemployment begins to fall Redundancy Making someone redundant is to end their employment Relative deflation An economy with an inflation rate, which is lower than comparable economies. Over time, a low relative rate of inflation can lead to an improvement in price competitiveness Remittances Sending of money to people in another country. For many lower-income nations, remittance income is now a big contribution to Gross National Income (GNI) Repo Rate (policy rate) The official 'base' rate of interest that is set by the Monetary Policy Committee and which, when changed, sends a signal to the rest of the financial markets about a desired change in the direction of other borrowing and savings interest rates. Repo is the rate of interest at which the Bank of England is prepared to lend to banks Retail Price Index (RPI) The RPI is broadly similar to the CPI but includes mortgage repayments and some taxes, and excludes the top 4 per cent of earners. It is used to calculate annual changes in wages, state benefits and pensions Risk averse Exhibiting a dislike of uncertainty, often seen in a recession Saving ratio The percentage of disposable income that is saved rather than spent
  8. 8. Slowdown A fall in the rate of growth of an economy but not a full-scale recession Slump A sustained decrease in real GDP and a persistent rise in unemployment Soft landing A slowdown in economic activity but which does not result in a recession Sovereign debt Debt issued by or guaranteed by a government Spare capacity When a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply tends to be elastic. Stagflation A combination of slow growth and rising inflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent Sterling exchange rate index External value of sterling calculated using a weighted index of a basket of currencies – weightings are based on the value of trade with different countries Stimulus Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rate cuts, quantitative easing, tax cuts and government spending increases Structural trade deficit A trade deficit that arises due to supply-side weaknesses rather than a change in GDP or currency – caused by poor competitiveness Structural budget deficit The size of a fiscal (budget) deficit adjusted to take account of the effects of changes in the economic cycle Structural unemployment Unemployment that results from the decline in a particular industry which leaves people unemployed because they do not have the skills needed by the industries that are growing Sustainable growth Growth which meets the needs of the present without compromising the ability of future generations to meet their own needs. Growth that can continue without damage to the environment, or the exhaustion of non-renewable resources Target A target is an objective of government policy e.g. low inflation Tariff A tax on imported products which may be ad valorem (%) or a specific tax (a set amount per unit imported). Tight labour market When demand for labour is high and there are shortages of labour. Businesses may have to offer higher wages to attract and keep the workers they need Time lags The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending Toxic debt Loans that may not be repaid. For example, if one home loan on one street goes bad, it might make people think that all the loans on the street will go bad Trade deficit A trade deficit occurs when a country imports a greater value of goods and services than it exports. A trade deficit as a net withdrawal from the circular flow of income Trade-off A trade-off implies that choices have to be made between different objectives of economic policy for example a trade-of between economic growth and inflation Tragedy of the Commons A conflict over finite resources between individual interests and the common good which can lead to irreversible damage to the stock of natural resources available to current and future generations Transmission mechanism How a change in interest rates affects the various sectors of the economy Trend growth The long run average growth rate – mainly determined by changes in the stock of available factor inputs and also improvements in productivity. Trend growth is
  9. 9. represented by a rightward shift in the LRAS (or PPC boundary) Trough The low point of the economic cycle beyond which a recovery starts Twin Deficits Twin deficits refer to a situation where an economy is running both a fiscal deficit and also a deficit on the current account of the balance of payments Under-employment Workers are underemployed when they are willing to supply more hours of work than their employers are prepared to offer. Unemployment trap When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job – creates a disincentives problem Unit wage costs Labour costs per unit of output Unsecured credit Credit not secured by another asset – i.e. money borrowed on credit cards Wage price spiral Where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation Wealth effect The supposed link between changes in wealth and household spending World Bank A source of financial and technical assistance to developing countries. It can provide loans and grants for a wide array of purposes that include investments in education, health, public administration, infrastructure, financial and private sector development, agriculture and environmental and natural resource management World Trade Organisation WTO oversees trade agreements, negotiations and disputes between member countries. The WTO is an organisation that was formed in 1995 to control trade agreements between countries and to set rules on international trade. It replaced GATT(the General Agreement on Tariffs and Trade) Zero Hours Contract An employment contract under which the employee is not guaranteed work and is paid only for work carried out Zombie Companies Weak and inefficient companies which are able to survive thanks to low interest rates and a supposedly more tolerant attitude to corporate borrowers by banks. Negative interest rate An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than nominal interest rates