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AS Macro Key Term Glossary


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Key term glossary for AS macroeconomics

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AS Macro Key Term Glossary

  1. 1. AS Macro Key Term GlossaryAAA credit rating The best credit rating that can be given to a corporations or a government’s bonds, effectively indicating that the risk of default is negligibleAccelerator effect Where planned capital investment is linked positively to the past and expected growth of consumer demand or national incomeAggregate supply Either an inflation shock or a shock to potential national output; adverseshock aggregate supply shocks of both types reduce output and can increase the rate of inflationAnimal spirits The state of confidence or pessimism held by consumers and businessesAppreciation A rise in the market value of one exchange rate against anotherAusterity Economic policy aimed at reducing a governments 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 Automatic fiscal changes as the economy moves through stages of thestabilisers 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 marketsBrain drain The movement of highly skilled people from their own country to another nationBRIC 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 USABubble 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 revenuesBusiness confidence Expectations about the future of the economy – vital in influencing business decisions about how much to spend on new capital goodsCapacity 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 capacityCapital market A stock or a bond market where firms can raise money for investment purposes
  2. 2. Capital stock The value of the total stock of capital inputs in the economyCapital-labour Replacing workers with machines in a bid to increase productivity and reducesubstitution the unit cost of production.. This can lead to structural unemploymentCatch-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 GDPClaimant Count The number of people claiming unemployment-related benefitsClassical 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 innovationClosed economy An economy operating without imports and exports – i.e. closed to global tradeComparative Comparative advantage refers to the relative advantage that one country oradvantage producer has over another. Countries can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supplyConstant prices Constant prices tells us that the data has been inflation adjustedConsumer Expectations about the future including interest rates, incomes and jobsconfidenceConsumer durables Products such as washing machines that are not used up immediately when consumed and which provide a flow of services over timeConsumer price The consumer price index (CPI) is the governments preferred measure ofindex inflationCorporation Tax A tax on the profits made by companiesCost push inflation An increase in the price level (or average price of goods and services) caused by a sustained increase in firms’ costs of productionCredit 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 The assessment given to debts and borrowers by a ratings agency accordingCredit rating 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 defaultedCreeping inflation Small rises in the general level of prices over a long period of inflationCreeping A period of time where import tariff rates rise and where countries introduceprotectionism quotas and barriers to the mobility of labour and capitalCurrent account The overall balance of credits minus debits for trade in goods, trade in services, investment income and transfersCurrent account The amount by which money relating to trade, investment etc going out of adeficit country is more than the amount coming in. A current account deficit implies a net reduction of demand in a country’s circular flow
  3. 3. Cyclical trade A trade deficit that arises purely due to changes in the economy’s cycle, fordeficit example many countries run a deficit when their economy is growing stronglyCyclical Unemployment caused by a lack of aggregate demand for goods and services,unemployment where national output < potential output leading to a negative output gapDefault 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 restructuringDeflation A persistent fall in the general price level of goods and servicesDe-industrialization A decline in the share of national income from manufacturing industriesDepreciation A fall in the market value of one exchange rate against anotherDepression A severe recession which may become a prolonged downturn in the economy and where a nation’s GDP falls by at least 10 per centDeregulation Reducing barriers to entry in order to make a market more competitiveDeveloping country Countries generally lacking a high degree of industrialisation and/or other measures of developmentDiscouraged People often out of work for a long time who give up on job searchworkersDiscretionary fiscal Deliberate attempts to affect aggregate demand using changes inpolicy government spending, direct and indirect taxation and borrowingDiscretionary Disposable income adjusted for spending on essential bills such as fuelincomeDisposable income Gross income less income tax and national insurancecontributions plus cash welfare benefits. Disposable income is the money that comes into a household from various sources,including welfare benefits but after taxes on incomeDouble dip When an economy goes into recession twice without having undergone a fullrecession recovery in between. The UK economy experienced a double-dip recession in 2012Dumping 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 supplyEcological debt Ecological debt is the concept that people’s demands have exceeded the Earth’s ability to cope with the rising consumption of its resourcesEconomic cycle Variations in the annual rate of growth of an economy over timeEconomic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffsEconomic stability When indicators such as growth, prices and unemployment do not change much from one year to anotherEconomically active Those who are unemployed and actively seeking employmentEconomically Those who are of working age but are neither in work nor actively seekinginactive work
  4. 4. Emerging markets The financial markets of developing countriesExpansionary A relaxation of monetary policy means an attempt to use an expansionarymonetary policy monetary policy to boost aggregate demand, output and jobs – includes lower interest ratesExpectations How we expect the future to unfold – this can have powerful effects on the spending decisions of households, businesses and the governmentExpenditure The value of the goods and services purchased by households and bymeasure of GDP government, investment in machinery and buildings. It also includes the value of exports minus imports. Calculation is as follows: AD=C+I+G+X-MExpenditure- Policies that are designed to ‘switch’ expenditure from imports toswitching policies domestically produced goods in order to improve the balance of payments and stimulate GDPExport revenue Sales from selling goods and services overseas, an injection of demandFine-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 ratesFiscal austerity 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 yearsFiscal policy A governments 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 economyFiscal stability Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending equal revenueFiscal stimulus Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activityForecast A prediction made about the likely future performance of an economyForeign direct FDI stands for Foreign Direct Investment. FDI is investment from one countryinvestment into another (normally by companies rather than governments) that involves establishing operations or acquiring tangible assets, including stakes in other businessesFree trade When trade is allowed to occur without any form of restriction such as a tariffFull 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 workG20 A group of finance ministers and central bank governors from 20 economiesG7 A group of seven major industrialized countries: Canada, France, Germany, Italy, Japan, the UK and the USA
  5. 5. GDP Gross domestic product (GDP) is the total value of output in the UK and is used to measure change in economic activityGini 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 investmentGNI Gross National Income – income generated from the resources owned by inhabitants and businesses of a given countryGolden 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 investmentGovernment debt The total stock of unpaid debt issued by a government. A government will normally borrow money by issuing bonds or other securitiesGross Domestic National income per head of population, a baseline measure of livingProduct per capita standardsGross National This is broadly the same as GDP except that it adds what a country earns fromIncome (GNI) 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 workersHaircut A reduction in the value of a troubled borrowers debts, imposed on, or agreed with, its lenders as part of a debt restructuringHard landing A full-scale recession shown by a decline in real national outputHot Money Money that flows 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 Value of assets – including property, shares, savings and pension fund assetsHuman 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 workHuman An index to assess comparative levels of development in countries, quantifiedDevelopment Index in terms of literacy, life expectancy and purchasing powerHysteresis A problem caused by high levels of unemployment. An unemployed worker loses skills and motivation and so finds it hard to re-enter the labour forceImmobility of Barriers to the movement of people between areas and between jobslabourIncome elasticity of Responsiveness of demand to a change in the real income of consumersdemandInflation A sustained increase in the general price level for goods and servicesInflation target The Bank of Englandhas a CPI inflation target, which is currently 2 per cent. When inflation rises or falls more than 1% above or below the target, the Governor must write a letter to the Chancellor to explain why it has
  6. 6. happened.Inflationary Demand and supply-side pressures that can cause a rise in the general pricepressures 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 productionInfrastructure The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economyInnovation Changes to products or production processes – innovation is important in delivering improvements in dynamic efficiency and generating better goods and servicesInternational An organisation of 186 countries, promoting global monetary cooperation,Monetary Fund financial stability, international trade, employment and sustainable economic(IMF) growth. It has provided help for several nations in the wake of the 2007-09 financial crises.International A nation’s stock of foreign currency and goldreservesInventories These consist of materials and supplies which are stored for use in production, work-in progress, finished goods and goods for re-saleInvestment Spending on capital goods including plant & machinery and infrastructureInvestment income Interest, profits and dividends from assets owned and located overseasJob search The process by which workers find appropriate jobs given their tastes and skillsKeynesian The economics of John Maynard Keynes. The belief that the state can directlyeconomics stimulate demand in a stagnating economy. For instance, by borrowing money to spend on public works projects like roads, housing, schools and hospitalsKeynesian Unemployment caused by a lack of aggregate demand in the economy – aunemployment deficiency of private sector spending causes output and employment to contractLabour shedding Cut backs in employment often seen in a slowdown or a recessionLabour shortages When businesses find it difficult to recruit the workers they needLabour supply Number of people able, available and willing to work at prevailing wage ratesLagging indicators Indicators which tend to follow economic cycles e.g. unemploymentLeading indicators Indicators which predict future economic trends e.g. consumer confidenceLeveraging The use of borrowed funds to increase your capacity to spend or investLIBOR 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
  7. 7. Life-cycle model A theory that says that savings rates depend on how old someone isLiquidity The ease with which something can be converted to cash with little loss of valueMacroeconomic The overall performance in terms of output, prices, jobs, trade and livingperformance standards.Marginal The proportion of any change in income that is spent rather than savedpropensity toconsumeMarginal The change in total saving as a result of a change in incomepropensity to saveMarginal rate of tax The rate of tax on the next unit (£1) of income earnedMisery index Calculated by adding together the unemployment rate and the rate of inflationMonetary Policy Bank of England committee of 9 people thatmeets every month to setCommittee (MPC) interest rates.Money supply The entire quantity of a countrys commercial bills, coins, loans and creditMoral hazard When an insured party decides to take higher risks because they perceive their losses will be covered – often linked to the excessive risk-taking by banks knowing that central banks might rescue themMultiplier 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 MexicoNational debt The total amount of debt that the government owes the private sectorNationalisation Bringing a privately owned asset such as a company under state controlNegative 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 pricesNet investment Gross investment minus an estimate for capital depreciationNet inward When the number of migrants coming into a country is greater than thosemigration leavingNet trade The balance between the value of exports and importsNominal GDP Monetary value of all goods and services produced expressed at current pricesNon-inflationary Sustained growth of real national output whilst maintaining price stabilitygrowthOutput gap Difference between actual and potential national output. A negative output gap means that an economy has a large margin of spare productive capacityOutput measure of Value of the goods and services produced by all sectors of the economy;GDP agriculture, manufacturing, energy, construction, the service sector and
  8. 8. governmentOverseas 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 paymentsParadox 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 savingsPatent 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 economyPeak The high point of the economic cycle beyond which a recession startsPension 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 outPer capita incomes Income per head of the population – a measure of average living standardsPhillips Curve A statistical relationship between unemployment and inflationPolicy asymmetry When a given change in interest rates affects different groups or different countries to a lesser or greater degreePrecautionary Saving because of fears of a loss of real income or employmentsavingPrice 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 peopleProductive Productive capacity of the economy – boosted by high quality investmentpotentialProductivity A measure of efficiency e.g. output per person employed or output per person-hourPropensity to Proportion of any change in income that is spent on overseas productsimportPropensity to save Proportion of any change in income that is saved rather than spentProtectionism Restricting trade through tariffs and other forms of import controlsPurchasing power The buying power of a unit of currency. It is inversely related to the rate of inflationQuantitative easing The introduction of new money into the national supply by a central bank.(QE) 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 spendQuota A physical limit on the quantity of a good that can be imported into a countryReal disposable Income after taxes and welfare benefits, adjusted for the effects of inflationincomeReal income Nominal income adjusted for price changes, expressed at constant prices
  9. 9. Real interest rate The nominal rate of interest adjusted for inflationReal wage The nominal wage adjusted for the effects of inflationRecession When an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidenceRecovery A phase of the economic cycle, after a recession/depression,during which real GDP starts to increase and unemployment begins to fallRedundancy Making someone redundant is to end their employmentRelative deflation An economy with an inflation rate, which is markedly lower than comparable economies. Over time, a low relative rate of inflation can lead to an improvement in price competitiveness, assuming that there has not been a compensating change in the exchange rate between two countriesRemittances 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 The official base rate of interest that is set by the Monetary Policyrate) 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 banksRetail Price Index The RPI is broadly similar to the CPI but includes mortgage repayments and(RPI) some taxes, and excludes the top 4 per cent of earners. It is used to calculate annual changes in wages, state benefits and pensionsRisk averse Exhibiting a dislike of uncertainty, often seen in a recessionSaving ratio The percentage of disposable income that is saved rather than spentSlowdown A fall in the rate of growth of an economy but not a full-scale recessionSlump A sustained decrease in real GDP and a persistent rise in unemploymentSoft landing A slowdown in economic activity but which does not result in a recessionSovereign debt Debt issued by or guaranteed by a governmentSpare 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 centSterling exchange External value of sterling calculated using a weighted index of a basket ofrate index currencies – weightings are based on the value of trade with different countriesStimulus 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
  10. 10. Structural trade A trade deficit that arises due to one or more underlying supply-sidedeficit weaknesses rather than to a change in GDP or currency – caused by poor competitivenessStructural Unemployment that results from the decline in a particular industry whichunemployment leaves people unemployed because they do not have the skills needed by the industries that are growingSustainable Growth which meets the needs of the present without compromising thegrowth ability of future generations to meet their own needs. Growth that can continue without damage to the environment, or the exhaustion of non- renewable resourcesTarget A target is an objective of government policy e.g. low inflationTariff 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 needTime lags The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spendingToxic 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 badTrade 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 incomeTrade-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 inflationTragedy of the A conflict over finite resources between individual interests and the commonCommons good which can lead to irreversible damage to the stock of natural resources available to current and future generationsTransmission How a change in interest rates affects the various sectors of the economymechanismTrend 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 represented by a rightward shift in the LRAS (or PPC boundary)Trough The low point of the economic cycle beyond which a recovery startsTwin 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 paymentsUnder-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can useUnemployment When the prospect of the loss of unemployment benefits dissuades thosetrap without work from taking a new job – creates a disincentives problem
  11. 11. Unit wage costs Labour costs per unit of outputUnsecured credit Credit not secured by another asset – i.e. money borrowed on credit cardsWage 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 inflationWealth effect The supposed link between changes in wealth and household spendingWorld 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 managementWorld Trade WTO oversees trade agreements, negotiations and disputes betweenOrganisation 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)