The document provides definitions for various macroeconomic key terms: - AAA credit rating refers to the best credit rating given to bonds, indicating negligible risk of default. - Aggregate supply shocks reduce output and can increase inflation by affecting potential output or causing inflation. - Austerity aims to reduce government deficits through tax increases and/or spending cuts. - Bank runs occur when depositors lose confidence and withdraw funds due to fears the bank may collapse. - Bond markets allow governments and firms to raise money through issuing new debt. - The BRIC economies refer to the rising emerging markets of Brazil, Russia, India, and China. - Bubbles occur when asset prices

1. AS Macro Key Term Glossary
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 Either an inflation shock or a shock to potential national output; adverse
shock 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 Automatic fiscal changes as the economy moves through stages of the
stabilisers 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

2. Capital stock The value of the total stock of capital inputs in the economy
Capital-labour Replacing workers with machines in a bid to increase productivity and reduce
substitution 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
Comparative Comparative advantage refers to the relative advantage that one country or
advantage 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 Expectations about the future including interest rates, incomes and jobs
confidence
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 The consumer price index (CPI) is the government's preferred measure of
index inflation
Corporation Tax A tax on the profits made by companies
Cost push inflation An increase in the price level (or average price of goods and services) 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
The assessment given to debts and borrowers by a ratings agency according
Credit 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 defaulted
Creeping inflation Small rises in the general level of prices over a long period of inflation
Creeping A period of time where import tariff rates rise and where countries introduce
protectionism 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 The amount by which money relating to trade, investment etc going out of a
deficit 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. Cyclical trade A trade deficit that arises purely due to changes in the economy’s cycle, for
deficit example many countries run a deficit when their economy is growing strongly
Cyclical Unemployment caused by a lack of aggregate demand for goods and services,
unemployment 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 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 People often out of work for a long time who give up on job search
workers
Discretionary fiscal Deliberate attempts to affect aggregate demand using changes in
policy government spending, direct and indirect taxation and borrowing
Discretionary Disposable income adjusted for spending on essential bills such as fuel
income
Disposable 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
income
Double dip When an economy goes into recession twice without having undergone a full
recession recovery in between. The UK economy experienced a double-dip recession in
2012
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 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 Those who are of working age but are neither in work nor actively seeking
inactive work

4. Emerging markets The financial markets of developing countries
Expansionary A relaxation of monetary policy means an attempt to use an expansionary
monetary policy 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 The value of the goods and services purchased by households and by
measure 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-M
Expenditure- Policies that are designed to ‘switch’ expenditure from imports to
switching policies 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
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 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 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 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 FDI stands for Foreign Direct Investment. FDI is investment from one country
investment 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

5. 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 National income per head of population, a baseline measure of living
Product per capita standards
Gross National This is broadly the same as GDP except that it adds what a country earns from
Income (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 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 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 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 An index to assess comparative levels of development in countries, quantified
Development Index in terms of literacy, life expectancy and purchasing power
Hysteresis 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 force
Immobility of Barriers to the movement of people between areas and between jobs
labour
Income elasticity of Responsiveness of demand to a change in the real income of consumers
demand
Inflation A sustained increase in the general price level for goods and services
Inflation 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. happened.
Inflationary Demand and supply-side pressures that can cause a rise in the general price
pressures 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 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 gold
reserves
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 The economics of John Maynard Keynes. The belief that the state can directly
economics 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 caused by a lack of aggregate demand in the economy – a
unemployment 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 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

7. 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
Macroeconomic The overall performance in terms of output, prices, jobs, trade and living
performance standards.
Marginal The proportion of any change in income that is spent rather than saved
propensity to
consume
Marginal The change in total saving as a result of a change in income
propensity to save
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 Bank of England committee of 9 people thatmeets every month to set
Committee (MPC) interest rates.
Money supply The entire quantity of a country's commercial bills, coins, loans and credit
Moral 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 them
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 The total amount of debt that the government owes the private sector
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 When the number of migrants coming into a country is greater than those
migration 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
Non-inflationary Sustained growth of real national output whilst maintaining price stability
growth
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 of Value of the goods and services produced by all sectors of the economy;
GDP agriculture, manufacturing, energy, construction, the service sector and

8. 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
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 because of fears of a loss of real income or employment
saving
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 Productive capacity of the economy – boosted by high quality investment
potential
Productivity A measure of efficiency e.g. output per person employed or output per
person-hour
Propensity to Proportion of any change in income that is spent on overseas products
import
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 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 spend
Quota A physical limit on the quantity of a good that can be imported into a country
Real disposable Income after taxes and welfare benefits, adjusted for the effects of inflation
income
Real income Nominal income adjusted for price changes, expressed at constant prices

9. Real interest rate The nominal rate of interest adjusted for inflation
Real wage The nominal wage adjusted for the effects of inflation
Recession 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 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 countries
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 The official 'base' rate of interest that is set by the Monetary Policy
rate) 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 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 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
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 External value of sterling calculated using a weighted index of a basket of
rate index 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

10. Structural trade A trade deficit that arises due to one or more underlying supply-side
deficit weaknesses rather than to a change in GDP or currency – caused by poor
competitiveness
Structural Unemployment that results from the decline in a particular industry which
unemployment leaves people unemployed because they do not have the skills needed by the
industries that are growing
Sustainable Growth which meets the needs of the present without compromising the
growth 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 A conflict over finite resources between individual interests and the common
Commons good which can lead to irreversible damage to the stock of natural resources
available to current and future generations
Transmission How a change in interest rates affects the various sectors of the economy
mechanism
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 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 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 use
Unemployment When the prospect of the loss of unemployment benefits dissuades those
trap without work from taking a new job – creates a disincentives problem

11. 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 WTO oversees trade agreements, negotiations and disputes between
Organisation 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)