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Key Term Glossary for AS Macro (2015)


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Key term glossary for unit 2 macroeconomics

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Key Term Glossary for AS Macro (2015)

  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  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  also  means  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  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   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  
  3. 3. 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   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  
  4. 4. 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   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  
  5. 5. 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   Macroeconomic   performance   The  overall  performance  in  terms  of  output,  prices,  jobs,  trade  and  living  standards.     Marginal  propensity  to   The  proportion  of  any  change  in  income  that  is  spent  rather  than  saved  
  6. 6. consume   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 stabilty   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   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  
  7. 7. 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   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  
  8. 8. 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  that  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   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  
  9. 9. 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