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Macroeconomics
The study of the economy as a whole, including inflation, growth, and unemployment.
Aggregate demand
The total of all economic demands or expenditures at any given price.
Aggregate demand curve
Shows the relationship between the price level and equilibrium national income. As the price level rises the equilibrium level of national income falls.
Animal spirits
Business confidence: the mood of managers and owners of firms about the future of their industry and the wider economy.
Gross investment
The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital.
Investment
The addition to the capital stock of the economy.
Retained profit
Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation.
Net exports or the net trade balance
Exports minus imports.
Aggregate supply curve
The relationship between the average level of prices in the economy and the level of total output.
Full capacity
The level of output where no extra production can take place in the long run with existing resources. The full capacity level of output for an economy is shown by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply curve.
Short-run aggregate supply curve
The upward sloping aggregate supply curve which assumes that money wage rates are fixed.
Supply-side shocks
Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift.
Circular flow of income
Withdrawals or leakages
In the circular flow of income, spending by households which does not flow back to domestic firms. It includes savings, taxes and imports.
Marginal propensity to import (MPM)
The increase in imports divided by the increase in income that caused them (i.e. change in M / change in Y)
Marginal propensity to save (MPS)
The increase in saving divided by the increase in income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT)
The increase in tax revenues divided by the increase in income that caused them (i.e. change in T / change in Y)
Marginal propensity to withdraw (MPW)
The increase in withdrawals from the circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W / change in Y); this is the same as the sum of the marginal propensity to save, tax and import (MPS + MPT + MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier
The figure used to multiply a change in an injection into the circular flow, such as investment, to find the final change in income (assuming the injection is not determined by income). It is the ratio of the final change in income to the initial change in an injection. It can be calculated as
________
1 - MPC
or
___________________
MPS + MPT + MPM
or
____
MPW
Multiplier effect or process
An increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income).
Gross domestic product (GDP)
A measure of the output or value added of an economy which does not include output or income from investments abroad or an allowance for the depreciation of the nation's capital stock.
Gross national income (GNI)
The value of goods and services produced by an economy over a period of time (GDP) plus net overseas interest payments and dividends (factor incomes).
Transfer payments
Income for which there is no corresponding output, such as unemployment benefits or pension payments.
Value and volume of national income
The value of national income is its monetary value at the prices of the day; the volume is the national income adjusted for inflation and is expressed either as an index number or in money terms at the prices in a selected base year.
Actual growth
Economic growth as measured by recorded changes in real GDP over time.
Boom or peak
Period of time when the economy is growing strongly and is operating above its productive potential.
Demand-side shock
A sudden and large impact on aggregate demand.
Depression or slump
A period of the trade cycle when there is a particularly deep and long fall in output.
Downturn
A period of the trade cycle when either economic growth or GDP itself is falling.
Economic growth
The rise in output in an economy which can be either actual growth or potential growth.
Economic recovery
The movement back from where the economy is operating below its productive potential to a point where it is at is productive potential.
Export-led growth
A rise in aggregate demand caused by a rise in exports.
Hysteresis
The process whereby a variable does not return to its former value when changed. In terms of the trade cycle, it is used to describe the phenomenon of an economy failing to return to its former long term trend rate of growth after a severe recession.
Output gap
The difference between the actual level of GDP and the productive potential of the economy.
Positive output gap
When actual GDP is above the productive potential of the economy and it is in boom.
Negative output gap
When actual GDP is below the productive potential of the economy.
Anticipated inflation
Increases in prices which economic actors are able to predict with accuracy.
Consumer Prices Index (CPI)
A measure of the price level used across the European Union and used by the Bank of England to measure inflation against its target.
Cost-push inflation
Inflation caused by increases in in the costs of production in the economy.
Deflation
A fall in the price level
Demand-pull inflation
Inflation which is caused by excess demand in the economy.
Disinflation
A fall in the rate of inflation.
Hyper-inflation
Large increases in the price level.
Inflation
A general rise in prices.
Price level
The average price of goods and services in the economy.
Retail Prices Index (RPI)
A measure of the price level which has been calculated in the UK for over 60 years and is used in a variety of contexts such as by the government to index welfare benefits.
Unanticipated inflation
Increases in prices which economic actors like consumers and firms fail to predict accurately and so their decisions are based on poor information.
Active population
Those in work or actively seeking work; also known as the labour force.
Activity rate or participation rate
The number of those in work or unemployed divided by the population of working age expressed as a percentage.
Cyclical or demand-deficient unemployment
Partly those in the population who would take a job if offered, but are not in work and are not currently seeking work; and those who are underemployed.
Inactive
The number of those not in work and not unemployed.
Inactivity rate
The number of those not in work and not unemployed divided by the population of working age expressed as a percentage.
Labour force
Those in work or actively seeking work; also known as the active population
Long-term unemployed
In the UK, those unemployed for more than one year.
Part-time workers
Workers who only work a fraction of the hours and the days which are the norm for a particular job.
Population of working age
The total number of people aged between the statutory school leaving age and the state retirement age.
Real wage or classical unemployment
When workers are unemployed because real wages are too high and inflexible downwards, leading to insufficient demand for workers from employers.
Seasonal unemployment
When workers are unemployed at certain times of the year, such as building workers or agricultural workers in winter.
Structural unemployment
When the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk. Examples of structural unemployment are regional unemployment, sectoral unemployment or technological unemployment.
Underemployed
Those who would work more hours if available or are in jobs which are below their skill level.
Unemployed
Those not in work but seeking work.
Unemployment
Occurs when individuals are without a job but are actively seeking work.
Unemployment rate
Balanced budget
A statement of spending and income plans by government where spending is equal to its receipts, mainly tax revenues.
Bank of England base rate
A rate of interest charged by the Bank of England to banks to borrow money overnight. It is the most important interest rate in the UK financial system because it influences other interest rates in the UK such as savings rates and rates of interest on loans by banks.
Budget
A statement of the spending and income plans of an individual firm or government. The Budget is the yearly statement on government spending and taxation plans in the UK.
Budget deficit
A deficit which arises because government spending is greater than its receipts. Government therefore has to borrow money to finance the difference.
Budget surplus
A government surplus arising from government spending being less than its receipts. Government can use the difference to repay part of the National Debt.
Contractionary fiscal policy
Fiscal policy which leads to a fall in aggregate demand.
Contractionary monetary policy
Monetary policy which leads to a fall in aggregate demand.
Direct tax
A tax levied directly on individuals or companies such as income tax or corporation tax.
Expansionary fiscal policy
Fiscal policy which leads to an increase in aggregate demand.
Expansionary monetary policy
Monetary policy which leads to an increase in aggregate demand.
Fiscal policy
The use of taxes, government spending and government borrowing by government to achieve its objectives.
Indirect tax
A tax levied on goods or services, such as value added tax, excise duties or council tax.
Instrument of policy
An economic variable, such as the rate of interest, income tax rate or government spending on education, which is used to achieve a target of government policy.
Supply-side constraints in a particular market in an economy which prevent higher growth for the whole economy.
Deregulation
The process of removing government controls from markets.
Industrial policy
Government policy to promote and support individual firms which it considers are important for the growth of the economy.
Interventionist policies
Government policies designed to correct market failures that are reducing the growth rate of the economy.
Labour market flexibility
The degree to which demand and supply in a labour market respond to external changes (such as changes in demand for a product or in population size) to return the market to equilibrium.
Market-based policies
Government policies designed to promote economic growth by reducing barriers to the efficient working of free markets.
Minimum wage
The least amount an employer can pay one of its workers, usually expressed as an hourly wage rate.
Poverty or earnings trap
Occurs when an individual is little better off or even worse off when gaining an increase in wages because of the combined effect of increased tax and benefit withdrawal.
Privatisation
The sale of government organisations or assets to the private sector.
Red tape
Rules and regulations issued by government which firms must adhere to operate legally.
Supply-side economics
The study of how changes in aggregate supply will affect variables such as national income; in particular, how government microeconomic policy might change aggregate supply through individual markets.
Supply-side improvements
Changes in individual markets, such as investment by firms or improvements in the skills of workers which lead to an increase in long run aggregate supply without necessarily the intervention of government.
Supply-side policies
Government policies designed to increase the productive potential of the economy and push the long run aggregate supply curve to the right.
