Absolute advantage: when a country can make more of a given product using fewer resources than another nation. Unit cost of production is lower.
Absolute poverty: occurs when income is inadequate to enjoy a minimum standard of living
Accelerator: a theory that links the change in investment to the rate of change in GDP
Active demand management: government use of fiscal or monetary policy to change levels of aggregate demand
Actual GDP: the level of real GDP produced by a country in, say, one year
Actual economic growth: an increase in real GDP from using more of an economy’s existing resources. Short run economic growth
Aggregate demand: total spending on domestic output at a given price level, over a given time period, usually one year
Aggregate supply: shows the total output domestic producers are willing and able to produce at a given price level, over a given time period, usually one year
Anticipated inflation: the expected rate of inflation for the near future.
Appreciation: an increase in the value of an asset or the exchange rate
Automatic stabilisers: changes in taxes and government spending beyond the control of government and brought about by the economic cycle
Average propensity to consume: the proportion of household income spent on products
Balance of Payments: a record of economic transactions between residents of a country and the rest of the world, over a period of time, usually one year.
Balanced budget: government revenue equals government expenditure
Bank: a financial institution that accepts deposits from savers and makes loans to borrowers
Base rate: the interest rate set by the Bank of England. Commercial banks set their own interest rates for mortgages and loans around this base rate
Bilateral exchange rate: the exchange rate between two currencies eg $2/£
Billion: £ billion denotes £1,000 million ie £1,000,000,000
Bloc: a group of countries in alliance e.g. the EU
Borrowing: gaining credit from a lender to be repaid, with interest, within a defined time period
Budget: expected annual government income & expenditure
Budget deficit: government revenue is less than government expenditure
Budget surplus: government revenue is greater than government expenditure
Capacity: the maximum amount of output a firm or country can produce given its current resources, in a given time period
Capital accumulation : an increase in a country’s stock (amount) of plant building and machinery over time.
Capital & Finance Account: a record of money flows between UK & overseas residents from the purchase of fixed or financial assets eg factories shares and loans
Capital output ratio: is the amount of capital needed to generate £1 of GDP, each year
Central bank: a country’s main bank, which issues currency, enacts monetary policy, and is banker to the government & commercial banks
Circular flow of income: the movement of spending and income across an economy
Commodities: primary products such as gold, oil, wheat or rubber
Common external tariff: a tax on imports imposed on goods imported in a trade bloc from non member countries
Common market: See single market
Comparative advantage: the ability to produce a product at a relatively lower opportunity cost than other countries, regions or individuals
Comprehensive Spending Review: government spending plans for the medium term eg next three years
Consumption: domestic household spending on consumer products
Cost push inflation: inflation caused by increasing prices of inputs eg wage rise, increased import price (imported inflation) or higher indirect taxation.
Credibility: the government’s commitment to long-term stability commands trust from the public business and markets.
Current Account: a record of money flows between UK & overseas residents arising from trade in goods & services and investment income from owning overseas assets
Customs union: a trading bloc where member countries abolish tariffs on trade between members and impose a common external tariff on trade with non members
Cyclical deficit: a budget deficit caused by the operation of automatic stabilisers during the down turn stages of the economic cycle: G>T
Cyclical unemployment: the number of jobless as a result of insufficient aggregate demand compared to aggregate supply.
Deflation: a sustained decrease in the general price level
Deflationary policies : government measures to lower total aggregate demand and spending eg higher interest rates and taxes
Demand management: government intervention in the economy to change the level of aggregate demand
Demand pull inflation: inflation resulting from increases in aggregate demand unaccompanied by an increase in aggregate supply: “too much money chasing too few goods”
Depreciation: a fall in the value of an asset or an exchange rate.
Developed economy: A country with a high per capita income and modern secondary and tertiary sectors.
Developing economy : A country with a low per capita income, and undeveloped secondary and tertiary sectors.
Discretionary fiscal policy: the government deliberately adjusts its spending and taxation to influence the overall level of economic activity
Disposable income : income left after deducting direct taxes, and adding state benefits
Discretionary income: income left after deducting direct taxes, adding state benefits and paying for essentials such as food and shelter
Dumping: when exports are priced below unit cost, or at a lower price than in the exporter’s home market
Dynamic efficiencies: improvements in productivity causing lower unit costs that occur over time as a result of eg investment trade or knowledge transfers
Economic inactivity: people of working age who are not seeking a job because of early retirement, family, long-term sickness or full-time study
Economic agents : a term used in model building to categorise groups of individuals or organisations eg : consumers, firms, the government and international
Economic convergence: the extent to which the economies of different countries share the structure and economic performance
Economic cycle: fluctuations in the level of real GDP over time over four stages: recession, recovery, boom and slowdown
Economic development: the process of improving individual’s economic well being and quality of life.
Economic growth : an increase in the capacity of the economy to produce goods and services, over time. An increase in productive potential is usually means a rise in GDP
Economic indicator: Any economic metric (statistic) that measures economic activity eg GDP, economic growth, inflation or unemployment rate, or current account
Economic performance: how well a country uses it scarce resources.
Economic shocks: unanticipated events that affect aggregate demand or supply
Economic stability: the absence of excessive fluctuations in the level of economic activity.
Economic Union: a trading bloc with a single market that also harmonises policies across member countries eg coordinated social and macroeconomic policies
Effective exchange rate: the weighted average of a currency’s exchange rates with its major trading partners’ currencies – weightings reflect the proportion trade
Euro zone: the 11 EU countries that have adopted a common currency, the euro
European Union: an association between 27 European member states seeking economic and political co-operation and integration.
Expenditure reducing: policies lowers domestic aggregate demand hence the demand for imports
Expenditure switching: policies that encourage economic agents to substitute domestic for overseas made products.
Exports: spending by overseas residents on domestically made products
External economic shocks: a significant unexpected economic event occurring outside the economy eg recession in the USA
Factor endowment: the quantity and quality of land, labour, capital and enterprise a country possesses
Fine tuning: government use of fiscal, monetary or exchange rate policy to change levels of aggregate demand
Fiscal policy: the use of government expenditure, benefit payments and taxation to manipulate the level and makeup of aggregate demand
Fiscal position: the current stat of the government budget ie deficit or surplus
Fiscal stance: the intended impact of government spending & taxation plans on the level of future economic activity
Fiscal transfers: taxes raised in one country are made available to finance government spending in another country
Fixed exchange rate : the value of one currency against other currencies is held constant
Flexibility: government can adjust fiscal and monetary policy in response to an economic shock without losing credibility
Floating exchange rate: The value of the currency is determined in markets called Foreign Exchange Market (Forex), without any government intervention
Foreign Exchange Market: the place where currencies are traded (FOREX)
Foreign direct investment (FDI): the purchase of physical assets such plant, buildings and land or a company
Foreign currency reserves : official international reserves (deposits) of overseas currencies of $, €, ¥ etc held by the government at the Central Bank.
Free trade: a county has no government controls or restrictions, such as tariffs or quotas, to limit international trade
Free trade area: an agreement between two or more countries to abolish tariffs in the new bloc
Frictional unemployment: the jobless have appropriate skills for vacancies are jobless but need time to find new employment
Full employment : all workers seeking jobs can find employment at the going wage rate. There is no cyclical unemployment
Futures market: markets where economic agents trade contracts to buy or sell commodities of currencies at a fixed price at a set date in the future
Gini coefficient: measures the degree of income inequality between different households The lower its value, the more equally household income is distributed
Globalisation: the process of ever closer links between national economies
Golden rule: over the economic cycle the government borrows only to invest and not to fund current expenditure
Government: the body that passes and enforces laws, collects taxes to finance public expenditure, and intervenes in the free market to change behaviour
Government intervention : the state takes action to try to correct market failure and so improve economic efficiency.
Gross Domestic Product (GDP): the total value of goods & services produced within a country’s borders in a given time period eg a year. The sum of all economic activity in UK territory
Gross National Income: the total income earned by the citizens of a country in one year from economic activity, during a given period, usually one year
Gross National Product: measures economic activity a nation’s citizens where ever they are in the world
Hedging: techniques that aim to reduce financial risk and uncertainty from unexpected changes in the price of commodities or currencies
Hot money flows: highly liquid funds that move around the world in search of the highest short term rate of return from expected interest rates and exchange rate changes
Human capital: the skill knowledge and expertise of the labour force acquired through experience education and training
Imports: spending by domestic residents on goods and services produced overseas
Income distribution : the extent to which total income is shared out between households
Index of Sustainable Economic Welfare : a Genuine Progress Indicator that adjusts traditional GDP data to take account of activities that raise or reduce well being
Infant industry : industries with a potential comparative advantage that need short run protection from lower cost overseas rivals while they establish themselves
Inflation: a sustained rise in the price level
Inflation rate: The percentage increase in the price level over a given period of time
Informal economy: undeclared or illegal economic activity which goes unrecorded in official data such as GDP
Infrastructure: the stock of capital used to support the economic system
Injection: Additions of extra expenditure into the circular flow of income generated by investment, government spending, or exports
Integration: when economic activity in separate regions or countries become increasingly interlinked and interdependent eg the European Union.
Interdependent: when economic agents are interlinked eg trading partners become mutually dependent on one another for products
Interest: the charge made for the use of borrowed money for a period of time; the reward for lending; the price of money
Interest rate: the sum charged for borrowing money, expressed as a percentage.
International competitiveness: the ability of firms in an economy to match the price and quality of other nation’s output.
International finance: capital flows across national borders
International trade: the exchange of goods and services across national borders.
International sector: the importing and exporting of products between one or more countries
Investment: spending by domestic firms on capital goods
Intra-industry trade : the exchange of products made by the same industry.
Inter-industry trade: the exchange of products made by different industries
Inter regional trade: the exchange of products between nations in different geographical areas
Inverted J curve effect: the current account initially improves following an appreciation of a currency where the trade balance initially improves before it worsens.
J Curve effect: the path followed by the current account following an exchange rate depreciation where the trade balance initially worsens before it improves.
Keynesian school: economists influenced by the work of J M Keynes who believe that markets often fail to clear requiring government intervention.
Labour force: the total number of people employed and those registered as unemployed. B400
Labour Force Survey : a measure of unemployment which totals all those who have looked for work in the past month and are able to start employment in the next two weeks.
Labour intensive: the use of a high proportion of labour in production relative to other resources
Laffer curve: a graph showing the relationship between tax rates and tax revenues.
Leakage: household withdrawals of potential spending from the circular flow of income through saving taxes or imports
Legitimacy: wide spread support from economic agents for government macro economic objectives and policies
Lending: extending credit to a borrower to be repaid, with interest, within a defined time period
Liberalisation: reductions in the barriers to international trade eg removal of quotas tariffs and exchange controls
Long run economic growth: an increase in the economy’s capacity to produce goods and services. Potential economic growth
Long term capital flows: the movement of money between countries to finance overseas investment in assets such as land, buildings, stocks and shares
Macroeconomic equilibrium: when aggregate demand equal aggregate supply with no tendency for output or the price level to change
Macroeconomic objectives: a whole economy aim of the government eg low unemployment
Market economy: an economic system where the market forces of supply & demand are used to allocate scarce resources between alternative uses
Marginal propensity to consume (mpc) : The proportion of extra income spent on consumption: mpc = ∆C/∆Y
Marginal propensity to save (mps): the proportion of extra income saved: mps = ∆S/∆Y
Marginal propensity to tax (mpt): the proportion of extra income taken in tax: mpt = ∆T/∆Y
Marginal propensity to import (mpm): the proportion of extra income spent on imports: mpm = ∆M/∆Y
Marginal propensity to withdraw (mpw): the proportion of extra income not consumed mpw = mps + mpt + mpm or ∆W/∆Y
Marshall-Lerner condition: predicts that depreciation improves the current account only if the combined elasticities of demand for imports & exports are greater than one.
Mixed economy: an economic system that uses both market forces and state control to allocate scarce resources between alternative uses
Model: a simplified view of complex relationships and processes, used to make predictions
Monetary policy: the use of interest rates to affect aggregate demand via the transmissions mechanism.
Monetary Policy Committee: a Bank of England group that meets monthly to set an interest rate to influence aggregate demand and achieve the government’s inflation target
Monetary Union: a bloc with both economic union and a single currency eg the Eurozone. The deepest form of economic integration
Multiplier effect: the process by which a change in an injection or leakage in the circular flow of income brings about a greater change in GDP
Multinational corporations (MNCs): a multinational corporation or company is a business that makes products in more than one country
National debt: the total amount owed by the government. The sum of previous budget deficits
Nationalisation: the transfer of ownership of a firm from the private to public sector
Negative output gap: actual GDP is less than potential GDP causing cyclical unemployment
Net exports: the difference between a country’s exports earnings [X] and its total spending on imports [M] ie [X-M]
Net investment: investment after such depreciation of fixed assets is taken into account. Net investment = gross investment – depreciation
New Classical school: economists who argue that free markets are self regulating and always clear quickly so that wages & prices adjust rapidly to changes without state action.
Nominal GDP: GDP valued at current prices eg 2008 output valued at 2008 prices
Non-renewable resources: natural resources such as oil which cannot be replaced and so can only be used once
Non trade barriers: imposing restrictions on trade other than tariffs eg foreign exchange controls
Opportunity cost: the best alternative sacrificed when an economic choice is made. The opportunity cost of more leisure time is the lost wages sacrificed.
Optimal currency area : a bloc of countries are better off with a single currency
Output gap: the difference between an economy’s potential and actual GDP
Performance indicators: the measures used to judge the success of an organisation eg prices, profits or productivity
Planned economy: an economic system where the state decides what to produce, how to produce it, and for whom to produce goods & services.
Positive output gap: actual GDP exceed potential GDP, generating inflationary pressure
Potential economic growth: an increase in the economy’s capacity to produce goods and services. Long run economic growth
Potential output: highest level of output a country can produce with current resources that delivers both full employment and stable inflation
Presbisch-Singer hypothesis : states the terms of trade between primary products and manufactured goods tend to deteriorate over time
Price level: the average market prices of a group of selected products eg the Retail Price Index (RPI). Changes in the price level are inflation or deflation
Price stability: no or minimal changes in the price level
Price transparency: The ability of economic agents to compare the price of given products in different countries
Primary sector: The part of the economy that extracts natural resources eg farming, fishing, quarrying and mining.
Privatisation: the transfer of ownership of a firm from the public to private sector
Productive capacity: the maximum possible GDP of an economy given its current stock of resources ie labour and capital. Potential output
Protectionism: measures taken by the government to shield domestic firms from foreign rivals eg tariffs, quotas and regulation
Public expenditure: government spending
Public sector: that part of the economy made up central government local government, and public corporations
Public sector net cash requirement : the difference between the revenue of general government and its spending
Purchasing power: The amount of products a unit of currency, eg one pound, can buy
Purchasing power parity: The exchange rate at which one unit of currency will purchase the same amount of products in the USA and another country
Quaternary sector: The part of the economy that creates intellectual and information processing services eg scientific research, R&D, education, and IT.
Quota: the legal limit on the amount of a product that can be imported
Rate of inflation: the percentage increase in the general price level, during a given period, usually one year
Real GDP: nominal GDP adjusted for inflation ie current output valued at constant (base year) prices.
Recession: two or more consecutive falls in quarterly GDP
Reflationary policies : government measures to stimulate aggregate demand eg lower interest rates and taxes
Relative opportunity cost: The cost of making one product in one country in terms of the best alternative item sacrificed, compared to another nation
Relative poverty: households receiving less than 60% of the median average income
Rules based policy: governments adjust macroeconomic policies to ensure published rules are kept eg the national debt must not exceed 40% of GDP
Saving: For households, savings is that part of disposable income which is not spent
Secondary sector : The part of the economy that manufactures goods eg, cars, construction & energy utilities
Short run aggregate supply: total output at a given price level, in a given time period, assuming costs such as wage rates, oil prices and components remain constant
Short run economic growth: an increase in real GDP from using more of an economy’s existing resources. Actual economic growth
Short term capital flows: speculative funds that move between countries hoping to make a capital gain from expected changes in interest and exchange rates ie hot money
Single currency: a currency shared by more than one nation eg the Euro
Single market: a trade bloc with no tariffs and non trade barriers between members, a common external tariff, and free movement of labour and capital between members
Social exclusion: low income groups are denied access to products
Stability and Growth Pact: an agreement between members of the Eurozone that the budget deficit is less than 3% of GDP and the total government debt is 60% or less of GDP
Stagflation: an economy experiencing both inflation and unemployment
Standard of living: the average amount of GDP for each person in a country ie per capita GDP.
Stocks: stored goods held ready for future use or sale ie inventory
Strong pound: the value of sterling is appreciating relative to other currencies
Structural change : a change in the relative importance of the primary, secondary and tertiary sectors of an economy over time
Structural unemployment : the jobless have inappropriate skills for vacancies
Subsidy: a payment made by the government to consumers or producers to encourage consumption or production
Supply side policy: measures designed to raise productive capacity and so increase aggregate supply by making labour and product markets work better
Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs
Sustainable development : economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs
Sustainable growth: an increase in GDP that does not compromise the ability of future generations to meet their own needs
Sustainable investment rule: the national debt, as a percentage of GDP is held at a stable and prudent level of no more than 40% of real GDP.
Symmetrical inflation target : inflation rates above or below the set inflation target rate are equally unacceptable
Tariff: a tax on imports and can be used to restrict imports and raise revenue for the government.
Taxes: compulsory charges imposed by government on individuals & firms
Terms of trade: the ratio of export prices to import prices expressed as an index value
Tertiary sector : the part of the economy that creates services eg transport, tourism, banking, insurance and retail
Trade: the exchange of products
Trade barriers : barriers and restrictions on the import or export of products
Trade in goods: exports and imports of tangible products eg oil, manufactures and components.
Trade in services : exports and imports of intangible products eg banking, insurance, & tourism
Trade off: The process of making a choice between alternatives eg deciding if is worth sacrificing a new car for a holiday in Hawaii
Trade creation: when high-cost domestic producers are replaced by low-cost imports from efficient partner countries during integration
Trade deficit: The value of exports is less than the value of imports ie net exports is negative lowering aggregate demand
Trade diversion: when economic integration results in low-cost producers outside the integration area being replaced by high cost producers in partner countries.
Trade surplus: The value of exports is greater than the value of imports, ie, net exports is positive boosting aggregate demand
Transaction: the act of buying or selling (exchanging) a product
Transaction costs: the expenses involved in trading eg time and transport
Transfer payments: unearned benefits paid out to households by the government eg unemployment, disability and child allowances
Transition economies: countries moving from a planned to market economic system.
Transmissions mechanism: the process by which a change in interest rates affects economic activity and inflation
Treasury: the government department responsible for the UK’s economic policy.
Trend growth: the average rate of economic growth in a given period of time – usually the course of the economic cycle
Unanticipated inflation: The failure of economic agents to estimate the future rate of inflation, accurately
Unemployment: people who are willing and able to work are unable to find a paying job
Unemployment rate: the proportion of the labour force registered as unemployed. Given by the equation: total unemployed/ number in the labour force x 100
Unemployment trap: lost benefits and extra tax mean employees earn less income from working than if they remain unemployed
Weak pound: the value of sterling is depreciating relative to other currencies
Wealth: the current value of an individual’s assets eg house and shares
Wealth distribution: the extent to which total wealth is shared out between households
World Trade Organisation (WTO): an inter-governmental body where member countries develop and enforce rules for international trade
Working age population: in the UK, the total number of men aged 16 to 64 and women aged 16 to 59
