A2 Glossary

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