Edexcel Economics Theme 2 Definitions

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actual economic growth

Back 1

the rate of growth of GDP in a period

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aggregate demand

Back 2

the total amount of spending on goods and services produced in an economy during a period of time

C+I+G+ (X-M)

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aggregate demand curve

Back 3

the relationship between the level of aggregate demand and the overall price level; it shows planned expenditure at any given possible overall price level

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automatic stabilisers

Back 4

effects by which government expenditure adjusts to offset the effects of recession and boom without the need for active intervention

(useful for evaluating demand side policies)

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average propensity to consume

marginal propensity to consume

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the proportion of income that households devote to consumption

the proportion of additional income that households devote to consumption

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balance of payments

Back 6

a set of accounts showing the transactions conducted between residents of a country and the rest of the world

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bank rate

Back 7

the interest rate that is set by the Monetary Policy Committee of the Bank of England in order to influence inflation

(Tip: it is useful to know where the bank rate is currently)

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business cycle

Back 8

a phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern of peaks and troughs

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capital productivity

Back 9

a measure of output per unit of capital

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claimant count of unemployment

Back 10

the number of people claiming the Jobseeker's Allowance (JSA) each month

(people claiming the JSA must declare that they are out of work, and capable of, available for and actively seeking work during the week in which their claim is made)

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consumer price index (CPI)

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a measure of the general level of prices in the UK

the annual percentage change of the CPI has been used as the inflation target (set by the government, for the Bank of England to achieve) since Jan 2004

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consumption

Back 12

total planned household spending

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consumption function

Back 13

the relationship between consumption and disposable income such that as disposable income rises so does consumption

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cost-push inflation

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inflation initiated by an increase in the costs faced by firms, inflation arising on the supply side of the economy

(cost-push inflation should be illustrated by a shift inwards of the SRAS curve)

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crowding out

Back 15

a process by which an increase in government spending 'crowds out' private sector activity by raising the cost of borrowing

G rises, financed by an increase in govt borrowing. This increases the supply of govt bonds, which pushes down their price increasing their 'yield'. This pushes up longer term interest rates throughout the economy, reducing investment (I).

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cyclical unemployment

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unemployment that arises during the downturn of the economic cycle, such as a recession

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deflation

disinflation

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a fall in the average level of prices (i.e. negative inflation)

a fall in the rate of inflation (i.e. prices rising but more slowly)

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demand-pull inflation

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inflation initiated by an increase in aggregate demand

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depreciation

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the fall in the value of physical capital equipment over time due to wear and tear

(depreciation is the reason capital needs to be replaced fairly regularly and why if the rate of investment falls the quality of capital will still suffer shifting in AS)

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discouraged workers

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people who have been unable to find employment and who are no longer looking for work

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disposable income

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the income left to consume or save, once direct taxes have been paid and benefits received

disposable income = income minus taxes plus benefits

real disposable income = disposable income minus inflation

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economically inactive

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people of working age who are not looking for work for a variety of reasons

(e.g. stay-at-home mums)

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exchange rate

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the price of one currency in terms of another

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export-led growth

Back 24

a strategy for achieving rapid economic growth through the promotion of export activity

(e.g. China)

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fiscal policy

Back 25

decisions made by the government on its expenditure, taxation and borrowing

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frictional unemployment

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unemployment associated with job search (i.e. people who are between jobs but will rapidly move into another)

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full employment

natural rate of unemployment

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when all economically active workers are able to find employment at going wage rates

the unemployment rate that exists when the economy is in long-run equilibrium

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budget deficit

budget surplus

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when government spending is greater than tax revenues G>T

when tax revenues are greater than government spending T>G

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gross domestic product (GDP)

gross national income (GNI)

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GDP is a measure of the economic activity carried out in the domestic economy over a period

GNI = GDP + net income from abroad

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human capital

Back 30

the stock of skills and expertise that contribute to a worker's productivity; it can be increased through education and training

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ILO unemployment rate

Back 31

the percentage of the workforce who are without a job, want a job, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks (or who are about to start a new job in the next 2 weeks)

The ILO stands for the International Labour Organisation

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index number

Back 32

a device for comparing the value of a variable in one period of location with a base observation (e.g. the consumer price index measures the average level of prices relative to a base period)

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inflation

Back 33

the rate of increase in the average price level in an economy

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what are the three injections into the circular flow?

what are the three withdrawals?

Back 34

G, I, X

S, M, T

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interventionist policies

Back 35

(similar to supply-side policies)

policies by which the government intervenes to stimulate aggregate supply

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investment

Back 36

expenditure undertaken by firms to add to the capital stock

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voluntary unemployment

involuntary unemployment

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when an individual chooses not to accept a job at the going wage rate (perhaps because the difference between benefits and income is small)

when an individual would like to accept a job at the going wage rate but is unable to find employment

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Keynesian School

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a group of economists who believe that the macroeconomy can settle at an equilibrium below full employment

(they therefore believe that governments can and should use demand-management to smooth the business cycle and reduce unemployment)

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labour productivity

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output per worker

or

output per hour worked

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marginal propensity to import

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the proportion of additional income that is spent on imports of goods and services

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marginal propensity to save

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the proportion of an increase in disposable income that households would devote to saving

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marginal propensity/rate of tax

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the proportion of additional income that is taxed

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marginal propensity to withdraw

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the proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensities to save, import and tax

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market-based policies

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policies that rely on allowing markets to work more freely

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Monetarist School

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a group of economists who believed that the macroeconomy always adjusts rapidly to the full employment level of output,

and that monetary policy should be the prime instrument for stabilising the economy

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monetary policy

Back 46

the decisions made by the central bank regarding monetary variables such as the money supply or the interest rate

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Monetary Policy Committee

Back 47

the body within the Bank of England responsible for the conduct of monetary policy

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money supply

Back 48

the quantity of money in the economy

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multiplier

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the ratio of a change in equilibrium real income to the autonomous change that brought it about

1/MPW or 1/(1-MPC) or 1/(MPS + MPM + MRT)

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natural rate of output

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the long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend

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natural rate of unemployment

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the unemployment rate that will exist when the economy is in long-run equilibrium

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nominal value

Back 52

the value of an economic variable (e.g. GDP, income) based on current prices, unadjusted for inflation

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output gap

Back 53

the difference between actual real GDP and potential real GDP

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Phillips curve

Back 54

an empirical relationship suggesting that there is a trade-off between unemployment and inflation

(this suggests you can't have low unemployment and low inflation at the same time - a conflict in objectives)

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potential economic growth

Back 55

an expansion in the productive capacity of the economy

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productivity

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a measure of the efficiency of a factor of production

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quantitative easing

Back 57

a process by which liquidity in the economy is increased when the Bank of England purchases assets from banks

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real value

Back 58

the value of an economic variable measured using constant prices, therefore adjusted for inflation

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recession

Back 59

two (or more) consecutive quarters of falling GDP (negative growth).

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retail price index

Back 60

a measure of the average level of prices in the UK

unlike the CPI it includes housing costs such as council tax and mortgage interest payments.

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seasonal unemployment

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unemployment that arises in seasons of the year when demand is relatively low

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short run aggregate supply curve

Back 62

a curve showing how much output firms would be prepared to supply in the short run at any given overall price level

use this curve if the costs for firms are changing (e.g. oil prices, wages)

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stagflation

Back 63

when both unemployment and inflation are high at the same time

(this can be used as an evaluation for the Phillips curve which suggests a trade-off between unemployment and inflation)

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structural unemployment

Back 64

unemployment arising because of changes in the pattern of economic activity within an economy

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supply-side policies

Back 65

a range of measures intended to have a direct impact on aggregate supply and specifically the potential capacity output of the economy

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total factor productivity

Back 66

the average productivity of all factors, measured as the total output divided by the total amount of inputs used

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transmission mechanism of monetary policy

Back 67

the process by which a change in the bank rate affects inflation/growth

(remember there are four channels:

1. via borrowing and savings behaviour

2. via a change in mortgage interest payments

3. via the wealth effect

4. via the exchange rate)

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underemployment

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where an individual is employed in a second choice occupation or is only able to work part-time but would like to work full-time

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unemployed

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people who are economically active but are not in employment

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voluntary unemployment

Back 70

situation arising when an individual chooses not to accept a job at the going wage rate

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withdrawals

Back 71

where money flows out of the circular flow in the form of savings, taxation and imports

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wealth

Back 72

the accumulation of assets such as property or shares

a stock concept (income is a flow concept)

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workforce

Back 73

people who are economically active - either in employment or unemployed

(Note: changes in the workforce/population shift AS, e.g. an increase in immigration means a greater workforce; but changes in employment/unemployment do not)