Ib Macroeconomics Glossary

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aggregate demand

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Total spending in the economy, made up of consumption, investment, government spending and net export spending.

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aggregate supply

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the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

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automatic stabilizers

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Features of government fiscal policy, e.g. unemployment benefits and direct tax revenues, that automatically counter-balance fluctuations in economic activity. For example, government spending on unemployment benefits automatically rise and direct tax revenues automatically fall when economy activity is slow.

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balanced budget

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A situation that exists when planned government spending is equal to planned government expenditure.

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budget deficit

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A situation that exists when planned government spending exceeds planned government revenue. A government may ‘run a budget deficit’ in order to increase aggregate demand (AD) in the economy.

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budget surplus

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A situation that exists when planned government revenue exceeds planned government spending .

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business cycle

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A diagram showing the periodic or cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases: recovery, boom, slowdown, recession.

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central bank

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The government’s bank. The institution that is responsible for an economy’s monetary policy.

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circular flow of income model

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A simplified model of the economy that shows the flow of money through the economy.

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classical AS model

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A model showing that the long-run aggregate supply curve is vertical at the full employment level of output.

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consumer price index

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A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the ‘average’ consumer.

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consumption

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Spending by households on consumer goods and services.

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core inflation

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A measure of inflation that factors out the changes in the prices of products that tend to experience volatile price swings, e.g. food and energy prices. This gives policy makers a better indication of long-term changes in the price level.

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cost-push inflation

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A persistent increase in the average price level that comes about as a result of increases in the costs of production and a decrease in aggregate supply (AS).

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credit

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Borrowed money.

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crowding out

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A situation where the government spends more (government expenditure) than it receives in revenue and needs to borrow money, forcing up interest rates and ‘crowding out’ private investment and private consumption,

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cyclical (demand-deficient) unemployment

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Unemployment that exists when there is insufficient aggregate demand in the economy and wages do not fall to compensate for this. This is usually associated with a slowdown in economic growth or negative growth.

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deflation

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A persistent fall in the average level of prices.

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deflationary (recessionary) gap

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The gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full emplyoment level of output.

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demand-pull inflation

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A persistent increase in the average price level that comes about as a result of increases in aggregate demand (AD).

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demand-side policies

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Also known as demand-management policies, these are policies to change the level of aggregate demand (AD) in the economy deliberately in order to achieve macroeconomic objectives.

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deregulation

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A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour of firms.

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disinflation

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A fall in the rate of inflation.

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economic growth

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An increase in the actual level of output of goods and services produced by an economy, i.e. an increase in real GDP over time.

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factor endowment

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The factors of production that a country has available to produce goods and services.

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fiscal policy

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The set of government polices concerning its taxation and expenditure. Fiscal policy may be used to manage the level of aggregate demand (AD) and may be expansionary (to raise AD) or contractionary (to lower AD).

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frictional unemployment

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Unemployment that occurs when people are entering the workforce after leaving education, or people who have left one job and are searching for a new job.

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full employment level of output

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The level of output that is produced by the economy when there is only natural unemployment.

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GDP per capita

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The total money value of all final goods and services produced in an economy in one year per head of the population.

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GDP

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the total money value of all final goods and services produced in an economy in a given time period, usually a year.

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Gini coefficient

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A coefficient (or index) that is derived from the Lorenz curve and is a numerical indicator of income equality. It is calculated by dividing the distance between the Lorenz curve and the line of absolute equality by the total area under the line of absolute equality (multiplied by 100 for the index). The higher the figure, the more unequal the income distribution.

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GNP/GNI

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The total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

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government spending

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Spending by governments on goods and services.

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green GDP

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A measure of the total output of an economy having taken into account the environmental consequences (externalities) involved in the production of that output.

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inflation

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A persistent increase in the average level of prices.

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inflationary gap

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The gap that occurs when macroeconomic equilibrium occurs at a level that is above the full employment level of output.

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infrastructure

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The large-scale capital usually provided by government that is necessary for economic activity to take place.

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injections

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The investment, government spending and export revenues that add spending to the circular flow of income.

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investment

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Spending by firms on capital goods; the addition of capital stock to an economy.

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Keynesian AS model

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A model showing the interpretation of the Keynesian view of aggregate suppy in the economy. In this model, with three distinct phases of aggregate supply, macroeconomic equilibrium may occur at a level of output that is less than full employment, and suggests that the economy may remain at this level of output in the absence of active intervention on the demand side by the government.

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labour union or trade union

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An organization of workers whose goals include the improvement of working conditions and payments to workers. Unions work on behalf of workers through negotiations with management.

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leakages

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The savings, taxes and import spending that remove spending from the circular flow of income.

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Lorenz curve

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A curve showing what percentage of the population earns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45 degree line), the more unequal is the distribution of income.

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macroeconomics

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The study of how the economy as a whole works.

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manufactured goods

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Goods that have been processed by workers.

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multiplier

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The amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection.

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natural rate of unemployment

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The rate of unemployment that is consistent with a stable rate of inflation. It is the rate of unemployment that exists when the economy is at the full employment level of output. It is the rate where the long run Phillips curve touches the x-axis.

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net exports

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Export revenues minus import expenditure.

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Phillips curve in the short run

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A curve that illustrates the view that there is a short-run inverse relationship between the inflation rate and the unemployment rate.

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Phillips curve in the long run

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A vertical line at the natural rate of unemployment that illustrates the view that there is no trade-off between the inflation rate and the unemployment rate.

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privatization

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A type of supply-side policy where the government sells public assets to the private sector.

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seasonal unemployment

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Unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer.

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stagflation

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The situation where an economy is facing stagnant growth, with high rates of unemployment and high rates of inflation.

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structural unemployment

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Unemployment that exists when in the long term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. There is a mismatch between skills and the jobs available.

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supply-side policies

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Policies designed to shift the long-run aggregate supply (LRAS) curve to the right, thus increasing potential output in the economy.

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tax allowances or tax credits

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A type of supply-side policy where the government allows households or firms to reduce the amount of direct tax paid to the government.

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transfer payments

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A payment from the government that is received when there is no good or service exchanged, e.g. a student grant or a pension. Transfer payments are a means of redistributing income in an economy.

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underemployment

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Exists when workers are carrying out jobs for which they are over-qualified or when workers are employed part-time, even though they are available for full-time employment.

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unemployment rate

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The number of unemployed workers expressed as a percentage of the total workforce.

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unemployment

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The state of being without work, but willing and able to work, and actively looking for a job.

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weighted price index

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An approach to calculating the change in the price level by giving a weight to each item according to its importance in consumers’ budgets.