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Edexcel Economics Theme 2
Terms in this set (127)
The study of the economy as a whole, including inflation, growth and unemployment.
The total of all demands or expenditures in the economy 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.
Business confidence: the mood of managers and owners of firms about the future of their industry and the wider economy.
The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital.
The addition to the capital stock of the economy.
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.
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.
Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift.
Circular flow of income
A model of the economy which shows the flow of goods, services and factors and their payments around the economy.
An economy where there is no foreign trade.
Rent, interest, wages and profits earned from wealth owned by economic actors.
In the circular flow of income, spending which is not generated by households including investment, government spending and exports.
The value of the output, expenditure or income of an economy over a period of time.
An economy where there is trade with other countries.
A stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services.
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
MPS + MPT + MPM
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).
Gross national product (GNP)
The market value of goods and services produced over a period of time through the labour or property supplied by citizens of a country both domestically (GDP) and overseas.
Hidden, black or informal economy
Economic activity where trade and exchange take place but which goes unreported to the tax authorities and those collecting national income statistics.
Net national income
A measure of national income which includes both net income from investments abroad and an allowance for depreciation of the nation's capital stock.
Per person or per head or per capita
Per individual in the population
Purchasing power parities
An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.
Standard of living
How well off is an individual, household or economy, measured by a complex mix of variables such as income, health, the environment, participation in society and political freedoms.
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.
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.
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.
A period of the trade cycle when either economic growth or GDP itself is falling.
The rise in output in an economy which can be either actual growth or potential growth.
The movement back from where the economy is operating below its productive potential to a point where it is at is productive potential.
A rise in aggregate demand caused by a rise in exports.
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.
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.
Economic growth as measured by the changes in the productive potential of the economy over time.
A period of the trade cycle when output or growth in output falls. The technical definition now used by the UK government is that a recession occurs when growth in output is negative for two consecutive quarters (i.e. two periods of three months).
For a whole economy, this exists when long run aggregate supply is greater than aggregate demand and so there is a negative output gap.
A sudden and large impact on aggregate supply.
Trade or business or economic cycle
Regular fluctuations in the level of economic activity around the productive potential of the economy. In business cycles, the economy veers from recession, when it is operating well below its productive potential, to booms when it is likely to be at or even above its productive potential.
Growth in the productive potential of the economy today which does not lead to a fall in the productive potential of the economy for future generations.
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.
Inflation caused by increases in in the costs of production in the economy.
A fall in the price level
Inflation which is caused by excess demand in the economy.
A fall in the rate of inflation.
Large increases in the price level.
A general rise in prices.
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.
Increases in prices which economic actors like consumers and firms fail to predict accurately and so their decisions are based on poor information.
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
When there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job.
The number of people in paid work.
Workers employed by another individual or firm.
Those in paid work.
The number of those in work divided by the population of working age expressed as a percentage.
When workers are unemployed for short lengths of time between jobs.
Workers who work the hours and the days which are the norm for a particular job.
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.
The number of those not in work and not unemployed.
The number of those not in work and not unemployed divided by the population of working age expressed as a percentage.
Those in work or actively seeking work; also known as the active population
In the UK, those unemployed for more than one year.
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.
When workers are unemployed at certain times of the year, such as building workers or agricultural workers in winter.
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.
Those who would work more hours if available or are in jobs which are below their skill level.
Those not in work but seeking work.
Occurs when individuals are without a job but are actively seeking work.
The number of those not in work, but seeking work, divided by the labour force expresses as a percentage.
Balance of payments account
A record of all financial dealings over a period of time between economic agents of one country and all other countries.
Balance of trade
The value of exports minus imports.
Capital and financial accounts
That part of the balance of payments account where flows of savings, investments and currency are recorded.
That part of the balance of payments account where payments for the purchase and sale of goods and services are recorded plus primart and secondary incomes.
The difference between the value of total exports and total imports including flows of primary and secondary incomes.
Current account deficit or surplus
A deficit exists when imports are greater than exports; a surplus exists when the value of exports are greater than imports.
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.
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.
A deficit which arises because government spending is greater than its receipts. Government therefore has to borrow money to finance the difference.
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.
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.
The use of taxes, government spending and government borrowing by government to achieve its objectives.
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.
The manipulation by government of monetary variables, such as interest rates and the money supply, to achieve its objectives.
The total accumulated borrowing of government which remains to be paid to lenders.
Public sector net borrowing (PSNB)
The official name given to the difference between government spending and its receipts in the UK.
Public sector net debt (PSND)
The official name given to the national debt in the UK.
A monetary policy instrument where the central bank buys financial assets in exchange for money in order to increase borrowing and lending in the economy.
Rate of interest
The price of money, determined by the demand and supply of funds in a money market where there are borrowers and lenders.
Supply-side constraints in a particular market in an economy which prevent higher growth for the whole economy.
The process of removing government controls from markets.
Government policy to promote and support individual firms which it considers are important for the growth of the economy.
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.
Government policies designed to promote economic growth by reducing barriers to the efficient working of free markets.
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.
The sale of government organisations or assets to the private sector.
Rules and regulations issued by government which firms must adhere to operate legally.
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.
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.
Government policies designed to increase the productive potential of the economy and push the long run aggregate supply curve to the right.
Occurs when an individual is little better off or even worse off when getting a job after being unemployed because of the combined effect of increased tax and benefit withdrawal.
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