Macroeconomic Definitions (Excluding Policies)

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A model which shows the movement of goods and services between Households and Firms and their corresponding payments in money terms
Circular Flow of Income
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The value of an economic variable based on current prices, taking no account of changing prices through time
Nominal Value
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(New Value / Base Value) x 100
Index Numbers
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Volume x Price (The value of goods/services)
Nominal GDP
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The value of an economic variable taking account of changing prices through time
Real Value
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Nominal GDP growth - Inflation (the volume of goods and services)
Real GDP Growth
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The percentage annual increase in national output: the rate of growth in real GDP (Waveform diagram horizontally like a Sine curve)
Actual Growth
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An expansion in the productive capacity of the economy (Horizontal line on the Actual Growth diagram, usually around 2.5% historically)
Potential Growth
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GDP (Fluctation in Business cycle diagram)
Actual Output
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The sustainable level of output that could be produced in the economy when it is operating at 'normal capacity utilization' (straight diagonal line on the actual output diagram)
Potential Output
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Increased productivity of factors of production/Increased factors of production
Causes of Long Run Economic Growth
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Investment Rate x MEC
Potential Growth Rate
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GDP per Capita
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An exchange rate corrected to take into account the purchasing power of a currency
Purchasing-Power Parity
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A measure of the general level of prices in the UK, used since January 2004 (calculated geometrically, does not exclude pensions, excludes mortgage payments)
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Between 1% of 2%
UK Inflation Target
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A measure of the average level of prices in the UK
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The rate of change of the average price level in an economy
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Survey used to compile weights for the bundle of goods and services (180,000 quotes on 680 products) used in calcuating CPI
Household Final Monetary Consumption Expenditure Survey
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The number of people claming the Job Seeker's Allowance each month (Includes some who are claiming but can't work and excludes those who can't claim but want to work)
Claimant Count
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A measure of the percentage of the workforce who are without jobs, want a job, have actuvely sought work over the past 4 weeks and are able to start work within 2 weeks (Based on Labour Force Survey Sample and easy for international comparison)
ILO Unemployment Rate
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Unemplyoment associated with job search: that is, people who are between jobs
Frictional Unemployment
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Unemployment associated with job search: that is, people who are between jobs
Seasonal Unemployment
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Unemployment arising because of changes in the pattern of economic activity within an economy
Structural Unemployment
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Unemployment that arises because of a deficiency of aggregate demand in the economy
Demand-Deficient Unemployment
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Situation arising when an individual chooses not to accept a job at the going wage rate
Voluntary Unemployment
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Situation arising when an individual who would like to accept a job at the going wage rate is unable to find employment
Involuntary Unemployment
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For some reason, if wage rate is sticky downwards and above the equilibrium there is unemployment between the labour supply curve and labour demand curve
Real Wage Unemployment
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CPI but including housing costs of owner-occupiers
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When those who are willing to work at the prevailing wage rate can't find jobs
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Personal struggle (financial, personal relations, stress), Loss of Output, Loss of Tax Revenues, Firms loose profits, Others lose out on wages that could have been earned at Y-Bar, Crime
Costs of Unemployment
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A set of accoutns showing the transactions conducted between residents of a country and the rest of the world, this is always zero. Made up of the Current Account, Financial Account, Capital Account and Net Errors/Omissions
Balance of Payments
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There is a deficit on this account if the balance of trade (Nx) is negative
Current Account (-)
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There is a surplus on this account if the balance of trade (Nx) is positive
Current Account (+)
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A term which justifies the balance of payments as at the exchange rate equilibrium this is true (providing the exchange rate is freely floating)
Pounds In = Pounds Out
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Equation which shows that a net importer has a capital inflow (A small deficit thus can be sustained with economic growth)
S - I = Nx
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The price of one currency in terms of another (if people only trade pounds for x and m at any equilibirum x=m, however there are other reasons such as higher interest, increased investment flows, increased demand for pounds, stronger pound, SPICEE)
Exchange Rate
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Overvalued exchange rate and Relative Cost/Price Levels
Cause of Trade Defecit
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GDP plus net income from abroad (doesn't represent income inequality distribution, neglects social factors such as the quality of life)
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The part of an economy that is neither taxed, nor monitored by any form of government
The Informal Sector
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A composite indicator of a country's development, resources measured by GDP per capita in $PPP terms, education levels by means and expected years of schooling and longevity by life expectancy at birth (still unequal distribution and inaccurate data)
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The percentage of adult male labour in agriculture/Combined primary and secondary enrolment figures/Access to clean water or energy consimption/Access to mobile phones
Other Measures of Development
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A flow concept - the amount of income that is earned during a period
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A stock concept - the amount of income that is earned during a period (inequality in wealth can lead to inequality in income)
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Where money flows out of the circular flow in the form of savings, taxation and imports
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Where money flows into the circular flow in the form of investment, government spending and exports
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Situation describing a household if its income is sufficient to allow it to purchase the minimum bundle of goods and services needed for survival
Absolute Poverty
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Situation applying to a household whose income falls below 60% of median adjusted household disposable income
Relative Poverty
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Total planned household spending (60% of AD)
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The relationship between consumption and disposable income; its position depends in the other factors that affect how much households spend on consumption (Autonomous consumption is increased by Wealth, Confidence and Interest Rates)
Consumption Function
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The change in spending that accompanies a change in perceived wealth. Usually the wealth effect is positive: spending changes in the same direction as perceived wealth
Wealth Effect
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The proportion of additional income devoted to consumption
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The proportion of income that households devote to consumption
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The income that households have to devote to consumption and saving, taking into account payments of direct taxes and transfer payments
Disposable Income
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Expenditure undertaken by firms to add to the capital stock (makes up 15% of AD)
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Expected Return = Expected Revenue - Cost
Expected Return Formula
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A diagram showing the negative relationship between investment and interest rates, it is shifted by Expectations by Confidence or State of the Economy
Investment Function
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Makes up 22% of AD
Government Expenditure
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Makes up + 30% and - 30% of AD and is shifted by exchange rates, relative prices and the incomes and economic state of people who previously imported UK goods (It will take a while for production to respond to a change in exchange rate)
Trade Balance
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PEDx + PEDm > 1 (If pound gets weaker and this does not hold then the trade balance does not get better)
Marshall-Lerner Condition
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Cd + I + G + X (Downward sloping because if price level is higher, real income, m/p is lower, interest rates are lower when prices are lower, when domestic prices are lower, export demand is higher)
Aggregate Demand
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A curve showing how much output firms would be prepared to supply in the short run at any given price level. (If the price level is higher then real wage will be lower, firms costs will go down and so they will be able to supply more)
Short-Run Supply Curve
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Costs, Resources and Productivity of those resources (In the short run some prices are sticky, in the long run all prices are flexible)
Determinants of Short-Run Supply
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A group which believes that the macro-economy always adjusted rapidly to full employment, and that monetary policy should be the prime stabilizing instrument
Monetarist School
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A group which believes that the macro-economy could settle at an equilibrium that was below full employment
Keynesian School
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The long-run equilibrium level of output (3% unemployment after the war)
Natural Rate of Output
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The ratio of change in equilibrium real income to the autonomous change that brought it about (difficult to measure, takes time to come into full effect, size of leakages)
The Multiplier
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ΔL + ΔK + ΔNR + ΔE + (ΔY/L+K+NR+E)
Long-Run Economic Growth
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Increased standard of living, profits and tax revenue, investment in R&D of cleaner energy development, reduced unemployment (sometimes)
Benefits of Long-Run Economic Growth
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Global Warming (decline of Biodiversity), Possibly structural unemployment, Unequal distribution, Inflation and Boom/Bust cycles
Costs of Long-Run Economic Growth
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Growth in the productive capacity which doesn't diminish capacity in future generations
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After government tax transfers, the coefficient is lower which means there is more equality
Caveat to the Gini Coefficient
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Theory which states that individuals acting independently and rationally according to each's self-interest behave contrary to the best interests of the whole group by depleting some common resources
Tragedy of the Commons
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A measure of the efficiency of a factor of production
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Labour Productivity
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Capital Productivity
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The fall in value of physical capital equipment over time as it is subject to wear and tear
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Gross Investment - Deprectiation
Net Investment
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The stock of skills and expertise that contribute to a worker's productivity; it can be increased through education and training
Human Capital
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If you hold one factor fixed while another grows then you'll hit diminishing returns
Diminishing Returns
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Inflation caused by the short-run aggregate supply curve shifting inwards
Cost-Push Inflation
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Inflation caused by the aggregate demand curve shifting outwards (Long-run persistent inflation can only be achieved by constantly expanding the money supply which shifts the AD curve out)
Demand-Pull Inflation
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Menu and Shoe Leather Costs/Balance of Trade
Costs of Anticipated Inflation
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Uncertainty and Investment/Redistribution (r = i - π)/Breakdown in the functions of money (Hyperinflation)
Costs of Unanticipated Inflation
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Costs rice, it is true: but they rise because of an increase in demand
Cost-Push Ilusion
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A term used to describe a period of time in an economy where gross domestic product (GDP) is increasing but inflation is low and stable
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It threatened the total collapse of large financial institutions. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment
Financial Crisis (2007-8)
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An empirical relationship suggesting that there is a trade-off between unemployment and inflation
Phillips Curve
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As inflation becomes greater and greater and therefore part of the economy, people begin to expect it. These expectations would factor into wage negotiations and therefore shift the Philips curve outwards
Determinants of Phillips Curve
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A theory crafted by Milton Friedman which kept the Philips Curve in the long run at ū which consisted of Frictional and Structural unemployment
Expectations Augmented Philips Curve
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This assumes that people expect inflationary conditions based on those previously exhibited and results in the inflationary cycle
Adaptive Expectation
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Here people notice the change and expect inflation straight away as soon as aggregate supply is increased, they take notice of the expansionary policy and so it automatically goes back to the natural level, unemployment can't be reduced below this
Rational Expectation
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Non-accelerating inflation rate of unemployment
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A situation describing an economy in which both unemployment and inflation are high at the same time
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The cycle where every time growth began to accelerate, the current account went into deficit (because people spend more on imports) and policy then had to be adjusted to slow down the growth rate to deal with the deficit
Stop-Go Cycle
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Card 2


Nominal Value


The value of an economic variable based on current prices, taking no account of changing prices through time

Card 3


Index Numbers


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Card 4


Nominal GDP


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Card 5


Real Value


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