AS

Economics: Macroeconomics

Key Term Glossary

AAA credit rating The best credit rating that can be given to a corporation's or a governments bonds,
effectively indicating that the risk of default is negligible
Accelerator effect Where planned capital investment is linked positively to the past and expected growth
of consumer demand or national income
Aggregate supply Either an inflation shock or a shock to potential national output; adverse aggregate
shock supply shocks of both types reduce output and can increase the rate of inflation
Animal spirits The state of confidence or pessimism held by consumers and businesses
Appreciation A rise in the market value of one exchange rate against another
Austerity Economic policy aimed at reducing a government's deficit (or borrowing). Austerity can
be achieved through increases in government revenues - primarily via tax rises - and/or
a reduction in government spending or future spending commitments.
Automatic stabilisers Automatic fiscal changes as the economy moves through stages of the business cycle
e.g. a fall in tax revenues from the circular flow in a recession.
Bank run When a large number of people suspect that a bank may go bankrupt and withdraw
their deposits. Bank runs are rare, one happened with the Northern Rock in 2007.
Bond Both companies and governments can issue bonds. The issue of new government debt
is done by the central bank and involves selling debt to capital markets
Brain drain The movement of highly skilled people from their own country to another nation
BRIC economies The BRIC grouping Brazil, Russia, India and China short hand for the rise of emerging
markets. The BRICs have a bigger share of world trade than the USA
Bubble When the prices of securities or other assets rise so sharply and at such a sustained rate
that they exceed valuations justified by fundamentals, making a sudden collapse likely
(at which point the bubble "bursts")
Budget deficit Occurs when government spending is greater than tax revenues. Reducing the deficit
can be achieved by tax increases or cuts in government spending or a period of
economic growth which brings about a rise in direct and indirect tax revenues
Business confidence Expectations about the future of the economy vital in influencing business decisions
about how much to spend on new capital goods
Capacity utilisation Measures how much of the productive potential of the economy is being used.
Utilisation falls during a recession leading to a rise in spare capacity
Capital market A stock or a bond market where firms can raise money for investment purposes
Capital stock The value of the total stock of capital inputs in the economy
Capital-labour Replacing workers with machines in a bid to increase productivity and reduce the unit
substitution cost of production. This can lead to structural unemployment
Catch-up effect This occurs when countries that start off poor tend to grow more rapidly than countries
that start off rich. The result is some convergence in the standard of living as measured
by per capita GDP
Claimant Count The number of people claiming unemployment-related benefits
Classical LRAS The classical LRAS curve is drawn as vertical because classical economists argue that a
AS Economics: Macroeconomics

Key Term Glossary

countrys productive capacity is determined by factors other than price and demand
such as investment and innovation
Closed economy An economy operating without imports and exports i.e. closed to global trade
Comparative Comparative advantage refers to the relative advantage that one country or producer
advantage has over another. Countries can benefit from specializing in and exporting the
product(s) for which it has the lowest opportunity cost of supply
Constant prices Constant prices tells us that the data has been inflation adjusted
Consumer Expectations about the future including interest rates, incomes and jobs
confidence
Consumer durables Products such as washing machines that are not used up immediately when consumed
and which provide a flow of services over time
Consumer price The consumer price index (CPI) is the government's preferred measure of inflation
index
Corporation Tax A tax on the profits made by companies
Cost push inflation An increase in the price level caused by a sustained increase in firms costs of
production
The assessment given to debts and borrowers by a ratings agency according to their
Credit rating
safety from an investment standpoint - based on their creditworthiness, or the ability of
the company or government that is borrowing to repay. Ratings range from AAA, the
safest, down to D, a company that has already defaulted
Creeping inflation Small rises in the general price level over a long period
Creeping A period of time where import tariff rates rise and where countries introduce quotas
protectionism and barriers to the mobility of labour and capital
Current account The overall balance of credits minus debits for trade in goods, trade in services,
investment income and transfers
Current account The amount by which money relating to trade, investment etc going out of a country is
deficit more than the amount coming in. A current account deficit implies a net reduction of
demand in a countrys circular flow
Cyclical trade deficit A trade deficit that arises purely due to changes in the economys cycle, for example
many countries run a deficit when their economy is growing strongly
Cyclical Unemployment caused by a lack of aggregate demand for goods and services, where
unemployment national output < potential output leading to a negative output gap
Default A default occurs when a borrower has broken the terms of a loan or other debt, for
example if a borrower misses a payment. The term also means any situation when
borrower can no longer repay its debts in full, such as bankruptcy or a debt
restructuring
Deflation A persistent fall in the general price level of goods and services
De-industrialisation A decline in the share of national income from manufacturing industries
Depreciation A fall in the market value of one exchange rate against another
Depression Used to describe a severe recession which may become a prolonged downturn in the
economy and where a nations GDP falls by at least 10 per cent
AS Economics: Macroeconomics

Key Term Glossary

Deregulation Reducing barriers to entry in order to make a market more competitive

Developing country Countries lacking a high degree of industrialisation and/or other measures of
development
Discouraged People often out of work for a long time who give up on job search
workers
Discretionary fiscal Deliberate attempts to affect aggregate demand using changes in government
policy spending, direct and indirect taxation and borrowing
Discretionary Disposable income adjusted for spending on essential bills such as fuel
income
Disposable income Gross income less income tax and national insurance contributions plus cash welfare
benefits. Disposable income is the money that comes into a household from various
sources, including welfare benefits but after taxes on income
Double dip recession When an economy goes into recession twice without having undergone a full recovery
in between
Dumping When a producer in one country exports a product to another at a price below the price
it charges in its home market or below the costs of supply
Ecological debt Ecological debt is the concept that peoples demands have exceeded the Earths ability
to cope with the rising consumption of its resources
Economic cycle Variations in the annual rate of growth of an economy over time
Economic growth An increase in the real value of goods and services produced in a country or area as
measured by the annual % change in real national output. Also a long-run increase in a
countrys productive capacity.
Economic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffs
Economic stability When indicators such as growth, prices and unemployment do not change much from
one year to another
Economically active Those who are unemployed and actively seeking employment
Economically Those who are of working age but are neither in work nor actively seeking work
inactive
Emerging markets The financial markets of developing countries
Exchange rate The rate at which one currency can be exchanged for another.
Expansionary A relaxation of monetary policy means an attempt to use an expansionary monetary
monetary policy policy to boost aggregate demand, output and jobs includes lower interest rates
Expectations How we expect the future to unfold this can have powerful effects on the spending
decisions of households, businesses and the government
Expenditure The value of the goods and services purchased by households and by government,
measure of GDP investment in machinery and buildings. It also includes the value of exports minus
imports. Calculation is as follows: AD=C+I+G+X-M
Expenditure- Policies that are designed to switch expenditure from imports to domestically
switching policies produced goods in order to improve the balance of payments and stimulate GDP
Export revenue Sales from selling goods and services overseas, an injection of demand
AS Economics: Macroeconomics

Key Term Glossary

Financial assets For consumers the main financial assets are property, pensions, equities, unit trusts and
cash
Fine-tuning Changes in monetary policy or fiscal policy designed to gradually manage the level of
aggregate demand and prices e.g. small changes in policy interest rates
Fiscal austerity or Fiscal austerity refers to decisions by a government to reduce the amount of
fiscal tightening government borrowing (i.e. cut the size of a fiscal deficit) over a period of years
Fiscal deficit This happen when government expenditure is higher than the revenue from tax
receipts in a particular year
Fiscal policy A government's policy regarding taxation and public spending. It can be loose (with the
emphasis on increased spending and lower tax revenue to boost economic activity,
with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting
spending and boosting tax revenue, resulting in a slower economy
Fiscal stability Many governments seek to maintain a degree of balance between tax revenues and
public sector spending. A balanced budget is one in which spending equal revenue
Fiscal stimulus Government measures, normally involving increased public spending and lower direct
and/or indirect taxation, aimed at giving a positive jolt to economic activity
Forecast A prediction made about the likely future performance of an economy
Foreign direct FDI stands for Foreign Direct Investment. FDI is investment from one country into
investment another (normally by companies rather than governments) that involves establishing
operations or acquiring tangible assets, including stakes in other businesses
Free trade When trade is allowed to occur without any form of restriction such as a tariff
Full capacity output A level of national output where all available factor inputs are fully employed this is a
factor influencing the underlying growth rate (LRAS)
Full employment When there enough job vacancies for all the unemployed to take work
G20 A group of finance ministers and central bank governors from 20 economies
G7 A group of seven major industrialized countries: Canada, France, Germany, Italy, Japan,
the UK and the USA
GDP Gross domestic product (GDP) is the total value of output in the UK and is used to
measure change in economic activity
Gini Coefficient A measure of the extent to which groups of households, from the bottom of the income
distribution upwards, receive less than an equal share of income.
Globalisation The deepening of relationships between countries of the world reflected in an
increasing level of overseas trade and investment
GNI Gross National Income income generated from the resources owned by inhabitants
and businesses of a given country
Golden Rule A rule introduced by the former Labour government which says that borrowing on state
provided goods and services should be zero over the course of one economic cycle.
Borrowing is allowed when it finances capital investment
Government debt The total stock of unpaid debt issued by a government. A government will normally
borrow money by issuing bonds or other securities
AS Economics: Macroeconomics

Key Term Glossary

Gross Domestic National income per head of population, a baseline measure of living standards
Product per capita
Gross National This is broadly the same as GDP except that it adds what a country earns from overseas
Income (GNI) investments and subtracts what foreigners earn in a country and send back home. GNI
is affected for example by profits from businesses owned overseas and also remittances
sent home by migrant workers
Haircut A reduction in the value of a troubled borrower's debts, imposed on, or agreed with, its
lenders as part of a debt restructuring
Hard landing A full-scale recession shown by a decline in real national output
Hot Money Money that flows freely and quickly around the world looking to earn the best rate of
return. It might be invested in any asset whose value is expected to rise (e.g. property
or shares) or placed in an account offering the best real rate of interest.
Household wealth The value of assets including property, shares, savings and pension fund assets
Human capital Investment in education and training to increase the quality of the labour force and to
make people more flexible in a changing world of work
Human An index to assess comparative levels of development in countries, quantified in terms
Development Index of literacy, life expectancy and purchasing power
Hysteresis When a sustained period of low aggregate demand can lead to permanent damage to
the supply side of the economy
Immobility of labour Barriers to the movement of people between areas and between jobs
Income elasticity Responsiveness of demand to a change in the real income of consumers
Inflation The rate of increase of consumer prices expected by consumers. Expectations can
expectations influence spending and saving decisions.
Inflation A sustained increase in the general price level for goods and services
Inflation target The Bank of England has a CPI inflation target, which is currently 2 per cent
Inflationary Demand and supply-side pressures that can cause a rise in the general price level.
pressures Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP
causing a positive output gap. Cost-push inflationary pressure can arise from increases
in unit wage costs, rising import prices and an increase in the prices of raw materials,
fuel and components used in production
Infrastructure The transport links, communications networks, sewage systems, energy plants and
other facilities essential for the efficient functioning of a country and its economy
Innovation Changes to products or production processes innovation is important in delivering
improvements in dynamic efficiency and generating better goods and services
International An organisation of 186 countries, promoting global monetary cooperation, financial
Monetary Fund stability, international trade, employment and sustainable economic growth. It has
(IMF) provided help for several nations in the wake of the 2007-09 financial crises.
International A nations stock of foreign currency and gold
reserves
Inventories These consist of materials and supplies which are stored for use in production, work-in
progress, finished goods and goods for re-sale
AS Economics: Macroeconomics

Key Term Glossary

Investment Spending on capital goods including plant & machinery and infrastructure
Investment income Interest, profits and dividends from assets owned and located overseas
Job search The process by which workers find appropriate jobs given their tastes and skills
Keynesian The economics of John Maynard Keynes. The belief that the state can directly stimulate
economics demand in a stagnating economy. For instance, by borrowing money to spend on public
works projects like roads, housing, schools and hospitals
Keynesian Unemployment caused by a lack of aggregate demand in the economy a deficiency of
unemployment private sector spending causes output and employment to contract
Labour shedding Cut backs in employment often seen in a slowdown or a recession
Labour shortages When businesses find it difficult to recruit the workers they need
Labour supply The number of people able, available and willing to work at prevailing wage rates
Lagging indicators Indicators which tend to follow economic cycles e.g. unemployment
Leading indicators Indicators which predict future economic trends e.g. consumer confidence
Leveraging The use of borrowed funds to increase your capacity to spend or invest
LIBOR Libor stands for the London Interbank Offered Rate and is used by banks world-wide to
determine the rate at which they lend to each other - whether thats receiving or giving
loans (including 24 hour - 5 year loans). Libor rates are set daily and released at the
same time everyday - 11am London time
Life-cycle model A theory that says that savings rates depend on how old someone is
Liquidity The ease with which something can be converted to cash with little loss of value
Liquidity trap When very low interest rates cease to have a strong effect on aggregate demand
Macroeconomic The overall performance in terms of output, prices, jobs, trade and living standards.
performance
Marginal propensity The proportion of any change in income that is spent rather than saved
to consume
Marginal propensity The change in total saving as a result of a change in income
to save
Marginal rate of tax The rate of tax on the next unit (1) of income earned
Misery index Calculated by adding together the unemployment rate and the rate of inflation
Monetary Policy Bank of England committee of 9 people meets every month to set interest rates.
Committee (MPC)
Money supply The entire quantity of a country's commercial bills, coins, loans and credit
Monetary stimulus Changes in monetary policy designed to increase aggregate demand including lower
policy interest rates and measures to increase the supply of credit
Moral hazard When an insured party decides to take higher risks because they perceive their losses
will be covered
Multiplier effect If there is an initial injection (e.g. a rise in exports) into the economy then the final
increase in aggregate demand and real GDP will be greater.
AS Economics: Macroeconomics

Key Term Glossary

NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US,
Canada and Mexico
National debt A government's total outstanding debt - effectively what the government still owes
from the budget deficits accumulated over time
Nationalisation Bringing a privately owned asset such as a company under state control
Negative equity When the value of an asset falls below the debt left to pay on that asset. Term is most
commonly used in connection with property prices after a slump in prices
Net investment Gross investment minus an estimate for capital depreciation
Net inward When the number of migrants coming into a country is greater than those leaving
migration
Net trade The balance between the value of exports and imports
Nominal GDP Monetary value of all goods and services produced expressed at current prices
Nominal wage The annual growth of wages unadjusted for inflation
growth
Non-inflationary Sustained growth of real national output whilst maintaining price stabilty
growth
Output gap Difference between actual and potential national output. A negative output gap means
that an economy has a large margin of spare productive capacity
Output measure Value of the goods and services produced by all sectors of the economy; agriculture,
GDP manufacturing, energy, construction, the service sector and government
Overseas assets Assets such as businesses, shares, property which are owned in overseas countries and
which might generate a flow of income which is a credit item on the current account of
the balance of payments
Paradox of thrift If people save more in a recession, it will reduce consumption and thus AD will fall,
impeding economic growth and, eventually, lowering the general level of savings
Patent box A reduced rate of Corporation Tax applied to profits from patents designed to
stimulate research and innovation and improve the supply-side of the economy
Peak The high point of the economic cycle beyond which a recession starts
Pension Fund Fund that pools employees' pension benefits and holds them so that they can be paid
at retirement. The money is invested in stocks, bonds and other assets to boost returns
and ensure that there are sufficient funds to be paid out
Per capita incomes Income per head of the population a measure of average living standards
Phillips Curve A statistical relationship between unemployment and inflation
Policy asymmetry When a given change in interest rates affects different groups or different countries to
a lesser or greater degree
Precautionary saving Saving because of fears of a loss of real income or employment
Price stability Price stability occurs when there is low inflation and the price changes that do occur
have little impact on day-to-day decisions of people
Productive potential Productive capacity of the economy boosted by high quality investment
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Key Term Glossary

Productivity A measure of efficiency e.g. output per person employed or output per person-hour
Propensity to import Proportion of any change in income that is spent on overseas products
Propensity to save Proportion of any change in income that is saved rather than spent
Protectionism Restricting trade through tariffs and other forms of import controls
Purchasing power The buying power of a unit of currency. It is inversely related to the rate of inflation
Quantitative easing The introduction of new money into the national supply by a central bank. The idea is
(QE) to add more money into the system to lower the risk of depression and deflation and
encourage banks/people to borrow and spend
Quota A physical limit on the quantity of a good that can be imported into a country
Real disposable Income after taxes and welfare benefits, adjusted for the effects of inflation
income
Real income Nominal income adjusted for price changes, expressed at constant prices
Real interest rate The nominal rate of interest adjusted for inflation
Real wage The nominal wage adjusted for the effects of inflation
Recession A period of at least six months when an economy suffers a fall in output. Or a broadly-
based contraction in output, employment, investment and confidence
Recovery A phase of the economic cycle, after a recession/depression, during which real GDP
starts to increase and unemployment begins to fall
Redundancy Making someone redundant is to end their employment
Relative deflation An economy with an inflation rate, which is lower than comparable economies. Over
time, a low relative rate of inflation can lead to an improvement in price
competitiveness
Remittances Sending of money to people in another country. For many lower-income nations,
remittance income is now a big contribution to Gross National Income (GNI)
Repo Rate (policy The official 'base' rate of interest that is set by the Monetary Policy Committee and
rate) which, when changed, sends a signal to the rest of the financial markets about a
desired change in the direction of other borrowing and savings interest rates. Repo is
the rate of interest at which the Bank of England is prepared to lend to banks
Retail Price Index The RPI is broadly similar to the CPI but includes mortgage repayments and some taxes,
(RPI) and excludes the top 4 per cent of earners. It is used to calculate annual changes in
wages, state benefits and pensions
Risk averse Exhibiting a dislike of uncertainty, often seen in a recession
Saving ratio The percentage of disposable income that is saved rather than spent
Slowdown A fall in the rate of growth of an economy but not a full-scale recession
Slump A sustained decrease in real GDP and a persistent rise in unemployment
Soft landing A slowdown in economic activity but which does not result in a recession
Sovereign debt Debt issued by or guaranteed by a government
Spare capacity When a business is not making full use of its available capacity there are spare factors
AS Economics: Macroeconomics

Key Term Glossary

of production including land, labour and capital. When an economy has plenty of spare
capacity, short run aggregate supply tends to be elastic.
Stagflation A combination of slow growth and rising inflation. The most notable recent period of
stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK
inflation rose at one point to nearly 30 per cent
Sterling exchange External value of sterling calculated using a weighted index of a basket of currencies
rate index weightings are based on the value of trade with different countries
Stimulus Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or
inflation. This can include interest rate cuts, quantitative easing, tax cuts and
government spending increases
Structural trade A trade deficit that arises due to supply-side weaknesses rather than a change in GDP
deficit or currency caused by poor competitiveness
Structural budget The size of a fiscal (budget) deficit adjusted to take account of the effects of changes in
deficit the economic cycle
Structural Unemployment that results from the decline in a particular industry which leaves
unemployment people unemployed because they do not have the skills needed by the industries that
are growing
Sustainable growth Growth that meets the needs of the present without compromising the ability of future
generations to meet their own needs. Growth that can continue without damage to the
environment, or the exhaustion of non-renewable resources
Target A target is an objective of government policy e.g. low inflation
Tariff A tax on imported products which may be ad valorem (%) or a specific tax (a set
amount per unit imported).
Tight labour market When demand for labour is high and there are shortages of labour. Businesses may
have to offer higher wages to attract and keep the workers they need
Time lags The time it takes for one change e.g. a change in interest rates to affect other variables
e.g. consumer confidence and spending
Toxic debt Loans that may not be repaid. For example, if one home loan on one street goes bad, it
might make people think that all the loans on the street will go bad
Trade deficit A trade deficit occurs when a country imports a greater value of goods and services
than it exports. A trade deficit as a net withdrawal from the circular flow of income
Trade-off A trade-off implies that choices have to be made between different objectives of
economic policy for example a trade-of between economic growth and inflation
Tragedy of the A conflict over finite resources between individual interests and the common good
Commons which can lead to irreversible damage to the stock of natural resources available to
current and future generations
Transmission How a change in interest rates affects the various sectors of the economy
mechanism
Trend growth The long run average growth rate mainly determined by changes in the stock of
available factor inputs and also improvements in productivity. Trend growth is
represented by a rightward shift in the LRAS (or PPC boundary)
Trough The low point of the economic cycle beyond which a recovery starts
AS Economics: Macroeconomics

Key Term Glossary

Twin Deficits Twin deficits refer to a situation where an economy is running both a fiscal deficit and
also a deficit on the current account of the balance of payments
Under-employment Workers are underemployed when they are willing to supply more hours of work than
their employers are prepared to offer.
Unemployment trap When the prospect of the loss of unemployment benefits dissuades those without work
from taking a new job creates a disincentives problem
Unit wage costs Labour costs per unit of output
Unsecured credit Credit not secured by another asset i.e. money borrowed on credit cards
Wage price spiral Where workers bid for higher wages because they have seen their real income eroded
by rising prices. This can lead to a further burst of cost-push inflation
Wealth effect The supposed link between changes in wealth and household spending
World Bank A source of financial and technical assistance to developing countries. It can provide
loans and grants for a wide array of purposes that include investments in education,
health, public administration, infrastructure, financial and private sector development,
agriculture and environmental and natural resource management
World Trade WTO oversees trade agreements, negotiations and disputes between member
Organisation countries. The WTO is an organisation that was formed in 1995 to control trade
agreements between countries and to set rules on international trade. It replaced
GATT(the General Agreement on Tariffs and Trade)
Zero Hours Contract An employment contract under which the employee is not guaranteed work and is paid
only for work carried out
Zombie Companies Weak and inefficient companies which are able to survive thanks to low interest rates
and a supposedly more tolerant attitude to corporate borrowers by banks.
Negative interest An interest rate that is below zero. For real interest rates, this can occur when the
rate inflation rate is higher than nominal interest rates