Key terms for AS Economics Macro Units - National & International Economy

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AS Macro Glossary
AAA credit rating The best credit rating that can be given to a corporation's or a government’s 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
shock
Either an inflation shock or a shock to potential national output; adverse aggregate
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
substitution
Replacing workers with machines in a bid to increase productivity and reduce the
unit 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 country’s 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
advantage
Comparative advantage refers to the relative advantage that one country or
producer 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

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Consumer confidence Expectations about the future including interest rates, incomes and jobs
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 index The consumer price index (CPI) is the government's preferred measure of inflation
Corporation Tax A tax on the profits made by companies
Cost push inflation An increase in the price level (or average price of goods and services) caused by a
sustained increase in firms’ costs of production
Credit crunch Where banks reduce lending to each other due to falling confidence that loans will
be repaid. This results in less credit being available for consumers and businesses,
resulting in an increase in the cost of borrowing money
Credit rating
The assessment given to debts and borrowers by a ratings agency according to
their 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 level of prices over a long period of inflation
Creeping
protectionism
A period of time where import tariff rates rise and where countries introduce quotas
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
deficit
The amount by which money relating to trade, investment etc going out of a country
is more than the amount coming in. A current account deficit implies a net reduction
of demand in a country’s circular flow
Cyclical trade deficit A trade deficit that arises purely due to changes in the economy’s cycle, for
example many countries run a deficit when their economy is growing strongly
Cyclical
unemployment
Unemployment caused by a lack of aggregate demand for goods and services,
where 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 is also used to mean 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-industrialization 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 nation’s GDP falls by at least 10 per cent
Deregulation Reducing barriers to entry in order to make a market more competitive
Developing country Countries generally lacking a high degree of industrialisation and/or other measures
of development
Discouraged workers People often out of work for a long time who give up on job search
Discretionary fiscal
policy
Deliberate attempts to affect aggregate demand using changes in government
spending, direct and indirect taxation and borrowing
Discretionary income Disposable income adjusted for spending on essential bills such as fuel
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. The UK economy experienced a double-dip recession in 2012
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

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Ecological debt Ecological debt is the concept that people’s demands have exceeded the Earth’s
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 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 inactive Those who are of working age but are neither in work nor actively seeking work
Emerging markets The financial markets of developing countries
Expansionary
monetary policy
A relaxation of monetary policy means an attempt to use an expansionary monetary
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 measure
of GDP
The value of the goods and services purchased by households and by government,
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-switching
policies
Policies that are designed to ‘switch’ expenditure from imports to domestically
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
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 Fiscal austerity refers to decisions by a government to reduce the amount of
government borrowing (i.e. cut the size of a fiscal deficit) over a period of years
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
investment
FDI stands for Foreign Direct Investment. FDI is investment from one country into
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

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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
Gross Domestic
Product per capita
National income per head of population, a baseline measure of living standards
Gross National
Income (GNI)
This is broadly the same as GDP except that it adds what a country earns from
overseas 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 Development
Index
An index to assess comparative levels of development in countries, quantified in
terms of literacy, life expectancy and purchasing power
Hysteresis A problem caused by high levels of unemployment. An unemployed worker loses
skills and motivation and so finds it hard to re-enter the labour force
Immobility of labour Barriers to the movement of people between areas and between jobs
Income elasticity of
demand
Responsiveness of demand to a change in the real income of consumers
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. When
inflation rises or falls more than 1% above or below the target, the Governor must
write a letter to the Chancellor to explain why it has happened.
Inflationary pressures Demand and supply-side pressures that can cause a rise in the general price level.
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
Monetary Fund (IMF)
An organisation of 186 countries, promoting global monetary cooperation, financial
stability, international trade, employment and sustainable economic growth. It has
provided help for several nations in the wake of the 2007-09 financial crises.
International reserves A nation’s stock of foreign currency and gold
Inventories These consist of materials and supplies which are stored for use in production,
work-in progress, finished goods and goods for re-sale
Investment Spending on capital goods including plant & machinery and infrastructure

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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 economics The economics of John Maynard Keynes. The belief that the state can directly
stimulate demand in a stagnating economy. For instance, by borrowing money to
spend on public works projects like roads, housing, schools and hospitals
Keynesian
unemployment
Unemployment caused by a lack of aggregate demand in the economy – a
deficiency of 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 that’s
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
Macroeconomic
performance
The overall performance in terms of output, prices, jobs, trade and living standards.
Marginal propensity to
consume
The proportion of any change in income that is spent rather than saved
Marginal propensity to
save
The change in total saving as a result of a change in income
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
Committee (MPC)
Bank of England committee of 9 people, meets every month to set interest rates.
Money supply The entire quantity of a country's commercial bills, coins, loans and credit
Moral hazard When an insured party decides to take higher risks because they perceive their
losses will be covered – often linked to the excessive risk-taking by banks knowing
that central banks might rescue them
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.
NAFTA North American Free Trade Agreement - a free trade area agreement signed by the
US, Canada and Mexico
National debt The total amount of debt that the government owes the private sector
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 migration When the number of migrants coming into a country is greater than those leaving
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
Non-inflationary Sustained growth of real national output whilst maintaining price stability

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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 of
GDP
Value of the goods and services produced by all sectors of the economy;
agriculture, 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
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
(QE)
The introduction of new money into the national supply by a central bank. Central
banks flood the economy with money by printing new notes to increase the supply
of money. The idea is 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
Income after taxes and welfare benefits, adjusted for the effects of inflation
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 markedly lower than comparable
economies. Over time, a low relative rate of inflation can lead to an improvement in
price competitiveness, assuming that there has not been a compensating change in

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the exchange rate between two countries
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
rate)
The official 'base' rate of interest that is set by the Monetary Policy Committee and
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
(RPI)
The RPI is broadly similar to the CPI but includes mortgage repayments and some
taxes, 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 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
rate index
External value of sterling calculated using a weighted index of a basket of
currencies – 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 deficit A trade deficit that arises due to one or more underlying supply-side weaknesses
rather than to a change in GDP or currency – caused by poor competitiveness
Structural
unemployment
Unemployment that results from the decline in a particular industry which leaves
people unemployed because they do not have the skills needed by the industries
that are growing
Sustainable growth Growth which 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

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Commons which can lead to irreversible damage to the stock of natural resources available to
current and future generations
Transmission
mechanism
How a change in interest rates affects the various sectors of the economy
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
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 When people want to work full time but find that they can only get part-time work –
the result is a loss of hours that the economy can use
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
Organisation
WTO oversees trade agreements, negotiations and disputes between member
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)