Economics terms Unit 2

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  1. GDP
    The sum of all goods and services produced in a country in a year. It is also the sum of all incomes earned in a year and the sum of all expenditure in one country in a year.
  2. Real GDP
    Market value of all final goods and services produced within a country adjusted for inflation.
  3. Real GDP per capita
    Market value of all final goods and services produced within a country adjusted for inflation per person
  4. Annual real GDP growth
    An increase in the market value of all final goods and services produced within a country adjusted for inflation measured from one year to another
  5. Economic growth
    An increase in real GDP
  6. Human Development Index (HDI)
    A measurement of development/ well being that is made up of real GDP per capita (PPP), life expectancy at birth and literacy rate/ average number of years spent in schooling
  7. Sustainable growth
    The maximum increase in potential capacity within an economy that will not lead to a fall in the potential capacity for future generations
  8. Sustainable development
    Development which meets the needs of the present generation without compromising the needs of future generations
  9. Output/ GDP gap
    Difference between potential GDP and actual GDP
  10. Actual GDP
    The amount spent on consumption, investment, government expenditure and net exports (AD)
  11. Potential GDP
    Maximum output that can be produced within a country if all economic resources are fully employed (AS)
  12. Negative output gap
    Happens when actual GDP is below potential GDP
  13. Positive output gap
    Happens when actual GDP is above potential GDP
  14. Recession
    When a country experiences fall in real GDP for two successive quarters
  15. Depression
    A sustained, long-term downturn in economic activities/ recession that lasts longer and hence has a larger decline in economic activities
  16. GNP
    Market value of all final goods and services produced by a country’s citizens regardless of where they are
  17. Hidden/ black/ informal economy
    Economic activity where trade and exchange take place but it goes unreported to the tax authorities motivated by the desire to evade tax
  18. Injections
    Inflow of money into the circular flow of income that does not come from households such as investment, government spending and exports
  19. Withdrawals
    Outflow of money from the circular flow of income since households may save, pay tax and buy imports
  20. Purchasing power parities
    How much money would be needed to purchase the same goods and services in two countries
  21. Transfer payments
    The redistribution of income in the market system.
  22. Cyclical/ demand-deficient/ Keynesian unemployment
    Unemployment that is due to negative economic growth/ recession/ lack of aggregate demand for goods and services
  23. Frictional unemployment
    Transitional unemployment when people are moving in between jobs/ short term joblessness whilst involved in job search
  24. Seasonal unemployment
    An unemployment that is caused by seasonal variation of the jobs offered
  25. Unemployment rate
    Percentage of the total labour force that is unemployed BUT actively seeking employment and willing to work
  26. Labour Force survey
    The official measure of unemployment used in the UK through face to face interviews followed by telephone surveys of 60000 households.
  27. Claimant count
    The number of people recorded caliming unemployment related benefits.
  28. CPI (Consumer price Index)
    The change in price of the 650 most commonly used goods and services in a variety of outlets.
  29. RPI
    The same as CPI but includes house prices and other housing related costs
  30. Inflation
    The increase in prices. Can be on AD/AS diagrams or with CPI.
  31. Deflation
    The decrease in price level. Can be from a decrease in CPI.
  32. Hyper inflation
    The rapid increase in the price level.
  33. Stagflation
    When inflation is taking place but growth is declining.
  34. Demand pull inflation
    The increase in price level due to increasing demand
  35. Cost push inflation
    The increase in price level due to a decrease in supply.
  36. Imported inflation
    When price level rises because of increase in prices of imports.
  37. Shoe leather costs
    The cost in terms of time and effort that people spend to counter the effect of inflation e.g. making more trips to banks to withdraw money or looking for the cheapest prices.
  38. Menu Costs
    Costs by firms when they need to update their prices on a more regular basis e.g. printing new menues, updating price catalogues
  39. Balance of Payments
    An account that summarises all the transactions between one country and the rest of the world.
  40. Current account
    One of the two components of balance of payments made up of net trade in goods and services.
  41. Hot money
    Money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible.
  42. Current account deficit
    When the total imports of goods and services outweigh the country's total exports of goods and services.
  43. Balance of trade
    Difference between a country's imports and exports
  44. Rate of interest
    The interest rate that is set by the Monetary Policy Committee which influence the return on savings and the costs of borrowing.
  45. Savings ratio
    The ratio of personal savings to disposable income/percentage of disposable income that is saved
  46. Marginal propensity to consume
    An increase in consumption that is due to an increase in £1 of disposable income.
  47. Marginal propensity to save
    An increase in saving that is due to an increase in £1 of disposable income
  48. Marginal propensity to import
    An increase in import expenditure that is due to an increase in £1 of disposable income
  49. Wealth effect
    An increase in spending when people feel richer associated with an increase in value of assets like stocks and properties.
  50. Investment
    Spending by businesses. Part of AD
  51. Aggregate demand
    Total amount of goods and services demanded at any given price level. Composed of Consumption + Investment + Government Spending + (Exports - Imports)
  52. Aggregate supply
    Total supply of goods and services produced within an economy at any given price level.
  53. Multiplier effect
    An initial increase in spending (consumption, investment, government spending and net exports) which will eventually lead to a larger secondary increase in AD.
  54. Full Capacity
    When all economic resources like land, labour and capital are fully utilised.
  55. Spare capacity
    When economic resources aren't fully utilised.
  56. Demand side policies
    Fiscal and monetary policies. These are the policies that influence AD.
  57. Fiscal Policy
    The manipulation of government spending and level of taxation to influence the movement of AD and the overall level of economic activities.
  58. Budget deficit
    When Government spends more than they are earning.
  59. National debt
    Total amount of money that the British government owes to private sector and other purchasers of UK.
  60. Crowding out effect
    When an increase in government spending causes the interest rates in the money market to increase thus fall a fall in private spending.
  61. Loose fiscal policy
    The lowering of tax or/and increase in government expenditure to stimulate the economy/revive the economy from recession
  62. Tightening fiscal policy
    The increase of tax or/and slash in government expenditure to slow down the economy/prevent overheating
  63. Monetary policy
    The manipulation of interest rates in order to influence the movement of AD and overall level of economic activities
  64. Loose monetary policy
    The lowering down of interest rates in order to stimulate economic activities/to prevent deflation/ensure that the price level does not fall too far from the targeted level.
  65. Tight monetary policy
    The rise in interest rates to cool down an overheating economy/prevent the price level from increasing too far above the targeted price level.
  66. Quantitative easing
    The increase in money supply through banks buying up financial assets and injects a predetermined amount of money into the economy.
  67. Liquidity trap
    A situation which prevailing interest rates are low and savings rate is high making monetary policy ineffective.
  68. Supply side policies
    Policies mean to influence the movement of AS by increasing the potential/prdouctive capacity of an economy.
  69. Poverty trap
    A situation where people on low incomes are discouraged from working extra hours or getting a better paid job since any extra income they earn will be taken away in the form of higher tax or loss benefits.
  70. Unemployment trap
    A situation where people have no incentive to take up a job knowing that the net increase in their income is insignificant due to income tax and withdrawal of some benefits.
  71. Hysteresis effect
    A situation where if unemployment is high, it will remain high for a considerable period of time since some people become less motivated or lose their skills making it difficult for them to re-enter the labour market.
  72. Exchange rate
    The value of a currency express in terms of another
  73. Appreciation
    When £1 gets to purchase more foreign currency.
  74. Depreciation
    When £1 gets to purchase less foreign currency
  75. Hot money
    Short term, speculative flows of money across foreign exchanges in order to make a profit on the difference between the buying and selling price of the currency.
  76. Privatisation
    The transfer of assets from state ownership to private sector ownership
  77. Deregulation
    The process of removing government controls over the market.
  78. Income effect
    When income tax is lowered, people earn a higher disposable income and in case if that is the targeted monthly income, then they wouldn't be bothered to increase productivity.
  79. Substitution effect
    When an increase in wages creates incentive to work longer hours as the financial reward from working has increased.
  80. Phillips Curve
    • A graph that shows the inverse relation between Inflation
    • and Unemployment. In the 1980s, it became useless.
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Economics terms Unit 2
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