AS Economics: Macroeconomics Key Term 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 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 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 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 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 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 nation’s 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 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 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 country’s 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.