Government and the macroeconomy

Local government- a government organisation with the authority to administer a range

of policies within an area of the country

Natural monopoly- an industry where a single firm can produce at a lower average cost
than two or more firms because of the existence of significant economies of scale

Trade blocs- a regional group of countries that remove trade restrictions between them

Free international trade- the exchange of goods and services between countries
without restriction

Economic growth- an increase in the output of an economy in the long run, an increase
in the economy's productive potential

Actual economic growth- an increase in the output of an economy

Potential economic growth- an increase in an economy's productive capacity

Aggregate demand - the total demand for a country's product at a given price level. It
consists of consumer expenditure, investment, government spending and net exports
(exports-imports)

Aggregate supply- the total amount of goods and services that domestic firms are
willing to supply at a given price level

Full employment- the lowest level of unemployment possible

Economically active- being a member of the labour force

Unemployment rate- the percentage of the labour force who are willing and able to
work but are without jobs

Price stability- the price level in the economy not changing significantly over time

Inflation rate- the percentage rise in the price level of goods and services over time

Balance of payments- the record of a country's economic transactions with other

countries

Budget- the relationship between government revenue and government spending

Budget deficit- government spending is higher than government revenue

Budget surplus- government revenue is higher than government spending

National debt- the total amount the government has borrowed over time

Multiplier effect- the final impact on aggregate demand being greater than initial
change

Direct taxes- taxes on income and wealth

Indirect taxes- taxes on expenditure

Progressive tax- one which takes a larger percentage of the income or wealth of the rich

Proportional tax- one which takes the same percentage of income or wealth of all
taxpayers

Regressive tax- one which takes a larger percentage of the income or wealth of the poor

Inflation- the rise in the price level of goods and services over time

Informal economy- that part of the economy that is not regulated, protected or taxed by
the government

Flat taxes- taxes with a single rate

Fiscal policy- decisions on government spending and taxation designed to influence

aggregate demand

Expansionary fiscal policy- rises in government expenditure and/or cuts in taxation

designed to increase aggregate demand

Contractionary fiscal policy - cuts in government expenditure and/or rises in taxation

designed to reduce aggregate demand

Monetary policy- decisions on the money supply, the rate of interest and the exchange
rate taken to influence aggregate demand

Foreign exchange rate- the price of one currency in terms of anther currency or
currencies
Expansionary monetary policy- increases in the money supply and/or the reduction in
the rate of interest designed to increase aggregate demand

Contractionary monetary policy- cuts in the money supply or growth of money supply
and/or rises in the rate of interest designed to reduce aggregate demand

Supply-side policy- measures designed to increase aggregate supply

Deregulation- the removal of rules and regulations

Gross domestic product (GDP)- the total output of a country

Circular flow of income- the movement of expenditure, income and output around the
economy

Value added- the difference between the sales revenue received and the cost of raw
materials used.

Nominal GDP- GDP at current market prices and so, not adjusted for inflation

Real GDP- GDP at constant prices and so, adjusted for inflation

Recession - a reduction in real GDP over a period of six months or more

Sustainable economic growth- economic growth that does not endanger the country's
ability to grow in the future

Employment- being involved in a productive activity for which a payment is received

Unemployment - being without a job while willing and able to work

Claimant count- a measure of unemployment which counts as unemployed these in

receipt of unemployment benefits

Labour force survey (ILO) Measure - a measure of unemployment which counts as

unemployed people who identify as such in a survey

Frictional unemployment- temporary unemployment arising from workers being in

between jobs

Structural unemployment - unemployment caused by long-term changes in the pattern

of demand and methods of production
Cyclical unemployment - unemployment caused by a lack of aggregate demand

Search unemployment - unemployment arising from workers who have lost their jobs,
looking for a job they are willing to accept

Casual unemployment- unemployment arising from workers regularly being between

periods of employment

Seasonal unemployment- unemployment caused by a fall in demand at particular times

of the year

Regional unemployment- unemployment caused by a decline in job opportunities in a

particular area of the country

Technological unemployment- unemployment caused by workers being replaced by

capital equipment

Deflation- a sustained fall in the prices of goods and services

Disinflation- a fall in the rate of inflation

Cost-push inflation- rises in the price level caused by higher costs of production

Demand-pull inflation- rises in the price level caused by excess demand

Wage-price spiral- wage rises leading to higher prices, in turn, lead to further wage
claims and price rises

Monetary inflation- rises in the price level caused by an excessive growth of the money
supply

Hyperinflation- a very rapid and large rise in the price level

Menu costs- costs involved in having to change prices as a result of inflation

Shoe-leather costs- costs involved in moving money around to gain higher interest
rates
 Economic development

Purchasing power parity- an exchange rate based on the ratio of the price of a basket of
a products in different countries

Human development index (HDI) - a measure of living standards which takes into
account income, education and life expectancy

Absolute poverty- a condition where people's income is too low to enable them to meet
their basic needs

Relative poverty - a condition where people are poor in comparison to others in the
country. Their income is too low to enable them to enjoy the average standard of living
in their country

Vicious circle of poverty - a situation where people become trapped in poverty

Emigration- the act of leaving the country to live in another country

Birth rate- the number of births in a year per 1000 population in a year

Death rate- the number of deaths in a year per 1000 population in a year

Infant mortality rate- the number of deaths per 1000 live births in a year

Population pyramid- a diagram showing the age and gender structure of a country's
population

Optimum population- the size of population which maximises the country’s output per
head

Economic development- an improvement in economic welfare