Topic 3 - Economic Objectives and the Role of Governments

• Demerit Good


  a good which when consumed provides external costs - could be over-consumed if left to the free market
• Merit Good


  a good which when consumed provides external benefits - could be under-consumed if left to the free-market
• Bank Rate


  rate set by the bank of england that influences all other rates of interest in the country
• Asset

  something that is expected to provide a benefit to the owner in the future
• State Provision

  goods and services are provided directly by the government
• Information Provision


  the government provides information to encourage consumers and organisations to change their behaviour
• Regulation


  rules, directives or government orders to control the way people and organisations behave
• Legislation

  laws to control the way people and organisations behave
• Subsidy


  amount of money the government gives directly to firms to encourage production and consumption
• Tax


  compulsory payment to the government
• Positive Externality

  beneficial effect on a third party, an external benefit
• Negative Externality


  harmful effect of economic activity on a third party, an external cost
• Externality


  effect of economic activity on a third party
• Supply-Side Policy


  policy that increases productive potential, the ability of the economy to supply more goods and services
• Monetary Policy


  policy that aims to control the total supply of money in the economy to achieve the government's economic objectives, particularly price stability
• Regressive Tax


  same rate of tax for all income levels
• Progressive Tax


  a tax for which the percentage of income paid in taxes increases as income increases
• Income and Wealth Distribution


  government action using mainly taxes and benefits to reduce inequalities of income and wealth
• Budget Surplus


  when tax revenue is greater than government spending
• Budget Deficit


  when government spending is greater than tax revenue
• Balanced Budget

  when tax revenue is equal to government spending
• Government Revenue

  source of finances for government spending
• Indirect Tax


  tax on spending
• Direct Tax


  tax on income or wealth
• Government Spending


  total amount of money spent by the government in a given period of time
• Fiscal Policy


  policy using government spending and taxation to influence the economy as a whole
• Real Value


  takes inflation into account
• Nominal Value


  value of something in money terms
• Consumer Price Index (CPI)


  method used to calculate the rate of inflation
• Rate of Inflation

  percentage rise in general price level over time
• Price Stability


  when general price level stays constant over time, or grows at an acceptably low rate
• Inflation


  sustained rise in general price level over time
• Cost of Living


  price level of goods and services bought by the average family
• Distribution of Wealth


  how wealth is shared out between individuals and households
• Net Income

  income after the effects of direct taxes and benefits - disposable income
• Gross Income


  income received before taxes are deducted and benefits are given
• Wealth


  market value of all assets owned by a person, group or country at a point in time
• Income


  reward for a service provided by a factor of production
• Distribution of Income


  how incomes are shared out between individuals and households
• Cyclical Unemployment


  caused by lack of demand in an economy