Theme 2 - UK economy

• Macroeconomics

  The study of the economy as a whole, including inflation, growth and unemployment.
• Aggregate demand

  The total of all demands or expenditures in the economy at any given price.
• Aggregate demand curve

  Shows the relationship between the price level and equilibrium national income. As the price level rises the equilibrium level of national income falls.
• Animal spirits

  Business confidence: the mood of managers and owners of firms about the future of their industry and the wider economy.
• Gross investment

  The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital.
• Investment

  The addition to the capital stock of the economy.
• Retained profit

  Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation.
• Net exports or the net trade balance

  Exports minus imports.
• Aggregate supply curve

  The relationship between the average level of prices in the economy and the level of total output.
• Full capacity

  The level of output where no extra production can take place in the long run with existing resources.

  The full capacity level of output for an economy is shown by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply curve.

  
• Short-run aggregate supply curve

  The upward sloping aggregate supply curve which assumes that money wage rates are fixed.
• Supply-side shocks

  Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift.
• Circular flow of income

  A model of the economy which shows the flow of goods, services and factors and their payments around the economy.
• Closed economy

  An economy where there is no foreign trade.
• Injections

  In the circular flow of income, spending which is not generated by households including investment, government spending and exports.
• National income

  The value of the output, expenditure or income of an economy over a period of time.
• Open economy

  An economy where there is trade with other countries.
• Wealth

  A stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services.
• Withdrawals or leakages

  In the circular flow of income, spending by households which does not flow back to domestic firms. It includes savings, taxes and imports.
• Marginal propensity to import (MPM)

  The increase in imports divided by the increase in income that caused them (i.e. change in M / change in Y)
• Marginal propensity to save (MPS)

  The increase in saving divided by the increase in income that caused it (i.e. change in S / change in Y)
• Marginal propensity to tax (MPT)

  The increase in tax revenues divided by the increase in income that caused them (i.e. change in T / change in Y)
• Marginal propensity to withdraw (MPW)

  The increase in withdrawals from the circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W / change in Y)
• Multiplier 


  The figure used to multiply a change in an injection into the circular flow, such as investment, to find the final change in income.
• Multiplier effect or process

  An increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income).
• Gross domestic product (GDP)

  The value of final goods and services produced in an economy within a given time period.
• Gross national income (GNI)

  The value of goods and services produced by an economy over a period of time (GDP) plus net overseas interest payments and dividends (factor incomes).
• Gross national product (GNP)

  The market value of goods and services produced over a period of time through the labour or property supplied by citizens of a country both domestically (GDP) and overseas.
• Hidden, black or informal economy

  Economic activity where trade and exchange take place but which goes unreported to the tax authorities and those collecting national income statistics.
• Net national income

  A measure of national income which includes both net income from investments abroad and an allowance for depreciation of the nation's capital stock.
• Per person or per head or per capita

  Per individual in the population
• Purchasing power parities

  An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country.
• Standard of living

  How well off is an individual, household or economy, measured by a complex mix of variables such as income, health, the environment, participation in society and political freedoms.
• Transfer payments

  Income for which there is no corresponding output, such as unemployment benefits or pension payments.
• Value and volume of national income

  The value of national income is its monetary value at the prices of the day; the volume is the national income adjusted for inflation.
• Actual growth

  Economic growth as measured by recorded changes in real GDP over time.
• Boom or peak

  Period of time when the economy is growing strongly and is operating above its productive potential.
• Demand-side shock

  A sudden and large impact on aggregate demand.
• Depression or slump

  A period of the trade cycle when there is a particularly deep and long fall in output.
• Downturn

  A period of the trade cycle when either economic growth or GDP itself is falling.