Definitions Flashcards
(26 cards)
What is Investment?
Spending by firms on capital goods (e.g. machinery, buildings)
Capital goods are essential for production processes in the economy.
Define Real GDP.
The total value of goods and services produced within an economy, adjusted for inflation.
Real GDP provides a more accurate reflection of an economy’s size and how it’s growing over time.
What is the Multiplier effect?
The proportional income in RGDP resulting from an initial injection into AD.
This concept explains how an initial increase in spending can lead to increased overall economic activity.
Explain the Accelerator effect.
The tendency of increases in RGDP to create larger increases in Investment (also works in reverse i.e. decreases/decreases).
The Accelerator effect highlights the relationship between economic growth and investment levels.
What is Economic growth?
Increases in RGDP from one period to the next.
Economic growth is typically measured as the percentage increase in real GDP.
Define Recession.
2 consecutive quarters of negative economic growth.
A recession indicates a significant decline in economic activity across the economy.
What is Long run economic growth?
Sustained increases or improvements in the factors of production available to an economy (land/labour/capital/enterprise).
Long run growth focuses on the potential output of an economy.
Define Inflation.
Sustained increase in the general price level.
Inflation erodes the purchasing power of money over time.
What is Deflation?
When the inflation rate for a period is negative (price level falls).
Deflation can lead to decreased consumer spending as people anticipate falling prices.
Explain Disinflation.
When the price level increases but the inflation rate falls.
Disinflation indicates a slowing rate of inflation.
Define Unemployment.
The number of economically active workers not in work.
Unemployment is a critical economic indicator that reflects the health of the economy.
What is Balance of payments?
The money flowing into an economy from overseas compared to money flowing out of an economy to overseas. (More money in = surplus, more money flowing out = deficit)
A balance of payments surplus indicates that a country is a net lender to the rest of the world.
Define Inequality.
Where there is an unfair disparity in income and/or wealth between different groups within an economy.
Economic inequality can lead to social and political tensions.
What is Absolute poverty?
Where households cannot afford basic needs- technically living on less than $2.15 per day.
Absolute poverty is a severe deprivation of basic human needs.
Define Relative poverty.
Households whose incomes are less than 60% of the median income level.
Relative poverty measures economic status in relation to the wider community.
What is Fiscal Policy?
The deliberate use of government expenditure and taxation to influence AD within an economy. (Can be expansionary or deflationary)
Fiscal policy is used to stabilize the economy and promote growth.
Define Budget deficit.
Where the government spends more in G than it raises in T. (Can be structural or cyclical)
A budget deficit can lead to increased government borrowing.
What is Crowding Out?
Where increased government borrowing reduces the funds available for private sector borrowing.
Crowding out can limit private investment and slow economic growth.
Define Monetary Policy.
The deliberate manipulation of money supply by the central bank, aimed at influencing levels of AD. (Usually by changing base rate or by QE)
Monetary policy tools include interest rate adjustments and open market operations.
What are Supply-side policies?
Government policies aimed at shifting AS curve to the right, particularly LRAS.
Supply-side policies focus on increasing production capacity and efficiency.
What is the exchange rate?
The value of one currency expressed in terms of another.
(e.g. £1=US$1.30)
What are the types of exchange rates?
Exchange rates can be floating, fixed, or semi-fixed.
What is comparative advantage?
Where one country can produce a good or service at a lower opportunity cost than another.
What is globalisation?
The growing interdependence of the world’s economies.
