List of Definitions for Unit 2: Managing the Economy (GCE, Edexcel)

1. GDP: market value of all final goods and services produced within a country in a given period

2. Real GDP/ GDP at constant prices: market value of all final goods and services produced within a country adjusted for inflation

3. Real GDP per capita: market value of all final goods and services produced within a country adjusted for inflation per person

4. Annual real GDP growth: an increase in the market value of all final goods and services produced within a country adjusted for inflation measured from one year to another

5. Economic growth: an increase in real GDP/ potential GDP

6. Human Development Index (HDI): a measurement of development/ well being that is made up of real GDP per capita (PPP), life expectancy at birth and literacy rate/ average number of years spent in schooling

7. Sustainable growth: the maximum increase in potential capacity within an economy that will not lead to a fall in the potential capacity for future generations

8. Sustainable development: development which meets the needs of the present generation without compromising the needs of future generations

9. Output/ GDP gap: difference between potential GDP and actual GDP

10. Potential GDP: maximum output that can be produced within a country if all economic resources are fully employed (AS)

11. Actual GDP: the amount spent on consumption, investment, government expenditure and net exports (AD)

12. Negative output gap: happens when actual GDP is below potential GDP

13. Positive output gap: happens when actual GDP is above potential GDP

14. Recession: is when a country experiences fall in real GDP for two successive quarters

15. Depression: a sustained, long-term downturn in economic activities/ recession that lasts longer and hence has a larger decline in economic activities

16. GNP: market value of all final goods and services produced by a country’s citizens regardless of where they are

17. Hidden/ black/ informal economy: economic activity where trade and exchange take place but it goes unreported to the tax authorities motivated by the desire to evade tax

18. Injections: inflow of money into the circular flow of income that does not come from households such as investment, government spending and exports

19. Withdrawals/ leakages: outflow of money from the circular flow of income since households may save, pay tax and buy imports

20. Purchasing power parities: a theory that argues that in the long run, identical goods and services in different countries should cost the same due to the adjustment of exchange rate

21. Transfer payments: income for which there is no corresponding output such as unemployment benefits or pension payments

22. Cyclical/ demand-deficient/ Keynesian unemployment: unemployment that is due to negative economic growth/ recession/ lack of aggregate demand for goods and services

23. Frictional unemployment: transitional unemployment when people are moving in between jobs/ short term joblessness whilst involved in job search

24. Seasonal unemployment: an unemployment that is caused by seasonal variation of the jobs offered

25. Structural unemployment: unemployment due to mismatch of skills of the unemployed and the requirement of new jobs

26. Unemployment rate: percentage of the total labour force that is unemployed BUT actively seeking employment and willing to work

27. CPI/ RPI-X: a weighted price index that measures the monthly change in the prices of goods and services (about the same but not exactly)

28. RPI: a measurement of inflation that includes mortgage interest payments and other housing related costs

29. Inflation: a sustained increase in price level/ fall in the purchasing power of £1

30. Disinflation: a slowdown in the rate of increase in general price level/ prices of goods and services

31. Deflation: a decrease in the general price level/ increase in the purchasing power of £1

32. Hyperinflation: a large/ rapid increase in the price level

33. Stagflation: an economy that faces stagnation/ falling growth/ rising unemployment that is coupled with rising inflation

34. Demand-pull inflation: an increase in price level that is due to an increase in aggregate demand/ when TOTAL demand for goods and services exceeds TOTAL supply

35. Cost-push inflation: an increase in price level that is due to an increase in costs of factors of production such as land, labour and capital

36. Imported inflation: an increase in price level that is due to an increase in prices of imports

37. Shoe leather costs: cost in terms of time and effort that people spend to counter the effect of inflation e.g. making more trips to banks to withdraw money and spend it (before it falls in value)

38. Menu costs: costs incurred by firms when they need to update prices on a more regular basis e.g. printing new menus, updating price catalogues, updating computer systems and hiring consultants to develop pricing strategies

39. Balance of payments: an account that summarises the financial transactions between one country and the rests of the world

40. Current account: one of the two components under balance of payments that is largely made up of net trade in goods and services

41. Capital and financial account: an account that records the buying and selling/ transactions of assets such as land, companies, stocks and government bonds and others like FDI and hot money

42. Current account deficit: when the total imports of goods and services are greater than the country’s total exports of goods and services

43. Balance of trade: difference between a country’s imports and its exports

44. Visible trade: imports and exports of goods

45. Invisible trade: imports and exports of services

46. Rate of interest: interest rate that is set by the Monetary Policy Committee which will eventually influence the return on savings and costs of borrowing/ price of money

47. Savings ratio: the ratio of personal savings to disposable income/ percentage of disposable income hat is saved

48. Marginal propensity to consume: an increase in consumption that is due to an increase in £1 of disposable income

49. Marginal propensity to save: an increase in saving that is due to an increase in £1 of disposable income

50. Marginal propensity to import: an increase in import expenditure that is due to an increase in £1 of disposable income

51. Wealth effect: an increase in spending when people ‘feel richer’ associated with an increase in value of assets like stocks and properties

52. Disposable income: income after tax

53. Investment: spending by FIRMS to acquire more capital goods such as the purchase of machineries and building of new factories

54. Aggregate demand: total amount of goods and services demanded at any given price level

55. Aggregate supply: total supply of goods and services produced within an economy at any given price level

56. Multiplier effect: an initial increase in spending (consumption, investment, government spending and net exports) which will eventually lead to a larger secondary increase in AD

57. Full capacity: when all economic resources like land, labour and capital are fully utilised

58. Spare capacity/ excess capacity: when economic resources like land, labour and capital are not fully utilised

59. Demand side/ management policies: policies that are meant to influence the AD such as fiscal and monetary policy

60. Fiscal policy: the manipulation of government spending and level of taxation to influence the movement of AD and overall level of economic activities

61. Budget deficit: when government spending exceeds tax revenue

62. National debt: total amount of money that the British government owes to private sector and other purchasers of UK gilts/ sum of all previously incurred annual budget deficits

63. Crowding out effect: when an increase in government spending causes the interest rates in the money market to increase thus a fall in private spending

64. Reflationary /Expansionary/ loose fiscal policy: the lowering of tax or/ and increase in government expenditure to stimulate the economy/ revive the economy from recession

65. Deflationary/ contractionary/ tightening fiscal policy: the increase of tax or/ and slash in government expenditure to slow down the economy/ prevent overheating

66. Monetary policy: the manipulation of interest rates in order to influence the movement of AD and overall level of economic activities

67. Reflationary/ expansionary/ loose monetary policy: the lowering down of interest rates in order to stimulate economic activities/ to prevent deflation/ ensure that the price level does not fall too far from the targeted level

68. Deflationary/ contractionary/ tight monetary policy: the rise in interest rates to cool down an overheating economy/ prevent the price level from increasing too far above the targeted level

69. Quantitative easing: the increase in money supply when government securities are bought from financial institutions allowing those banks to have more liquidity and hence greater ability to generate lending/ a policy that is usually pursued when the interest rates have already been lowered close to 0% and yet failed to deliver the desired effect/ solution to liquidity trap

70. Liquidity trap: a situation which prevailing interest rates are low and yet savings rate is high, making monetary policy ineffective

71. Supply side policies: policies meant to influence the movement of AS by increasing the potential/ productive capacity of an economy

72. Poverty trap: a situation where people on low incomes are discouraged from working extra hours or getting a better paid job since any extra income they earn will be taken away in the form of higher tax or lost benefits

73. Unemployment trap: a situation where unemployed people have no incentive to take up a job knowing that the net increase in their income is insignificant due to income tax and withdrawal of some benefits

74. Hysteresis effect: a situation where if unemployment is high, it will remain high for a considerable period of time since some people become less motivated or lose their skills making it difficult for them to re-enter the labour market

75. Exchange rate: the value of a currency express in terms of another

76. Appreciation: when £1 gets to purchase more foreign currency

77. Depreciation: when £1 gets to purchase lesser foreign currency

78. Hot money: short term, speculative flows of money across foreign exchanges in order to make a profit on the difference between the buying and selling price of the currency

79. Privatisation: the transfer of assets from state ownership to private sector ownership

80. Deregulation: the process of removing government controls over the market

81. Income effect: when income tax is lowered, people earn a higher disposable income and in case if that is the targeted monthly income, then they wouldn’t be bothered to increase their productivity

82. Substitution effect: when an increase in wages creates incentive to work longer hours as the financial reward from working has increased