A2 MACRO KEY TERM GLOSSARY

AAA credit rating The best credit rating that can be given to a corporation's bonds,
effectively indicating that the risk of default is negligible
Accelerator effect Where planned capital investment is linked positively to the past and
expected growth of consumer demand
Accommodatory policy A neutral macroeconomic policy stance in the face of an economic
shock. For fiscal policy, generally means keeping tax and government
expenditure rates unchanged. For monetary policy, generally means
keeping (real) interest rates unchanged.
Aggregate supply shock Either an inflation shock or a shock to potential national output;
adverse aggregate supply shocks of both types reduce output and
increase inflation
Animal spirits The state of confidence or pessimism held by consumers and
businesses
Automatic stabilisers Automatic fiscal changes arising automatically as the economy moves
through different stages of the business cycle - for example a fall tax
that the government takes out of the circular flow in a recession
Bank run When a substantial number of depositors suspect that a bank may go
bankrupt and withdraw their deposits. Bank runs are rare but one
happened with the Northern Rock in the autumn of 2007
Beggar my Neighbour This is an economic policy that seeks to promote a country's economy
at the expense of another country. An obvious example is the use of
tariff barriers. A country may place tariff on imports to help promote
local domestic industry. This may help local unemployment, but, be
at the expense of the other country's export sector
Behavioural economics Branch of economic research that adds elements of psychology to
traditional models in an attempt to better understand decision-making
by investors, consumers and other economic participants
Bond Both companies and governments can issue bonds when they need to
borrow money. The issue of new government debt is done by the
central bank and involves selling debt to capital markets
Brain drain The movement of highly skilled or professional people from their own
country to another country where they can earn more money
BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short
hand for the rise of emerging markets in the global economy. The
BRICs already have a bigger share of world trade than the USA.
Bubble When the prices of securities or other assets rise so sharply and at
such a sustained rate that they exceed valuations justified by
fundamentals, making a sudden collapse likely (at which point the
bubble "bursts").
Budget deficit Occurs when government spending is greater than tax revenues. The
UK budget deficit in 2009-10 is forecast to be more than 12% of GDP
Business confidence Expectations about the future of the economy – vital in business
decisions about how much to spend on new capital goods
Capacity The amount that can be produced by a plant, company, or economy
(industrial capacity) over a certain period, if current resources
(including capital, workers, etc.) are used to their fullest extent
Capacity utilisation Measures how much of the productive potential of the economy is
being used. Utilisation falls during a recession
Capital flight The rapid movement of large sums of money out of a country. There
could be several possible reasons - lack of confidence in a country's
economy and/or its currency and political turmoil
Capital flows Movements of capital between countries. Outward capital flows are
movements of domestically-owned capital abroad; inward capital
flows are movement of foreign-owned capital to the domestic
economy
Capital stock The value of the total stock of capital inputs in the economy –
affected by the rate of net investment spending
Capital-labour Replacing workers with machines in a bid to increase productivity and
substitution reduce unit costs. This can lead to structural unemployment
Carry trade A strategy in which an investor borrows money at a low interest rate
in order to invest in an asset that is likely to provide a higher return.
Car scrappage scheme This is a scheme co-funded with the car industry that had the
objective of increasing the demand for cars in the UK.
Catch-up effect This occurs when countries that start off poor tend to grow more
rapidly than countries that start off rich. The result is some
convergence in the standard of living as measured by per capita GDP
Claimant Count The number of people claiming unemployment-related benefits. Since
October 1996 this has been defined as the number of people claiming
Jobseeker's Allowance
Classical LRAS The classical LRAS curve is drawn as vertical because classical
economists argue that a country’s productive capacity is determined
by factors other than price and demand such as investment and
innovation
Classical unemployment Classical unemployment is the result of real wages being above their
market clearing level leading to an excess supply of labour
Clean float A currency exchange rate that varies (or floats) according to market
forces, free from government intervention
Comparative advantage Comparative advantage refers to the relative advantage that one
country or producer has over another. Countries can benefit from
specializing in and exporting the product(s) for which it has the lowest
opportunity cost of supply
Competitive devaluation When a country tries to devalue its currency to increase its
international competitiveness. However, this often encourages other
countries to also devalue leading to only temporary increases in the
competitiveness of exports.
Consumer confidence Expectations about the future including interest rates, incomes and
jobs
Counter-cyclical Not following the normal pattern of business activity, for example
increasing when other activities are decreasing
Countervailing tariffs Tariffs (duties) that are imposed by a country to counteract subsidies
provided to a foreign producer
Credit crunch When creditors become reluctant to lend money to businesses or
individuals because of the increased risk of default due to adverse
economic or political conditions
Creeping inflation Small rises in the general level of prices over a long period of
inflation.
Creeping protectionism A period of time where import tariff rates rise and where countries
 introduce quotas and barriers to the mobility of labour and capital
Currency union A group of countries (or regions) using a common currency – for
example the 16 countries that have entered the single European
currency
Current account deficit The amount by which money relating to trade, investment etc going
out of a country is more than the amount coming in
Cyclically adjusted Adjusting the value of an economic variable e.g. the budget deficit
for the effects of the business cycle
Debt burden The amount of debt that a business or country has normally expressed
as a share of GDP
Debt deflation High levels of debt leading to falling asset prices
Debt forgiveness The cancelling by a creditor of a debt to a country or a company
De-industrialization A decline in the share of national income from manufacturing
industries
Deflation A persistent fall in the general price level of goods and services
Depression Used to describe a severe recession which may become a prolonged
downturn in the economy and where GDP falls by at least 10 per cent
Discouraged workers People often out of work for a long time who give up on job search
Discretionary fiscal Deliberate attempts to affect aggregate demand using changes in
policy government spending, direct and indirect taxation and borrowing.
Discretionary income Disposable income adjusted for spending on essential bills such as fuel
Disequilibrium Disequilibrium unemployment comes about when the aggregate
unemployment demand for labour is less than the aggregate supply of labour at the
current real wage rate and market forces are failing to correct the
problem
Double dip recession When an economy goes into recession twice without having undergone
a full recovery in between
Dumping When a producer in one country exports a product to another country
at a price which is either below the price it charges in its home
market or is below its costs of production
Economic nationalism The idea that a country's economy will perform best if its industries
are protected from competition, for example by taxes on imported
goods
Economic shocks Unpredictable events such as volatile prices for oil, gas and
foodstuffs.
Economic stability When the main indicators such as growth, prices and unemployment
do not change much from one year to another.
Emerging markets The financial markets of developing countries
Expansionary monetary A policy by monetary authorities to expand money supply and boost
policy economic activity, mainly by keeping interest rates low to encourage
borrowing by companies, individuals and banks
Expectations How we expect the future to unfold – this can have powerful effects
on the spending decisions of households, businesses and the
government
Fine-tuning Changes in monetary policy or fiscal policy designed to gradually
manage the level of aggregate demand and prices
Fiscal drag The tendency of income from taxation to rise when an economy is
growing. This helps to slow consumer spending and corporate activity,
and thus acts as a counterbalance to unrestrained growth
Fiscal stimulus Government measures, normally involving increased public spending
and lower taxation, aimed at giving a positive jolt to economic
activity
Fixed exchange rate An exchange rate that is fixed against other major currencies through
action by governments or central banks, usually within small margins
of fluctuation around the central rate. Likely to involve periodic
intervention in the foreign exchange market by one or more central
banks to buy or sell the currency in question if it moves below or
above its margins.
Foreign direct FDI is the acquisition of a controlling interest in productive operations
investment abroad by companies resident in the home economy. May involve the
creation of new productive capacity such as a new factory
Foreign exchange The reserves of gold or foreign currencies (e.g. US dollars or Euros)
reserves typically held by central banks on behalf of their national government
Free trade When trade between nations is allowed to occur without any form of
import restriction
Full capacity output A level of national output where all available factor inputs are fully
employed – this is a factor influencing the underlying growth rate
Full employment When there enough job vacancies for all the unemployed to take work
Gini Coefficient The Gini coefficient is a measure of the overall extent to which groups
of households, from the bottom of the income distribution upwards,
receive less than an equal share of income.
Gilts Government bonds paying a fixed amount of money (‘coupon’) as
interest annually and redeemable at face value on maturity
Globalisation The deepening of relationships between countries of the world
reflected in an increasing level of overseas trade and investment.
Golden Rule A rule introduced by the Labour government which says that
borrowing on state provided goods and services should be zero over
the course of one economic cycle. Borrowing is used to finance capital
investment.
Hard landing A full-scale recession shown by a decline in real national output
Hidden unemployment Unemployment which is known to exist but is not included in the
official government figures
Hot Money Money that flows freely and quickly around the world economy looking
to earn the best available rate of return. It might be invested in any
asset whose value is expected to rise (e.g. property or shares) or
simply be placed in an account offering the best real rate of interest.
Infant industry New industry that requires government protection from overseas
competition (for instance through the setting of import tariffs) in
order to develop
Inflation target The Government sets the Bank of England a CPI inflation target, which
is currently 2 per cent.
Infrastructure The transport links, communications networks, sewage systems,
energy plants and other facilities essential for the efficient
functioning of a country and its economy
Innovation Changes to products or production processes – innovation is important
 in delivering improvements in dynamic efficiency
Interest elasticity of The responsiveness of demand to a change in interest rates. This is
demand relevant in discussing the effects of changes in monetary policy.
International Monetary The IMF is an organisation of 186 countries, promoting global
Fund (IMF) monetary cooperation, financial stability, international trade,
employment and sustainable economic growth. It has provided help
for several nations in the wake of the 2007-09 financial crises.
Investment income Interest, profits and dividends from assets owned and located
overseas.
J Curve Effect The effect of currency depreciation on the trade deficit depends on
price elasticity of demand for exports and imports. In the short term,
demand is often inelastic and the J Curve effect says a trade deficit
can actually worsen after depreciation, but get better in the medium
term.
Job search The process by which workers find appropriate jobs given their tastes
and skills
Keynesian economics The economics of John Maynard Keynes. The belief that the state can
directly stimulate demand in a stagnating economy. For instance, by
borrowing money to spend on public works projects like roads, schools
and hospitals.
Labour shedding Cut backs in employment often seen in a slowdown or a recession
Labour shortages When businesses find it difficult to recruit the workers they need
Labour supply The number of people able, available and willing to work at prevailing
wage rates
Lagging indicators Indicators which tend to follow economic cycles e.g. unemployment
Leading indicators Indicators which predict future economic trends e.g. consumer
confidence
Leveraging The use of borrowed funds to increase your capacity to spend or
invest
LIBOR London Interbank Offered Rate and - used by banks world-wide to
determine the rate at which they lend to each other - whether
receiving or giving loans. Libor rates are set daily and released at the
same time everyday - 11am London time
Life-cycle model A theory that says that savings rates depend on how old someone is
Liquidity Liquidity refers to the ease with which something can be converted to
cash with little or no loss of value
Macroeconomic The overall performance of an economy in terms of output, prices,
performance jobs, global trade and living standards.
Macro stabilization A coordinated set or group of mostly restrictive fiscal and monetary
policies policies aimed at reducing inflation, cutting budget deficits, and
improving the balance of payments
Managed floating An exchange rate that is basically floating but subject to intervention
currency from time to time by the monetary authorities, in order to resist
fluctuations that they consider to be undesirable
Marginal propensity to The proportion of any change in income that is spent rather than
consume saved
Marginal propensity to The change in total saving as a result of a change in income
save
Marginal rate of tax The rate of tax on the next unit (£) of income earned
Mercantilism The notion that the wealth of a nation was based on how much it
could export in excess of its imports, and thereby accumulate
precious metals. Applied in the modern context to countries
accumulating huge trade surpluses in goods or services and focusing
on export-led growth
Monetarism School of economic thought that considers money supply as the main
factor influencing the economy, and monetary policy as the key
instrument of government decision-making. Controlling money supply
should ensure steady economic growth and a healthy price
environment. Opposed by the Keynesian school, which considers fiscal
policy as the key macroeconomic tool
Money illusion Money illusion occurs when people confuse nominal and real values
when making economic decisions. Money illusion is most likely to
occur when inflation is unanticipated, so that people’s expectations of
inflation turn out to be some distance from the correct level.
Money supply The entire quantity of a country's commercial bills, coins, loans,
credit, and other liquid instruments in the economy.
Moral hazard When an insured party decides to take higher risks because they
perceive their losses will be covered – often linked to the excessive
risk-taking by banks knowing that central banks might rescue them
Multiplier effect If there is an initial injection (e.g. a rise in exports) into the economy
then the final increase in AD and Real GDP will be greater.
NAFTA North American Free Trade Agreement - a free trade area agreement
signed by the US, Canada and Mexico
NAIRU Non-accelerating inflation rate of unemployment: the number of
people without work that some economists say is necessary at a
particular time in order to prevent prices rising too fast.
National debt The total amount of debt that the government owes the private sector
Negative equity Negative equity occurs when the value of an asset falls below the
outstanding debt left to pay on that asset. Term is most commonly
used in connection with property prices and describes a situation
where the market value of a house is less than the existing mortgage
debt.
Negative interest rate An interest rate that is below zero. For real interest rates, this can
occur when the inflation rate is higher than nominal interest rates.
Net investment Gross investment minus an estimate for capital depreciation
Net inward migration When the number of migrants coming into a country is greater than
those leaving in a given time period
Neutral interest rate A neutral interest rate is a rate of interest that neither deliberately
seeks to stimulate aggregate demand and growth, nor deliberately
seeks to weaken growth from its current level. In other words, a
neutral rate of interest would be that which is set at a level which
encourages a rate of growth of demand close to the estimated trend
rate of growth of real GDP.
Non-inflationary growth Sustained growth of real national output whilst maintaining price
stability
Open market operations Central bank intervention in money markets where it buys and sells
securities to control the money supply and the level of interest rates
Output gap The difference between actual and potential national output. A
 negative output gap after a recession implies that an economy has a
large margin of spare productive capacity.
Overseas assets Assets such as businesses, shares, property which are owned in
overseas countries and which might generate a flow of investment
income which is a credit item on the current account of the balance
of payments.
Paradox of thrift The basic concept is that if people save more in a recession, it will
reduce consumption and thus aggregate demand will fall, impeding
economic growth and, in fact, lowering the general level of savings
Phillips Curve A statistical relationship between unemployment and inflation
Policy asymmetry When a given change in interest rates affects different groups or
different countries to a lesser or greater degree
Potential output The economy's maximum productive capacity in a physical sense. The
largest output that could be produced, given the prevailing state of
technology, with all available labour, capital and land fully utilised.
Precautionary saving Saving because of fears of a loss of real income or employment
Price stability Price stability occurs when there is low inflation and the price
changes that do occur have little impact on day-to-day decisions of
people.
Productivity A measure of efficiency e.g. measured by output per person employed
or output per person-hour
Protectionism The use of tariff and non-tariff restrictions on imports to protect
domestic producers from foreign competition
Purchasing power parity Method of currency valuation based on the premise that two identical
goods in different countries should eventually cost the same. This is
illustrated by the Big Mac index.
Rational expectations Where decisions are based on current information and anticipated
future events
Reserve currency A foreign currency that is held in countries' official reserves because
of its global importance as a medium of exchange and its inherent
stability
Ricardian equivalence The argument attributed to David Ricardo that government budget
deficits have no lasting effects on economic activity. Rational
taxpayers are supposed to anticipate that tax cuts today will mean tax
increases in future, and so save more when the government saves less.
Quantitative easing Central banks flood the economy with money by printing new notes,
to increase the supply of money. The idea is to add more money into
the system to avert deflation and encourage banks/people to borrow
and spend.
Quota A quota imposes a physical limit on the quantity of a good that can be
imported into a country in a given period of time.
Real disposable income Income after taxes and benefits, adjusted for the effects of inflation
Real interest rate The nominal rate of interest adjusted for inflation
Real wage The nominal wage adjusted for the effects of inflation
Relative deflation The term “relative deflation” is generally used to describe an
economy with an inflation rate, which has not necessarily descended
into negative territory, but is markedly lower than comparable
economies
Remittances Sending of money to people in another country for example migrant
workers sending some of their wages to their home country.
Retail Price Index (RPI) The RPI is broadly similar to the CPI but includes mortgage
repayments and some taxes, and excludes the top 4 per cent of
earners. It is used to calculate increases in wages, state benefits and
pensions.
Risk averse Exhibiting a dislike of uncertainty, often seen in a recession
Saving ratio The percentage of disposable income that is saved rather than spent
Soft landing A slowdown in activity but which does not result in a recession
Sovereign wealth fund A government or state run fund usually created by profits from natural
(SWF) resources such as oil, gas or minerals. Highly secretive, their assets
grew dramatically when oil prices rose to record levels. Some of the
largest SWFs are in the oil-rich Middle East
Spare capacity When a business is not making full use of its available capacity – there
are spare factors of production including land, labour and capital.
When an economy has plenty of spare capacity, short run aggregate
supply tends to be elastic.
Special drawing rights A unit of money created by the IMF. Each member country can borrow
SDRs at favourable interest rates from the IMF's reserves when they
are needed for reasons related to a country's balance of payments
Stability and growth EU's fiscal rule intended to maintain discipline in the public finances
pact of Euro Area member-states. The pact sets a limit for government
budget deficits of 3 per cent of gross domestic product in normal
times.
Stagflation A combination of slow economic growth and rising inflation, can lead
to stagflation. The most notable recent period of stagflation occurred
during the 1970s, when world oil prices rose dramatically, and UK
inflation rose at one point to nearly 30 per cent.
Sterling exchange rate The external value of sterling calculated using a weighted index of a
index basket of currencies – the weightings are based on the pattern of
trade between the UK and other countries
Sustainable growth Growth which meets the needs of the present without compromising
the ability of future generations to meet their own needs
Tariff A tax on imported products which may be ad valorem (%) or a specific
tax (a set amount per unit imported).
Tight labour market When demand for labour is high and there are shortages of labour.
Businesses may have to offer higher wages to attract more workers
Time lags The time it takes for one change e.g. a change in interest rates to
affect other variables e.g. consumer confidence and spending
Toxic debt Loans that may not be repaid.
Trade-off Choices have to be made between different objectives of policy
Transmission mechanism How a change in interest rates affects sectors of the economy
Trend growth The long run average growth rate – mainly determined by changes in
the stock of available factor inputs and also improvements in
productivity
Under-employment When people want to work full time but find that they can only get
part-time work – the result is a loss of hours that the economy can use
Unemployment trap When the prospect of the loss of unemployment benefits dissuades
 those without work from taking a new job – creates a disincentives
problem
Unorthodox monetary Any policy undertaken, usually by central banks, that operates outside
policy the usual parameters for influencing either the price or the quantity
of money in an economy. – this includes quantitative easing
Unit wage costs Labour costs per unit of output
Unsecured credit Credit not secured by another asset – i.e. money borrowed on credit
cards
Velocity of circulation The average number of times a unit of money changes hands in an
economy during a given period - normally measured by dividing the
total amount spent (GDP) by the amount of money available (money
supply)
Wage price spiral A situation where workers bid for higher wages because they have
seen their real income eroded by rising prices. This can lead to a
further burst of cost-push inflation in an economy.
Wealth effect The supposed link between changes in wealth and household spending
World Bank Owned by 186 member countries, the World Bank is a source of
financial and technical assistance to developing countries. It normally
targets public works and other essential capital or social projects.
World Trade The WTO oversees trade agreements, negotiations and disputes
Organisation between member countries