Macroeconomic Definitions


    Absolute Advantage. An economy has an absolute advantage in good X if it can produce more of X than any other country using the same resources.

    Absolute Poverty. Absolute poverty occurs when a person’s income is below the minimum income required to afford basic necessities for human survival (food, water, shelter, clothing).

    Actual GDP Growth. Actual GDP growth is the growth in real GDP that currently occurs.

    Aggregate Demand. Aggregate demand (AD) is the total amount of expenditure on goods and services in an economy.

    Aggregate Supply. Aggregate supply is the total amount of supply of goods and services in an economy.

    Automatic Stabilizers. Automatic stabilizers are changes in government expenditure and taxation that automatically kick-in to help reduce the ups and downs of the business cycle.

    Balance of Payments. The balance of payments (BoP) is a record of all external financial transactions between one economy and the rest of the world.

    Business Cycles. Business cycles are the pattern of booms and recessions in an economy over a period of time. Business cycles are the fluctuation of real GDP around the long-term trend growth rate.

    Capital Flight. A dangerous situation, capital flight occurs when international investors suddenly lose confidence in an economy and rapidly withdraw their capital from that economy.

    Comparative Advantage. An economy has a comparative advantage in good X if it can produce X at a lower opportunity cost than any other country.

    Consumption. Consumption is total consumer expenditure on durables, non-durables and services.

    Contractionary Fiscal Policy. A contractionary fiscal policy means so AD falls. Multiplier effects make AD fall further. AD shifts left so inflation falls and real GDP falls.

    Cost-Push Inflation. Cost-push inflation occurs when LRAS shifts left because resource prices rise or wages rise, firms’ costs rise and their prices rise.

    Credit Crunch. A situation where banks and other financial institutions decrease their lending or stop lending altogether.

    Crowding In. An increase in government spending causes an increase in private investment (maybe the government invests in the infrastructure which encourages private firms to invest).

    Crowding Out. An increase in government spending causes a decrease in private investment (maybe the government uses resources that private firms would have used).

    Current Account. A record of an economy’s international trade in goods, services and investment income.

    Customs Union. A customs union is where there is free trade within the trading bloc and a common external tariff on goods coming from outside the bloc.

    Deflation. Deflation is a fall in the average price level over a given time period.

    Demand-Pull Inflation. Demand-pull inflation occurs when AD rises, spare capacity falls, resources begin to run out so firms’ costs rise and prices rise.

    Direct Tax. Direct taxes are taxes on consumers’ income (income tax) or firms’ profits (corporation tax).

    Dumping. Dumping occurs when country A sells its goods in country B below the cost of production.

    Economic Growth. Economic growth is the percentage change in real GDP over a given time period.

    Exports. Exports are domestic goods and services sold to foreign agents.

    Exchange Rate. An exchange rate (XR) is the price of one currency in terms of another.

    Expansionary Fiscal Policy. An expansionary fiscal policy means so AD rises. Multiplier effects make AD rise further. AD shifts right so inflation rises and real GDP rises.

    Financial Account. A record of an economy’s international capital flows including multinational companies’ investment, FDI and portfolio investment.

    Fiscal Policy. Fiscal policy is the manipulation of government expenditure (G) and taxation (T) by the government to influence macroeconomic variables.

    Fixed Exchange Rate. A fixed XR is where the central bank buys and sells the domestic currency to keep the XR at a fixed level.

    Floating Exchange Rate. A floating XR is where market forces determine the XR, that is, the XR is determined by the intersection of market demand and supply.

    Free Trade. Free trade refers to international trade conducted without any restrictions on trade.

    Free Trade Area. A free trade area is one in which all trade barriers are removed between member countries. Each member can impose its own restrictions on goods from outside the free trade area.

    Full Employment. An economy is at full employment if all resources are fully employed, no more can be produced.

    Gini Coefficient. The Gini coefficient is a numerical measure of the extent of income inequality. The Gini lies between 0 and 1. 0 represents complete income equality, everyone earns the same income. 1 represents complete income inequality, one person earns all the country’s income.

    Globalization. Globalization refers to the increasing interdependence and connectivity of different economies around the world, economies integrate into a single global economy.

    Government Expenditure. Government expenditure is total expenditure by the government on goods and services.

    Gross Domestic Product. Gross Domestic Product (GDP) measures the monetary value of output produced by an economy during a given time period.

    Hot Money. Money that international investors move around the globe to seek the highest returns. An unstable form of investment because investors could easily switch money from one economy to another depending on relative interest rates, confidence in an economy and expected XR movements.

    Hyperinflation. A period of rapid inflation.

    Imports. Imports are foreign goods and services bought by domestic agents.

    Indirect Tax. Indirect taxes are taxes on expenditure (Ad valorem or specific taxes).

    Infant Industry. An infant industry is new, it needs time to grow and become efficient to be able to compete internationally. So the infant industry must initially be protected from foreign competition.

    Inflation. Inflation is a rise in the average price level over a given time period.

    Interest Elasticity of Investment. The responsiveness of investment to a change in interest rates.

    International Competitiveness. International competitiveness is the ability of a country to compete with rival countries in terms of prices and/or quality.

    Investment. Investment is total investment expenditure by firms on buildings, machinery and the change in inventories.

    J-Curve. After an exchange rate devaluation, the current account moves into a deficit in the shortrun because of fixed contracts for exports and imports. Exports are cheaper and imports are dearer yet their volumes remain the same, so the current account initially moves towards a deficit. After contracts are renegotiated in the long-run, exports rise, imports fall and the current account moves towards a surplus.

    LDC. Less developed country.

    Leakage. A leakage from the circular flow is money leaving the economy (saving, taxes and imports).

    Liquidity Trap. A liquidity trap occurs when the interest rate is at its minimum, interest rates cannot fall any lower.

    Loose Monetary Policy. A loose monetary policy causes interest rates to fall and AD to rise. Multiplier effects make AD rise further. Inflation rises and real GDP rises.

    Long-Term Trend Growth Rate. The long-term trend growth rate is potential real GDP growth, the GDP growth that will occur if all resources are fully and efficiently employed. This increases if technology and knowledge improve.

    Lorenz Curve. The Lorenz curve is a diagrammatic representation of a country’s income inequality.

    Managed Exchange Rate. A managed XR is where the central bank set a target for the XR and allows the XR to float around that target, the central bank will buy/sell the domestic currency to make sure the XR stays close enough to its target.

    Marshall-Lerner Condition. A devaluation will only lead to an improvement in the current account if the sum of the elasticities of demand for exports and imports is greater than one.

    Monetary Policy. Monetary policy is the manipulation of monetary variables (interest rate and money supply) by the MPC to influence AD and inflation.

    Monetary Union. A monetary union is a group of economies sharing the same currency. One central bank controls the currency, monetary policy and exchange rate policy for all the members.

    Multinational Company. A multinational company (MNC) is a firm operating in more than one country.

    Negative Output Gap. Occurs when real GDP is below the trend growth rate.

    Net Exports. Net exports are exports minus imports (X-M).

    Output Gap. The difference between actual or real GDP and the trend growth rate.

    Positive Output Gap. Occurs when real GDP is above the trend growth rate.

    Productive Capacity. Productive capacity refers to how much output an economy can produce.

    Productivity. Productivity is output per worker.

    Protectionism. Protectionism refers to a country imposing trade barriers to restrict imports.

    Public Sector Net Cash Requirement. Public sector net cash requirement (PSNCR) is government borrowing over a period of time, the difference between government expenditure and tax revenue.

    Quantitative Easing. Quantitative easing is the control of the money supply by the MPC to influence AD and inflation.

    Quota. A quota is a direct restriction on the quantity of imports.

    Real GDP. Real GDP is GDP adjusted for inflation.

    Real Exchange Rate. A country’s real exchange rate is its nominal exchange rate times its price level and divided by the foreign price level

    The UK becomes more internationally price competitive if its real XR falls. The UK’s real XR will fall if the UK’s nominal XR falls, domestic prices fall and/or foreign prices rise, ceteris paribus.

    Recession. A recession occurs if real GDP falls for two consecutive quarters.

    Relative Poverty. Relative poverty occurs when a person’s income is so low that they cannot afford what their society deems ‘average’ or ‘common’ goods (for example a TV in the US).

    Ricardian Equivalence Hypothesis. A rise in government spending will trigger a fall in consumption. A rise in government spending will make agents anticipate higher future tax revenues, agents consume less to save more so that they can repay high future taxes, AD does not change because government spending rises but consumption falls, fiscal policy is ineffective.

    Spare Capacity. An economy has spare capacity if resources are underutilized. More resources can be employed and more can be produced.

    Stagflation. A period of rising inflation and rising unemployment.

    Supply-Side Policies. Supply-side policies are designed to increase productivity and shift LRAS right.

    Tariff. A tariff is a tax on imports.

    Tight Monetary Policy. A tight monetary policy causes interest rates to rise and AD to fall. Multiplier effects make AD fall further. Inflation falls and real GDP falls.

    Trading Bloc. A trading bloc is a group of countries that allow free trade within their bloc but may impose tariffs on countries outside the bloc.

    World Trade Organization. The World Trade Organization (WTO) promotes free trade between all of its member countries. The WTO provides a forum for free trade negotiations by conducting rounds, a series of negotiations designed to lead to major free trade agreements. The WTO also settles trade disputes between member countries and sets trade rules.


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