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<