Essential Macroeconomic Terms and Economic Concepts

Core Economic Concepts

Macroeconomics: The study of the economy as a whole.

Microeconomics: The study of individual parts of the economy.

Macroeconomic Objectives

The aims of a government relating to key economic performance indicators, such as:

• Economic growth
• Inflation
• Unemployment

The Economic Cycle

• Boom: The peak of the economic cycle where GDP is growing at its fastest.
• Downturn: A period in the economic cycle where GDP grows, but at a slower rate.
• Recession: A less severe form of depression.
• Depression (or Slump): The bottom of the economic cycle where GDP falls, accompanied by significant increases in unemployment.

National Income and GDP

• Economic growth: The increase in national income over time.
• GDP: An internationally recognized measure of national income.
• National income: The value of income, output, or expenditure over a period of time.
• Aggregate demand: Total demand in the economy, including consumption, investment, government expenditure, and exports minus imports.

Inflation and Price Levels

• Inflation: A general and persistent rise in prices.
• CPI (Consumer Price Index): A measure of the general price level (excluding housing costs) used in the UK and across the Eurozone.
• RPI (Retail Price Index): A measure of the general price level which includes house prices and council tax.
• Cost-push inflation: Inflation caused by rising business costs.
• Demand-pull inflation: Inflation caused by excessive demand in the economy relative to supply.
• Money supply inflation: Inflation caused by rapid growth in the money supply.
• Deflation: A period where the level of aggregate demand is falling.
• Monetarists: Economists who believe there is a strong link between growth in the money supply and inflation.
• Index linking: Where certain government payments are linked to increases in the RPI.
• Purchasing power of money: The amount of goods and services that can be bought with a fixed sum of money.

Unemployment

Unemployment: People who are actively seeking work but are unable to find a job.

• Voluntary unemployment: Unemployment resulting from people choosing not to work.
• Structural unemployment: Caused by changes in the structure of the economy, such as the decline of an industry.
• Seasonal unemployment: Unemployment caused when seasonal workers (e.g., in the holiday industry) are laid off after the season ends.
• Frictional unemployment: When workers are unemployed for a short period while moving from one job to another.
• Cyclical unemployment: Unemployment caused by falling demand resulting from a downturn in the economic cycle.

International Trade

• Balance of payments: A record of all transactions relating to international trade.
• Current account: The part of the balance of payments where all exports and imports are recorded.
• Balance of trade (Visible balance): The difference between visible exports and imports.
• Visible trade: Trade in physical goods.
• Invisible trade: Trade in services.
• Exports: Goods and services sold overseas.
• Imports: Goods and services bought from overseas.