Oeconomica
Definitions
Definitions are extremely important for all essay response questions and is tested under the Learning Objective "Relevant economic terms are used appropriately throughout the response"
Below is a list of definitions pertaining to macroeconomic topics that are frequently tested. This is not a comprehensive list and if you feel that we have left out any important definitions please do not hesitate to suggest it using the "Contact Us" form.
HL and SL
Expenditure Approach (GDP)
Adds up all spending to buy final goods and services produced within a country over a time period
Income Approach (GDP)
Adds all the income earned by the factors of production that produce all goods and services within a country over a time period
Output Approach (GDP)
he value of all final goods and services produced in a country over a time period
Gross Domestic Product
Final market value of all goods and services produced in a country over a time period
Gross National Income
Income earned by residents of a country regardless of their physical location
Nominal Values
Value measured in terms of price prevailing at the time
Real Values
Measure of value that takes into account changes in price over time
Per capita
Values that take into account the population
Purchasing Power Parity
Buying power equivalence
Business Cycle
Short term fluctuations in the growth of real output which are alternating in periods of expansion and contraction
Potential Growth
Output represented by the long term growth trend
Happiness Index
An index that is concerned with personal happiness
Happy Planet Index
An index that is concerned with planets wellbeing
Aggregate Demand
The total amount of real GDP that consumers, firms, the government and foreigners want to buy at each possible price level over a time period
Short run
Period of time when price of resources are roughly constant in spite of changes in price levels
Long run
Period of time in which the price of all resources are flexible and change with changes in price level
Aggregate Supply
Total quantity of goods and services produced in an economy over a particular time period at different price levels
Unemployment
People of working age who are actively looking for a job but are unable to find one
Underemployment
People of working age that are employed but not making full use of their skills
Structural unemployment
Unemployment due to change in demand for certain type of labor skills
Frictional Unemployment
Unemployment arising from individuals who are between jobs
Seasonal Unemployment
Unemployment due to change in demand for labor in certain industries on seasonal basis
Cyclical Unemployment
Unemployment caused by a deficiency in aggregate demand
Inflation
A sustained increase in the general price level of goods and services
Deflation
A sustained decrease in the general price level of goods and services
Consumer Price Index (CPI)
Measure of cost of living for typical household
Demand pull inflation
Inflation caused by excess aggregate demand
Cost push inflation
Inflation caused by a fall in aggregate supply
Economic growth
Increase in real GDP
Economic Inequality
Degree that people in a population differ in their ability to satisfy their economic needs
Lorenz curve
Curve that is used to depict the level of income inequality in an economy
Poverty
An inability to satisfy minimum consumption needs
Absolute poverty
A situation in which a person or family does not have enough income to meet basic human needs
Relative poverty
comparison of the income of individuals or households in a society to a the median income
Direct tax
Tax paid directly to the government tax authorities by the tax payer
Proportional Tax
There is a constant increase in the tax with income
Progressive tax
There is a more than proportionate increase in tax with income
Regressive tax
There is a less that proportionate increase in tax with income
Monetary Policy
Policy undertaken by central bank to influence aggregate demand
Nominal Interest Rates
Interest rate that prevails at that given time
Real Interest Rate
Interest rate adjusted for inflation
Expansionary Monetary Policy
Increase in money supply by central bank to increase aggregate demand
Contractionary Monetary Policy
Decrease in money supply by central bank to decrease aggregate demand
Ratchet Effect
In Keynesian model price level only increases but does not decrease due to sticky wages in downward direction
Fiscal Policy
Manipulation by the government of its own expenditure and taxes to influence the level of aggregate demand
Expansionary Fiscal Policy
Increase in the government expenditure or reduction in taxes to increase the level of aggregate demand
Contractionary Fiscal Policy
Decrease in the government expenditure or increase in taxes to decrease the level of aggregate demand
HL Only
Government debt
The amount of money that a government owes to lenders outside of the government itself
Sustainable debt
Level of debt where the borrowing government has enough revenue to meet its debt obligation
Marginal tax rate
Tax paid on additional income
Average tax rate
Tax paid divided by total income
Minimum reserve requirement
The minimum amount of money that the bank is required to legally store
Crowding out
If government is forced to borrow their is an increase in the demand for money leading to an increase in the rate of interest and therefore reducing private investment.
Automatic Stabilizers
Factors that stabilize the short term fluctuations with very little government intervention
Keynesian Multiplier
The ratio of real GDP divided by a change in any of the components of aggregate spending
Marginal Propensity to Consume
Fraction of additional income that household spend on consumption of domestically produced goods and services
Marginal Propensity to Save
Fraction of additional income saved
Marginal Propensity to Tax
Fraction of additional income taxed
Marginal Propensity to Import
Fraction of additional income spent on imported goods and services