S-Cool Revision Summary

S-Cool Revision Summary


Balance of payments

This is a record of all the flows of money into, and out of, the UK over a given time period (usually a year). It is split into two: the Current Account (exports and imports of goods and services) and the Capital and Financial Accounts (flows of money for investment plus government reserves of foreign currencies)


'Bretton Woods' fixed exchange rate system

In 1948, the Bretton Woods conference was one of the most important of the century. Not only did they set up the IMF and the General Agreement on Tariffs and Trade (GATT, which became the WTO), but they set up a fixed exchange rate system which gave the international monetary system much stability over the next twenty years.


Capital account

This is the commonly used name for the Capital and Financial account of the balance of payments.


Capital and Financial account

This is one half of the balance of payments. It measures all flows of money into and out of a country for the purpose of direct investment and portfolio investment. It also includes the government's foreign reserves and money borrowed and lent across boundaries in the banking sector. See the topic called 'The balance of payments' for details.


Claimant count

This is the official measure of unemployment in the UK. Those counted must be out of work, physically able to work and looking for it, and actually claiming benefit. It is not felt to be as accurate as the ILO measure, because it does not include many who are not working, but are not technically claiming unemployment benefit.


Current account

This is one half of the balance of payments. It measures all exports and imports of goods and services for a given country. It also includes investment income and transfers. See the topic called 'The balance of payments' for full details.


Current account deficit

If a country has a deficit on their current account then it means that it imports more goods and services (in terms of value) than it exports. Remember that the current account also includes transfers and investment income, which has to be included in these calculations. For more detail, see the topic called 'The balance of payments'.


Deindustrialisation

This is where economic activity moves away from manufacturing and into the service sector. It is the opposite of industrialisation. This process has been going on in the UK for a number of years now.


Economic cycle

Economies tend to have periods of strong growth (or booms) and then periods of slow or negative growth (slumps, or recessions). This process where the economy does well and then badly and then well again is known as the economic cycle. Governments would love to be able to eliminate this cycle and just grow at a steady, sustainable (i.e. without inflation) rate all the time. The current Labour government seems to have got close to doing this, but economists are dubious as to whether the cycle has gone for good.


Economic growth

Economic growth refers to the growth in real GDP, or the growth in the size of the economy after allowing for price rises.


External costs

This is the cost of an externality. If a factory, when making cars, pollutes a nearby river, then the external cost is the cost borne by the third party who has to clear up the mess.


Full employment

This does not technically mean that everyone in the country has a job. There will always be some people out of work, either voluntarily (early retirement, for example) or perhaps those who are structurally unemployed (Lost their job in an old industry and their skills are non-transferable). In the UK at the moment, the official claimant count of unemployment is about one million. This is considered to be fairly close to full employment.


Government spending

Governments have to spend money on certain essential services that would be under consumed if left to the market. Defence, education and health are examples. Governments use taxes to raise the money that they need to spend.


Gross Domestic Product (GDP)

GDP is a measure of the size of an economy. It can be measured using three methods. One can add up all the output (of goods and services) in an economy; one can add up all the expenditure (on the goods and services) in the economy or one can add up all the incomes earned (used to spend on the goods and services) in the economy. See the topic called 'Aggregate demand and aggregate supply' for more detail.


Gross National Product (GNP)

GNP is the same as GDP except that net property income from abroad is included. This is the income earned from assets held abroad minus the income that leaves the country earned by foreigners who have assets in the UK.


Headline rate of inflation

This is the inflation rate calculated from the Retail Price Index (RPI).


Import controls

These were popular in the days of fixed exchange rate systems, where an economy could not get away with changes in the exchange rate to cure current account deficits. Examples of import controls include tariffs (a tax on imports) and quotas (a physical limit on the number of imports). Most countries are now committed to free trade and so can only use import controls if the World Trade Organisation allows them to.


Inflation

Inflation is usually defined as a sustained rise in the general level of prices. Technically, it is measured as the annual rate of change of the Retail Price Index (RPI). It is often referred to as the headline rate of inflation.


International Labour Organisation measure of unemployment

This measure is felt to be more accurate than the claimant count because it is based on a survey and, on top of everyone in the official count, includes the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits.


International Monetary Fund (IMF)

This institution was set up in 1948 to manage the international monetary system. All major countries contribute some money to the fund. The IMF then uses this money to stop struggling countries collapsing when they run out of foreign reserves. Although the major countries never need to call upon the IMF, it is important for them that other countries do not collapse. After all, they need markets for their goods!


Investment

When economists refer to investment, they mean firms' investment in new capital. They do not mean individuals' 'investments' in shares. This is actually a form of saving. One is saving one's money in shares.


Macroeconomics

Macroeconomics is concerned with issues, objectives and policies that affect the whole economy. All economic analysis that refers to aggregates is macro. The UK unemployment rate, the UK inflation rate, the rate of economic growth in the UK; these are all UK aggregates and therefore macro issues.


'Menu' costs

This is one of the minor costs of inflation. During periods of high inflation, prices are continually rising, so businesses have to continually change their menus, price tags, vending machines, etc. The cost of doing this is known as the 'Menu' cost of inflation.


Microeconomics

Microeconomics looks at issues associated with individual firms, consumers, workers or even industries. It is smaller scale compared with macroeconomic issues, hence the prefix 'micro'. It should be noted, though, that some micro issues, like the telecom industry in Europe, might be bigger than the macro issues of a small country like, say, Costa Rica.


Monetary Policy Committee (MPC)

Four days after the election of the Labour government in May 1997, the Chancellor, Gordon Brown, announced that decisions on whether interest rates should change would be transferred to the independent Monetary Policy Committee (MPC) of the Bank of England. The nine members of the committee meet once a month and announce their decision at midday on the first Thursday of each month.


Negative real interest rate

If the nominal (i.e. actual) interest rate is 6% (as it was for much of 2000), but the annual inflation rate is 8% (it was more like 2.5% during 2000), then the effective real interest rate is -2% (6 - 8). If you had £100 in the bank for that year, you would earn £6 interest, giving you £106. But something that cost £100 a year ago will now cost £108. So in real terms, the money has lost value sitting in your savings account!


New Deal

This has been one of the major policies of the Labour government. Put simply, it guarantees either training or a job to all young people. It has been so successful that the government is planning to extend the scheme to all those who are long-term unemployed, regardless of age.


Phillips curve

Phillips was an economist who spotted a relationship between the rate of change of money wages and unemployment. He used data from past years to show that this relationship was negative. Since this find (in 1958), economists have used it to state that the relationship between inflation (closely related to the rate of change of money wages) and unemployment is negative. Until the relationship broke down (although not entirely) in the 70s, governments used this relationship to gauge what the cost in terms of inflation would be for a given cut in unemployment, and vice versa. See the topic called 'Unemployment and inflation' for much more detail.


Price stability

Technically, this means that prices are stable. This means that the inflation rate would be zero. The term does tend to be used when the inflation rate is low. Prices are rising in this case, but very slowly, on average. Prices are still fairly stable when inflation is low.


Production Possibly Frontier (PPF)

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.


Real GDP

GDP (Gross Domestic Product) is a measure of the size of a domestic economy. To gauge how quickly the economy is growing, changes in real GDP are measured. Changes in real GDP take out increases in nominal GDP (the actual increase in GDP) that are due to price rises only.


Recession

Technically, a country is in recession if the economy's growth rate (percentage change in real GDP) is negative for two quarters in a row. If an economy is in recession then it is not doing very well! Negative economic growth tends to be the result of closing businesses and unemployment.


Redundancy payments

In many industries, if a worker is laid off, or made redundant, then he is compensated with a lump sum payment. The size of the payment depends of the length of time in the job.


Retail Price Index (RPI)

This is an index measuring the average change in the price level of a basket of goods and services. The average is weighted to reflect the relative importance of the various goods and services. The RPI is published every month and is then used to calculate the annual percentage change in the average price level (or inflation rate).


'Shoe leather' costs

This is one of the minor costs of inflation. During periods of high inflation, prices are continually rising, so it not so easy, as a consumer, to know exactly where to buy a good to get the lowest price. The search costs are higher. These are often called 'shoe leather' costs, because of the cost of replacing one's shoe leather having walked around loads of shops to find the best price!


Structural unemployment

This is unemployment caused by a change in the structure of an economy. For example, the decline in the manufacturing industry over the last thirty years has created many unemployed men coming up to retirement age who have only been trained in the skills required for the dead industry. They find it very hard to find another job. Often they will stay unemployed until they reach retirement age. They will be part of the huge group of 'long term' unemployed. Most of these 'long term' unemployed are structurally unemployed.


Supply-side reforms

These are reforms that improve the supply-side of the economy. Examples include privatisation and the taming of the trade unions. Notice that these supply-side reforms can improve the supply conditions in the product market and the labour market.


Tariffs

These are taxes on imports. They were once a very popular type of import control.


Thrift

Thrift is another word that economists use when they are referring to saving. If an individual is being thrifty, then they are being virtuous and careful in the sense that they are saving money.


Trade deficit

This is not the same as a current account deficit. A trade deficit occurs if an economy imports more goods than it exports, in value terms. It only refers to the 'trade in goods' section of the current account. For more details, see the topic called 'The balance of payments'.


'Trend' rate of economic growth

The 'trend' growth rate in this country is estimated by the government to be 2.5%. This means that the projected increase in the productive potential of the UK will allow the economy to grow by 2.5% a year in real terms without causing inflation to rise. The productive potential of an economy can rise for a number of reasons. First, there could be an increase in the amount of resources (increased population or finding new oil reserves, for example). Secondly, there could be improvements in technology. Thirdly, the labour force could become more productive and finally, firms and the government may invest in new capital.


'Trickle down' effect

Those who did very well out of the booming capitlist economies defended the system by claiming that there was a 'trickle down' effect. The idea is that although the rich are getting even richer, they create a lot of wealth for the economy as a whole, and some of this wealth 'trickles down' to the poorer members of society. The cake keeps getting bigger, the poor are getting a smaller proportion of the cake, but they still get more cake, because the cake is so big!


Uncompetitiveness of an economy's industries

If an economy's industries are uncompetitive, then they are struggling to sell their goods abroad in more competitive markets. This can happen if the value of a country's currency rises, making home produced exports more expensive abroad (this happened in 2000, when the £ was very strong). Exports can also be uncompetitive if they are of an inferior quality.


Underlying rate of inflation

This is the preferred measure of inflation of the government. It is calculated from the RPIX, which is the same as the RPI but with housing costs taken out in the form of mortgage interest payments. The government prefer this measure because it is unaffected by the instrument with which they try to control inflation (i.e. the rate of interest).


Unequal distribution of income

A country that has an unequal distribution of income has many rich individuals but also many poor individuals. The gap between the rich and the poor can be very large. Capitalist economies create a lot of wealth, but tend to have unequal distributions of income. The former Soviet Union was very inefficient, but did at least have a fairer distribution of income.


Value Added Tax (VAT)

This is the major indirect tax in the UK. It is imposed on goods and services, and is only paid by an individual if the good or service in question is purchased. Its current rate is 17.5%. Some goods are 'zero-rated', the tax is levied at 0% (i.e. there is no VAT on these goods). These goods tend to be essentials, or necessities. Many basic foodstuffs are zero-rated. The idea is that poorer people, who spend more of their incomes on necessities, will end up paying less VAT.


Welfare state

This is the phrase used to describe the government's system of benefits and services provided to help, in particular, those whose start in life was not good. It makes sure that every member of society will receive a minimum standard of living. It includes education and health services, as well as a selection of benefits, such as housing benefit, unemployment benefit and chid benefit.


Working population

Also called the labour force. This includes all members of the population of working age (16 - 65 year old men and 16 - 60 year old women) who are either in employment, or unemployed but willing and able to work, and actively seeking work.


World Trade Organisation (WTO)

The General Agreement on Tariffs and Trade (GATT) was formed at Bretton Woods (a small town in the USA) in 1948. Its aim was free trade throughout the world (free from import controls, that is). Tariffs averaged 50% just after the war. By the time that the GATT became the WTO in 1993, tariffs averaged 5% around the world. Whereas GATT was a series of long meetings between countries called 'rounds', the WTO is an on-going organisation to which countries can complain if they feel another country is obstructing the sale of their exports in an unfair way. See the topic called 'Why trade?' to see why free trade is a good thing.