S-Cool Revision Summary

S-Cool Revision Summary


Aggregate demand

This is the aggregate of all the demand in the economy. It includes consumption by households, investment by firms, government spending and consumption by foreigners on exports. Consumption by UK households on foreign imports must be subtracted because it is included in the measure called 'consumption by households'. An aggregate demand curve shows the total demand in the whole economy at any given price level.


Aggregate supply

This is the aggregate of all the supply in the economy. Effectively, it is the sum of all the industry supply curves in an economy. An aggregate supply curve shows the amount supplied (or the level of real output) in the whole economy at any given price.


Automatic stabilisers

The extremes of the economic cycle are dampened down by the fact that benefits automatically increase and tax revenues taken from consumers automatically decrease when an economy moves into the trough of the cycle. The opposite occurs when the economy moves towards the peak of the cycle. These factors automatically stabilise the economy, hence their name.


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). See the topic called 'The balance of payments' for more detail.


Bonds

The government as a way of borrowing money issues government bonds. Bonds tend to be long-term investments for the purchaser (twenty years or more). The government receives, say, £100 for a bond, does not have to pay it back for at least twenty years, but does have to pay the holder interest each year. Government bonds are also known as 'gilts'.


Budget deficit

This is a short phrase used to describe the PSNCR. It refers to the government's budget being in deficit. This should not be confused with the trade deficit, which is the deficit in the 'trade in goods' part of the current account of the balance of payments (i.e. the value of imports of goods are higher than the value of exports of goods).


Buffer stock schemes

A Buffer stock scheme is one where, having set an 'intervention' price, the government will intervene and either buy excess stock or sell their excess stock in an attempt to keep the price around the intervention price. This occurs, in particular, in markets for agricultural products, where prices can be very variable depending on the quality and quantity of the harvest.


Capital expenditure

This includes all government spending on anything that increases the country's capital stock. Examples include roads, schools and hospitals.


Common Agricultural Policy (CAP)

This is a policy of the European Union and is similar to a Buffer stock scheme. The EU tries to protect the incomes of European farmers by offering various subsidies so as to protect them from the fierce competition from abroad. The EU does not want to find itself in a situation where it relies on other countries for all its food requirements.


Community Charge

This is the local government tax that was levied from the late 80s until 1993, when the Council Tax replaced it. It was highly unpopular because it was seen as unfair. The individual was taxed rather than property. This made it very regressive in nature. Individuals paid the same amount whether they earned, say, £10,000 a year or £100,000 a year.


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 expenditure

This is recurring government expenditure on goods and services. Wages in public sector occupations like teaching and nursing are good examples.


Debt interest

This refers to the interest due on the government's national debt. For the tax year 1999-2000, this amounted to just over £25 billion!


Demand management

This is the government policy advocated by Keynesian economists. They suggest that governments should use taxation and government spending to make sure the level of aggregate demand in the economy is high enough to keep unemployment low and avoid recession, but low enough to avoid over heating and inflation. In other words, governments should 'manage' the level of demand.


Depression

This is a very severe recession. Growth rates are low or negative and unemployment is high for a number of years. This happened to the USA and the UK in the 1930s.


Direct tax

A direct tax is one that is levied directly on income. So, for individual workers, this is income tax. For businesses this is corporation tax.


Externalities

An externality is a sort of 'by-product' of a certain production process, or of consuming something, which affects a third party. This effect can be positive or negative. Consuming education has a positive effect on the rest of society, and pollution is an example of a negative by-product of a production process that will affect a third party (affluent pumped into a river that is used by fisherman, for example)


Fiscal policy

Fiscal policy is any government policy associated with taxation of government spending.


General government expenditure

This is the total of all capital expenditure and current expenditure, including debt interest.


General government final consumption

This is the total of all current expenditure excluding transfer payments.


Geographical mobility

This refers to the ability of a worker to be mobile geographically. For example, how easy is it for a builder living in Liverpool to take a job in London as a builder and move himself and his family down there? British workers tend not to be very geographically mobile.


Government spending

This is the general term used for the annual spending by the government on things like defence, health education social security benefits, law and order, etc. For more specific terms, see general government expenditure and general government final consumption.


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.


Income elasticity of demand

It measures the responsiveness of the quantity demanded to a given change in real income. It can be calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in real income.


Indirect tax

An indirect tax is one that is levied indirectly. One only pays VAT, for example, if one actually buys the good on which it is levied. To a certain extent, there is a choice.


Injections

These represent money that enters the circular flow of income. Investment, government spending and exports are all injections.


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!


Keynesian economist

A follower of the economics devised by John Maynard Keynes. Briefly, Keynesian economists believe that the market is not always the answer. They work in perfect conditions, but things are not always perfect. In particular, at the time of the depression in the 1930s, Keynes believed that markets were not working. He felt that there was insufficient demand in the economy and it was up to the government to increase demand through government spending and lowering taxes. Keynesians believe in demand management, whereas classical (and monetarist) economists do not believe in this sort of government intervention.


Leakages

These represent money that leaves the circular flow of income. Savings, taxes and imports are all leakages.


Marginal propensity to consume

This measures the amount of every extra £1 earned that is spent. For example, a worker might be earning £200 a week. If he gets a £10 a week pay rise, and spends £6 of that £10, then his marginal propensity to consume is 0.6.


Market failure

In theory, if markets are left to the forces of supply and demand, markets will never fail. In the real world, markets are rarely totally free. Trade unions distort labour markets and externalities distort product markets. In terms of this topic, markets would fail to produce the right amount of public goods and merit goods. This is why the government steps in an provides defence, health services and education.


Merit goods

Merit goods are goods that are socially beneficial. Although they can, and are, provided privately, they would be under-consumed if left solely to the free market. Governments intervene to make sure that there is a socially optimal level of consumption. Education and health are good examples.


National debt

This is the total amount of money owed by the government. It is the sum of all the PSNCRs ever accumulated. The UK government currently owes about £400 billion!


National Minimum Wage (NMW)

The NMW was introduced in April 1999. It was set at £3.60 an hour for workers aged 22 and over, and £3.00 for 18-21 year olds. All employers are obliged, by law, to pay these hourly rates to their employees. It is designed to help those who were previously on very low wages to lift themselves out of poverty. Critics argue that it creates unemployment. See the topic called 'Labour markets' for much more detail.


Negative externality

An externality is a sort of 'by-product' of a certain production process, or of consuming something, that affects a third party. This effect can be positive or negative. Pollution is an example of a negative by-product of a production process that will affect a third party (affluent pumped into a river that is used by fisherman, for example)


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.


Non-diminishability

Also known as non-rivalry. This is another characteristic of a public good. The addition of new consumers of a public good does not diminish the amount that the existing consumers can consume. This is also true of defence.


Non-excludability

Public goods have this characteristic. One cannot exclude anyone from consuming a public good, hence the title of the characteristic. Defence is a good example.


Normative economic statements

An economic statement is a normative one if it is a value judgement. Any subjective opinion not based on fact is normative. For example, a positive statement might be, "due to the shift from direct taxation towards indirect taxation, the distribution of income in the UK has become more unfair." A normative version might be, "The distribution of income in the UK is unfair." The first statement can be proved; the second is an opinion.


Occupational mobility

This refers to the ability of workers to be mobile in terms of changing jobs. Occupational mobility will improve if a government invests money into retraining, especially for those workers who lost their job in one of the declining industries (whose skills are now redundant).


Pay As You Earn (PAYE)

This is the method of collection of income tax for most employees in the UK. As its title suggests, the tax is paid straight away, 'as you earn'. The employer takes it from your gross income and pays it for you so that the income received in the pay packet is your 'after-tax' disposable income.


Poll Tax

This is the less formal name that was used to describe the Community Charge.


Poverty trap

Workers on low incomes are trapped in poverty if, as a result of gaining a pay rise, the resulting loss of benefits and increase in income tax paid mean that the actual take home disposable income barely increases, or even falls. There is no incentive, therefore, for the worker to try harder and look for better-paid work.


Progressive taxes

A tax is progressive if the amount of tax paid by the individual rises as a proportion of his income as his income rises. Notice that the fact that the amount of tax paid rises as one's income rises is not enough to make it a progressive tax.


Proportional taxes

A tax is proportional if the amount of tax paid by the individual as a proportion of his income remains constant as his income rises. Notice that the earner will pay more actual tax as his income rises, but the amount paid will always be the same percentage of his income.


Public goods

Public goods are goods that have the characteristics of non-excludability and non-diminishability. They tend to be provided by the public sector (i.e. the government) due to the fact that no one can be excluded from consuming them. This means that consumers take a free ride so it is almost impossible for a private firm to get anyone to pay for a public good.


Public Sector Debt Repayment (PSDR)

If a government manages to spend less than it collects in tax revenue then it can use what it has left to pay off some of the national debt. In this situation, the PSNCR is negative, or it is called a Public Sector Debt Repayment (PSDR).


Public Sector Net Cash Requirement (PSNCR)

This is the amount of money that the government has to borrow each year. It is, therefore, the difference between tax revenues and total government spending for a given year. If a government manages to spend less than it collects in tax revenue then it can use what it has left to pay off some of the national debt. In this situation, the PSNCR is negative, or it is called a Public Sector Debt Repayment (PSDR). The PSNCR used to be called the Public Sector Borrowing Requirement (PSBR).


Recession

Officially, this is defined as an economy that experiences two consecutive quarters of negative growth in real GDP. Basically, the economy is not doing well. Unemployment probably rises. Recessions tend not to last too long. Very long recessions become depressions.


Regressive taxes

A tax is regressive if the amount of tax paid by the individual falls as a proportion of his income as his income rises. Notice that the amount of tax actually paid may well rise as one's income rises. It is the amount paid as a proportion of one's income that counts.


Replacement ratio

This concept is linked to the unemployment trap. The replacement ratio measures the proportion of a person's take home pay (including benefits) that will be 'replaced' by just benefits if that person loses his job. Obviously, if this figure is close to 100% (which it has been in the past) there is little incentive to actually take the job in question.


Tax burden

This is the burden of taxation on the economy. It is normally expressed as a percentage of GDP. For example, the tax burden in the UK for the tax year 1999-2000 was around 37%. This meant that 37% of real national income was taxed by the government. Income tax is probably the main source, but there are business taxes, duties and VAT as well.


The 'golden rule'

This is the rule that the Labour government has set itself with regard to government borrowing. They only allow themselves to borrow for capital expenditure. The implication is that all current expenditure has to be covered by tax revenues for any given year.


The Laffer curve

The Laffer curve shows the relationship between the tax rate and the government tax revenue received by the government. At tax rates of 0% and 100%, government revenue will be zero. The question is, at what tax rate will the government maximise its tax revenue?


Trade deficit

This is the deficit in the 'trade in goods' part of the current account of the balance of payments (i.e. the value of imports of goods are higher than the value of exports of goods). This should not be confused with the budget deficit, which is a short phrase used to describe the PSNCR (i.e. any government spending over and above government tax revenue, for a given year).


Transfer payments

This is the part of government current expenditure that is not counted as new spending because it is simple a transfer from taxpayers to benefit receivers. All benefits and state pensions are included, If a pensioner spends his entire pension, it is not included when calculating the size of the economy because the income earned by the taxpayer who funded that pension has already been included.


Treasury bills

The government as a way of borrowing money issues treasury bills. They are a short-term form of borrowing, typically being repaid after three months. The government is borrowing from the people who buy these bills. The investor's return on the bill is higher than the initial price paid.


Unemployment trap

This is similar to the poverty trap but it involves the lack of incentives in terms of increased take home pay from taking a job when currently unemployed, rather than getting a better paid job, or a pay rise in a current job.


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.


Working Families Tax Credit

This is a benefit that is paid through a worker's pay packet. It is paid to those on low pay with a family and is designed to 'make-work pay'. In other words, it is a benefit (or tax credit) designed to eliminate (as best it can) the poverty trap and unemployment trap.