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.

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 Account (flows of money for investment plus government reserves of foreign currencies).

Balance of payments deficit

This is a term that is often used that doesn't actually mean anything because the balance of payments always balances. The term is mistakenly used to refer to a disequilibrium in the balance of payments. In other words, the current account is in deficit or surplus.

Balancing item

This is the old name for net errors and omissions. The new name is much more sensible because this item is included in the balance of payments simply to reflect the mistakes that are made in the collection of the data.

Bretton Woods 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 International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, which became the World Trade Organisation), but they set up a fixed exchange rate system which gave the international monetary system much stability over the next twenty years.

Budget deficit

This is a short phrase used to describe the Public Sector Net Cash Requirement (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 thecurrent 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 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.

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 income 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.

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.

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.

Customs union

A customs union is a group of countries that trade free of barriers between themselves but have a common external tariff for all countries trying to import into the customs union. The EU is a good example.

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.

Devaluation

Devaluation is a large, and often immediate, fall in the value of a currency. The pound fell by around 15% in value when it dropped out of the ERM in September 1992.

Direct investment

This refers to any investment in a business in another country. Basically it refers to the transfer of ownership of UK and foreign businesses. If Marks & Spenser set up a new store in France, the money invested appears in this section of the capital account as an outflow of money (-). If the French car company Renault set up a factory in the UK, the money invested appears in this section of the capital account as an inflow of money (+).

Elasticity of demand

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

Exchange Rate Mechanism (ERM)

This is the fixed (but adjustable) exchange rate system for EU currencies. In began in 1979 (without the UK). Currencies were fixed to a central rate (a weighted average of all the currencies), but countries were allowed to vary their exchange rate within a two and a quarter percent band. Realignments were allowed in exceptional circumstances. The UK joined in 1990 at too high a rate. The £ was allowed a 6% band, but it didn't help much. The £ was at the bottom of this band for most of 1992, and was forced out in September. Those currencies that survived the turmoil's of 1992 and 1993 stayed in the ERM until their currencies were subsumed into the EURO in January 2000.

Exports

An export is a good or service that is sold abroad.

Fiscal policy

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

Foreign Direct Investment (FDI)

As the title suggests, this refers to direct investment from abroad. A good example is when Nissan built a car factory in Sunderland in the 80s.

Free trade

Free trade refers to a situation where countries trade with each other 'free' of trade barriers.

Imports

An import into the UK is a good or service produced in another country that is sold in the UK. If you own a Mercedes car, then you have bought an imported good.

Investment income

This is the section of the current account that measures the inflow of income form various investments abroad (interest from bonds and bank accounts, profits from businesses and dividends from shares) net of similar income flowing out to foreigners with investments in the UK. It is often referred to as IPDs.

Invisibles

This is the old name for all the intangible items of the current account (i.e. everything that is not visible). Invisibles have now been sub-divided into three separate sections - trade in services, investment income and transfers.

IPDs

This is an abbreviation that is often used to describe interest, profit and dividends. These are forms of incomes earned on investments abroad. They appear in the investment income section of the current account.

J-curve

The J-curve illustrates the phenomenon whereby a trade deficit gets worse (i.e. bigger) before it gets better (i.e. smaller) following a devaluation of the currency.

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.

Marginal propensity to import

This measures the amount of every extra pound earned that is spent on imports. If you earned an extra pound and spent 20p of it on imports, then the marginal propensity to import would be 0.2.

Marshall Lerner condition

This condition states that for a devaluation to be successful in terms of reducing a trade deficit, the sum of the elasticity of demand for UK exports and the elasticity of demand for UK imports must be greater than one.

Monetary policy

This is government policy concerned with the money supply, the rate of interest and the exchange rate. At any one time, the government can only really try to control one of these three things. Whilst it is quite easy to set the base rate, some would argue that it is futile to try and control the money supply (see the early 80s) and attempts to control the exchange rate (e.g. within the ERM) can also lead to disaster. Monetary policy in the UK is now, sensibly, centred on the adjusting of the interest rate (the job of the MPC) with the goal of controlling the inflation rate.

Monetary Policy Committee

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.

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. Law obliges all employers,, 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.

Net errors and omissions

This is the part of the balance of payments that measures mistakes made in the collection of the millions of pieces of data. It used to be called the balancing item but the new name makes much more sense given what it represents.

Net external assets

The UK has money invested in other countries, which are UK assets. Foreigners have money invested in the UK, which are liabilities to the UK. If the UK has more assets abroad than liabilities in the UK, then it has net external assets.

Net external liabilities

The UK has money invested in other countries, which are UK assets. Foreigners have money invested in the UK, which are liabilities to the UK. If the UK has more liabilities in the UK than assets abroad, then it has net external liabilities.

Official reserves

This is the section of the capital account that deals with movements of government reserves of gold and foreign currencies. The government may use these reserves to influence the value of the pound. Since the UK fell out of the ERM the government has tended not to intervene in the currency markets, allowing the pound to find its own level.

Portfolio investment

This refers to movements of money between countries for the buying and selling of shares and bonds. It is one of the main sections in the capital account. If a UK resident bought shares in an American company, this would appear as an outflow of money in this section (-). If an American bought some shares in a British company, this would appear as an inflow of money in this section (+).

Protectionism

Those who believe in protectionism think that there are grounds for using trade barriers to 'protect' domestic industries. Examples include protecting domestic jobs, retaliating against dumping and the infant industry argument.

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).

Tariff

This is the most famous of all trade barriers. It is a tax, or duty, imposed by the government on imported goods.

Trade balance

If the UK trade balance is in surplus for a given year, this means that the value of exports sold abroad is greater than the value of imports consumed in the UK. The UK usually has a trade deficit. The value of imports tends to be higher than the value of exports.

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).

Trade gap

This is another term that is used to describe the gap between the value of the goods that the UK exports and the value of the goods that the UK imports. It is more commonly known as the trade deficit.

Trade in goods

This is the section of the current account that measures the value of goods that are exported and imported. It includes any tangible items, such as oil, food, raw materials, consumer goods, etc.

Trade in services

This is the section of the current account that measures the value of services that are exported and imported. Examples of services in this section include financial and business services, transport services and tourism.

Visibles

This is the old name for thetrade in goods section of the current account. It was easy to remember because all items in this section (i.e. goods) are visible.

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.