Unit 2 Definitions

1. Aggregate Demand: total planned expenditure or formula: AD = C + I + G + (X-M)

2. Appreciation: an increase in the value of a currency in a floating exchange rate
3. Balance of Payments: A record of all in and outflows in a country arising from economic activity in
the domestic and foreign sectors during a given time period. It consists of the current account and
the capital account
4. Balance of Trade: value of goods and services exported minus value of goods and services
imported
5. Budget Deficit: government expenditure greater than tax revenues
6. Budget Surplus: tax revenues greater than government expenditure
7. Commodity: is raw material used in manufacturing OR Goods traded on international commodity
exchange/traded at a global price.
8. Consumption: expenditure on final goods and services.
9. Consumption: is spending on consumer goods and services. it is a component of AD
10. Cost-push inflation: an increase in the costs of production in an economy, leading to a fall in
short-run aggregate supply (SRAS)
11. CPI: weighted price index, which measures the change in the prices of different goods and services
12. Current Account – A record of all money flows to and from a country arising from exports and
imports of goods and services, as well as transfers of income and other net transfers
13. Current Account Balance: value of goods and services exported minus value of goods and
services imported plus investment income plus current transfers. A positive value is a current
account surplus; a negative value is a current account deficit
14. Deflation: sustained fall in general price level
15. Deflationary policy: measures to reduce aggregate demand.
16. Demand-pull inflation: increasing aggregate demand (AD) in the economy.
17. Demand-side shock: is unpredictable, rapid and sizeable increase or decrease in AD
18. Depreciation: a fall in the value of a currency in a floating exchange rate
19. Disinflation: a slowing of the rate of increase in average prices.
20. Economic growth: annual increase in real GDP or Increase in total value of output produced
within the boundaries of a country.
21. Exchange Rate: rate at which one currency exchanges for another
22. Fiscal Policy: use of taxation and/or government expenditure to influence the level of economic
activity
23. Flow of Incomes: Repatriated profits, dividends from foreign shares and interest payments on
foreign bank accounts count as invisible exports
24. GDP deflator = nominal GDP/real GDP x 100
25. GDP growth: increase in the real level of national output measured by the annual percentage
change in real GDP OR a long-term expansion of the productive potential of the economy.
26. GDP per capita: GDP/population
27. Government expenditure: it includes current, capital and transfer payments.

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 Unit 2 Definitions

28. Government revenue: it arises from direct tax, indirect tax and sales of goods, services and
privatization.
29. HDI: a composite statistic of life expectancy, education, and income indices used to rank countries
into four tiers of human development. The higher the ranking the higher the level of development.
30. Income: is disposable income available for spending (personal income less taxes)
31. Inflation rate = (current years GDP deflator– Previous year’s GDP deflator) / Previous year’s GDP
Deflator X 100
32. Inflation: sustained rise in the general price level
33. Injection: is an inflow into the circular flow of income. Injections include investment, government
expenditure and exports.
34. Interest rate: is the price paid for borrowing money/reward for saving
35. Investment: Increase in the capital stock of an economy or capital goods purchased by businesses
and/or government to raise productivity.
36. Invisible Balance :The net sum of invisible trade, consisting of services, flows of incomes and net
transfers
37. LRAS: increase in the quantity and productivity (quality) of factors of production OR Increase in
productive potential of the economy.
38. Macroeconomic Objectives: The main aims or goals of macroeconomic policy. It includes
economic growth, full employment, Bop equilibrium, lower inflation, protecting environment and
redistribution of income.
39. Monetary Policy: use of interest rates/changes in quantity of money/use of assets purchases/sales
to influence the level of economic activity.
40. MPC: MPC measures the proportion of extra income that is spent on consumption OR ΔC/ΔY

41. MPM: Marginal propensity to import measures the amount of additional income spent upon
imports rather than domestically produced goods and services. Marginal propensity to import
(MPM) measures relationship between changes income and demand for imports
MPM = Δ imports/ Δ income
42. Multiplier Process: An initial change in aggregate demand can have a much greater final impact
on the level of equilibrium national income .This can lead to a bigger eventual effect on output and
employment .
43. Multiplier: an initial change in an injection can have a much greater final impact on the level of
equilibrium national income
ΔY / ΔI OR 1/(1-MPC) OR 1/(1-MPS+Tax+MPM)
44. Negative output gap: when actual growth is less than trend growth rate OR real output below
potential output OR current output below full employment level
45. Net Transfers : Remittances, foreign aid and grants are counted in the invisible balance
46. Net withdrawal: reduction to the circular flow of income
47. Nominal GDP growth: the increase in value in monetary terms. It may simply reflect price
increases.

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48. Nominal income: monetary value without taking inflation into account
49. Per capita GDP: GDP/population
50. Producer Price Index: PPI measures changes in the costs of production / index used to measure
input prices / prices charged by manufacturers for finished goods. The producer (wholesale) price
index shows changes in costs which are likely to be represented in future output prices
51. Purchasing Power Parity (PPP): is calculated by comparing the price of a basket of comparable
goods and services in different countries.
52. Rate of inflation: rate at which prices are rising. When prices are rising, the value of money is
falling/less may be purchased for any given unit of currency.
53. Real GDP growth: GDP is adjusted for the effects of inflation.
54. Real income: nominal income - inflation
55. Real Wages: nominal wages minus the inflation rate
56. Recession: 2 or more consecutive quarters of negative economic growth
57. Reserve ratio: the amount of cash reserves banks have to maintain/keep in reserve with the
central bank
58. Savings: postponed consumption or investment. The savings ratio is the % of disposable income
saved rather than spent - high savings ratio lowers consumption and aggregate demand
59. Services: The trade in services forms part of the invisible balance. Foreign tourists spending
money in the country counts as invisible exports; the purchasing of foreign holidays counts as an
invisible import
60. Spare capacity: actual GDP growth is below trend/potential GDP growth
61. SRAS: it shows how much output the economy can generate in the short term at each price level
62. Trend rate of growth: is the long run average rate for a country over a period of time
63. Unemployment Rate: % of workforce who are willing to work but unable to find employment.
64. Unemployment: person actively seeking work but unable to find suitable work
65. Visible Trade Balance: The sum of visible (trade in goods) exports revenue minus the sum of
trade import expenditure. A positive value is a trade surplus; a negative value is a trade deficit
66. Wealth: is value of a household's assets minus its liabilities (debts owed)
67. Withdrawal: is an outflow from the circular flow of income. Withdrawals include savings, taxes and
imports.
68. Youth unemployment : ILO defined as the number of unemployed youth (typically 15-24
years) divided by the youth labour force

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