Edexcel A-level Economics Paper 2 with 100% correct answers

Macroeconomics The study of the economy as a whole, including inflation, growth and unemployment. Aggregate demand The total of all demands or expenditures in the economy at any given price. Aggregate demand curve Shows the relationship between the price level and equilibrium national income. As the price level rises the equilibrium level of national income falls. Animal spirits Business confidence: the mood of managers and owners of firms about the future of their industry and the wider economy. Gross investment The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital. Investment The addition to the capital stock of the economy. Retained profit Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation. Net exports or the net trade balance Exports minus imports. Aggregate supply curve The relationship between the average level of prices in the economy and the level of total output. Full capacity The level of output where no extra production can take place in the long run with existing resources. The full capacity level of output for an economy is shown by the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply curve. Short-run aggregate supply curve The upward sloping aggregate supply curve which assumes that money wage rates are fixed. Supply-side shocks Factors such as changes in wage rates or commodity prices which cause the short run aggregate supply curve to shift. Circular flow of income A model of the economy which shows the flow of goods, services and factors and their payments around the economy. Closed economy An economy where there is no foreign trade. Income Rent, interest, wages and profits earned from wealth owned by economic actors. Injections In the circular flow of income, spending which is not generated by households including investment, government spending and exports. National income The value of the output, expenditure or income of an economy over a period of time. Open economy An economy where there is trade with other countries. Wealth A stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services. Withdrawals or leakages In the circular flow of income, spending by households which does not flow back to domestic firms. It includes savings, taxes and imports. Marginal propensity to import (MPM) The increase in imports divided by the increase in income that caused them (i.e. change in M / change in Y) Marginal propensity to save (MPS) The increase in saving divided by the increase in income that caused it (i.e. change in S / change in Y) Marginal propensity to tax (MPT) The increase in tax revenues divided by the increase in income that caused them (i.e. change in T / change in Y) Marginal propensity to withdraw (MPW) The increase in withdrawals from the circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W / change in Y); this is the same as the sum of the marginal propensity to save, tax and import (MPS + MPT + MPM). Multiplier or national income multiplier or Keynesian multiplier or real multiplier The figure used to multiply a change in an injection into the circular flow, such as investment, to find the final change in income (assuming the injection is not determined by income). It is the ratio of the final change in income to the initial change in an injection. It can be calculated as 1 ________ 1 - MPC or 1 ___________________ MPS + MPT + MPM or 1 ____ MPW Multiplier effect or process An increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income). Gross domestic product (GDP) A measure of the output or value added of an economy which does not include output or income from investments abroad or an allowance for the depreciation of the nation's capital stock. Gross national income (GNI) The value of goods and services produced by an economy over a period of time (GDP) plus net overseas interest payments and dividends (factor incomes). Gross national product (GNP) The market value of goods and services produced over a period of time through the labour or property supplied by citizens of a country both domestically (GDP) and overseas. Hidden, black or informal economy Economic activity where trade and exchange take place but which goes unreported to the tax authorities and those collecting national income statistics. Net national income A measure of national income which includes both net income from investments abroad and an allowance for depreciation of the nation's capital stock. Per person or per head or per capita Per individual in the population Purchasing power parities An exchange rate of one currency for another which compares how much a typical basket of goods in one country costs compared to that of another country. Standard of living How well off is an individual, household or economy, measured by a complex mix of variables such as income, health, the environment, participation in society and political freedoms. Transfer payments Income for which there is no corresponding output, such as unemployment benefits or pension payments. Value and volume of national income The value of national income is its monetary value at the prices of the day; the volume is the national income adjusted for inflation and is expressed either as an index number or in money terms at the prices in a selected base year. Actual growth Economic growth as measured by recorded changes in real GDP over time. Boom or peak Period of time when the economy is growing strongly and is operating above its productive potential. Demand-side shock A sudden and large impact on aggregate demand. Depression or slump A period of the trade cycle when there is a particularly deep and long fall in output. Downturn A period of the trade cycle when either economic growth or GDP itself is falling. Economic growth The rise in output in an economy which can be either actual growth or potential growth.