Economics terms in Macroeconomics

A situation in which income is below the level needed to meet basic needs for survival, such as food, clean water, shelter and clothing, measured against a fixed standard such as an international poverty line.

The total planned spending on an economy’s final goods and services at each possible average price level in a given period: consumption plus investment plus government spending plus net exports (C + I + G + (X − M)).

The total quantity of final goods and services that all firms in an economy plan to produce at each possible average price level in a given period.

Laws and regulators that promote competition by preventing firms from abusing market power, blocking mergers that reduce competition, and punishing price fixing and other collusion.

In the monetarist/new classical model, the process by which flexible wages and prices shift SRAS until the economy returns to the full employment level of output without government intervention.

Features of the tax and benefit system, such as progressive income taxes and unemployment benefits, that automatically dampen rises and falls in aggregate demand without any new government decision.

A weighted average of the prices of all goods and services produced in an economy, measured by a price index; the variable on the vertical axis of an AD/AS diagram.

Total tax paid as a percentage of total income: total tax divided by total income, multiplied by 100.

A government budget in which government revenue equals government spending over the year, so there is neither a deficit nor a surplus.

The cash that commercial banks hold and the deposits they keep at the central bank, which they use to settle payments with each other and to meet withdrawals.

The reference year against which values in other years are compared in an index, given the value 100.

The representative collection of goods and services bought by a typical household, in fixed quantities or weights, whose cost is tracked to calculate a consumer price index.

The phase of the business cycle in which real GDP grows rapidly and rises above potential output, so unemployment is low and inflationary pressure builds.

The amount by which a government’s total spending exceeds its total revenue over a period, usually a year; a flow that adds to government debt.

The amount by which government revenue exceeds government spending in a given year.

The degree of optimism firms feel about future sales, profits and economic conditions, which strongly influences how much they invest.

The short-term fluctuations of real GDP around its long-term growth trend, through phases of expansion, peak, contraction and trough.

Government spending on investment in long-lasting productive assets, such as roads, railways, schools and hospitals, that add to the economy’s infrastructure.

A tax on the profit made when an asset, such as shares or property, is sold for more than it was bought for.

The institution that manages a country’s (or currency area’s) money supply and interest rates, issues its currency, acts as banker to the government and to commercial banks, and conducts monetary policy.

The situation where a central bank sets monetary policy free from day-to-day control by the government, so that decisions are not driven by short-term political goals.

The interest rate at which the central bank lends to commercial banks, which sets the level of short-term interest rates in the economy; also called the base rate, policy rate, discount rate or refinancing rate.

A private financial institution that accepts deposits from households and firms and makes loans to them, earning profit from the difference between the interest it charges and the interest it pays.

A single index that combines several different measures, such as income, health and education, into one number, so that a many-sided idea such as poverty or development can be measured.

A regular cash payment to low-income households made only if they meet conditions, such as sending their children to school or attending health clinics.

The degree of optimism households feel about the economy and their own future incomes and jobs, which affects how much of their income they spend rather than save.

An index measuring the change in the cost of a fixed, weighted basket of goods and services bought by a typical household, compared with a base year set at 100.

Spending by households on final goods and services, both durable and non-durable; the largest component of aggregate demand in most economies.

A cut in government spending, an increase in taxes, or both, intended to reduce aggregate demand or a budget deficit; when aimed mainly at the deficit it is often called austerity.

Monetary policy that raises interest rates or reduces the money supply to lower aggregate demand, used to close an inflationary gap and reduce inflation.

A measure of inflation that excludes the most volatile prices, usually food and energy, to show the underlying trend in the general price level.

A direct tax on the profits of companies.

Inflation caused by increases in costs of production, such as wages, energy, raw materials or imported inputs, which shift the short-run aggregate supply curve to the left.

A demand-side policy that acts against the business cycle, raising aggregate demand in a downturn and reducing it in a boom, to reduce fluctuations in output.

An assessment by a rating agency of how likely a borrower, such as a government, is to repay its debts in full and on time; a lower rating raises borrowing costs.

The fall in private sector spending, especially investment, that occurs when increased government borrowing raises interest rates, reducing the effect of expansionary fiscal policy on aggregate demand.

Government spending on the day-to-day running of the public sector and on goods and services used up within the year, such as public sector wages and medicines.

Unemployment caused by a fall in aggregate demand in the downturn of the business cycle, when firms need fewer workers to produce a lower level of output.

The payments of interest (and repayments of principal) that a government must make on its outstanding debt in a period.

A sustained fall in the general (average) level of prices in an economy over time, so that the inflation rate is negative.

The situation where equilibrium real GDP is below the full employment level of output, so resources are unemployed and there is cyclical unemployment; also called a recessionary gap.

The quantity of money (cash and bank deposits) that households and firms wish to hold at each interest rate; it is higher at lower interest rates because the opportunity cost of holding money is lower.

A sudden, unexpected change in one or more components of aggregate demand that shifts the AD curve, such as a collapse in exports or in consumer confidence.

Inflation caused by increases in aggregate demand, when total spending grows faster than the economy’s capacity to produce, especially near full employment.

The removal or reduction of government rules that restrict how firms operate or who may enter a market, intended to increase competition and efficiency.

A tax paid directly to the government by the person or firm on whom it is levied, on their income, profits or wealth, such as personal income tax, corporate income tax or wealth tax.

Deliberate changes in government spending or tax rates, decided by the government, to influence aggregate demand.

Treating people less favourably because of a characteristic unrelated to their productivity, such as gender, race, ethnicity, religion, age or disability, for example in hiring, pay, promotion or access to credit.

A fall in the rate of inflation, so that the general price level continues to rise but more slowly than before.

Household income after direct taxes have been paid and transfer payments received; the income households have available to spend or save.

The error of counting the value of an intermediate good more than once, both on its own and again as part of the price of the final good.

An increase in the real output of goods and services in an economy over time, measured as the percentage change in real GDP (or real GDP per capita), usually over a year.

The interest rate at which the quantity of money demanded equals the money supply set by the central bank, shown where the money demand and money supply curves intersect.

An increase in government spending, a cut in taxes, or both, intended to increase aggregate demand; it usually increases a budget deficit or reduces a surplus.

Monetary policy that lowers interest rates or increases the money supply to raise aggregate demand, used to close a deflationary gap and reduce unemployment.

A method of measuring national income by adding up all spending on final goods and services produced in the economy: GDP = C + I + G + (X − M).

The use of government spending and taxation by the government to influence aggregate demand and so the level of economic activity, employment and prices.

A lasting legal or constitutional limit on a government’s budget, such as a maximum deficit or debt as a percentage of GDP, intended to keep the public finances sustainable.

Communication by a central bank about the likely future path of its policy rate, used to shape expectations and longer-term interest rates.

Short-term unemployment of people who are between jobs or entering the labour market and are searching for suitable work.

The situation where the only unemployment is the natural rate (structural, frictional and seasonal unemployment), so there is no cyclical unemployment and the economy produces its potential output.

A price index measuring the average price of all goods and services in GDP relative to a base year (= 100), used to convert nominal values into real values.

The difference between the average (usually median) earnings of men and women, expressed as a percentage of men’s earnings.

A measure of inequality equal to the area between the line of perfect equality and the Lorenz curve divided by the whole area under that line; it ranges from 0 (perfect equality) to 1.

A financial asset issued by a government to borrow money, which pays the holder interest and repays the amount borrowed on a set date.

The government’s plan of revenue and spending for a year; the budget balance is government revenue minus government spending.

The total amount owed by a government as a result of past borrowing, equal to accumulated past budget deficits minus surpluses; a stock, often expressed as a percentage of GDP.

Spending by the government on goods and services, such as public-sector wages, health care, education and infrastructure; it excludes transfer payments such as pensions and unemployment benefits.

GDP adjusted for environmental costs by subtracting the estimated value of resource depletion and environmental damage caused by economic activity.

The total market value of all final goods and services produced within a country’s borders over a period of time, usually a year, whoever owns the factors of production.

The total income earned by a country’s residents over a period of time, wherever it is earned: GDP plus income earned abroad by residents minus income paid to non-residents.

A measure of sustainable well-being combining life expectancy and self-reported well-being, divided by the ecological footprint, showing how efficiently countries turn resources into long, happy lives.

Unemployment not shown in official figures, such as discouraged workers who have stopped looking for work or people placed on sickness benefits or early retirement who would work if jobs were available.

The total amount households owe to lenders, such as mortgages, credit card debt and other loans; high indebtedness means a larger share of income goes on repayments and interest.

The skills, knowledge, education, training and health of the labour force, which raise the productivity of workers.

Extremely high and accelerating inflation, often defined as more than 50% a month, in which money rapidly loses almost all its value.

Rewards or penalties, often financial, that influence the decisions of economic agents, such as the higher take-home pay that encourages people to work more or firms to invest.

A method of measuring national income by adding up all incomes earned by the factors of production (wages, rent, interest and profit), excluding transfer payments.

One-fifth (20%) of a population ranked by income, from the poorest fifth (the first quintile) to the richest fifth (the fifth quintile).

Government policy that supports the growth of particular industries or sectors judged important for the economy, using tools such as subsidies, tax credits, public investment, protection or state ownership.

A situation in which people’s chances of achieving a high income or good standard of living depend on circumstances they did not choose, such as parents’ income, gender, ethnicity or place of birth.

A sustained increase in the general (average) level of prices in an economy over time, usually measured as the percentage change in a consumer price index.

A monetary policy framework in which the central bank publicly commits to keeping inflation at, or within a range around, a stated rate, usually about 2% a year, over the medium term.

The situation where equilibrium real GDP is above the full employment level of output, so unemployment is below its natural rate and there is upward pressure on the price level.

Economic activity that is not registered with or regulated by the government and is not recorded in official statistics, such as unregistered trading and cash-in-hand work.

The physical capital an economy needs to function, such as roads, railways, ports, energy networks, telecommunications, and water and sanitation systems, often provided or financed by the government.

The price of borrowing money, or the reward for saving it, expressed as a percentage of the sum borrowed or saved per year.

The ability of a country's firms to sell goods and services in world markets, which depends on the relative price and quality of its output, including unit labour costs and the exchange rate.

An income or consumption threshold set by the World Bank in dollars a day at purchasing power parity, below which a person is counted as extremely poor; $3.00 a day (2021 prices) since June 2025.

Supply-side policies in which the government acts directly to raise productive capacity, for example by spending on education, training, health care, research and development, infrastructure or industrial policy.

Spending by firms on capital goods, such as machinery, equipment, buildings and software, that are used to produce other goods and services; it also includes households’ purchases of new housing.

The Keynesian view of aggregate supply: a curve that is horizontal when there is much spare capacity, slopes upwards as output nears capacity, and becomes vertical at the full employment level of output.

The ratio of the final change in real GDP to the initial change in an injection (investment, government spending or exports) that caused it; equal to 1 ÷ (1 − MPC) or 1 ÷ (MPS + MPT + MPM).

All people of working age who are either employed or unemployed, that is, without a job but willing, able and actively looking for work.

The labour force (the employed plus the unemployed) as a percentage of the working-age population.

The ease with which wages, hours and the number of workers adjust to changes in economic conditions, including how easily firms can hire and dismiss workers.

An organisation of workers that bargains collectively with employers over wages, working conditions and other terms of employment on behalf of its members.

The 45-degree line on a Lorenz diagram along which each percentage of the population receives the same percentage of income, showing a perfectly equal distribution.

In the monetarist/new classical model, the total output an economy produces when all wages and prices have fully adjusted; a vertical line at the full employment level of output (potential output).

A curve showing the cumulative percentage of total income or wealth received by each cumulative percentage of the population, ranked from the poorest to the richest.

The situation where aggregate demand equals aggregate supply, which determines the economy’s average price level and real GDP; in the short run it occurs where AD meets SRAS.

The proportion of an increase in income that is spent on domestically produced goods and services; MPC = ΔC ÷ ΔY.

The proportion of an increase in income that is spent on imported goods and services; MPM = ΔM ÷ ΔY.

The proportion of an increase in income that is saved rather than spent; MPS = ΔS ÷ ΔY.

The proportion of an increase in income that is paid to the government in taxes; MPT = ΔT ÷ ΔY.

The percentage of each additional unit of income that is paid in tax: the change in tax paid divided by the change in income, multiplied by 100.

The market in which savers supply funds and borrowers (firms, households and the government) demand them; the real interest rate brings the two into equilibrium.

Supply-side policies that raise productive capacity by letting markets work more freely, through more competition, more flexible labour markets and stronger incentives, such as deregulation, privatisation and tax cuts.

A transfer payment made only to people whose income or wealth is below a set level, so that support is targeted at those most in need.

The costs to firms of changing their prices, such as reprinting price lists and updating systems, which rise when inflation is high.

The income a particular type of household needs for a minimum acceptable standard of living, found by pricing a basket of goods and services that members of the public agree is necessary.

The minimum proportion of deposits that commercial banks must legally hold as reserves (cash or deposits at the central bank) rather than lend out.

A demand-side policy in which the central bank changes interest rates, the money supply or credit conditions to influence aggregate demand and reach goals such as low and stable inflation.

The chain of effects by which a change in the central bank’s policy rate spreads through other interest rates, asset prices, the exchange rate and expectations to aggregate demand, output and inflation.

Anything generally accepted as payment for goods and services; it serves as a medium of exchange, a unit of account, a store of value and a standard of deferred payment.

The process by which commercial banks increase the money supply by making loans, since each new loan creates a new deposit; also called credit creation.

The maximum increase in total bank deposits that can result from an initial new deposit, equal to one divided by the reserve requirement ratio.

The total quantity of money in an economy at a point in time, made up of notes and coins held by the public plus deposits in commercial banks.

A composite poverty measure counting people as poor if deprived in at least one-third of ten weighted indicators of health, education and living standards; it combines the share of people poor with the intensity of their deprivation.

The system of measuring the total value of an economy’s output, income and expenditure over a period of time, usually a quarter or a year.

The rate of unemployment when the economy is at full employment output: the sum of structural, frictional and seasonal unemployment, with no cyclical unemployment.

The value of a country’s exports of goods and services minus the value of its imports (X − M); the component of aggregate demand that comes from trade with other countries.

Income earned abroad by a country’s residents (profits, interest, dividends and wages) minus income paid to non-residents; the difference between GNI and GDP.

The interest rate expressed in money terms, as quoted by a bank or lender, with no adjustment for inflation.

A value measured at the prices of the time it refers to (current prices), with no adjustment for changes in the price level.

A composite measure of well-being published by the OECD, covering 11 topics such as income, jobs, health, environment and life satisfaction, which users can weight themselves.

The buying and selling of government bonds by the central bank in the open market to change the reserves of commercial banks, the money supply and short-term interest rates.

A method of measuring national income by adding up the value added by every firm and industry in the economy, which avoids double counting intermediate goods.

The difference between an economy’s actual real GDP and its potential output (the full employment level of output), often expressed as a percentage of potential output.

Per person: a total, such as GDP, GNI or spending, divided by the population, used to compare averages between countries or over time.

The unit for the arithmetic difference between two percentages: a rate that rises from 4% to 6% has risen by 2 percentage points, which is a 50% increase.

A direct tax on the income of individuals, such as wages, salaries, rent, interest and dividends, usually charged at rates that rise with income.

A curve showing the relationship between the unemployment rate and the inflation rate: the short-run curve slopes downward (a trade-off); the long-run curve is vertical at the natural rate of unemployment.

The real GDP an economy can produce when all its factors of production are employed at normal, sustainable rates; shown by the long-term growth trend.

The condition of lacking the income or resources needed for a minimum acceptable standard of living, judged against basic needs or against the typical living standards of a society.

A self-reinforcing situation in which low incomes lead to low saving, low investment and poor health and education, which keep productivity and incomes low, so poverty persists over time and across generations.

The transfer of ownership of a firm or industry from the public sector (the government) to the private sector, usually by selling shares or assets.

Output per unit of input over a period of time; labour productivity is output per worker or per hour worked.

A tax whose average rate rises as income rises, so that people with higher incomes pay a larger percentage of their income in tax.

A tax whose average rate stays the same at every level of income, so that everyone pays the same percentage of their income in tax.

The quantity of goods and services that a given amount of money can buy; inflation reduces it and deflation increases it.

An exchange rate at which a given basket of goods and services costs the same in two countries; values converted at PPP rates allow for differences in price levels.

An expansionary monetary policy in which the central bank creates new reserves to buy large quantities of financial assets, mainly government bonds, to lower long-term interest rates and raise the money supply.

The reversal of quantitative easing, in which the central bank reduces its holdings of bonds by selling them or not replacing them when they mature, shrinking bank reserves.

GDP measured at the constant prices of a base year, so that changes in it show changes in the volume of output rather than in prices.

The nominal interest rate adjusted for inflation, approximately the nominal interest rate minus the rate of inflation; it measures the true cost of borrowing and the true return to saving.

A value adjusted for changes in the price level, measured at the constant prices of a base year, so that it reflects changes in quantity only.

A period in which real GDP falls, commonly defined as two consecutive quarters of negative real GDP growth.

A tax whose average rate falls as income rises, so that people with lower incomes pay a larger percentage of their income in tax than people with higher incomes.

A situation in which income is well below the typical income of the society a person lives in, usually measured as household income below 50% or 60% of the median.

Unemployment that occurs because demand for labour in some industries, such as tourism, agriculture and construction, changes with the seasons of the year.

The total output firms plan to produce at each average price level in the period when the prices of factors of production, especially money wages, stay fixed; it slopes upwards.

The extent to which people can move up or down the income or social scale during their lives or compared with their parents; low mobility means children’s incomes depend strongly on their parents’.

The failure of a government to make payments of interest or principal on its debt when they are due.

The combination of high or rising inflation with stagnant or falling real output and rising unemployment, typically caused by an adverse supply shock.

Long-term unemployment caused by a mismatch between workers’ skills or location and the jobs available, after changes in the structure of the economy, or by labour market rigidities.

A sudden, unexpected change in the costs or availability of inputs, such as a jump in oil prices or a natural disaster, that shifts the SRAS curve.

Government policies that aim to increase an economy's productive capacity by improving the quantity and quality of factors of production and the efficiency of markets, shifting LRAS to the right.

A level of government debt that can continue to be serviced without ever-larger tax rises or spending cuts, a sharp rise in borrowing costs, or default.

Government spending on goods and services, such as free school meals, social housing or health care, that is directed at particular low-income or disadvantaged groups.

The legal use of loopholes, allowances or the relocation of income and profits to reduce the tax paid, unlike tax evasion, which is illegal concealment of income.

The delays between a change in economic conditions and the recognition of the problem, the decision on a policy, its implementation and its full effect on the economy.

The reduction or removal of barriers to international trade, such as tariffs, quotas and subsidies to domestic producers.

Payments from the government to individuals, such as pensions, unemployment benefits and child benefits, for which no good or service is provided in return.

The lowest point of real GDP in a business cycle, where a contraction ends and recovery begins.

The situation in which people are employed but work fewer hours than they want, or in jobs that do not use their skills and qualifications.

The situation in which people of working age who are willing and able to work, and actively looking for work, do not have a job.

Transfer payments made by the government to people who are unemployed and looking for work, replacing part of their lost income.

The number of unemployed people expressed as a percentage of the labour force (the employed plus the unemployed).

A regular, unconditional cash payment made by the government to every adult or citizen, regardless of income, wealth or employment.

The value of a firm’s output minus the cost of the intermediate goods and services it buys from other firms; the sum of all value added equals final output.

Groups that gain from an existing situation and therefore resist policies that would change it, such as protected firms, trade unions or professional bodies lobbying against reform.

A direct tax on the value of a person’s net assets (property, savings, shares and other assets minus debts), usually charged each year and only above a high threshold.

A price index in which the price change of each item or category is multiplied by a weight reflecting its share of household spending, so items with larger spending shares affect the index more.

An annual ranking of countries by the average rating people give their own lives on a scale from 0 to 10, with an analysis of the factors linked to the differences.

The situation where the central bank’s policy rate is at or close to zero, so it has little or no room to cut interest rates further to stimulate aggregate demand.