Economic Terms

A contract issued by the Government in return for a loan (from individuals or institutions) which entitles the holder to fixed annual interest payments (coupons) for the duration of the loan and to repayment of the loan at the end of the contract period. They are called gilt edged as the government originally issued paper notes with gilded edges to confirm ownership.

The cash value of annual gilt coupon payments divided by the market value of the gilt. The yield varies over time in line with changes in the market value of the gilt (this changes continuously in response to changes in market demand and supply). The current yield of existing gilts at any time will determine the rate at which governments may borrow new money.

A statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the Lorenz Curve.

Below is a diagram to illustrate how to calculate the coefficient.The Gini Coefficient is a measure of statistical dispersion intended to represent the income distribution of a nation's residents. The Gini Coefficient is computed by dividing the area between the 45^o line and the lorenz curve by the area under the 45^o line. This index has a measure between 0 and 1. The closer the Gini Coefficient is to 1 the more unequal the distribution of income for a country is.

For instance if the Gini Coefficient rises this means that the index is moving closer to 1 and as a result the income distribution for a country is worsening, increasing the level of income inequality. Graphically this would be represented by an outwards shift of the Lorenz Curve as the richer part of the population hold the highest proprtion of national income. This is traditionally what has happened in the UK economy when we expereicned the recent double-dip recession that widened the gap between the highest and lowest earners.

This was an act introduced after the uncertainties and volatilities of the stock market crash in the late 1920's. It introduced lots of individual forms of regulation to strengthen the financial sector.

It introduced deposit insurance for all depositors up to a pre-determined level. It also prevented financial institutions from merging with one another and as a result commerical and investment banks consolidating and forming a financial conglomerate like Citi Group.

An ongoing process that is improving the integration of the world’s economies to reduce the restrictions on where goods and services are made and sold. This allows large numbers of goods and services to be sold in many countries.

Below shows how globalisation has affected the UK economy in an AD-AS framework.

As the UK has run a trade deficit continuously since 2006 the globalisation impact on AD has been negative (indicated by AD at AD1 rather than at AD). This does not mean there has been no AD growth over that period it just means that the contribution from globalisation has been negative as the UK imports more than it exports. However, globalisation has allowed the UK economy to expand productive processes and capture economies of scale so that it has had a positive impact on the productive capacity of the UK economy (LRAS to LRAS1). Overall, the effect of globalisation is that the UK has expanded its productive capacity (YFE to YFE1) without inflationary effects (P to P1). This is an excellent example of how the expansion of productive capacity is critical to achieving sustainable economic growth. 

 

Different countries will experience a different balance of demand and supply side effects. Students will need to explain the outcome of these using AD/AS analysis.  

A physical product which commands a price when sold and yields utility when consumed.

Physical products which command a price when sold and yields utility when consumed.

A plan detailing the income and expenditure a government anticipates over a given period of time together with details of any borrowing requirements.

When a government intervention (indirect tax, subsidy or regulation) fails to correct a market failure and would create a net welfare loss compared to the free market solution.

Below is a diagram to illustrate how government intervention can sometimes fail to solve market failure and in some cases worsen the welfare belonging to society. In this instance, there is a presence of a negative externality that causes a divergence between the marginal social cost and the marginal private cost curves. Therefore the only way this externality can be removed is if the government introduces a tax equidistant to the distance between the marginal social and marginal private cost curves. However if the government imposes too high a tax then this causes the firm to have a lack of incentive to produce many goods and as a result the dead-weight loss triangle may be even greater than previously. This is normally caused by the government having insufficient information to correct market failure or the government is bowing to electorate pressures and not choosing a socially optimal policy.

Goods that are provided by the government e.g. state education. These goods can be either pure public goods or quasi public goods.