Economic Terms

When a Government introduces a regulation, indirect tax or subsidy that is designed to overcome a specific market failure e.g taxes to discourage consumption of alcohol and petrol, subsidies to encourage installation of solar panels or state provision of education to correct insufficient supply.

Below is a diagram to illustrate how a government can successfully intervene in a market that is plagued with negative externalities.  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. In this case the government has successfully imposed a tax of the correct level and this makes the marginal social and private cost curves equal to each other and therefore firms now realise the negative externality they were producing and therefore the quantity being produced is at the socially optimal level. As a result the dead weight loss triangle has been removed and the welfare for society has increased.

 

When a Government introduces a regulation, indirect tax or subsidy that is designed to overcome a specific market failure e.g taxes to discourage consumption of alcohol and petrol, subsidies to encourage installation of solar panels or state provision of education to correct insufficient supply.

The expenditure undertaken by government to provide things like transfer payments, public services and infrastructure.

In the context of measuring Aggregate Demand any expenditure relating to transfer payments is excluded. 

Government spending is one of the key macroeconomic policy levers available to a government to control the business cycle. Increases in government spending cause an expansion in aggregate demand and decreases in government spending cause a reduction in aggregate demand.

An increase in government spending can be funded via raising taxes across the economy and/or borrowing more by selling government bonds. The decision of how the government funds the extra spending depends on the political environment, cost of borrowing and the overall health of the economy. For instance, if the cost of borrowing (i.e. bond yields) are high then the government may decide this is not a good time to borrow to invest in public infrastructure. This is because the returns generated will struggle to exceed the initial borrowing costs and interest charges. However, it may be the case that the government operates in a low growth economy and imposing heavier taxes on economic agents, could create significant long-term damage to the economy and therefore it is not feasible to raise spending by taxes and higher borrowing may be the only option.

Keynesian economists argue that governments should be active in using government spending to impact the economy, in particular encouraging an increase in government spending during recessions. Classical economists are more wary of having too much government spending due to its potential effects to cause or increase a budget deficit.

How governments use taxes and benefits to transfer wealth from the affluent to the needy sections of the economy. This helps to address inequalities in the distribution of income and wealth.

The total market value of all the final goods and services produced in an economy over a given period of time. This can be determine by measuring the expenditure, income or output of the economy.

Below is a diagram to illustrate the three methods of measuring the level of economic activity via GDP. All three of these methods should lead the same answer in a closed economy.

GDP divided by the population of an economy. It is a useful way of measuring economic progress i.e. GDP growth may not be perceived as successful if GDP per capita has declined.

Below is a graph to show real GDP per capita changes over the past 30 years and as this is one of the main measures of the standard of living for a country, because this has been increasing over the past 30 years then living standards have been increasing as well.

Is the final value of all the goods and services produced using labour and property owned by the inhabitants of an economy.

Hard commodities are industrial materials that are mined e.g. silver, gold. petroleum, coal, gas, copper.

A sharp slow down in economic growth carrying the risk of a recession after a period of healthy economic growth.