Economic Terms

The lowest rate of unemployment that can be sustained without increasing inflation and therefore the rate of unemployment when the labour market is in equilibrium. This type of unemployment can be calculated by adding together the level of structurally and frictionally unemployed workers in the economy at a point in time (supply-side types of unemployment).

Below is a diagram to illustrate the level of the NRU in an economy. As can be seen the NRU is the difference between those who would like a job at the current prevailing wage rate and those who are willing to take a job.

The basic requirements for survival e.g. food, shelter, warmth, protection, healthcare.

Costs arising from the consumption of a good or service that are experienced by third parties e.g. noise disturbance, injuries requiring treatment and animal distress associated with consumption of fireworks.

These types of externalities are produced due to the over-consumption of a demerit good.

This is because the over-consumption creates a divergence between the marginal private benefit and the marginal social benefit curves. This is because consumers do not take into account the negative effects on society of consuming this good e.g. second hand smoke when smoking a cigarette. The external cost that is released onto society is represented by the dead weight loss triangle below. 

This type of externality can be internalised via government interventions such as: indirect taxes, educational policies and product bans.

When the future outlook for economic variables is negative e.g, interest rates will rise and economic growth will slow.

Are negative costs and benefits that are incurred or experienced by third parties.

A negative cost or benefits that are incurred or experienced by third parties.

When actual GDP is less than the value of GDP if it had grown consistently in line with the trend rate of growth. Normally characterised by falling real output and slowing inflation.

Below is a diagram to illustrate when real output falls below the full employment level and therefore the economy has a high level of spare capacity.

Costs arising from the production of a good or service that are imposed onto third parties e.g. the pollution associated with oil extraction.

Below is a diagram to show a negative production externality that is being imposed on third parties. This is created because of a divergence between the marginal private cost and marginal social cost curves i.e. individual producers do not realise the negative externality they are releasing onto society and therefore they over-produce the good. This leads to the level of output produced to be above the socially optimal level and ultimately this leads to market failure. The deadweight loss triangle represents the size of the externality in the market.

When evaluating policies that governments could implement on the market to correct this type of market failure, it is important to consider the size of the externality. The larger the externality in the market, the more incentive there will be for governments to intervene in the market, as the larger externality the greater the impact on society's welfare. However, for governments to correct the market failure, they need to calculate how large the production externality may be. It is almost impossible for governments to accurately quantify the size of the externality in the market and therefore this means government intervention can be an imperfect measure to internalise the externality and as a result government failure could arise. 

A measure of economic activity that has not been adjusted for inflation.

Below is a chart to show the level of nominal GDP for the UK and how it has evolved over time. The problem with this measure compared to real GDP is that it does not give a true reflection of economic activity as it includes price rises as well as output changes. Therefore it will often overstate the value of a country's economy. 

The money value of a variable without adjustment for inflation.