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# Economic Terms

### Rate of inflation

This is the rate at which the general level of prices rise over a period of time. e.g. CPI or RPI.

### Rate of return regulation

This policy might be used to regulate pricing abuses in monopoly situations. It effectively restricts the rate of return that can be earned on the capital employed in a business.

### Rational Expectations

When people form their inflation expectations by using all the available information at their disposal.

Below is an illustration of rational expectations in a supply and demand framework and its effects on the economy. As individuals are using all of the information at their disposal to form their inflation expectations if they see an expansion in the aggregate demand curve creating inflationary pressures, automatically they will negotiate higher wage demands so that real wages are unaffected and therefore the shift of the AD and SRAS curve happen automatically and if agents have these forms of expectations then it is just a continual movement up the LRAS curve from a to c.

In terms of the phillips curve it just shifts up the short-run phillips curve at the natural rate of unemployment creating a new long-run phillips curve as shown below.

### Rationing function of prices

This is also known as the allocating function of prices. As the price mechanism determines what consumers spend their money on it also determines how scarce resources are allocated (used).

### Real GDP

Is a macroeconomic measure of the value of economic output adjusted for price changes.

This measure deflates the nominal measure of GDP as nominal GDP can change because of price changes and output changes. Therefore this measure just takes away all the price changes from the nominal GDP measure and therefore makes the real measure of GDP a measure of productivity changes.

### Real incomes

The value of incomes received after allowing for inflation.

### Real interest rate

This is the rate of interest adjusted for the rate of inflation e.g. if the rate of interest on a savings account is 0.5% and inflation is 2.0% the real interest rate is - 1.5%.

### Real value

This is the value of a variable after allowing for inflation.

### Real wage unemployment

Unemployment that occurs when labour market imperfections preserve a higher real wage rate than the equilibrium real wage rate.

Below is a diagram to show the labour market in disequilibrium and how this type of unemployment persists. In this instance, the wage rate has been pushed up to W1 and this has caused the supply of labour to rise as workers have a greater incentive to supply more hours of labour, as the reward per hour of work is greater. However, the demand for labour falls as firms have less incentive to employ workers at a higher wage rate and therefore the divergence between the supply and demand for labour creates this form of unemployment. This type of unemployment is normally created due to the imposition or increase of a national minimum wage rate which is fixed above the prevailing wage rate.

### Recession

Negative real GDP growth for 2 consecutive quarters.

Below is a diagram that shows the level of real GDP growth for the UK economy in terms of quarters. As can be seen from the graph the red shaded regions represent when the economy has gone through a period of two consecutive periods of negative growth and therefore this being officially classified as a recession or a downturn. These periods correspond to the 2008 global financial crisis and the early 1990's recession.

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