Economic Terms

A general description for loan agreements relating to money borrowed by governments. the sovereign debt of countries with strong credit ratings are referred to as gilt edged.

Highlights the extent of how far away an economy or firm is from producing at its maximum feasible production level. The spare capacity refers to resources which are not being fully utilised in the production processes of firms and this explains why output lies below the maximum level. 

If an individual firm has spare capacity this means the factors of production (labour, land, capital and enterprise) are not being used in the most efficient way and this reduces the ability of firms to produce at their maximum level. The implications of firms having a significant level of spare capacity is that they are likely to face an inelastic supply curve i.e. restricted in their ability to increase production when prices rise. This inelastic supply will then go on to impact the firms profitability. 

From an economy's perspective, if spare capacity exists this relates to the total economy's endowment of resources not being fully utilised in the most efficient way possible. As a result the firm is producing at a level below its productive capacity and is classed as productively inefficient. 

The cleanest way to evaluate spare capacity in the economy is to use the Keynesian aggregate supply curve. As this curve shows that the AS curve for an economy is upwardly sloping. It shows as the economy moves closer to full employment the AS curve becomes more inelastic. This means the impact of aggregate demand curve shifts on the inflation rate becomes amplified the less spare capacity the economy has, because the increased demand cannot be absorbed by spare resources. The evaluative point here is that the more spare capacity an economy has the less of an impact AD curve shifts have on the inflation rate.

Below is a depiction of the Keynesian AS curve for an economy that is positioned at a point with significant spare capacity.

By working with other workers and dividing up the tasks involved in production the overall productive process becomes more efficient because specialisation helps the workers to become more proficient in a smaller number of tasks.

For instance, rather than all villagers carry out all tasks it would be much more beneficial for the entire village to divide specialised tasks to individual villagers. This way each villager would become more focused and more skilled in that particular practice because of the 'learning by doing' approach. This is the basic concept invented by Adam Smith and his idea of the pin factory to increases productivity and efficiency in the production process.

A tax per unit of consumption that does not vary with the value of consumption. The fuel duty on unleaded petrol is currently 58p/litre (n.b. also subject to VAT which is an ad valorem tax).

The following table and diagram detail a specific tax of £2.00:

Investing when there is an expectation that prices will rise and produce a profit.

The decision to buy a good is based on the expectation that the prices are expected to rise rather than for the purpose of consuming the good itself. The goods are typically held for a short period and the sold to make a gain. This activity is common in commodity markets.

An outcome of economic activity that effects firms and individuals that are not directly involved in an activity e.g. externalities.

The immediate exchange of one currency for another using the current exchange rate, which has been determined by demand and supply for those respective currencies in the foreign exchange market.

Below is a diagram to show that this type of contract takes the exchange rate that prevails in the market for that particular currency i.e. where demand and supply for that currency intersect.

Government intervention designed to manipulate markets to prevent excessive price fluctuations

A term used to describe an economy that is experiencing anaemic growth, rising inflation and high levels of unemployment.   

Below is a series of diagrams to show how to represent the economic impacts of stagflation for both the economy and the labour market.

Stagflation is created as a result of an inward shift in the SRAS curve, as shown in the AD-AS diagram above. This inward shift is an example of a supply side shock as is normally instigated because of an increase in production costs such as commodity prices or wage costs. Another term that could be used to describe stagflation is cost push inflation. 

Because the stagflation has created lower output (as a result of firms curtailing production). This means value of labour for firms is reduced and therefore this causes an inwards shift in the demand for labour curve in the labour market. Assuming ceteris paribus, this results in reduced employment and creates rising unemployment in the economy.