Edexcel A-level Economics Paper 2
Macroeconomics - ANS The study of the economy as a whole, including inflation, growth and
unemployment.
Aggregate demand - ANS The total of all demands or expenditures in the economy at any given
price.
Aggregate demand curve - ANS Shows the relationship between the price level and equilibrium
national income. As the price level rises the equilibrium level of national income falls.
Animal spirits - ANS Business confidence: the mood of managers and owners of firms about the
future of their industry and the wider economy.
Gross investment - ANS The addition to capital stock, both to replace the existing capital stock
which has been used up (depreciation) and the creation of additional capital.
Investment - ANS The addition to the capital stock of the economy.
Retained profit - ANS Profit kept back by a firm for its own use which is not distributed to
shareholders or used to pay taxation.
Net exports or the net trade balance - ANS Exports minus imports.
Aggregate supply curve - ANS The relationship between the average level of prices in the
economy and the level of total output.
Full capacity - ANS The level of output where no extra production can take place in the long run
with existing resources. The full capacity level of output for an economy is shown by the
classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply
curve.
Short-run aggregate supply curve - ANS The upward sloping aggregate supply curve which
assumes that money wage rates are fixed.
Supply-side shocks - ANS Factors such as changes in wage rates or commodity prices which
cause the short run aggregate supply curve to shift.
Circular flow of income - ANS A model of the economy which shows the flow of goods, services
and factors and their payments around the economy.
Closed economy - ANS An economy where there is no foreign trade.
,Income - ANS Rent, interest, wages and profits earned from wealth owned by economic actors.
Injections - ANS In the circular flow of income, spending which is not generated by households
including investment, government spending and exports.
National income - ANS The value of the output, expenditure or income of an economy over a
period of time.
Open economy - ANS An economy where there is trade with other countries.
Wealth - ANS A stock of assets which can be used to generate a flow of production or income.
For example, physical wealth such as factories and machines is used to make goods and
services.
Withdrawals or leakages - ANS In the circular flow of income, spending by households which
does not flow back to domestic firms. It includes savings, taxes and imports.
Marginal propensity to import (MPM) - ANS The increase in imports divided by the increase in
income that caused them (i.e. change in M / change in Y)
Marginal propensity to save (MPS) - ANS The increase in saving divided by the increase in
income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) - ANS The increase in tax revenues divided by the increase in
income that caused them (i.e. change in T / change in Y)
Marginal propensity to withdraw (MPW) - ANS The increase in withdrawals from the circular flow
(S + T + M) divided by the increase in income that caused them (i.e. change in W / change in
Y); this is the same as the sum of the marginal propensity to save, tax and import (MPS + MPT
+ MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier - ANS The figure
used to multiply a change in an injection into the circular flow, such as investment, to find the
final change in income (assuming the injection is not determined by income). It is the ratio of the
final change in income to the initial change in an injection. It can be calculated as
1
________
1 - MPC
or
1
, ___________________
MPS + MPT + MPM
or
1
____
MPW
Multiplier effect or process - ANS An increase in investment or other injection will lead to an
even greater increase in income (assuming the injection is not determined by income).
Gross domestic product (GDP) - ANS A measure of the output or value added of an economy
which does not include output or income from investments abroad or an allowance for the
depreciation of the nation's capital stock.
Gross national income (GNI) - ANS The value of goods and services produced by an economy
over a period of time (GDP) plus net overseas interest payments and dividends (factor
incomes).
Gross national product (GNP) - ANS The market value of goods and services produced over a
period of time through the labour or property supplied by citizens of a country both domestically
(GDP) and overseas.
Hidden, black or informal economy - ANS Economic activity where trade and exchange take
place but which goes unreported to the tax authorities and those collecting national income
statistics.
Net national income - ANS A measure of national income which includes both net income from
investments abroad and an allowance for depreciation of the nation's capital stock.
Per person or per head or per capita - ANS Per individual in the population
Purchasing power parities - ANS An exchange rate of one currency for another which compares
how much a typical basket of goods in one country costs compared to that of another country.
Standard of living - ANS How well off is an individual, household or economy, measured by a
complex mix of variables such as income, health, the environment, participation in society and
political freedoms.
Transfer payments - ANS Income for which there is no corresponding output, such as
unemployment benefits or pension payments.
Macroeconomics - ANS The study of the economy as a whole, including inflation, growth and
unemployment.
Aggregate demand - ANS The total of all demands or expenditures in the economy at any given
price.
Aggregate demand curve - ANS Shows the relationship between the price level and equilibrium
national income. As the price level rises the equilibrium level of national income falls.
Animal spirits - ANS Business confidence: the mood of managers and owners of firms about the
future of their industry and the wider economy.
Gross investment - ANS The addition to capital stock, both to replace the existing capital stock
which has been used up (depreciation) and the creation of additional capital.
Investment - ANS The addition to the capital stock of the economy.
Retained profit - ANS Profit kept back by a firm for its own use which is not distributed to
shareholders or used to pay taxation.
Net exports or the net trade balance - ANS Exports minus imports.
Aggregate supply curve - ANS The relationship between the average level of prices in the
economy and the level of total output.
Full capacity - ANS The level of output where no extra production can take place in the long run
with existing resources. The full capacity level of output for an economy is shown by the
classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply
curve.
Short-run aggregate supply curve - ANS The upward sloping aggregate supply curve which
assumes that money wage rates are fixed.
Supply-side shocks - ANS Factors such as changes in wage rates or commodity prices which
cause the short run aggregate supply curve to shift.
Circular flow of income - ANS A model of the economy which shows the flow of goods, services
and factors and their payments around the economy.
Closed economy - ANS An economy where there is no foreign trade.
,Income - ANS Rent, interest, wages and profits earned from wealth owned by economic actors.
Injections - ANS In the circular flow of income, spending which is not generated by households
including investment, government spending and exports.
National income - ANS The value of the output, expenditure or income of an economy over a
period of time.
Open economy - ANS An economy where there is trade with other countries.
Wealth - ANS A stock of assets which can be used to generate a flow of production or income.
For example, physical wealth such as factories and machines is used to make goods and
services.
Withdrawals or leakages - ANS In the circular flow of income, spending by households which
does not flow back to domestic firms. It includes savings, taxes and imports.
Marginal propensity to import (MPM) - ANS The increase in imports divided by the increase in
income that caused them (i.e. change in M / change in Y)
Marginal propensity to save (MPS) - ANS The increase in saving divided by the increase in
income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) - ANS The increase in tax revenues divided by the increase in
income that caused them (i.e. change in T / change in Y)
Marginal propensity to withdraw (MPW) - ANS The increase in withdrawals from the circular flow
(S + T + M) divided by the increase in income that caused them (i.e. change in W / change in
Y); this is the same as the sum of the marginal propensity to save, tax and import (MPS + MPT
+ MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier - ANS The figure
used to multiply a change in an injection into the circular flow, such as investment, to find the
final change in income (assuming the injection is not determined by income). It is the ratio of the
final change in income to the initial change in an injection. It can be calculated as
1
________
1 - MPC
or
1
, ___________________
MPS + MPT + MPM
or
1
____
MPW
Multiplier effect or process - ANS An increase in investment or other injection will lead to an
even greater increase in income (assuming the injection is not determined by income).
Gross domestic product (GDP) - ANS A measure of the output or value added of an economy
which does not include output or income from investments abroad or an allowance for the
depreciation of the nation's capital stock.
Gross national income (GNI) - ANS The value of goods and services produced by an economy
over a period of time (GDP) plus net overseas interest payments and dividends (factor
incomes).
Gross national product (GNP) - ANS The market value of goods and services produced over a
period of time through the labour or property supplied by citizens of a country both domestically
(GDP) and overseas.
Hidden, black or informal economy - ANS Economic activity where trade and exchange take
place but which goes unreported to the tax authorities and those collecting national income
statistics.
Net national income - ANS A measure of national income which includes both net income from
investments abroad and an allowance for depreciation of the nation's capital stock.
Per person or per head or per capita - ANS Per individual in the population
Purchasing power parities - ANS An exchange rate of one currency for another which compares
how much a typical basket of goods in one country costs compared to that of another country.
Standard of living - ANS How well off is an individual, household or economy, measured by a
complex mix of variables such as income, health, the environment, participation in society and
political freedoms.
Transfer payments - ANS Income for which there is no corresponding output, such as
unemployment benefits or pension payments.
