Terms for OCR A-Level Economics:
1. Crowding Out Effect – This occurs when increased government borrowing leads to higher
interest rates, which in turn reduces private sector investment. It happens because government
borrowing competes with businesses and consumers for available funds in financial markets.
2. Crowding In Effect – The opposite of crowding out, this effect suggests that government
spending can stimulate private sector investment by boosting demand and business confidence,
leading to increased economic activity.
3. Quantitative Easing (QE) – A monetary policy tool where a central bank purchases financial
assets (such as government bonds) from banks to increase the money supply and encourage
lending and investment. It is used to combat low inflation and stimulate economic growth.
4. Narrow and Broad Money in Terms of Liquidity –
 Narrow Money refers to the most liquid forms of money, such as cash and demand
deposits (e.g., money in checking accounts).
 Broad Money includes narrow money plus less liquid assets like savings deposits and
money market instruments, which take more time to convert into cash.
5. Fisher Equation of Exchange – Expressed as MV = PT, where:
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M = Money supply
V = Velocity of money (how frequently money is spent)
P = Price level
T = Volume of transactions/output
This equation shows the relationship between money supply and inflation, assuming
velocity and output remain stable.
6. Harrod-Domar Model – A growth model that suggests economic growth depends on the levels
of saving and capital investment. It argues that higher savings lead to more investment, which
drives economic growth, but also highlights potential problems like insufficient savings leading
to low growth, particularly in developing countries.
7. Absolute and Comparative Advantage
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Absolute Advantage: A country has an absolute advantage when it can produce a good or
service using fewer resources than another country. This concept, introduced by Adam Smith,
suggests that countries should specialize in goods where they are most efficient.
Comparative Advantage: A country has a comparative advantage when it can produce a good at
a lower opportunity cost than another country. Even if a country lacks absolute advantage in
any good, it can still benefit from trade by specializing in goods where it has the lowest relative
cost.
Example:
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Country A can produce 10 cars or 20 computers.
Country B can produce 8 cars or 10 computers.
Country A has an absolute advantage in both goods but has a comparative advantage in
computers (lower opportunity cost).
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Country B has a comparative advantage in cars and should specialize in them.
8. Terms of Trade (ToT)
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Terms of Trade measure the relative price of exports to imports, expressed as:
ToT=(Index of export pricesIndex of import prices)×100\text{ToT} = \left( \frac{\text{Index of
export prices}}{\text{Index of import prices}} \right) \times
100ToT=(Index of import pricesIndex of export prices)×100
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If ToT rises, a country can buy more imports for the same amount of exports, improving its trade
position.
If ToT falls, the country needs to export more to afford the same level of imports, worsening its
position.
9.
Marshall-Lerner Condition
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This condition states that a depreciation (or devaluation) of a currency will improve the trade
balance if the sum of the price elasticities of demand for exports and imports is greater than 1
(elastic demand).
If demand for exports and imports is inelastic (<1), a weaker currency may worsen the trade
balance initially because the price change does not lead to a significant volume change.
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Formula:
∣Ex∣+∣Em∣>1|E_x| + |E_m| > 1∣Ex∣+∣Em∣>1
Where:
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ExE_xEx = Price elasticity of demand for exports
EmE_mEm = Price elasticity of demand for imports
10. J-Curve
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The J-Curve effect explains how a currency depreciation affects the trade balance over time.
Initially, after a depreciation, the trade deficit worsens because:
o Imports become more expensive immediately.
o Exports take time to respond due to contracts and production lags.
Over time, as demand for exports increases and import demand falls, the trade balance
improves, forming a J-shaped curve on a graph.
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The Money Supply, Narrow Money & Broad Money
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Money supply refers to the total financial assets functioning as money within an
economy
The money supply is broken into different types of money
o Demand deposits are funds held in a checking account that account
holders can withdraw at any time without prior notice
o Near money assets are savings deposits, money market funds, and other
financial instruments that, while not directly functioning as currency, are
highly liquid and easily convertible into cash or used for transactions
o M0 includes physical currency and central bank reserves
o M1 encompasses currency in circulation and demand deposits
o M2 consists of M1 plus savings deposits and similar near-money assets
o M3 includes M2 along with large time deposits and institutional money
market funds
The distinction between narrow money and broad money
Narrow money
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Is part of the money supply made up of cash and liquid assets from banks and
building society deposits
o Its primary role is to function as a means of payment
Broad money
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It is part of the money supply, comprising of cash, liquid assets from banks
and building society deposits, and also [popover id="6aic1Am7Z87QoU8V"
label="illiquid assets"]
Liquidity measures the ease in which an asset can be converted into cash
o An example of an illiquid asset is a house, which requires a considerable
amount of time to be transformed into cash
o Shares are illiquid but are more easily sold
o Cash is the most liquid of all assets
Role of Financial Markets
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Financial markets are any place or system that provides buyers and sellers the
means to exchange goods/services and trade financial instruments
o These include bonds, equities, international currencies and derivatives
1. They facilitate saving: storing money for future use is essential for households
& firms. It also provides a pool of money that financial institutions can lend, i.e.
one person's savings is another person's borrowing
2. They lend to businesses & individuals: access to credit is a key requirement
for economic growth & development. Being able to borrow money speeds
up consumption by households & investment by firms. It also allows
households or firms to purchase assets & pay them off over an extended period
of time, e.g. mortgages on home purchases
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3. They facilitate the exchange of goods & services: each purchase of
goods/services requires the movement of money between at least two parties.
Financial markets provide multiple ways for this exchange to happen, including
phone apps (Google Pay), debit cards, credit cards & bank transfers
4. They provide forward markets in currencies & commodities: forward
markets are also called futures markets. They provide some price stability in
commodity markets and enable investors to make a profit by speculating on
future prices
5. They provide a market for equities: equities are shares in public companies
that are listed on stock exchanges around the world. Financial markets facilitate
both long term investment and speculation by providing platforms which
connect buyers and sellers e.g. E-Trade
An Introduction to Macroeconomic Objectives
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Macroeconomic Objectives are goals set by the government aimed at improving
the overall economic performance of a country as well as the quality of life of
its citizens
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Diagram: The Macroeconomic Objectives
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The government aims to achieve these objectives through the use
of macroeconomic policies
It can be difficult to achieve some outcomes simultaneously
o E.g. High economic growth and stable price levels can be in conflict with
one another
Economic Growth
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Economic growth is a central macroeconomic aim of most governments
Many developed nations (UK included) have an annual target rate of 2–3%
o This is considered to be sustainable growth
o Growth at this rate is less likely to cause excessive demand pull
inflation
Politicians often use it as a metric of the effectiveness of their policies and
leadership
Economic growth has positive impacts on confidence, consumption,
investment, employment, incomes, living standards and government budgets
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Strong economic growth means higher incomes, lower unemployment rates and
better government budgets
Sustainable economic growth will have less demand-pull inflationary pressures
or excessive environmental pressure
Price Stability
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The UK has a target inflation rate of 2% using the Consumer Price Index (CPI)
A low rate of inflation is desirable, as it is a symptom of economic growth
The different causes of inflation (cost push or demand pull) require different
policy responses from the Government
o Demand-side policies ease demand pull inflation
o Supply-side policies ease cost push inflation
Minimising Unemployment Levels
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The target unemployment rate for the UK is 4–5%
This is close to the full employment level of labour (YFE)
o There will always be a level of frictional unemployment
o This makes it impossible to achieve 100% employment
Within the broader unemployment rate, there is an increased emphasis on the
unemployment rate within different sections of the population
o E.g. youth unemployment, ethnic/racial unemployment by group
 In 2021, black unemployment in the UK was 11% and white
unemployment was 4.1%
Low levels of unemployment are a sign of a strongly performing economy and
are inversely linked to real GDP growth
o When real GDP increases, unemployment falls
o When real GDP decreases, unemployment rises
Stable Balance of Payments on Current Account
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The Balance of Payments (BoP) for a country is a record of all the financial
transactions that occur between it and the rest of the world
o The current account focuses mainly on the financial transactions related to
exports and imports of goods and services
Governments aim for Balance of Payments equilibrium on the Current Account
o If exports > imports, it will create a current account surplus
o If imports > exports, it will create a current account deficit
 Each one of these conditions has advantages and disadvantages
associated with it
 However, a current account deficit is more problematic in the longrun
The UK has traditionally run a small deficit
o As a percentage of GDP, the UK current account deficit is insignificant so
has not been problematic
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Balancing the Government Budget
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The Government Budget is presented annually and includes the forecasted
revenue and expenditure
Examples of Government Revenue and Expenditure
Revenue
Expenditure
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Sale of state assets; water, electricity
Taxes: VAT, corporation tax, carbon tax
Sales revenue from goods or services, e.g. train tickets
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The UK Government aims to run a balanced budget
o If expenditure > revenue, there is a budget deficit
o Any deficit has to be financed through public-sector borrowing
o Any borrowing is added to the public sector debt(Government debt)
If the UK government's debt becomes too high (expressed as a % of GDP),
then lenders begin to lose confidence in the Government's ability to repay the
debt
o The Government then has to raise the interest rate it offers to lenders,
which makes borrowing more expensive
The UK Government has worked extremely hard recently to reduce the budget
deficit and run a balanced budget
o COVID-19 expenditure has eroded the progress they made
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Government spending, such as public sect
Unemployment benefits
Spending on public and merit goods
Environmental Protection
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The UK government aims to ensure sustainable economic development and
reduce adverse impacts on the environment
In April 2021, the UK Government stated that their environmental aim was to
reduce emissions by 78% by 2035
o This reduction is based on the emission levels of 1990
o It is one of the most ambitious climate change targets globally
o It includes the UK’s share of international aviation and shipping emissions
Broader environmental aims include
o A focus on sustainability
o The reduction of negative externalities of production
o 100% energy from renewable sources by 2035
Equity in the Distribution of Income
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Equitable distribution ensures fairness and allows the same opportunities for
everyone
The aim is not equality of distribution as it removes the incentive to work and
study
High levels of income inequality can create social unrest
Income inequality is measured using the Gini Coefficient
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