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G
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| Gearing ratio |
The gearing ratio shows the proportion of the total capital of the firm that is loan capital. It therefore measures the extent to which the company has borrowed. The higher the gearing ratio, the greater the proportion of their capital the firm has borrowed and the higher the interest payments the firm faces will be. |
| Geographical immobility |
Geographical immobility is a situation where resources do not freely move from one location to another. It is particularly a problem with labour as people are often reluctant to relocate for work, and it may therefore be a cause of unemployment. |
| Gini coefficient |
The Gini coefficient is a precise way of measuring the position of the Lorenz Curve. To work out the Gini coefficient we measure the ratio of the area between the Lorenz Curve and the 45 degree line to the whole area below the 45 degree line.
If the Lorenz Curve was the 45 degree line - then the value of the Gini Coefficient would be zero, but as the level of inequality grows so does the Gini Coefficient. In the most extreme possible scenario the Gini Coefficient would be 1. In the UK the figure is around 0.35 and during the 1980s grew as the level of inequality increased.
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| Gilt-edged securities |
Gilt-edged securities are a form of long-term government borrowing. They are a promise to repay in the future and usually have a fixed term (for example 5 years). They pay a fixed level of interest which is determined when they are issued. Their value will vary inversely with changes in the level of interest rates. If interest rates rise, then the
fixed interest gilt will appear less attractive to investors and their value will fall. However, they are always redeemed at the end for their face value (original value). |
| Government capital expenditure |
Government capital expenditure refers to government spending on investment goods. This means spending on things that last for a period of time. This may include investment in hospitals, schools, equipment and roads. |
| Government current expenditure |
Government current expenditure refers to government day to day spending. This means spending on recurring items. This includes salaries and wages that keep recurring, spending on consumables and everyday items that get used up as the good or service is provided. |
| Gross Domestic Product |
Gross Domestic Product (GDP) is a measure of National Income. It is the total value of all goods and services produced over a given time period (usually a year) excluding net property income from abroad. It can be measured either as the total of income, expenditure or output. |
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I
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| Income elasticity of demand |
The income elasticity of demand is a measure of how responsive the level of demand is to a change in income. It is an important piece of information to a firm as it helps them to predict how much the demand for their product will grow as the economy grows. We calculate the income elasticity from the following formula:
Income elasticity
of demand = |
% change in demand
% change in the level of income
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If the figure is greater than one then the product is described as 'income-elastic' or income-sensitive. This means that demand will grow by more than the level of income. If the figure is less than one, then the product is described as 'income-inelastic' and the demand will grow less than the level of income.
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| Indirect taxes |
Indirect taxes are taxes on expenditure. Examples of indirect taxes in the UK include VAT and taxes on alcohol, tobacco and petrol. |
| Inflation |
Inflation is a sustained increase in the general price level. In other words it is the rate at which prices are increasing. It can be measured either monthly, quarterly or annually. It is usually measured by the Retail Price index. |
| Inflationary gap |
This occurs when there is too much demand in the economy. This excess level of demand will tend to lead to demand-pull inflation. |
| Interest elasticity of demand for investment |
The interest elasticity of demand for investment is the responsiveness of investment to changes in interest rates. If as a result of interest rates changing there is almost no change in investment we would describe it as interest-inelastic. If however, a change in interest rates brought about a significant change in investment we would
describe it as interest-elastic. |
| Investment |
Investment is the purchase of capital equipment. Such as the purchase of machines, equipment, factories that firms need to enable them to produce. It is usually split into two parts:
- Replacement investment - this is where companies buy new machinery and equipment that simply replaces something they had already that was worn out or inefficient. Depreciation is often used as an approximation for this.
- Net investment - this is where companies buy new machinery or equipment. It is this type of investment that actually adds to the capital stock of the economy.
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| Invisible hand |
The invisible hand is an expression that came about from work by Adam Smith. He argued that the 'invisible hand' would organise markets and ensure that they arrived at the optimum outcome. This would all happen by individuals and firms pursuing their self-interest, yet despite this apparent
selfishness, the invisible hand of markets still ensured the best outcome for all concerned. |
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L
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| Laffer Curve |
The Laffer curve is named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue received by the government would also increase. However, there would come a point as tax rates where people would not regard it as worth working so hard. This lack of incentives would lead to a fall in income and therefore a fall in tax revenue. The
logical end point is with tax rates at 100% where no-one would bother to work (understandably!) and so tax revenue would become zero. Drawn on a diagram this gives the Laffer curve:
T* represents the optimum tax rate where the maximum amount of tax revenue can be collected.
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| Laissez-faire |
The term "laissez-faire" is used to describe an economic system where the government intervene as little as possible and leave the private sector to organise most economic activity through markets. Classical economists were great advocates of a laissez-faire system with minimal government
intervention. They believed free markets were the best organisers of economic activity. |
| Long-run aggregate supply |
See the definition for aggregate supply. |
| Lorenz Curve |
The Lorenz curve is a way of illustrating the income distribution of a country. The horizontal axis measures the percentages of the population while the vertical axis shows the percentage of the national income that they receive. The Lorenz Curve will look like this:
The further the Lorenz Curve is from the line of perfect equality, the more unequal the distribution of income in that country.
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