Following economic news often means encountering confusing financial jargon. From fiscal policy to quantitative easing, the terminology can quickly become head-scratching. To help demystify common economics vocabulary, we’ve put together this handy guide to defining these terms in simple English.
Gross Domestic Product (GDP)
GDP measures the total value of goods and services produced within the UK. It represents the size and health of the British economy. If UK GDP is increasing, the economy is generally growing. GDP is an important metric used to assess economic performance and track growth.
The Office for National Statistics publishes quarterly GDP estimates. Analysts look at GDP trends over time to judge the expansion or contraction of the overall UK economy. Higher GDP indicates more economic activity and prosperity.
Inflation
Inflation means prices are rising across the British economy. Things like food, rent, petrol and electronics get more expensive for consumers. UK inflation happens when aggregate demand grows or supplies fall. As more pounds chase fewer goods and services, prices increase.
The Bank of England targets 2% inflation per year as ideal. But high inflation is concerning since people’s money doesn’t go as far. Runaway inflation like in the 1970s can even destabilize economies. Tracking inflation informs fiscal and monetary policies.
Interest Rates
Interest rates are what UK banks charge you to borrow money through financial products like loans and mortgages. Interest rates also refer to the rates you can earn by saving money in British bank accounts.
When the Bank of England raises interest rates, the cost of borrowing money increases. This impacts the affordability of mortgages and other bank loans. Higher interest rates also encourage saving money over borrowing and spending.
Quantitative Easing (QE)
Quantitative easing is when the Bank of England prints new money electronically to buy government bonds and other financial assets. This increases the supply of pounds in circulation and available in the economy.
QE aims to encourage spending and investment to stimulate the British economy during recessions. But it risks high inflation if too much money is printed. The BoE has used QE in recent crises to try to spur recovery.
Fiscal Policy
Fiscal policy refers to the UK government’s decisions around taxation and spending. When the government cuts taxes or increases spending, it typically injects new money into the economy. This expansionary fiscal policy can stimulate economic growth.
Conversely, austerity measures like raising taxes or reducing government expenditure can contract an overheating economy. This contractionary fiscal policy is one tool to combat high inflation.
Exchange Rates
Exchange rates determine how much one currency is worth in relation to another currency. For example, how many U.S. dollars you can buy with one British pound sterling.
When exchange rates fluctuate substantially, it impacts import and export prices as well as overseas investments. Governments and central banks usually prefer competitive exchange rates to support trade and exports.
Employment Rate
The UK employment rate measures the percentage of people employed in the British economy. Higher employment rates indicate greater economic prosperity. Low employment rates signal recession and systemic unemployment issues.
Ideally, economists aim for full employment where most adults seeking jobs can find work. Tracking employment metrics helps assess the health of the UK labor market.