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Some Useful Terms in Economics

Summary:
There are some terms used on this blog that provoke some confusion. Here are some quick definitions that might help some readers. Nominal vs. real, and price deflators Real quantity: a nominal quantity divided by a price deflator. Real GDP is nominal GDP divided by a price deflator. If the deflator takes a value of 1.00 in 2012, then real GDP is in 2012$. Real price: A nominal price divided by a general price for all items. The price of oil divided by the CPI would be a real price. Also “inflation adjusted” price. Relative price: A nominal price divided by the price for all other items. The price of oil divided by the CPI excluding oil would be a relative price. Real interest rate: nominal interest rate minus expected inflation rate over corresponding period. Indices Laspeyres price

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There are some terms used on this blog that provoke some confusion. Here are some quick definitions that might help some readers.

Nominal vs. real, and price deflators

  • Real quantity: a nominal quantity divided by a price deflator. Real GDP is nominal GDP divided by a price deflator. If the deflator takes a value of 1.00 in 2012, then real GDP is in 2012$.
  • Real price: A nominal price divided by a general price for all items. The price of oil divided by the CPI would be a real price. Also “inflation adjusted” price.
  • Relative price: A nominal price divided by the price for all other items. The price of oil divided by the CPI excluding oil would be a relative price.
  • Real interest rate: nominal interest rate minus expected inflation rate over corresponding period.

Indices

  • Laspeyres price index: Price index with weights fixed in the base period (usually a year). CPI used to be a simple Laspeyres. [post]
  • Paasche price index: Price index with weights fixed in the reference period. GDP deflators used to be Paasche.
  • Chain weighted quantity index: Index where growth rates are weighted by changing weights each period. NIPA components are chain weighted. Note: Adding up chain-weighted components of an aggregate will not necessarily equal the chain-weighted aggregate. [post]
  • NIPA: National Income and Product Accounts.

Growth rate conventions 

  • Month-on-Month growth rate: For X recorded at a monthly frequency, (Xt/Xt-1)-1
  • Month-on-Month growth rate, annualized: For X recorded at a monthly frequency, (Xt/Xt-1)12-1
  • Quarter-on-Quarter growth rate: For X recorded at a quarterly frequency, (Xt/Xt-1)-1
  • Quarter-on-Quarter growth rate, annualized: For X recorded at a quarterly frequency, (Xt/Xt-1)4-1  [post]
  • SAAR: Seasonally Adjusted at Annual Rates, usually refers to quantities, m/m growth rates or q/q growth rates, annualized. In US statistics, GDP is usually reported in official releases as SAAR (sometimes just AR), and GDP q/q growth rates as SAAR.
  • Year-on-Year growth rate: For X recorded at a monthly frequency, (Xt/Xt-12)-1
  • Year-on-Year growth rate: For X recorded at a quarterly frequency, (Xt/Xt-4)-1
  • Annual growth rate: For X recorded at annual frequency, (Xt/Xt-1)-1

Price deflator vs. inflation

  • Inflation: the growth rate of a price deflator. [post]Also first derivative of log price level with respect to time.
  • Deflation: negative inflation
  • Disinflation: declining inflation

Debt, money, assets

  • Gross debt: For government debt, total amount of debt issued, including debt owned by other parts of the same government. E.g., FRED series GFDEBTN
  • Net debt: For government debt, total amount of debt issued, excluding – or netting out – debt owned by other parts of the same government. E.g., FRED series FYGFDPUN
  • Flow: A variable that occurs over time. GDP is a flow.
  • Stock: A variable that is measured at an instant in time. Debt is a stock.
  • Inside asset: An asset held by the private sector that corresponds to a liability of the private sector.
  • Outside asset: An asset held by the private sector that has no corresponding liability of the private sector.
  • Money base or high powered money: currency and bank reserves (both outside assets). E.g., FRED series BOGMBASE
  • M1: narrow money, currency plus checking deposits. E.g., FRED series M1SL
  • M2: broad money, currency plus checking, savings accounts, and other e.g., money market deposits. E.g., FRED series M2SL
  • Velocity (of money): nominal GDP divided by money stock. [post]

Macroeconomic policy

  • Fiscal multiplier: the change in GDP for a change in government spending, ΔY/ΔG (or for a change in government transfers, or for a change in taxes)  [post]
  • Crowding out: the offset of decreased interest sensitive components of aggregate demand in response to an increase in budget deficits and/or GDP. [post]

Statistics

  • Standard error: an estimate of the standard deviation of the sampling population.
  • XX% Confidence interval: the range over which the interval will encompass the true parameter XX% of the times, if the test is repeated 100 times. [post]
  • Mean error: the average of errors.
  • Bias: if the mean error is non-zero.
  • Root mean squared error: the square root of the mean of squared errors. [post]
  • Mean absolute error: mean of the absolute value of the errors.
  • Time series model: a model of a variable involving only lags of the variable itself, and error terms. Time series models often refer to ARIMA models, of which a random walk is a simple version of.
  • ARIMA: AutoRegressive Integrated Moving Average. Example, of an ARIMA(1,1,1) model: ΔXt = α + φΔXt-1 + εt + θεt-1
  • Deterministic trend: a trend that follows exactly with time.
  • Stochastic trend: a trend that moves with time, but with includes a random error, e.g., Xt = δ +  Xt-1 + εt [post]

Seasonal adjustment

  • Seasonally adjusted: adjusted to remove influences of predictable seasonal variations, often denoted “s.a.”
  • Not seasonally adjusted: not adjusted to remove influences of predictable seasonal variations, often denoted “n.s.a.”
  • X-13ARIMA-SEATS: Standard statistical technique to extract and remove seasonal components, used by Census and other agencies.

Business cycles

  • Recession, Contraction: According to NBER, a broad based decline in economic activity, defined using various indicators (including, but not exclusively, real GDP), after a “peak”. Other definitions exist. [post]
  • Expansion: According to NBER, a broad based increase in economic activity, defined using various indicators (including, but not exclusively, real GDP), after a “trough”. Other definitions exist. [post]
  • Output gap: usually gap between reported GDP and potential GDP. [post]
  • Potential GDP: the level of output consistent with normal utilization of the factors of production with the given level of technology. CBO reports a commonly used estimate, e.g., FRED series GDPPOT
  • Unemployment gap: the gap between the reported level of unemployment and the natural rate of unemployment (the latter sometimes equated with the non-accelerating inflation rate of unemployment, NAIRU).

Welfare economics 

  • Dead weight loss: the cumulation of excess of marginal social benefit over marginal social cost for all units of consumption foregone, or cumulation of excess of marginal social cost over marginal social benefit for all units of excess production undertaken  [post]
  • Externality: a cost or benefit associated with an activity not entirely borne or received by the agents undertaking an activity, e.g. air pollution. [post]

Data sources: A list of data sources, including FRED referenced above.

Note: Many of the series I link to at FRED are generated by various agencies (BLS, BEA, Census, OECD), but these series are the series as reported, unless otherwise indicated in the documentation that FRED provides. (So if you see a series sourced from FRED on , do not accuse me of not having provided the “raw data”.)

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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