Some Useful Terms In Economics

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

• 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.
• Quarter-on-Quarter growth rate: For X recorded at a quarterly frequency, (X_t/X_t-1)-1.
• Quarter-on-Quarter growth rate, annualized: For X recorded at a quarterly frequency, (X_t/X_t-1)⁴-1.
• Month-on-Month growth rate: For X recorded at a monthly frequency, (X_t/X_t-1)-1.
• Month-on-Month growth rate, annualized: For X recorded at a monthly frequency, (X_t/X_t-1)¹²-1.
• Quarter-on-Quarter growth rate: For X recorded at a quarterly frequency, (X_t/X_t-1)-1.
• Quarter-on-Quarter growth rate, annualized: For X recorded at a quarterly frequency, (X_t/X_t-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 quarterly frequency, (X_t/X_t-4)-1.
• Annual growth rate: For X recorded at annual frequency, (X_t/X_t-4)-1.
• Real interest rate: nominal interest rate minus expected inflation rate over corresponding period.
• 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.
• Inflation: the growth rate of a price deflator. [post]
• Gross debt: For government debt, total amount of debt issued, including debt owned by other parts of the same government.
• Net debt: For government debt, total amount of debt issued, excluding – or netting out – debt owned by other parts of the same government.
• 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).
• M1: narrow money, currency plus checking deposits.
• M2: broad money, currency plus checking, savings accounts, and other e.g., money market deposits.
• Velocity (of money): nominal GDP divided by money stock. [post]
• 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: ΔX_t = α + φΔX_t-1 + ε_t + θε_t-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., X_t = δ +  X_t-1 + ε_t. [post]
• 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]
• 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]