Junior Economist Qualification flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Absolute value above one means elastic demand, below one inelastic, exactly one unit elastic.

Lerner index

Measure of market power equal to (price minus marginal cost) divided by price. It equals the reciprocal of the absolute price elasticity of demand facing the firm.

Pigouvian tax

A tax set equal to the marginal external cost of a negative externality at the socially efficient output, making producers internalize the damage they impose on third parties.

Shutdown rule

A competitive firm should stop producing in the short run when price falls below minimum average variable cost, because revenue no longer covers avoidable costs.

Expenditure multiplier

In a simple closed economy, the change in equilibrium output per unit change in autonomous spending, equal to one divided by one minus the marginal propensity to consume.

GDP deflator

Nominal GDP divided by real GDP, multiplied by one hundred. It measures the price level across all domestically produced final goods and services.

Natural rate of unemployment

The unemployment rate consistent with stable inflation, reflecting frictional and structural unemployment. Cyclical deviations from it are the focus of stabilization policy.

Okun's law

Empirical relationship whereby unemployment rising one percentage point above its natural rate is associated with roughly two percent of lost output relative to potential.

Central limit theorem

As sample size grows, the sampling distribution of the sample mean approaches a normal distribution with mean equal to the population mean and variance equal to sigma squared over n.

Bayes' theorem

Formula giving the conditional probability of an event given evidence: the likelihood of the evidence under the event times the prior, divided by the unconditional probability of the evidence.

Standard error of the mean

The standard deviation of the sampling distribution of the sample mean, equal to the sample standard deviation divided by the square root of sample size.

Type I and Type II errors

A Type I error rejects a true null hypothesis with probability alpha. A Type II error fails to reject a false null hypothesis with probability beta; power is one minus beta.

Omitted variable bias

Bias in an estimated coefficient when a relevant regressor is excluded. Its direction equals the sign of the omitted variable's effect times its correlation with the included regressor.

Gauss-Markov theorem

Under linearity, random sampling, no perfect collinearity, zero conditional mean error and homoskedasticity, ordinary least squares is the best linear unbiased estimator.

Heteroskedasticity

A condition where the variance of the regression error differs across observations. It leaves OLS coefficients unbiased but makes conventional standard errors invalid.

Adjusted R-squared

A goodness-of-fit measure that penalizes the addition of regressors, computed as one minus the ratio of error variance to total variance adjusted for degrees of freedom.

Tax incidence

The distribution of a tax's economic burden between buyers and sellers. It depends on relative elasticities, falling more heavily on the side that is less elastic.

Automatic stabilizers

Fiscal features such as progressive income taxes and unemployment benefits that dampen economic fluctuations automatically, without requiring new legislation by policymakers.

Ricardian equivalence

The proposition that deficit-financed government spending has no real effect if households fully anticipate the future taxes needed to repay the debt.

Crowding out

The reduction in private investment that occurs when government borrowing raises interest rates, an effect that is stronger when the economy is near full employment.

Money multiplier

The ratio of the money supply to the monetary base, equal to one plus the currency-deposit ratio divided by the reserve ratio plus the currency-deposit ratio.

Fisher equation

The relationship between nominal and real interest rates: the nominal rate approximately equals the real rate plus expected inflation, or exactly their compounded sum.

Duration

A weighted average maturity of a bond's cash flows. It approximates the percentage price change for a one percentage point change in yield.

Yield curve inversion

A term structure in which short-term interest rates exceed long-term rates. Historically it has often preceded recessions, though it is not a guarantee.

Comparative advantage

The ability to produce a good at lower opportunity cost than a trading partner. Specialization according to it raises total output even when one country is absolutely less productive.

Marshall-Lerner condition

A currency depreciation improves the trade balance only if the sum of the absolute export and import demand elasticities exceeds one.

Purchasing power parity

A theory holding that exchange rates adjust so identical baskets of goods cost the same across countries, implying exchange-rate changes track inflation differentials.

J-curve

The pattern in which a country's trade balance initially worsens after a currency depreciation, then improves as export and import quantities adjust over time.

Tinbergen rule

A principle of policy design stating that achieving a given number of independent targets requires at least that many independent policy instruments.

Regulatory capture

A situation in which a regulatory agency acts in the interests of the industry it supervises rather than the public interest, often through information and revolving-door advantages.

Time inconsistency

The tendency of policymakers to announce one policy and later adopt another when preferences change over time, which can undermine credibility and raise inflation expectations.

Conflicts of interest disclosure

The professional obligation to reveal financial or personal interests that could bias analysis or advice, allowing readers and clients to judge the work's independence.