Junior Economist Qualification key terms

A measure of how much the quantity demanded of a good changes when its price changes, calculated as the percentage change in quantity divided by the percentage change in price. Demand is elastic when the ratio exceeds one in absolute value.

The percentage change in quantity demanded divided by the percentage change in consumer income. Positive values indicate a normal good, values above one suggest a luxury, and negative values indicate an inferior good.

The difference between the total amount consumers are willing to pay for a quantity of a good and the amount they actually pay. It measures the welfare gain buyers obtain from a market transaction.

The difference between the revenue sellers receive from a sale and the minimum amount they would have accepted. It reflects the welfare gain to producers and, together with consumer surplus, forms total market surplus.

The loss of total economic surplus caused when a market produces a quantity different from the efficient level, for example because of a tax, a price control, or monopoly pricing.

A legally imposed maximum price for a good or service. Set below the equilibrium price, it typically creates excess demand, shortages, and non-price rationing such as queues or informal side payments.

A legally imposed minimum price for a good or service. Set above the equilibrium price, it usually produces excess supply, such as unsold output or surplus labor, and may require public purchases to be sustained.

A cost or benefit from production or consumption that falls on third parties who are not part of the transaction. Negative externalities lead markets to overproduce; positive externalities lead to underproduction relative to the social optimum.

A good that is both non-rival in consumption and non-excludable, such as national defense. Because users cannot easily be charged, private markets tend to supply too little and public provision or funding is often required.

The tendency of individuals to benefit from a good or service without paying for it when exclusion is impossible or costly. It undermines voluntary funding of public goods and collective action.

The proposition that if property rights are clearly defined and transaction costs are zero, private bargaining will reach an efficient allocation regardless of who initially holds the rights. Distribution, however, depends on the initial assignment.

A tax set equal to the marginal external cost of an activity, designed to make producers or consumers internalize the externality and bring output closer to the socially efficient level.

The total market value of all final goods and services produced within a country's borders during a given period. It is commonly measured by the expenditure, income, or production approach.

Nominal GDP values output at current prices, while real GDP values it at the prices of a chosen base year, removing the effect of price changes so that changes reflect actual output.

A price index computed as nominal GDP divided by real GDP, multiplied by 100. It covers all domestically produced goods and services and is used to derive real from nominal output.

The difference between actual output and potential output, usually expressed as a percentage of potential output. A negative gap signals slack and unemployment; a positive gap signals overheating pressure.

An empirical relationship showing that lower unemployment is associated with higher inflation in the short run. The long-run curve is generally treated as vertical at the natural rate of unemployment.

The unemployment rate consistent with stable inflation, reflecting frictional and structural unemployment rather than cyclical weakness. It is not zero, because some job search and mismatch always occur.

The change in equilibrium output caused by a one-unit change in a fiscal instrument such as government spending or taxes. Its size depends on consumption behavior, imports, and the degree of economic slack.

A fiscal feature, such as progressive income tax or unemployment insurance, that dampens fluctuations automatically because revenues fall and transfers rise during downturns without new legislation.

The reduction in private investment or consumption that occurs when expansionary fiscal policy raises interest rates or absorbs real resources. It weakens the net output effect of the stimulus.

Deliberate changes in government spending or taxation enacted to influence the economy, as distinct from automatic stabilizers. Its effectiveness depends on timing, size, and financing.

A result stating that the distribution of the sum or mean of many independent random variables tends toward a normal distribution as the sample size grows, regardless of the underlying distribution's shape.

The principle that the sample average converges to the population mean as the sample size increases. It justifies using large samples to estimate population values reliably.

The estimated standard deviation of a sample statistic across repeated samples. It measures the precision of an estimate and shrinks as the sample size grows, typically in proportion to the square root of n.

A range of values, constructed from sample data, that is expected to contain the true population parameter in a stated proportion of repeated samples, commonly 95 percent.

A result is statistically significant when the probability of observing it under the null hypothesis is below a chosen threshold, usually five percent. It concerns evidence, not the size or importance of an effect.

A Type I error rejects a true null hypothesis, a false positive; a Type II error fails to reject a false null hypothesis, a false negative. Their probabilities trade off with sample size and the chosen threshold.

The probability that a test correctly rejects a false null hypothesis, equal to one minus the Type II error rate. Power rises with larger samples, larger true effects, and lower measurement noise.

An estimation method that chooses coefficient values minimizing the sum of squared residuals in a linear model. Under classical assumptions the estimates are unbiased and, among linear unbiased estimators, efficient.

Bias in an estimated coefficient that arises when a relevant variable is left out of a regression and is correlated both with the included regressor and the dependent variable.

A situation in which an explanatory variable is correlated with the regression error term, for example through omitted factors, simultaneity, or measurement error, so that estimates do not identify causal effects.

A variable used to isolate variation in an endogenous regressor that is unrelated to the error term. A valid instrument must be correlated with the regressor and affect the outcome only through it.

A condition in which the variance of regression errors differs across observations. It leaves coefficient estimates unbiased but makes conventional standard errors invalid, so robust standard errors are used.

The share of variation in the dependent variable explained by a regression model, ranging from zero to one. A high value does not by itself establish causation or a well-specified model.

A measure of the average change over time in the prices paid by households for a fixed basket of consumption goods and services. It is widely used to gauge inflation and index payments.

A tax structure in which the average tax rate rises as taxable income or another base increases, so higher-income units pay a larger share of their income. Personal income tax is a common example.

The division of a tax burden between buyers and sellers, determined mainly by relative elasticities rather than by who legally remits the tax. The less elastic side bears the larger share.

The ratio of broad money to the monetary base, showing how much money the banking system can create from each unit of central bank money. It depends on reserve requirements and currency holdings.

The minimum share of deposits that banks must hold as reserves with the central bank or as vault cash. It constrains credit creation and is one of the traditional monetary policy tools.

Central bank purchases or sales of securities in the market to adjust bank reserves and short-term interest rates. Purchases add liquidity; sales withdraw it.

The interest rate a central bank sets or targets to steer borrowing costs and liquidity in the economy, often the rate on its lending or deposit facilities. It anchors other short-term rates.

A graph of interest rates on bonds of the same credit quality against their maturities. Its slope reflects expectations about future rates, inflation, and risk, and an inversion often precedes downturns.

The extra return investors require for holding a long-term bond instead of a sequence of short-term bonds. It compensates for uncertainty about future rates and inflation.

The proposition that, after adjusting for price levels, currencies should trade so that identical baskets of goods cost the same across countries. It is a long-run anchor rather than a precise short-run predictor.

The nominal exchange rate adjusted for relative price levels between two countries. It measures the relative price of foreign goods in terms of domestic goods and indicates competitiveness.

A systematic record of a country's transactions with the rest of the world, comprising the current account, the capital and financial account, and changes in reserves. Accounts balance by construction.

The ability to produce a good at a lower opportunity cost than another producer. It explains gains from specialization and trade even when one party is absolutely more productive in everything.

A tax levied on imported goods, usually as a percentage of value or a fixed amount per unit. It raises domestic prices, protects domestic producers, and tends to reduce traded quantities.

A monetary policy framework in which the central bank publicly commits to a numerical inflation goal and uses interest rate decisions and communication to meet it, with transparency and accountability.

The tendency to take greater risks when the costs of those risks are borne partly by someone else, such as a deposit insurer or a lender. It is a core concern in regulation and insurance design.

A market failure in which asymmetric information causes higher-risk or lower-quality participants to dominate a market, driving out safer or better ones. Insurance and lending markets are common settings.

Rules imposed on financial institutions to limit systemic risk, such as capital adequacy, liquidity, and exposure limits. They aim to protect depositors and the stability of the financial system.

A situation in which a professional's personal, financial, or other interests could improperly influence judgments made on behalf of a client or employer. Disclosure and recusal are typical safeguards.

The requirement that an auditor be free from relationships or interests that could compromise objective judgment. It underpins the credibility of audit opinions and public confidence in financial reporting.