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Real Versus Nominal Value (economics)
In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not changed on average; therefore, changes in real value exclude the effect of inflation. In contrast, a nominal value has not been adjusted for inflation, and so changes in nominal value reflect at least in part the effect of inflation but will not hold the same purchasing power. Commodity bundles, price indices and inflation A commodity bundle is a sample of goods, which is used to represent the sum total of goods across the economy to which the goods belong, for the purpose of comparison across different times (or locations). At a single point of time, a commodity bundle consists of a list of goods, and each good in the list has a market price and a quantity. The market value of the good is the market price times the quantity at that p ...
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Economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes what's viewed as basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the economy as a system where production, consumption, saving, and investment interact, and factors affecting it: employment of the resources of labour, capital, and land, currency inflation, economic growth, and public policies that have impact on these elements. Other broad distinctions within economics include those between positive economics, describing "what is", and normative economics, advocating "what ought to be"; between economic theory and applied economics; between rational a ...
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Real Interest Rate
The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate. If, for example, an investor were able to lock in a 5% interest rate for the coming year and anticipated a 2% rise in prices, they would expect to earn a real interest rate of 3%. The expected real interest rate is not a single number, as different investors have different expectations of future inflation. Since the inflation rate over the course of a loan is not known initially, volatility in inflation represents a risk to both the lender and the borrower. In the case of contracts stated in terms of the nominal interest rate, the real interest rate is known only at the end of the period of the loan, based on the realized inflation rate; this is called the ex-post real intere ...
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Inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The employment cost index is also used for wages in the United States. Most economists agree that high levels of inflation as well as hyperinflation—which have severely disruptive effects on the real economy—are caused by persistent excessive growth in the money supply. Views on low to moderate rates of inflation are more varied. Low or moderate inflation may be attr ...
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Index (economics)
In Statistics, Economics and Finance, an index is a statistical measure of change in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from different perspectives. Influential global financial indices such as the Global Dow, and the NASDAQ Composite track the performance of selected large and powerful companies in order to evaluate and predict economic trends. The Dow Jones Industrial Average and the S&P 500 primarily track U.S. markets, though some legacy international companies are included. The consumer price index tracks the variation in prices for different consumer goods and services over time in a constant geographical location and is integral to calculations used to adjust salaries, bond interest rates, and tax thresholds for inflation. The GDP Deflator Index, or real GDP, measures the level of prices of all- ...
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Financial Repression
Financial repression comprises "policies that result in savers earning returns below the rate of inflation" to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments." It can be particularly effective at liquidating government debt denominated in domestic currency. It can also lead to large expansions in debt "to levels evoking comparisons with the excesses that generated Japan’s lost decade and the 1997 Asian financial crisis." The term was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon to "disparage growth-inhibiting policies in emerging markets." Mechanism Financial repression may consist of any of the following, alone or in combination.: #Explicit or indirect capping of interest rates, such as on government debt and deposit rates (e.g., Regulation Q). #Government ownership or control of domestic banks and financial institutions with barriers that limit other institutions from entering the mar ...
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Deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive. Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral. Some economists argue that prolonged deflationary periods are related to the underlying of technological progress in an economy, because as productivity increases ( TFP), the cost of goods decreases. Deflation usually happens when su ...
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Cost-of-living Index
A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as prices vary. There are many different methodologies that have been developed to approximate cost-of-living indexes. A Konüs index is a type of cost-of-living index that uses an expenditure function such as one used in assessing expected compensating variation. The expected indirect utility is equated in both periods. Application to price index theory The United States Consumer Price Index (CPI) is a price index that is based on the idea of a cost-of-living index. The U.S. Department of Labor's Bureau of Labor Statistics (BLS) explains the differences: The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making ...
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Constant Item Purchasing Power Accounting
Constant purchasing power accounting (CPPA) is an accounting model that is an alternative to model historical cost accounting under high inflation and hyper-inflationary environments. It has been approved for use by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Under this IFRS and US GAAP authorized system, financial capital maintenance is always measured in units of constant purchasing power (CPP) in terms of a Daily CPI (consumer price index) during low inflation, high inflation, hyperinflation and deflation; i.e., during all possible economic environments. During all economic environments it can also be measured in a monetized daily indexed unit of account (e.g. the Unidad de Fomento in Chile) or in terms of a daily relatively stable foreign currency parallel rate, particularly during hyperinflation when a government refuses to publish CPI data. Authorized by the IASB during low inflation In the IASB's original Fra ...
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Classical Dichotomy
In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the money value of output and the interest rate. In particular, this means that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation. An economy exhibits the classical dichotomy if money is neutral, affecting only the price level, not real variables. As such, if the classical dichotomy holds, money only affects absolute rather than the relative prices between goods. The classical dichotomy was integral to the thinking of some pre-Keynesian economists (" money as a veil") as a long-run proposition and is found today in new clas ...
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Aggregation Problem
An ''aggregate'' in economics is a summary measure. It replaces a vector that is composed of many real numbers by a single real number, or a scalar. Consequently there occur various problems that are inherent in the formulations that use aggregated variables.Franklin M. Fisher (1987). "aggregation problem," '' The New Palgrave: A Dictionary of Economics'', v. 1, pp.53-55 The aggregation problem is the difficult problem of finding a valid way to treat an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general microeconomic theory. The second meaning of "aggregation problem" is the theoretical difficulty in using and treating laws and theorems that include aggregate variables. A typical example is the aggregate production function. Another famous problem is Sonnenschein-Mantel-Debreu theorem. Most of macroeconomic statements comprise this problem. Examples of aggregates in micro- and ...
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Cross-sectional Data
Cross-sectional data, or a cross section of a study population, in statistics and econometrics, is a type of data collected by observing many subjects (such as individuals, firms, countries, or regions) at the one point or period of time. The analysis might also have no regard to differences in time. Analysis of cross-sectional data usually consists of comparing the differences among selected subjects. For example, if we want to measure current obesity levels in a population, we could draw a sample of 1,000 people randomly from that population (also known as a cross section of that population), measure their weight and height, and calculate what percentage of that sample is categorized as obese. This cross-sectional sample provides us with a snapshot of that population, at that one point in time. Note that we do not know based on one cross-sectional sample if obesity is increasing or decreasing; we can only describe the current proportion. Cross-sectional data differs from time ...
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Time-series
In mathematics, a time series is a series of data points indexed (or listed or graphed) in time order. Most commonly, a time series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of discrete-time data. Examples of time series are heights of ocean tides, counts of sunspots, and the daily closing value of the Dow Jones Industrial Average. A time series is very frequently plotted via a run chart (which is a temporal line chart). Time series are used in statistics, signal processing, pattern recognition, econometrics, mathematical finance, weather forecasting, earthquake prediction, electroencephalography, control engineering, astronomy, communications engineering, and largely in any domain of applied science and engineering which involves temporal measurements. Time series ''analysis'' comprises methods for analyzing time series data in order to extract meaningful statistics and other characteristics of the data. Time series ''forecasting ...
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