Key Terms

adjustable-rate mortgage (ARM): a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates

base year: arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year

basket of goods and services: a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time

Consumer Price Index (CPI): a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer’s purchases

core inflation index: a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

cost-of-living adjustments (COLAs):a contractual provision that wage increases will keep up with inflation

deflation: negative inflation; most prices in the economy are falling

Employment Cost Index: a measure of inflation based on wages paid in the labor market

GDP deflator: a measure of inflation based on the prices of all the GDP components

hyperinflation: an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

index number: a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

indexed: a price, wage, or interest rate is adjusted automatically for inflation

inflation: a general and ongoing rise in price levels in an economy

International Price Index: a measure of inflation based on the prices of merchandise that is exported or imported

Producer Price Index (PPI): a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

quality/new goods bias: inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

substitution bias: an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably

Access for free at https://openstax.org/books/principles-economics-3e