These are all terms that have been misused in comments on this blog (all by one person!). For purposes of facilitating coherent discussion, I provide some short definitions.
- Market failure : Failure to achieve a competitive market equilibrium due to the presence of externalities, public goods, or (potentially) due to market imperfections.
- Market imperfections: Monopoly, duopoly, oligopoly, monopsony, oligopsony, imperfect information (non-exhaustive)
(The above are sometimes used interchangeably on the web, but I learned from textbooks, so I’ll hew to a textbook distinction).
- Monopoly power: pricing power exerted when there are less than infinite number of producers (regardless of whether is just one producer or not).
- Monopsony power: pricing power exerted when there are less than infinite number of purchasers (regardless of whether is just one purchaser or not).
- Competitive market: a market devoid of market failures and market imperfections.
- Free market: a market devoid of government intervention of any type.
- Potential GDP: Is not necessarily a “binding constraint ” on GDP. The most common is that it is the level of output consistent with the utilization of factors of production at normal rates. It can be estimated using the production function approach (CBO), or inverting a Phillips curve (Ball-Mankiw), which would be consistent with NAILGDP, i.e., Non-Accelerating Inflation Level of GDP. A “binding constraint” interpretation is the Delong-Summers approach, proxied here.
- Trend GDP: typically a statistical measure of GDP that proxies for potential GDP. Hodrick-Prescott, band pass, and Hamilton are several statistical filters that are used, while deterministic trends are out of favor.
- Chain weighted: The weights ascribed to prices used to construct a price index and resulting quantity index are “chained” together such that weights vary over time. This contrasts with fixed weights as in the CPI (for main categories). Ratios of chain weighted quantity indices do not have a ready interpretation, i.e., the (x/y)*100 cannot be interpreted as x as a percentage of y when x and y are chain weighted indices.
- (The?) Taylor rule: an equation summarizing link between implied policy rate and an output gap, inflation gap, and a (real) natural rate of interest and inflation rate. There is not one single Taylor rule with one single set of parameters that dominates (unlike the one ring to rule them all, in LotR).
- Confidence interval: A reported conﬁdence interval is a range between two numbers. The frequency with which an observed interval (e.g., 0.72–2.88) contains the true effect is either 100 % if the true effect is within the interval or 0 % if not; the 95 % refers only to how often 95 % conﬁdence intervals computed from very many studies would contain the true size if all the assumptions used to compute the intervals were correct.