Economy & finance basics
CPI, GDP, rate decisions, finance acronyms and chart tricks — what the numbers in the news actually mean.
Games in this section
What it covers
- 1What CPI measures and how inflation erodes purchasing power
- 2GDP, GDP per capita and the unemployment rate, and what each misses
- 3How a rate rise or cut transmits through the economy
- 4Who does what: central bank, commercial bank, broker, insurer, fund
- 5Decoding GDP, CPI, ETF, REIT, APR and other acronyms
- 6Truncated axes and other misleading chart techniques
- 7Why correlation is not causation
- 8What the major crashes looked like as they happened
Quick check
Three questions from this section.
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Coming soonQuestions people ask
What is CPI in simple terms?
The Consumer Price Index tracks the price of a fixed basket of everyday goods and services. CPI up 3% means the same basket costs 3% more than a year ago.
What is the difference between GDP and GDP per capita?
GDP is the total value of what an economy produces in a year; per capita divides it by population. Total shows scale, per capita is closer to living standards, and neither shows how it is distributed.
How much does inflation reduce the value of money?
At 3% a year, purchasing power falls to about 74% after ten years and 55% after twenty. Today's $100 buys what $55 buys now, two decades out.
What happens when interest rates rise?
Borrowing gets more expensive, spending and investment slow, and inflation usually eases. The effect on mortgages, savings rates and business funding typically lags by months.
What do ETF, REIT and APR stand for?
ETF is exchange-traded fund, REIT is real estate investment trust, APR is annual percentage rate. The first two are investment vehicles; the third is how borrowing cost is quoted.
What is the difference between a central bank and a commercial bank?
A central bank sets monetary policy and supervises the financial system. A commercial bank takes deposits and makes loans to the public. Only the first can change policy rates.
How do charts mislead people?
The most common trick is truncating the vertical axis so a tiny change looks like a cliff. Others include changing the scale, cherry-picking the date range, and using area to show a single dimension.
Why is correlation not causation?
Two series can move together by coincidence or because a third factor drives both. Establishing cause needs a mechanism and ideally a controlled test, not a correlation coefficient.