Definition: Ceteris paribus is an economic term of Latin origin that means “all other things being equal” or “all else equal.” In other words, it’s an assumption that everything outside of a discussion is held constant and nothing interferes with the subject at hand. This concept is important in both economics and finance, as it is nearly impossible to isolate a range of different variables in the real world.
What Does Ceteris Paribus Mean?
What is the definition of ceteris paribus? Ceteris paribus is broadly used in economics to eliminate the possibility of a change in “other” factors that determine the relationship between two variables. It indicates the effect of one variable on another, keeping all other variables unchanged.
For instance, higher interest rates are expected to cause currency appreciation, provided that other factors that affect the exchange rates, such as inflation, government debt or the relative strength of other currencies, remain constant. However, all thing being equal, higher interest rates cause a currency appreciation.
Let’s look at an example.
This concept is commonly applied to the law of demand and supply. If the supply of a particular good outweighs its demand, then CP, the price of this product will increase too. This means that, provided that any other factor that affects demand remains unchanged, the price of a product is rising when its supply is greater than demand.
Also, if the price of a product increases, the demand for this product, CP, will decrease. For example, when the oil prices rise, consumers are not driven to buy oil, therefore suppressing demand. This presupposes that all other determinants of demand remain constant. Thus, all else equal, when the oil prices rise, demand for oil declines.
Another example is the interest rates. Higher interest rates cause consumer spending to decline. This presupposes that consumer confidence is low and that people are not driven to take new loans because the interest rates are higher, thus increasing the cost of borrowing. Therefore, CP, higher interest rates are causing a decline in consumer borrowing.
Define Ceteris Paribus: Ceteris paribus, all else equal, is a concept that assumes outside and unrelated factors are held constant for the sake of discussion of testing and proving a theory.