Real Saving

  

Categories: Econ

Some people save for real, and some just nominally.

People who save for real are mindful of inflation. You think your money is safe in your bank account? It’s earning interest, you tell yourself. Sure it is, but how much interest, exactly? And what’s inflation at? You need these things to calculate your real savings.

Inflation measures how much prices are going up. If inflation rose at 2% (which it has been annually on average for awhile now), then that means prices are up 2%. It also means your salary (which hasn’t changed in the past year) is giving you less buying-power than before. The prices of everything around you are going up, and yet your paycheck is staying the same. So you can buy...less.

The same applies to your savings account. If your savings account is only giving you 1% interest per year (APY) and inflation is rising at 2% per year, then your real savings are going down by 1% each year. Your money is eroding away...and you don’t even know it. Well, now you do. The average APY on savings accounts in 0.09% according to the FDIC, so...yeah. Everyone’s money is eroding away if it’s not keeping up with inflation.

Think about it this way: Grandma Ethel kept $100 in her savings account with 1% interest starting in 1959, and never added or took out any money. Between 1959 and 2019, that $100 dollars grew to $181.67

Back in 1959, $100 could buy you 200 movie tickets. Grandma Ethel could’ve watched 200 movies with that money. Today, her $181.67 could now only buy her 20 movie tickets. Movie ticket prices went up from an average of 50 cents to just over $9. Even though her savings were earning interest, prices were rising much faster.

In macroeconomics, real savings matters, too. Keynes’ famous IS-LM model, where S is savings, can be done in real (rather than nominal) terms to compare results across time.

Now go check your bank account APY, and find one that’s at least 2%. Oh, and one for Grandma Ethel, too.

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Finance: What are Gross Domestic Product...8 Views

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Finance Allah Shmoop What are gross domestic product GDP and

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gross national product GNP So how do you know how

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flush a baby alligator down the toilet And three years

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later it crawls back out looking for its mommy But

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in actuality it represents the total value of all the

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stuff you make in your country along with all the

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services you provide You know like legal services and dental

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cleaning services and stuff like that And you know that's

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you fish for herring all day Each of you catch

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an average of ten pounds of herring every day Hearing

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sells for about ten bucks a pound and everyone works

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two hundred days a year so multiply that all up

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a year each each catching ten pounds each day with

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each pound selling for ten bucks And well you could

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say the GDP of squish squad Scary is two hundred

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forty thousand dollars That's the value of all the stuff

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you're country made in a year Meanwhile elsewhere in the

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in two thousand seventeen so Well yeah that's a little

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bit more But of course the U S has three

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hundred twenty five million ish people in it instead of

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like airplane manufacturing and high value financial transactions And you

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know shmoop subscription sales instead of just herring fishing So

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it makes sense that the U S economy would be

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much much bigger toe Look at how an economy is

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doing People usually watch how it changes over time say

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one of your fellow squish Quaid Ian's starts fishing with

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dynamite Well it's a new technique Output goes from ten

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point today to twelve next year With the new output

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two forty and change before That's twenty percent GDP growth

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GDP growth rates because of the rapid expansion of its

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manufacturing base Right they optimize their farmers and take them

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from growing turn ups and instead have them assemble semiconductors

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semiconductor than a turnip As recently as two thousand ten

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China put up annual GDP growth rates still in the

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world The year after discovering dynamite fishing swish squad Ian's

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two eighty eight It was the year before decline of

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entails Gross domestic product consists of all the products and

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services made it given your inside the country So you

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know made within the borders of the country made domestically

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companies from a country regardless of where it was actually

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made like you're an American citizen No building pots or

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pottery in Mexico We found that in the GNP number

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while sitting in his living room in Des Moines that

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that would count in GDP but not in GNP right

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nineteen nineties GNP was typically used to track national economic

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size of a country In the level of economic and

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technical sophistication Big complex economies like the US usually aspire

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to modest growth like two or three percent smaller Countries

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in developing economies can post much higher growth rates with

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percentages in the double digits Not being all that uncommon

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regardless of who makes it GNP measures the value of

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stuff made by citizens of a country regardless of where

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Norwegian caught would count on the squish Wadi and GDP

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