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Macroeconomics: Unit 3, Real vs Nominal Variables 1 Views
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Transcript
- 00:01
no macro economics Allah Shma riel versus nominal variables Alright
- 00:09
people Bag of cash in your hand Black mask covering
- 00:13
your face You're looking like a really bank robber but
- 00:17
really is a relative right You sprint away from the
- 00:21
bank's revolving doors to the old pickup truck where your
Full Transcript
- 00:23
heist partner is waiting with the engine running Betsy got
- 00:27
well 10 miles to the gallon when your dad bought
- 00:29
her in the seventies and she still gets 10 miles
- 00:32
of the gallon today Tank indicator is so flexible it's
- 00:35
stretching back Asked E you're definitely gonna have to stop
- 00:38
to get gas And you're also definitely screwed You just
- 00:43
robbed a bank Yet you now have to pay four
- 00:45
bucks a gallon for gas to give Betsy a good
- 00:47
drink And you're wondering who really got robbed here You
- 00:52
know your dad used to tell you that he would
- 00:54
pay a whopping $10 to fill up the tank in
- 00:57
the day and now you're stuck paying upwards of $60
- 01:02
Well unfortunately for you you're still paying about the same
- 01:05
amount for the same tank of gas that your dad
- 01:08
was paying back in the seventies Yeah $10.60 dollars are
- 01:12
definitely not the same numbers But they were at least
- 01:16
for that tankful of gas So how does this make
- 01:18
any sense Well gas prices have been going up and
- 01:21
up enough and you've been paying Mohr for gas But
- 01:24
not really It's all about relativity That's right Einstein can't
- 01:28
claim all of the relativity discovery here Gently he left
- 01:32
some for The Economist When you pay $60 for a
- 01:35
tank of gas your paying a nominal price nominal as
- 01:39
in name That's what the NAM route is in Latin
- 01:43
there a nominal prices just the named price not adjusted
- 01:47
for inflation time nor anything else in economics Things are
- 01:52
measured in nominal in real terms Well so what's the
- 01:55
difference Inflation That's what that is Overtime In most venues
- 02:01
prices rise so you'll hear someone quote what a barrel
- 02:04
of oil costs at some point in history And you'll
- 02:06
wonder if that's uh today's dollars or like $1943 And
- 02:12
it's a big deal because in 1943 4 $112 bought
- 02:16
you like ah house Yeah well the big idea here
- 02:20
is the terminology For starters when economist measure value They
- 02:24
typically used two different terms Nominal in rial Nominal value
- 02:29
is the value of an object company bond or getaway
- 02:33
truck In any given year it's the name or numerical
- 02:36
value attached to the market clearing price of that object
- 02:41
while in 1968 a Big Mac cost 49 cents Oil
- 02:45
cost around a dollar 32 a barrel an average cost
- 02:49
of a new house Well it was about 15 grand
- 02:52
in 2015 The same Big Mac was 4 79 The
- 02:56
same barrel of oil cost around in a 50 or
- 02:58
60 bucks and the average cost of a house well
- 03:01
it was around $300,000 for that That same half their
- 03:05
yeah really Value is completely different It takes inflation into
- 03:09
a factor at least into account When calculating real value
- 03:13
we take the nominal value of an object and adjusted
- 03:17
for inflation right We take the name value and then
- 03:21
put it in context Well the real value of the
- 03:24
popcorn at the movies that now cost you $10.45 and
- 03:28
used to cost five bucks 25 years ago well remains
- 03:31
the same same relative price If there were roughly 3%
- 03:35
inflation every year over the past 25 years the cumulative
- 03:38
inflation would be this thing 5 25 3% 25 1.3
- 03:41
to 25th power about 209% total Right So the price
- 03:45
of popcorn in terms of dollars from 25 years ago
- 03:48
is the price now scaled down by the inflation or
- 03:52
10 45 divided by 2.9 or about five bucks Which
- 03:55
means the real value of popcorn has not changed well
- 03:59
An engineer at Hewlett Packard in 10 45 09 1968
- 04:01
who just moved to a nation Silicon Valley with apricot
- 04:05
orchards in downtown Los Altos back then is looking for
- 04:09
a home She has a salary of $10,000 a year
- 04:13
and the average house at the time costs in about
- 04:12
40 grand So about four times her annual cash pay
- 04:18
Fast forward to today And that's game Engineering position pays
- 04:22
about 200 grand a year and the median home price
- 04:25
in her part of the Bay Area is well over
- 04:28
one point 6,000,000 Will both the salary and home prices
- 04:32
have inflated over the past half century but home prices
- 04:36
have inflated at a vastly greater rate than did her
- 04:40
wages Well the average consumer buys products from a variety
- 04:43
of categories They pay for a house pizza new shoes
- 04:46
gas for the car medical care basketball game tickets student
- 04:49
loans and their phone bills among many other things if
- 04:52
they paid four grand for all their purchases in a
- 04:55
month in 2014 and they pay 4500 bucks for all
- 04:59
their purchases in the same month in 2018 while the
- 05:03
CP I between those years would be calculated as follows
- 05:07
So I've got the value of basket now invited by
- 05:10
the Value basket based year time 145 100 over 4000
- 05:15
times 100 there So that's one twelve 12.5 a C
- 05:19
P I have one twelve 12.5 means that there's been
- 05:20
12 and 1/2 percent inflation from 14 4018 That doesn't
- 05:27
mean 12.5% per year That means cumulative inflation So that's
- 05:33
compound inflation calculated as 1.125 equals well one plus X
- 05:40
to the fourth at that magic formula because it's compounded
- 05:44
over four years So then you just have to solve
- 05:46
for X and that's how you do it It's basically
- 05:49
the forth route of 1.125 and minus one there and
- 05:53
it gets you about 3% annually That's how we do
- 05:56
the math Your mop just kind of make things up
- 05:59
When studying a macro economy well you can look at
- 06:01
changes in GDP In other words the effects of a
- 06:04
rise in unemployment high inflation or increased productivity are closely
- 06:08
linked to the value of goods and services a k
- 06:11
a Gross domestic product But often the reported GDP might
- 06:15
not be exactly what it seems today That is Ah
- 06:18
country might report a 10% growth in one year in
- 06:22
GDP a huge number but you should be a bit
- 06:26
cynical and ask yourself if that's because they actually produced
- 06:29
Mohr goods and services produced more valuable goods and services
- 06:34
or simply raised the prices by running the printing presses
- 06:37
and churning out more money to create inflation To get
- 06:40
to that 10% figure If the nominal GDP grows by
- 06:44
2% but the inflation rates 3% well then the economy
- 06:49
actually relatively shrank by 1% That's why when economists studied
- 06:55
GDP they opt to use real GDP instead of just
- 06:58
nominal Basically economists look at the price of goods in
- 07:01
one particular year and use them to compute the GDP
- 07:04
for all subsequent years So when they look at changes
- 07:08
in real GDP which is to say always measuring GDP
- 07:11
and say $1973 then any changes aren't a result of
- 07:16
inflation Instead measuring everything in terms of the base years
- 07:20
dollars shows how an economy is really growing We love
- 07:24
graphs and nobody does graphs better than the Federal Reserve
- 07:27
Economic Data Division E Fred But one of the best
- 07:31
things about Fred is that we can compare to different
- 07:34
graphs what We've gone ahead and grabbed a snapshot of
- 07:37
one of those special combined graph So check this out
- 07:40
Okay so here we can see both the nominal GDP
- 07:44
just called gross domestic product The blue line there is
- 07:46
this thing and real GDP the redline That thing notice
- 07:51
how the real GDP growth was negative in 1975 even
- 07:54
though nominal GDP growth was almost 10% Well guess what
- 07:59
During the Vietnam War the global economy was starting to
- 08:01
really heat up meaning inflation was wrapped Billy rising well
- 08:05
to cool things off Jimmy Carter raised interest rates massively
- 08:09
which helped slow things down And while they fought and
- 08:11
eventually destroyed inflation you can see the Red Line is
- 08:14
a lot more volatile than the relatively steady blue line
- 08:17
Since that Red accounts for inflation and shows what's actually
- 08:21
going on Well that big drop in real GDP in
- 08:24
seventies shows that real output drastically fell Why isn't the
- 08:28
blue line is volatile Stagflation was rampant in the 19
- 08:32
seventies So is output fell the price level and inflation
- 08:36
rose The high inflation dampened the fall in nominal GDP
- 08:40
But real GDP accounts for the heightened inflation and shows
- 08:44
the real blow to the economy 10 bucks for a
- 08:46
full tank or 50 cents a gallon and you're paying
- 08:48
$60 for a full tank there or $3 a gallon
- 08:53
While there would have been a 600% inflation in gas
- 08:57
prices since 1970 using 1970 as our base here and
- 09:01
assuming everyone on ly consumed gas for breakfast lunch and
- 09:04
dinner well the CP I then would be 600 Yeah
- 09:08
you're paying for the same Think of gas that gets
- 09:11
you basically the same mileage But it just feels like
- 09:15
you're paying more Is the numbers higher Right Well the
- 09:17
number of dollars you're paying is Mohr anyway Yeah how
- 09:22
long it took you tow Earn those dollars Well may
- 09:24
be a lot less than it took dear old dad
- 09:27
to earn his 10 bucks And if you're thinking about
- 09:29
all this with your hands cuffed behind your back or
- 09:32
well you might start to think Hey maybe 20 years
- 09:35
in prison isn't so bad if it's just a nominal
- 09:38
right Well jail time unfortunately is not subject to inflation 00:09:43.797 --> [endTime] Just be sure to hold on to that sofa
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