Macroeconomics: Unit 3, Real vs Nominal Variables

CoursesMacroeconomics
LanguageEnglish Language

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

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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

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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

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it's a big deal because in 1943 4 $112 bought

02:16

you like ah house Yeah well the big idea here

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is the terminology For starters when economist measure value They

02:24

typically used two different terms Nominal in rial Nominal value

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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

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while in 1968 a Big Mac cost 49 cents Oil

02:45

cost around a dollar 32 a barrel an average cost

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of a new house Well it was about 15 grand

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in 2015 The same Big Mac was 4 79 The

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same barrel of oil cost around in a 50 or

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60 bucks and the average cost of a house well

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it was around $300,000 for that That same half their

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yeah really Value is completely different It takes inflation into

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a factor at least into account When calculating real value

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we take the nominal value of an object and adjusted

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for inflation right We take the name value and then

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put it in context Well the real value of the

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popcorn at the movies that now cost you $10.45 and

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used to cost five bucks 25 years ago well remains

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the same same relative price If there were roughly 3%

03:35

inflation every year over the past 25 years the cumulative

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inflation would be this thing 5 25 3% 25 1.3

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to 25th power about 209% total Right So the price

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of popcorn in terms of dollars from 25 years ago

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is the price now scaled down by the inflation or

03:52

10 45 divided by 2.9 or about five bucks Which

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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

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orchards in downtown Los Altos back then is looking for

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a home She has a salary of $10,000 a year

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and the average house at the time costs in about

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40 grand So about four times her annual cash pay

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Fast forward to today And that's game Engineering position pays

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about 200 grand a year and the median home price

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in her part of the Bay Area is well over

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one point 6,000,000 Will both the salary and home prices

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have inflated over the past half century but home prices

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have inflated at a vastly greater rate than did her

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wages Well the average consumer buys products from a variety

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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

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they paid four grand for all their purchases in a

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month in 2014 and they pay 4500 bucks for all

04:59

their purchases in the same month in 2018 while the

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CP I between those years would be calculated as follows

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So I've got the value of basket now invited by

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the Value basket based year time 145 100 over 4000

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times 100 there So that's one twelve 12.5 a C

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P I have one twelve 12.5 means that there's been

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12 and 1/2 percent inflation from 14 4018 That doesn't

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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

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over four years So then you just have to solve

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for X and that's how you do it It's basically

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the forth route of 1.125 and minus one there and

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it gets you about 3% annually That's how we do

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the math Your mop just kind of make things up

05:59

When studying a macro economy well you can look at

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changes in GDP In other words the effects of a

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rise in unemployment high inflation or increased productivity are closely

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linked to the value of goods and services a k

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a Gross domestic product But often the reported GDP might

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not be exactly what it seems today That is Ah

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country might report a 10% growth in one year in

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GDP a huge number but you should be a bit

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cynical and ask yourself if that's because they actually produced

06:29

Mohr goods and services produced more valuable goods and services

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or simply raised the prices by running the printing presses

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and churning out more money to create inflation To get

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to that 10% figure If the nominal GDP grows by

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2% but the inflation rates 3% well then the economy

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actually relatively shrank by 1% That's why when economists studied

06:55

GDP they opt to use real GDP instead of just

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nominal Basically economists look at the price of goods in

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one particular year and use them to compute the GDP

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for all subsequent years So when they look at changes

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in real GDP which is to say always measuring GDP

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and say $1973 then any changes aren't a result of

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inflation Instead measuring everything in terms of the base years

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dollars shows how an economy is really growing We love

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graphs and nobody does graphs better than the Federal Reserve

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Economic Data Division E Fred But one of the best

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things about Fred is that we can compare to different

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graphs what We've gone ahead and grabbed a snapshot of

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one of those special combined graph So check this out

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Okay so here we can see both the nominal GDP

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just called gross domestic product The blue line there is

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this thing and real GDP the redline That thing notice

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how the real GDP growth was negative in 1975 even

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though nominal GDP growth was almost 10% Well guess what

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During the Vietnam War the global economy was starting to

08:01

really heat up meaning inflation was wrapped Billy rising well

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to cool things off Jimmy Carter raised interest rates massively

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which helped slow things down And while they fought and

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eventually destroyed inflation you can see the Red Line is

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a lot more volatile than the relatively steady blue line

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Since that Red accounts for inflation and shows what's actually

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going on Well that big drop in real GDP in

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seventies shows that real output drastically fell Why isn't the

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blue line is volatile Stagflation was rampant in the 19

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seventies So is output fell the price level and inflation

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rose The high inflation dampened the fall in nominal GDP

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But real GDP accounts for the heightened inflation and shows

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the real blow to the economy 10 bucks for a

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full tank or 50 cents a gallon and you're paying

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$60 for a full tank there or $3 a gallon

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While there would have been a 600% inflation in gas

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prices since 1970 using 1970 as our base here and

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assuming everyone on ly consumed gas for breakfast lunch and

09:04

dinner well the CP I then would be 600 Yeah

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you're paying for the same Think of gas that gets

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you basically the same mileage But it just feels like

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you're paying more Is the numbers higher Right Well the

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number of dollars you're paying is Mohr anyway Yeah how

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long it took you tow Earn those dollars Well may

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be a lot less than it took dear old dad

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to earn his 10 bucks And if you're thinking about

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all this with your hands cuffed behind your back or

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well you might start to think Hey maybe 20 years

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in prison isn't so bad if it's just a nominal

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right Well jail time unfortunately is not subject to inflation 00:09:43.797 --> [endTime] Just be sure to hold on to that sofa