I wonder how many people in countries like the United States , Switzerland , South Korea, Brazil , Canada , Russia , and China
Say what? You must be crazy! Prices are not falling, you are thinking! They are rising way too fast is probably what you believe!
Yes, most citizens see their purchases as becoming more expensive when, in actuality, most goods and services are becoming relatively less expensive. Of course, the paradox is that although nominal prices (the actual price tags) are, in fact, increasing, nominal income (the average, actual wage or salary) has been growing even faster over the decades. This is a topic that in economics is called “real income” or a macroeconomic measurement that compares a nation’s nominal income growth relative to the nominal growth in prices that the same income buys. In the United States, and virtually every country around the world, nominal income has grown at a faster percentage than nominal prices causing real income to increase, meaning that most Americans enjoys greater access to more and better goods and services than ever before.
Let’s take some specific facts:
In the United States real median household income grew from $42,934 to $53,657 from 1967 through 2014 for a total percentage gain of 25% (source: U.S. Census Bureau). Both of the aforementioned median household incomes are stated in current dollars, which makes the comparison valid meaning that inflation is stripped out of the comparison. Median household real income is an attempt to quantify the progress that the “middle American” family or typical family has made over time. So, in summary, the median household in America can buy 25% more with their income today than they could in 1967. In other words, relative prices are lower than they have ever been before. Due to productivity (think PPC curve shifts right due to technology, education, and trade) we are producing more products and services than ever before and anytime there is more of something the price will fall relative to income.
If we look at the same United States
Now let’s get back to the main premise of the title of this blog and the opening assertion that prices are lower than ever. What we are really saying is that you have to benchmark actual product price increases to nominal income increases in order to really understand whether things are becoming relatively more expensive or inexpensive. The vast majority of products and services are relatively cheaper today in all nations than they have ever been before, which helps explain why more citizens than ever before can afford to own much larger homes, drive more and better cars, have cable and computers, and have access to better healthcare and prescription drugs. The reason we are led to believe differently (ie, prices are out of control!) is because we are victims of our own human nature, which tends to focus on the problem areas (higher actual or nominal prices) and not the true picture (lower relative prices when compared to income). Many citizens observe things adversely “at the margin” and quickly notice those products and service prices that are rising faster than average like gasoline prices, education, and healthcare! Hey, even gasoline prices are not at an all-time relative price high as incomes have increased faster over time.
Now, you may say to yourself that statistics can lie or mislead and you are sure in your gut that things are getting more expensive relatively. You can try to validate that incorrect “gut feeling” by examining whether a country’s middle class has access to more or less products and services. “Real income” really is just a measurement of the quantity of the products and services that the median family personally has, although it says nothing of the quality of those goods but quality has improved as well. The median and average American continually has more actual products and services in the aggregate as U.S.
Now let me introduce one word of caution; over the last 15 years in the United States, there has been an increase in real average incomes of 2.7% per year, but little of those real income gains have accrued to our nation's middle class, working class, or poor, but rather to the more highly educated and skilled. The purchasing power (real incomes) of the middle class has actually fallen from $56,080 in 1999 to $53,657 today, which is a 4% decline!. The primary reasons for this fall off in real incomes for the middle class family is attributed by most economists to increased global competition and increased technology integration into companies, which tends to keep wages down (more supply of global labor substitutes and technology keeping middle class workers keeping middle class wages in check). The educated and highly skilled, however, have seen their real incomes increase consistently over that same period.
So fellow APers, my first new car, a 1979 Buick Regal that I bought out of college costing $6,700 with my $14,500 annual salary working for Price Waterhouse was a lot "more expensive" than the first new car of comparable status that you may buy immediately after college for $20,000! Get it?
Review Questions:
1. Before reading this blog, did you have an impression created by the media that the average American was somehow worse off economically than the previous generation?
2. Why are goods and services today relatively less expensive than they were for the previous generation? Provide an answer using the terms "nominal income", "inflation", and "real income".
3. In Fairfax County, do you think nominal (actual) incomes have risen much faster than product prices when compared to the US overall average? Support your answer! Hint: you can get the correct answer if you trust your visual observation as you drive through the County! You don't need to do research via Google!
4. What has happened to the purchasing power or real income of the middle class in America since 1999? What is the cause? Do you have any recommendations or policy actions that you would take if you were President to increase middle class American's real income?
5. Explain the answer to my "car riddle" in the very last paragraph of the blog?
1. Previous to reading this blog, I was under the impression that the average American was not doing well economically, same as many of us. The media seems to focus on negativity, causing the public to believe we are perpetually in a downward spiral. It seemed as though we were on a sharp decline, doing worse than ever before and still falling.
ReplyDelete2. Goods and services today are relatively less expensive than they were for previous generations. This is because our nominal income (the average, actual wage or salary) has been rising much faster than the prices of goods and services have been. Although prices have experienced a large inflation, the real income has also inflated. We tend to focus on the raise in prices, it is something we notice every time we buy something. Nominal income has risen much faster than nominal prices, causing a raise in the nation's real income. Real income is a macroeconomic measurement that compares a nation’s nominal income growth relative to the nominal growth in prices that the same income buys. This means that Americans have greater access to goods and services than ever before because prices are proportionately lower.
3. I believe that in Fairfax Countu, nominal incomes have risen much faster than product prices when compared to the US overall average. We are fortunate enough to live in a very privileged area, where many families are able to live their lives without worrying about money too much. The answer is easy to see simply by driving around. People who live in Fairfax County have enough money to spend on nice things. If you take the time to look at the cars people drive, for example, you will see they are high quality cars. Most people have fairly new models, and they are mostly nice brands (which are therefore more expensive). If you were to drive in another part of the country and look at the cars the locals drive, you would see much older cars, many of which would be low quality and cheap.
4. Purchasing power for the middle class in America has fallen 4% since 1999, from $56,080 to $53,657. This is because America grows greatly in forms of technology, not workers. The upper class, educated and highly skilled experience rocketing nominal incomes, but the middle to lower class is being replaced by technology or remaining constant. There is not a whole lot of room to grow. I would attempt to pass a policy that made college more affordable. I would encourage more education opportunities and more classes that encourage creativity. This would help students to reach their full potential, and possibly achieve those higher paying jobs.
5. When you first got out of college and bought a Buick Regal for $6,700 with an annual salary of $14,500, you were spending about 46% of your annual salary on a car. It is impossible to know how much you would be making immediately after college, especially since it differs so much from major to major. However, the average income of a student straight out of college would recieve about $45,478 annually, making a $20,000 car only 44% of their annual income. Proportionately speaking, this is less, and one could say that this second car is relatively less expensive!
1. The media creates the impression that our economy is not as strong as it once was. That message has certainly made it out to the younger more current generation at least.
ReplyDelete2. Due to the raise in normal income goods and services are relatively much cheaper then they used to be. The normal income has a direct correlation with real income and is positively related. Even though there has been an increase in inflation over the current years the real income has overcome the inflation which has to do with why goods and services are relatively cheaper.
3. Everyone in Fairfax County knows that we are one of the richest counties in the country. I do believe that our normal incomes have risen much more fast compared to the US overall average. We have a very low level of unemployment in our county and it seems that just about everyone who wants a job has one here. Based on looking at what the normal family lives in and drives to work in everyday I can make the assumption that compare the the US overall average our normal incomes have risen much faster.
4. Since 1999 the middle class has dropped 4%. Our society calls for more highly educated workers which are typically more well off in terms of wealth than others. An increase in technology has led to not as many needed workers in fields like industry which often make up the middle class. If I were president I would try to create jobs that didn't require a high education and give it those members of the middle class who are out of jobs.
5. Although you made $14,500 at the time the normal income has gone up significantly. A car equal to the car that you got might have cost you $6,700 at the time but due to inflation the car price has gone up along with the normal income. So although the car took up about half of you annual income in today's society the $20,000 is likely to be half of someone else who just got out of college due to a raise in normal income.
1. Yes, before reading this blog I was under the impression that the average American was worse off economically than the previous generation.
ReplyDelete2. Goods and services are less expensive than in the previous generation because the real income has been increasing. Even though nominal prices are increasing, nominal income has increased exceedingly over the past few decades. In fact, according to a 2014 census, there has been a total percentage gain of 25%.
3. I believe that in Fairfax County incomes have risen much faster than prices product prices compared to the US overall average. If one searches the wealthiest counties in the country, Fairfax County would be on the list. It is clear while driving through the county and seeing all the large houses and businesses that are thriving in our economy today.
4. The real income of the middle class in America has declined since 1999. The total percentage of decline is 4%. Today, many jobs are often looking for workers with higher education and skills, leaning away from people middle class families. If I were president I would try to convince more students to attend college and make it more affordable for those middle class families.
5. The average income of Americans is significantly higher now than it was when you graduated college. The income has risen from the $14,500 to $53,657. So instead of spending about half my income on a new car, as you did, I will only have to sacrifice a smaller amount of my income.
1. Yes, before reading this article I always thought that prices were rising because the number on the tag was increasing. It always seems that the newest phone or TV that comes out is always more expensive than the older one and I haven’t seen a lot of examples where prices have decreased. The Media always says how things are increasing in price and how Americans aren’t earning enough money to buy things.
ReplyDelete2. Goods and Services have become more efficient over the years and the methods of production have changed a lot compared to the older days. This means that companies can make more of a product for less so then they can sell the products for less while still making a profit. Nominal income was lower for previous generations that it was now due to inflation as the dollar is worth less than it was back then. The prices of things have changed a lot as our nominal income has increased more than our nominal price. Thus meaning we can buy more. Our real income has increased which means that we have more buying power so we can buy more goods for less than we used to be able to.
3. Yes I think that nominal income has increased much quicker than the rest of the US on average as Fairfax is one of the wealthiest places in America. Just by driving around you can see big fancy homes and expensive items in the stores. It is near the capital and a lot of big companies are stationed near the capital and its workers often live in Fairfax or northern Virginia. Fairfax has high education levels which allow people to get better jobs which pay more money which means they get more money to spend on goods and services.
4. The average purchasing power and real income of Americans has decreased over the years as companies begin to send production abroad as there is cheaper labor there than there is in the USA. Median Household income has fallen almost 5,000 dollars since 1999 which shows the middle classes income is decreasing. If I was president I would make a better education system that gives people resources and skills that will help them more in life and help them get a better job. The key to being successful is to be educated, so if we have an uneducated work force then we will be less efficient and less productive.
5. Your car riddle show how the ratio of income to price has changed over the years and how the purchasing power has changed due to inflation. The beginning income of graduates has increased so now the 20,000 dollar car would not be as big of a proportion of the person’s income as the 6,000 dollar car is of the 14,000 income. 6,100 is almost half of the persons 14,500 income and although 20,000 is a bigger number it does not cost more relatively to inflation and the income of the person.
1. Before reading this blog I think that the media played a role in my view of how well off the average American was. I think the media creates this idea that the economy is doing poorly and that the dollar is not going as far as it used to. Also the media like to focus and minimum wage and how so many people cannot live on it. As we learned in class this is not true, but many Americans believe it.
ReplyDelete2. Goods and services today are less expensive than they were for the previous generation because nominal income has increased more than nominal prices. This is what real income is, it compares nominal income growth to nominal growth in prices. Inflation is removed from this equation to make it a valid comparison.
3. I believe that nominal incomes in Fairfax County have risen much faster than product prices when compared to the overall average. Fairfax is known to be one of the richest counties in the United States, it is also made up of very wealthy upper and middle-class families. Since the nominal incomes have risen faster that product prices, people in Fairfax can afford to purchase bigger houses and nicer cars than many other areas in the U.S. that might not have a greater rise in nominal income than product prices.
4. The purchasing power of the middle class in America since 1999 has fallen 4%, from $56,080 to $53,657. The cause of this decline is increased global competition and increased technology integration into companies. Today to be successful in the middle class and upper class it takes a specialized skill and higher education. A policy that I would put into place to increase middle-class American’s real income would be to make higher education more affordable. By making education more affordable the middle class could learn a specialized skill and make more money for their expertise.
5. Your $6,700 car was more expensive in relation to your income at that period in time. It was almost half of your annual salary of your first job. Today, a $20,000 car would be “less expensive” for a person out of college who would be making between $50,000- $60,000 for the same job you were doing out of college.
1. Before reading this blog, I was sure that my generation was in trouble economically. The media assured me that this idea was the truth. They made it sound like our economy was still a mess, and that there is incredibly high amounts of poverty.
ReplyDelete2. Prices are much lower now because the nominal income has grown so much. Now that people have more money to spend, the real income has gone up too, because people are spending more. Inflation has also affected america making things cost more money, but being worth less. While the price has gone up, the incomes have gone up more, effectively making items cheaper then they were before.
3. I would say that the nominal incomes in Fairfax County have increased more then the product prices. Compared to the rest of our nation, we are much richer. For example, it is financially easier for the average person in Fairfax County to buy a new car, then it would be from someone from Amelia County, Virginia.
4. The purchasing power in america has gone down since 1999. This is because of the high costs of advanced education. If I was the President, I would try to help make student loans easier to pay off, as I believe debt is a major reason why students don't want to attend college.
5. The car was more expensive in 1979, because it was half of your pay check. Now, people out of college have a higher income, so a car priced around $20,000 would not break the bank as much.
Before reading this blog, I was under the impression that most consumer goods were much more expensive than they were in the past. I assumed that inflation was the causing an elevated price in most products; but I didn't know of any definitive reason why products are so expensive. This was because there was no reason, products are simply not more expensive.
ReplyDeleteGoods and services are less expensive today then they once were because the median and average “real” income (which takes in account inflation) in the United States has increased by over 25%. This gives the average consumer significantly more buying power making their access to products much higher.
I believe that the real nominal income in fairfax county has grown significantly more than the national average; not only is the education superior to almost every other county in the nation, the location of the county provides access to several major businesses and corporations in DC, loudoun, and arlington county. Northern Virginia itself is a completely unique cultural atmosphere, being one of the most affluent areas in America. Just driving through Fairfax City displays the wealth that the county has.
The purchasing power or real income of the middle class in America since 1999 has steadily declined, due mostly to a lack of a college education. The easiest policy solution would not be to make it easier to get a college education; because that would eventually hurt the productivity and efficiency of our workforce, but rather improve primary and secondary education. This would improve the workforce even more because it would benefit not only the standards of colleges and universities but also help those who did not go to or could not afford a college education by giving them more of the skills necessary to survive in our workforce. The more you educate those with the lowest nominal income the more the standard of living raises in our country.
Even though Mr. Latters OG Buick was only $6700, he paid much more for it than we will for a 20000 dollar car when we graduate. This is because Mr. Latter’s nominal income was much lower than our’s will be, he had less buying power at the time than we will. Here is my non scientific semi-logical explanation of how we get more bang for our buck in our current day: One of the most famous cars from 1979 was the Datsun (Now Nissan) 280ZX, which originally went for around $16,000. With inflation; this is around $52,000 today. The Datsun was a top of the line vehicle for the time. For $52,000 now, you can purchase a 2015 Range Rover Evoque, which would probably beat the Datsun in every categeory. Our money now buys us much better products for the price.
1. The media controls a lot that goes out into the world. I never really gave it a thought that what it said could lead me astray. The media sent out a very negative view on an American economic standpoint. The media also talks a lot about how kids will have it very badly when they grow up because of how bad the economy is but after reading this blog my view on media will be a lot better.
ReplyDelete2. The income that is compared to the prices of goods, or nominal income, has been declining since the older generations. Nominal income which can be also known as real income has increased in recent years which have been shown in the 2014 census. In the 2014 census nominal income has increased almost 25%. Inflation helped cause the rise in prices and income, this has helped with the nominal income.
3. Looking around Fairfax city has shown me that this county has a pretty high average income. Looking around you can see lots of wealthy houses, government buildings, new business, and even better after school programs for students. This shows that the income, compared to the national average, is greater and rising faster that product prices.
4. Since 1999 the middle class has been on an decline in real income. The middle classes real income has declined almost 4%. This decline is mainly due to the increase in technology and the increase in competition. If we put more effort into educating our workers than we would see an increase in the labor industry because of completion against international workers.
5. The car that you bought, the 1979 Buick Regal, was almost half the cost of you annual salary. This is bad because you already lost half your income from buying this car on a $14,500 salary. This is also weird because the amount you are receiving after college, $20,000 because it has definitely changed over the course of many years.
1. I knew that the economy had grown significantly since the previous generation, and that living conditions of the average American had improved. However, likely because of the media, I attributed this entirely to improvements in technology, and I believed that if it were not for these technological advances, the average American would be worse off. I certainly did not realize how much better off this generation is.
ReplyDelete2. While the nominal prices of goods and services are increasing, the nominal incomes of Americans are increasing even faster. This means that Americans are seeing an increase in their real income, meaning that Americans can acquire increasingly more goods and services with their incomes. Adjusted for inflation, real household incomes have grown significantly over the past fifty years, which indicates that goods and services have become relatively much less expensive.
3. Fairfax County almost undoubtedly has a higher increase in nominal incomes compared to product prices than the US average. Fairfax, and Northern Virginia in general, has one of the highest costs of living in the country. This means that many very wealthy and skilled people live in Northern Virginia. As the blog post stated, most of the increase in average income has gone to the more highly educated and skilled, which would include many people living in Fairfax.
4. Since 1999, the real income of the American middle class has declined by about 4%. This is largely due to increased competition of middle class labor with labor from other countries and with labor provided by robots. If I were president, I would likely not take any immediate action to increase middle class income. Tackling the main issue keeping it back would involve interfering with competition, which is rarely a good idea in economics.
5. While the nominal price of cars has increased, due to inflation and the more rapid increase of incomes, a car may have a lesser "value" now than it did in 1979. Real incomes have increased, so the purchase of a car takes up a smaller proportion of one's income now than it would in 1979.
1. Yes. Growing up I was always hearing about how bad the economy was now compared to what it was before. Adults around me always complained about the rising prices of goods, especially gas. The media also had a part in influencing my way of thinking regarding the state of our nation's economy. They made it seem like our country was on the verge of failure and bankruptcy, which now that I am taking this class, is simply not true. I always imagined how nice it must have been to buy things for such a "low cost". However I didn't take into consideration the inflation of money value since then and the rise of the average income.
ReplyDelete2. The reason why things are relatively less expensive than before is because people nowadays simply earn more money, thus allowing them to afford more goods. Inflation has changed the value of money. For example,something that was 50 cents back then is now $3 (I really don't know) give or take. The actual prices of goods and services (nominal prices) may seem to be higher than ever before, but the nominal income (average income of a person in the US) has increased allowing additional spending and allowing the higher costs. The real income of the nation is shown to have increased over the years as our country makes more and more and people earning more and more.
3. I do believe the average nominal income has increased faster compared to other areas of the country. Average salaries have increased over the years and people have started to become well off financially. All this was occurring while price tags in stores remained relatively the same. This allowed Fairfax County to boom and rise to the top as one of the most wealthy counties in the United States. Bigger and more expensive houses are being built around the newly developed suburbs. The cities inside Fairfax County are being renovated and modernized with little to no budget issues. Most people are driving their own cars instead of relying on public transit. The Northern Virginia area is notorious for its wealthy people and the jobs offered in this area. Federal, contractors, and other work have allowed people to increase their income and overall increase the quality of their lives.
4. The purchasing power of the middle class has slightly declined over the years. The cause is competition and the advancement of technology according to economists. People's jobs are being replaced by more efficient robots so they can be relocated somewhere else. I believe allowing more people to work skilled jobs would help the buying power of the middle class since it would get people jobs, which in turn would help them get income again.
5. In 1979, $6700 would be the equivalent to almost half of Mr. Later's income, which was a total of $14,500. Now, people are making around $50k-60k annually, and a similarly classed new car would be around $20k. The resulting purchase using today's money would be only 1/3 of the average income. This results in the new car being "less expensive" than the "more expensive" Buick from 1979.
1. Yes, I had a slight impression that the current generation was worse off economically than the last. This impression came from the fact that the media always talks about how bad the debt is and that lots of people are on food stamps or homeless, etc.
ReplyDelete2. Goods are relatively less expensive today than they were for the previous generation because today nominal income has increased faster than nominal prices. This causes real income to increase. Some may say that this is subject to inflation, but prices were stabilized and put into real dollars to show that prices are relatively falling.
3. Yes, I do believe that nominal income has risen faster in Fairfax County compared to the rest of the US. Fairfax is known as one of the more wealthy counties in the country. Some areas are better off than others, but overall Fairfax’s real income is higher than a large portion of the country.
4. Purchasing power of the middle class in America has fallen since 1999. This is due to the fact that much of the increased purchasing power or real income has been with the upper class. This is because of global competition. The competition causes production methods to become more efficient, i.e. technology, and this in effect cuts out jobs for the middle class. The lack of jobs controls wages and keeps them from rising too high. If I was president, I would slightly lower taxes on the middle class.
5. Basically, back in the day, the car seemed like a lot of money because it took up a large portion of the annual salary. Now, even though your first car might be worth 20,000, average incomes are much higher. This again explains the idea of relative prices and incomes.
1. I do believe that the media causes distorted view of our society. Before reading this blog, I did feel that our generation was not doing worse than the previous generation. Because of the development in technology, society continues to grow at a progressive rate.
ReplyDelete2. The reason why goods and services today are less expensive is because the normal income of the consumers is rising, surpassing the nominal price rate. Since people are earning more money and the prices of goods are not increasing at the same rate, people are able to purchase more goods. Real income has increased over the past years, diminishing possibilities of inflation.
3. The nominal income for Fairfax county has definitely increased throughout the years. If you compare Fairfax county to most other suburban counties in the United States, the difference can be sensed solely from visual perspective. Many of the people that live here are able to live fairly comfortable lives. A couple years ago, Forbes rated Fairfax county as #2 richest county in the nation, behind Loudoun.
4. The purchasing power in America has declined, as the upper class begins to expand, more products are being purchased and produced. Education is extremely important in becoming successful- although many people are born with a certain drive to achieve, education is the key to success for all.
5. You purchased the more expensive car because of the income rate in 1979. It proved to be a better investment for your income.