Thursday, May 5, 2011

The "Real" Deal

If you buy something today, you pay today's price for it. A simple concept, to be sure. But let's give this concept a name. Call it "actual prices." The price you actually pay is the actual price. Fair enough?

Oh. And the thing you bought? We'll call that "output".

If you take the actual prices of things and then strip out the inflation, you can see what the prices would have been if there was no inflation. If you use 2005 for a "base year" you see what the prices would have been in 2005. If you use 1967 for a base year, you see what prices would have been in 1967.

If you do this for all the output we produce in a year, you get what economists call "real output", as opposed to actual output. For example, you can see what an iPad or a 2011 Cadillac would have cost, if you bought it in 1967.

So that's "real" output. Got the picture? Real is the wrong word.

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