Presentation on theme: "Proverb #4: Just because you don’t pay for something doesn’t mean it’s not costly -- TANSTAAFL."— Presentation transcript:
Proverb #4: Just because you don’t pay for something doesn’t mean it’s not costly -- TANSTAAFL
Types of Imputed Costs & Benefits: Imputed interest costs the cost of having your money tied up in a particular resource when it could be earning interest elsewhere. Imputed depreciation the decline in the value of a resource over time. Imputed appreciation the increase in the value of a resource over time.
Example of imputed interest cost: Purchasing a new car using cash. What’s the full price of the purchase? List price: $15,000 Savings interest rate = 5% /yr You would have otherwise kept the money in the bank for 5 more years if you had not used it to purchase the car Then, the imputed interest costs of paying cash… loss of $15,000(1+.05) 5 = $19,144 imputed interest costs are: $19,144-$15,000= $4,144
Example: In some instances, the imputed interest costs may be so high that it is better to borrow money rather than use your savings… Suppose a 12% annual interest paid on invested money Suppose a 9% annual interest for a secured car loan net gain of $15,000*(.03) = $450 in year 1 Be cautious if using this approach – fairly risky
Proverb #5: Everything’s relative Relative prices - the price of one commodity compared to the price of another commodity (i.e., the base commodity) RP x = relative price of good x NP x = nominal price of good x NP b = nominal price of the base commodity
Example: Tuition and Fees for In-State Undergraduate Residents at Selected Schools by semester, 2014-2015 (15 credits): NP uofu = $3,917.50 NP usu = $2,781.54 NP uofc = $5,120 The relative price shows how tuition and fees compare to the base school...
Example (cont.): Using the U of U as the Base Commodity RP uofu = $3,917.50 / $3,917.50 = 1.0 RP usu = $2,781.54 / $3,917.50 = 0.70 RP uofc = $5,120 / $3,917.5 = 1.31 Meaning of relative prices… The price of attending the University of Colorado is 1.31 times the price of attending the University of Utah
Most common relative price comparison? Inflation - the general rate at which the price of a particular good/service or a group of goods/services increases over a specified period of time. Bottom Line – the purchasing power of the dollar declines over time
Inflation measures the purchasing power of a dollar at different points in time. In other words, inflation measures the $ you would need to have in year Y+1 to purchase the same basket of goods/services that you purchased in year Y.