Wednesday, February 6, 2008

A "Real" and Interesting Perspective

How much time do you spend developing the idea of real income? Do you discuss the difference between real and nominal income when you talk about standard of living? Is it a topic in personal finance courses as well as economics courses? Or is it more likely to pop up in only one of these, and if so which one? I introduce the idea early on in my course and revisit it several times. I think it has merit when discussing how competition works, or if you're developing the idea of consumer surplus, among other things.

After looking at this video, featuring Drew Carey, I think it may also fit in when discussing income distribution. The piece spends quite a bit of time with Dallas Fed economist, Michael Cox. Back in 1997, Cox did an annual report article for the Federal Reserve Bank of Dallas. It offers an interesting way to examine standard of living, using "time worked to earn" approach that can be another way of looking at real income. Additionally, it has a lot of data relating real prices (time equivalents) in the early 20th century to similar items in 1997.

There are also a number of items that have no early-20th century equivalents. For these he still traces the evolution of price, providing some interesting food for thought and discussion.

For those teaching economics or personal finance, the article and the video provide students with an alternative way of looking at income, both on a national scale and a personal scale. It also provides a framework for discussing topics of inflation and whether certain measures accurately reflect cost of living, given qualitative improvements related to nominal price. Finally, the video does a good job of asking to what extent perception becomes reality when we discuss income distribution.

What are your thoughts?

**UPDATE**
And if you like numbers, charts and graphs, here's something else to add to the discussion.

1 comment:

juliechismar said...

As we discuss the subprime mortgage situation ( fallout? mess?) You might find the comments of my students interesting. The students are insistant that the borrowers are responsible for NOT reading the agreements and asking the right questions. Even when I try to balance the discussion with "some do not know the right questions", I receive responses such as reading is not "hard." I might suggest their analysis is a bit too simplistic and certainly these students are not yet experienced with home buying decisions. Perhaps the study of interest rates and the cost of borrowing has made an impression. Those of us in classrooms can use the current housing situation to teach personal finance in economics courses.