- 31 Dec 2019 09:47
#15056822
I've been thinking about this. Is the U.S. really a richer country today than it was in 1970 ?
How much richer?
I know the official GDP amount is much higher today than it was back then, but that may be mostly accounted for by inflation.
So although this is a very inexact and imperfect estimate, I believe we can get some proper idea of what level of inflation there's actually been by comparing the cost of cars and housing today with the cost of cars and housing back then.
Average cost of car in 1970:
3,542
Average cost of car today:
33,560
Average cost of housing in 1970:
23,600
Average cost of housing today:
188,900
So the average cost of a car has gone up by a factor of 9.5, and the average cost of housing has gone up by a factor of 8.
Now let's look at the GDP.
Per capita GDP in 1970 was 5,246.
Per capita GDP today is 57,466.
So that's an increase by a factor of 10.95
So what can we conclude from this quick little calculation?
Per capita GDP, adjusted for real purchasing power, has gone up by about 20 percent.
Now that alone isn't enough to indicate real wealth has gone up, but it does show there haven't been any gigantic changes in per capita GDP.
Overall GDP adjusted for official inflation is not the same thing as per capita GDP adjusted for purchasing power, the latter tells us how rich we are.
Economists and policymakers like to use "real GDP" but there are two problems with that. First, the population of the country has increased by more than 57% since 1970. More people, more GDP. Second, the "official inflation" numbers in all likelihood do not accurately reflect the actual increase in costs of expensive things like cars and housing well. To arrive at their inflation numbers, government economists use a basket full of other things, like bread and milk, that make up only a small fraction of consumer spending. Measuring how much inflation there's been is actually an extremely difficult thing to do, because there's no exact objective definition other than arbitrary price measurement points we make for it.
As yet another example, let's look at gold. Price per ounce in 1970 was $38.90
Price as of January 2017 was $1210.45
If the cost of gold had remained unchanged, that would mean an inflation rate of 3111% since then.
I'm not saying this to say that a dollar is worth 31 times less than it was in 1970, but it does help show official inflation numbers are far from being accurate.
If we had a 4% inflation rate per year for 47 years, the dollar would only be worth 6.3 times less.
How much richer?
I know the official GDP amount is much higher today than it was back then, but that may be mostly accounted for by inflation.
So although this is a very inexact and imperfect estimate, I believe we can get some proper idea of what level of inflation there's actually been by comparing the cost of cars and housing today with the cost of cars and housing back then.
Average cost of car in 1970:
3,542
Average cost of car today:
33,560
Average cost of housing in 1970:
23,600
Average cost of housing today:
188,900
So the average cost of a car has gone up by a factor of 9.5, and the average cost of housing has gone up by a factor of 8.
Now let's look at the GDP.
Per capita GDP in 1970 was 5,246.
Per capita GDP today is 57,466.
So that's an increase by a factor of 10.95
So what can we conclude from this quick little calculation?
Per capita GDP, adjusted for real purchasing power, has gone up by about 20 percent.
Now that alone isn't enough to indicate real wealth has gone up, but it does show there haven't been any gigantic changes in per capita GDP.
Overall GDP adjusted for official inflation is not the same thing as per capita GDP adjusted for purchasing power, the latter tells us how rich we are.
Economists and policymakers like to use "real GDP" but there are two problems with that. First, the population of the country has increased by more than 57% since 1970. More people, more GDP. Second, the "official inflation" numbers in all likelihood do not accurately reflect the actual increase in costs of expensive things like cars and housing well. To arrive at their inflation numbers, government economists use a basket full of other things, like bread and milk, that make up only a small fraction of consumer spending. Measuring how much inflation there's been is actually an extremely difficult thing to do, because there's no exact objective definition other than arbitrary price measurement points we make for it.
As yet another example, let's look at gold. Price per ounce in 1970 was $38.90
Price as of January 2017 was $1210.45
If the cost of gold had remained unchanged, that would mean an inflation rate of 3111% since then.
I'm not saying this to say that a dollar is worth 31 times less than it was in 1970, but it does help show official inflation numbers are far from being accurate.
If we had a 4% inflation rate per year for 47 years, the dollar would only be worth 6.3 times less.