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let's say I'm an economist and I'm curious about whether in general things are getting more expensive or not and if they are getting expensive by how much so the way I'd approach that is I would think of well what are just a bunch of goods and services that the average person would buy so I would I would think up of I would think up some type of basket of goods goods and services and I would try to weight that basket based on how people actually spend their money so I'd say okay 40% of people's money on average is spent on housing maybe another 10% is spent on transportation maybe another 10% is spent on food and I would go out into the market and I would see I would try to take an average of what these things cost and I would sample a bunch of products a bunch of services so I get a decent average of that so this was not a this is not a this is not a simple thing to do but I'm an economist and I'm serious about trying to calculate that and let's say that when I take that weighted average of all of this stuff I just come up with a number and this is I'm not giving you the details of how it's actually calculated but give you the idea of what they're doing so I get a number so I just you know to rent a to buy or lease your average automobile to lease your average apartment to buy your average servings of food for for a given family all the rest let's say I come up with that costs and I'm making up a number here let's say that it costs $20,000 my basket of goods and services just based on the way that I've waited it and this is all happening in year one so this is in year one year one now I'm curious whether between year one and let's say year five and year five whether things got more expensive so I'll take that same basket of goods and services so basket of goods and services and I'll try to figure out what is their weighted average cost in year five and this is a lot harder than it might sound right now because the baskets of goods and services change if computers get faster do you use the same computer or do you think about what the average computer is which would I'll be a better computer if most people's TVs got bigger do you use the same TV in year one and year five or do you adjust for what is now the average TV which is now bigger if houses have gotten bigger on average you use the same house you use the average house so there's a whole bunch of areas here that you can really tweak and these are actually huge subjects of debate on what is the actual increase in cost but let's say that you're able to do this and what you think is a pretty reasonable way and you find that the same basket of goods adjusted for things like technology and all of the rest now costs now cost twenty-two thousand dollars so your takeaway from here is the same things that cost twenty thousand dollars that's the things that give you the same standard of living in year one to get that same standard of living in year five you now need to spend ten percent more it's gotten two thousand dollars more expensive off of twenty thousand dollars so it's gotten ten percent more expensive so you as the economist what you would say is as the way you've defined it your consumer price index and this is abbreviated with CPI Consumer Price Index your Consumer Price Index is up by by ten percent another way based on the way you measured it and it changes from country to country and even within countries they change the way that they do these baskets basket of goods but by the way you've measured it you would say that price inflation price inflation has or you would say that the price inflation has been has been ten percent between year one and year five or in general everything got ten percent more expensive or you would need ten percent more money to have the same standard of living and in general when people are just referring to inflation so if you just see the word inflation being referred to especially in modern times they are referring to price inflation this general increase in the price of goods and services measured by some type of basket of goods there is another type of inflation and that is monetary inflation monetary inflation and they are related monetary inflation is inflation due purely to an piece of the money supply so this is increase increase in money supply and in general in general if this increase in the money supply does outstrip kind of the productive capacity of the country it could very well lead to price inflation but in general what people measure when they talk about inflation from one your next they're talking about this basket of goods they're talking about price inflation the other thing that you'll sometimes see maybe in year five maybe in year five someone says hey I could sell you this house this house so this is in year five I could sell you a house and this house in year five is is six hundred and sixty thousand dollars is six hundred sixty thousand dollars and someone might ask well what what would be that price if we adjusted it for inflation in year one dollars so what they're saying is if you adjust for how much how much value your money has lost because if things are getting more expensive that means each dollar is being worth less you can buy less with each dollar so when people say how much is that adjusted for inflation in year one money you're essentially saying what amount of money with that house have had to cost in year one that when you adjust it for inflation when you increase it by ten percent so that's the same thing increasing by ten percent is the same thing as multiplying by one hundred and ten percent or multiplying by one point one so what amount of money would that house had to have cost in year one that if I multiply it by one point one I get six hundred and sixty thousand dollars and we could do a little quick math here to figure that out so if we say let's say that I don't know let's call it P P is the price of the house in year one I'll call it P one that x one point one times one point one is going to be equal to six hundred sixty thousand dollars when you factor in the ten percent inflation over these years now this is simple algebra right here you can divide both sides by one point one divide both sides by one point one and we get and we get these cancel out you get the price of that house in year one sixty six divided by eleven would be six now you can work it out with a calculator if you don't feel comfortable at but what I'm about to do but this would give you this would give you six hundred thousand dollars if you work this math right out here and you could figure out the decimals and what we could do well I think I think you get the general idea here you can use your calculator I kind of did this one in my head but the general idea is a house in year one that is $600,000 $600,000 if you factor in the the devaluing of the currency or how much how much more expensive everything got in year five would cost six hundred sixty thousand dollars so you might hear someone say when they're talking about inflation or they're talking about price increases this house in year five is six hundred sixty thousand dollars which is equal to which is equal to $600,000 $600,000 in year in year one year one money and it is an example of that you know I live in a neighborhood where the houses are have gotten all of a sudden you know because I live in the heart of Silicon Valley it's not a fancy neighborhood by any stretch of the imagination but the houses now are quite expensive and we have neighbors who moved in in the 50s and they say my god I bought our house for $10,000 and now people are selling these houses for so much more and the reality is is that it is true the house has appreciated but ten thousand dollars in 1950 was actually a lot a lot of money a doctors and engineers did not make that much more than then that much per year I don't know the exact amount so the reality is is that you actually have to it you have to adjust money for the year that you're talking about and you have to adjust it for inflation so if you believe this ten percent inflation number hopefully people's incomes also increased by the same amount so the same person maybe with the same skills and the same job who could afford the house for six hundred thousand dollars in year one could now pay six hundred sixty thousand dollars for it and it won't take an unusually large chunk of their of their expenditure that it would take the same chunk that it did in you on so hopefully that clarifies things a little bit and I'll in the future do more videos going into the details of inflation