Transcript Proverb #4: Just because you don’t pay for something doesn

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


Imputed depreciation


the cost of having your money tied up in a
particular resource when it could be earning
interest elsewhere.
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)
NPx
RPx 
NPb
RPx = relative price of good x
NPx = nominal price of good x
NPb = nominal price of the base commodity
Example:

Tuition and Fees for In-State
Undergraduate Residents at Selected
Schools by semester, 2014-2015 (15
credits):
NPuofu = $3,917.50
 NPusu = $2,781.54
 NPuofc = $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
RPuofu = $3,917.50 / $3,917.50 = 1.0
 RPusu = $2,781.54 / $3,917.50 = 0.70
 RPuofc = $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.
http://inflationdata.com/articles/charts/decade-inflation-chart/
Related Concepts...

Escalating Inflation (Increasing Inflation Rates)

prices rise at an increasing rate
• 3%, 4%, 7%

Disinflation (Decreasing Inflation Rates)

prices rise at a decreasing rate
• 6%, 5%, 3.5%

Deflation (Prices Decreasing)

prices decline
• -1%, -2%, -1%
5 Important Components of Goals (SMART):
Specific
 Measurable
 Attainable
 Realistic
 Timely
