SOC101Y1 Lecture Notes - Tropical Year, Tax Rate
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Inflation and Real Dollars:
Inflation is the increase over time in the cost of a standard basket of goods & services.
Real dollars are nominal dollars minus inflation (so cost in real dollars is the cost of a
standard basket of goods & services minus inflation, & income in real dollars is nominal
income minus inflation, or purchasing power).
Market income is income before taxes & transfers.
Year 1: a typical basket of goods & services costs $100.
Year 2: a typical basket of goods & services costs $105.
Therefore, the annual inflation rate = 5%; $105 nominal year 2 dollars = $100 real year
How much is $100 year 2 dollars worth in real 1-year dollars (i.e., what is the real value
of year 2 dollars using year 1 as a base)?
The real value of $100year 2 is $95.24year 1 (since ($100/$105) * 100 = $95.24).
Real value = (dollars today/inflated base dollars today) * dollars today.
Ex. The inflation rate between year 1 and year 2 is 3%. The inflation rate
between year 2 and year 3 is 4%. What are $1,000year 3 in year 1 dollars?
$1000 + 3% = $1030
$1030 + 4% = $1071.20
$1000/$1071.20*1000 = $933.53
More women working now, and increased productivity
All averages mask-underlying distributions – increase in wealth for example, could go to
wealthy families (who is getting this increase, & who isn’t?)
Difference between Income & Wealth
Income: what you earn in a given period of time
Wealth: total worth of assets (i.e. house, total $ in bank account)
Differences in wealth are increasing faster than income differences
Government collects taxes & redistributes incomes (i.e. old age pensions)
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