Index > Course > 2021-02-16: Real and Nominal Dollars; Discounting

2021-02-16: Real and Nominal Dollars; Discounting

For the 25th, Read:

• Understanding Life-Threatening Risks (Keeney)
• What does a disease deserve? (Kaiser)

Dealing with projects of different duration

For example:

• A ferry that lasts 20 years
• A bridge that lasts 100 years

There are two major strategies:

1. Multiple purchases of the shorter option
   • Purchase the ferry 5 times
2. “Salvage” the longer-term project
   • aka re-sale value of the car after 50k miles

Real vs Nominal Dollars

Example:

• You buy a car for 22k
• The next day, everything doubles in price
  • Everything. Bread, chips, cigarettes, paychecks.
• Everything still costs the same - but the value of the dollar halved.

Although income has risen since the 60s, prices have risen too.

Conversions between real and nominal values can be done:

• from the past, via the consumer price index
• from the future, by assuming a constant inflation rate (~2%)

Discounting and Inflation are different:

• 1 mil today is still more appealing than 1.1 mil inflation adjusted in 10 years

Discount Rates

• Nominal Interest
  • Market interest rates are in nominal dollars
  • A 1 year CD might offer 6% interest
• Real Inflation
  • Inflation increases the cost of goods
  • A $100 basket might cost $103 in 1 year

The real dollar cost of things stays roughly the same, while the nominal cost changes due to inflation.

Discounting non-monetary things

If I have a briefcase with 1 million tons of CO2 in it - should I release it now, or in 10 years?

If you open it now, then CO2 performs its warming magic for 10 years. There are 10 less years of warming if you wait to open the briefcase.

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Index > Course > 2021-02-16: Real and Nominal Dollars; Discounting