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

the cost of having your money tied up in a particular resource when it could be earning interest elsewhere.

Imputed depreciation 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

moneySuppose a 9% annual interest for a secured car

loannet 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)

RPx = relative price of good x

NPx = nominal price of good x

NPb = nominal price of the base commodity

b

xx NP

NPRP

Example:

Tuition and Fees for In-State Undergraduate Residents at Selected Schools by semester, 2009-2010 (15 credits):NPuofu = $2,902NPusu = $2,414NPuofc = $4,243

The relative price shows how tuition and fees compare to the base school...

Example (cont.):

Using the U of U as the Base CommodityRPuofu = $2,902 / $2,902 = 1.0RPusu = $2,414 / $2,902 = 0.83RPuofc = $4,243 / $2,902 = 1.46Meaning of relative prices…The price of attending the University

of Colorado is 1.46 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://en.wikipedia.org/wiki/Image:US_Historical_Inflation.svg

January 1914 – March 2009

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