I start teaching a couple classes tomorrow; here are some cautionary notes.

From the first edition:

Forgetting whether nominal or real magnitudes are more important

Often we hear of records being broken. But there are records and there are records. For instance, consider this headline: Nasdaq and S&P 500 Climb to Records. The statement is correct, but it’s lacking in context to the extent that the real, or inflation adjusted, price is more relevant (given that share prices represent valuations of a claim to capital).

Figure 1: Nasdaq (blue), and CPI-deflated (red), in 2009$. Source: NASDAQ via FRED, BLS, and author’s calculations.

Now, some people evidence wariness about deflation, particularly in terms of the accuracy of the deflators. However, it is usually better to account for price level effects and note the concerns, rather than rely on people to keep their preferred deflators in their head to calculate the real magnitudes (see this post).


Keep reading this article on Econbrowser Blog - James Hamilton & Menzie Chinn.

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