# how can \$8 I’m 1850 be \$300 now how does that work and how do we math that.

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how can \$8 I’m 1850 be \$300 now how does that work and how do we math that.

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Its more about purchasing power – \$8 is \$8 no matter what date you are talking about, but what \$8 _can buy you_ his highly dependent on when we are discussing.

To determine that, we tend to look at a basket of goods that existed across the time periods being discussed and see how the prices of those goods changed. For example, a dozen eggs is a commodity that hasn’t changed much, so if it used to cost \$1 and now it costs \$5 that is a pretty good indicator of how the purchasing power of \$1 has gone down.

Of course, not all prices for goods change uniformly, which is why we look at the average change for an entire basket of goods to get an estimate. Technology is a good example of something that isn’t a great estimator. A cheap TV would cost \$129 in 1950 and can cost \$99 today, but that doesn’t mean that the value of currency has gone up – it just means that the cost of a TV has gone way down. You have to exclude outliers like that to get a good estimate.

It is as much art as it is sciences and the comparisons may not work for any individual good or service, but it is close _enough_ to help facilitate understanding about the change in currency value.

Because of inflation, prices go up. Assuming a healthy inflation of 2.5% a year, prices would double every 28 years. So, if you wanted to buy today the same thing that was \$8 in 1850, it would be \$300 now.

It gets a little convoluted when you go back that far because what people were buying and what was even available to buy has changed so dramatically. The relative price of food has plummeted thanks to mechanized agriculture, but the price of a horse has gone insane.

So rather than try to work out inflation between 1850 and 2023 directly, it’s best to do it in year-by-year increments.

What did a loaf of bread cost last year? What does it cost now? How about a gallon of milk, or a used car, or 10kWh of electricity?

The world’s governments keep track of this information to calculate their inflation rates year over year, and they (usually) try to manipulate policy to keep it within a target range.

You look back over these government reports over the last two centuries and can come up with a total inflation rate since 1850 – but again this value is kinda useless because so much else has changed.

It has to do with inflation. Money is weird. One way to understand it is to think about everything we do with money as *trading*, which is weirder in our world of retail and fixed prices.

The way people make money is they trade some kind of labor for it. If someone offers me \$50 to mow their grass, I’m trading the effort of mowing grass for money. If I think their yard is too big, I might ask them for more money. If they think that’s an unfair price, they don’t have to pay me. We’re haggling.

Most people don’t haggle for payment like this every day. A lot of people have a job where we agree they get paid a salary or per hour for what they do. But there are still people like contractors who have to look at a job, decide what it will cost them and how long they’ll have to work, then give a “quote”. People often ask multiple people for those quotes to try and get the best value. Sometimes people will promise to work faster for more money.

This happens across the whole economy. A baker has to work a whole day to produce a certain amount of food. They have to spend a certain amount of money to get flour. That money is determined by how much the farmer thinks is fair to be paid to grow wheat, harvest it, and refine it into flour. If too many farmers are making flour, not all of it will sell. That will likely cause some farmers to lower their trade price so their flour sells first. It’s better to make *less* money than no money, right? This means “the price of flour has gone down.”

But what if there are too many bakers, and the farmers run out of flour? Now bakers might offer more money for flour so a farmer will fill their order first. This means “the price of flour has gone up”. The farmers make more money. But now the baker spent more money than planned. That means if they want the same amount of money for their day of labor, they might increase the price of their bread.

That causes some funky interactions. The farmer spends their day working in fields. The farmer does not have time to bake bread. So even though the farmer sells flour to bakers, the farmer *also* buys bread from bakers. They made more money selling flour at a higher price, but now they have to pay more to get bread.

That situation, where people make more money but also have to spend more money, is “inflation”. Sometimes it means things break even: if we look at how much costs went up compared to how much wages went up, we decide that everything is the same. Here’s one situation where that happens that’s got easy math:

> “I made \$10 last year and groceries cost \$5. This year I make \$20, but groceries cost \$10.”

This person was spending half their money on groceries last year. This year they make twice as much money, but they still spend half their money on groceries. That means nothing has really changed, but inflation has happened. We can argue that \$10 of last year’s money is now worth \$20 of this year’s money because of it. What we mean to say is it looks like people pay twice as much for labor now, but the prices of everything also doubled so things are basically even.

We worry about this because it’s not always nice and even like this. Imagine this situation:

> “I made \$10 last year and groceries cost \$5. This year I make \$12, but groceries cost \$9.”

This person makes \$2 more than they used to, that’s a 5% raise. But their groceries now cost \$4 more than they used to, that’s an 80% increase. Their groceries got A LOT more expensive than their labor. They need \$18 for things to break even, so they’re *losing money* compared to last year.

That’s why people get upset when we notice grocery prices, rents, and all other things we buy have increased in price dramatically but peoples’ wages haven’t gone up much for 20 years. That means people have to spend more and more money to get the same things, but they aren’t being paid more money for the same amount of work. If you think about that, it means “You have to work harder to get the same thing.” That’s not very fun, especially when it’s happening fast and you can remember when you could get a lot more for your labor.

Are you discussing interest or inflation?