Will the real return in the current year's money and last year's money always be the same, or was that only the case in this example?

yes. the only difference between current years money and previous years money is inflation rate. The real return in current year's money is adjusted for inflation, so the real return is equal to the return in previous year's money.

at 1:13 I am confused . why sal do x multiply to 1.02 equals 110 .

If the inflation rate is 2%, then you multiply last year's money by 100% + 2%, or 102%, to get today's money. 102% in decimal form is 1.02.

When you say "if you believe the whole CPI index" is that implying a lot of goods and services don't increase in price over the years? How real is inflation

Sal is saying that the basket of goods that the government uses to calculate inflation may not be a good idea for a basket.

1:58 does last years money have more or less value then this years money?

I'll restate your question just so your clear on what I'm answering. I think you are asking: _If I earned $100 last year and kept it in my wallet, would I be able to buy more or less with it if I waited until a year later to spend it._ That depends on how the value of money has changed. Inflation is the reduction in the value of each dollar. So if prices had *inflated*, you would be able to buy *less* with your $100. If prices had *deflated*, you would be able to buy *more* with your $100.

why we multiply 1.02 instead of .02?

Because you are trying to find out how much money you have in total, not how much money you earned.

a :55 he said "x multiply 2% but wrote it 1.02?

yes it 1.00x2%=0.02 then that combined in total is 1.02

could you describe what real return means?

Yes I can, but Sal does it better.. Watch previous video

So what exactly is the formula for calculating the real rate of return?

(1 + R nominal) = [(1 + R real) * (1 + inflation)] - 1 ==> Nominal Rate of Return in %

Main content

AP®︎/College Macroeconomics

Course: AP®︎/College Macroeconomics > Unit 4

Lesson 2: Nominal vs. real interest rates

Calculating real return in last year dollars

Name: Calculating real return in last year dollars
Uploaded: 2011-07-22T23:26:53Z
Description: In this video we take a slightly different approach to understanding the difference between real and nominal values: find the value of an asset in a previous year's dollars.

AP.MACRO:

MEA‑3.B (LO)

MEA‑3.B.1 (EK)

MEA‑3.B.3 (EK)

Google Classroom

In this video we take a slightly different approach to understanding the difference between real and nominal values: find the value of an asset in a previous year's dollars. Created by Sal Khan.

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Carmen Simone Pharr
Posted 11 years ago. Direct link to Carmen Simone Pharr's post “Will the real return in t...”
Will the real return in the current year's money and last year's money always be the same, or was that only the case in this example?
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(11 votes)
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- saxet
  Posted 11 years ago. Direct link to saxet's post “yes. the only difference ...”
  yes. the only difference between current years money and previous years money is inflation rate. The real return in current year's money is adjusted for inflation, so the real return is equal to the return in previous year's money.
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Gordon Michael Alexander Clark
Posted 10 years ago. Direct link to Gordon Michael Alexander Clark's post “1:58 does last years mone...”
1:58
does last years money have more or less value then this years money?
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- Stuart
  Posted 10 years ago. Direct link to Stuart's post “I'll restate your questio...”
  I'll restate your question just so your clear on what I'm answering. I think you are asking: If I earned $100 last year and kept it in my wallet, would I be able to buy more or less with it if I waited until a year later to spend it.
  That depends on how the value of money has changed. Inflation is the reduction in the value of each dollar. So if prices had inflated, you would be able to buy less with your $100. If prices had deflated, you would be able to buy more with your $100.
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  (19 votes)
kaustubh.sharma260796
Posted 10 years ago. Direct link to kaustubh.sharma260796's post “at 1:13 I am confused . w...”
at
1:13
I am confused . why sal do x multiply to 1.02 equals 110 .
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(4 votes)
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- Geoff Ball
  Posted 10 years ago. Direct link to Geoff Ball's post “If the inflation rate is ...”
  If the inflation rate is 2%, then you multiply last year's money by 100% + 2%, or 102%, to get today's money.
  
  102% in decimal form is 1.02.
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  (10 votes)
MagicandMice
Posted 11 years ago. Direct link to MagicandMice's post “could you describe what r...”
could you describe what real return means?
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- saxet
  Posted 11 years ago. Direct link to saxet's post “Yes I can, but Sal does i...”
  Yes I can, but Sal does it better.. Watch previous video
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  (10 votes)
NM
Posted 10 years ago. Direct link to NM's post “Why do we need to calcula...”
Why do we need to calculate the real return in last year's money?
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yoman1289
Posted 7 years ago. Direct link to yoman1289's post “When you say "if you beli...”
When you say "if you believe the whole CPI index" is that implying a lot of goods and services don't increase in price over the years? How real is inflation
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(3 votes)
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- Tejas
  Posted 7 years ago. Direct link to Tejas's post “Sal is saying that the ba...”
  Sal is saying that the basket of goods that the government uses to calculate inflation may not be a good idea for a basket.
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Arindam Neogi
Posted 8 years ago. Direct link to Arindam Neogi's post “why we multiply 1.02 inst...”
why we multiply 1.02 instead of .02?
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- Andrew M
  Posted 8 years ago. Direct link to Andrew M's post “Because you are trying to...”
  Because you are trying to find out how much money you have in total, not how much money you earned.
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  (4 votes)
Quinn Hendricks
Posted 10 years ago. Direct link to Quinn Hendricks's post “So what exactly is the fo...”
So what exactly is the formula for calculating the real rate of return?
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- Meg Preiss
  Posted 9 years ago. Direct link to Meg Preiss's post “(1 + R nominal) = [(1 + R...”
  (1 + R nominal) = [(1 + R real) * (1 + inflation)] - 1 ==> Nominal Rate of Return in %
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شذا أحمد شلبى
Posted 7 years ago. Direct link to شذا أحمد شلبى's post “a :55 he said "x multiply...”
a :55 he said "x multiply 2% but wrote it 1.02?
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- chadmonteiro
  Posted 7 years ago. Direct link to chadmonteiro's post “yes it 1.00x2%=0.02 then ...”
  yes it 1.00x2%=0.02 then that combined in total is 1.02
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  (2 votes)
23zecenalilian
Posted 2 years ago. Direct link to 23zecenalilian's post “What is Calculate Last Ye...”
What is Calculate Last Year's Real Dollar Yield?
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Video transcript

Male voice: In the last video, we were able to calculate the real return by putting everything in today's dollars. Put that $100 we invested a year ago in today's dollars, figure out what our actual return was, our dollar return is in today dollars, then we got our real return. What I want to think about in this video is how we can do it another way. We can actually put everything in last year's money. We got $110. Let's put $110, of today's money in last year's money. To think about this, we could do a little algebra, or you don't have to do algebra, but maybe that makes it a little bit more intuitive. There's some amount of money last year, there's some amount of money, let's call that X, that if we multiply it by the inflation rate, so if we grow it by 2%, that's going to be worth $110 today. Or, to just solve for X, you divide both sides by 1.02 and we get the amount of money that if you grow it by inflation, or that had the same amount of purchasing power as $110 today, would be 110 divided by 1.02 which is, let me move over to the right at little bit, this would be 110 divided by 1.02. This would be equal to $107.8 just roughly, just to round it. This is equal to $107.8. So $110 today buys us the exact same thing, if you believe the whole CPI Index, as $107.80, maybe I can even add another digit, 84 cents, would have bought us last year. What is our dollar return in last year's money? Dollar return in last year's money. Last year's money. Well, we ended up with $107.84 in last year's money. So 107.84, or $107.84. We had originally invested, in last year's money, $100. We had originally invested $100. So our dollar return is $7.84, or if you want to calculate the real return, how much did our actual purchasing power increase? Well, we got a $7.84 return off of a $100 investment, so this is pretty easy to calculate. We once again get to the same 7.8% for the real return.