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“Is a quick video over inflation. And it s me about how it relates to to constant dollars constant and actual dollars. So what is actual dollars well that s actual amount i give you like if i said. I m gonna give you a hundred dollars.
So what we want to mean by this i m gonna give you 100 bill 100. So 100 bill. So that is the actual money. I m giving you i m gonna say i m gonna give you that per year.
So i m actually i mean. This is kind of going a little overboard with the actual part. But that actually give you a hundred a solid 100 bill every year..
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So i m gonna give it to you initially at year one so this will be years. This is b the value of money. I give you so i give you a hundred dollars. The so this will be money first year hundred dollars again second year hundred dollars now that s me actually giving you a hundred dollar bill.
Now how about instead. I say i want to give you a constant hundred dollars constant hundred dollars hundred dollars. What that means is i want to give you a hundred dollars that i want to give you the amount of money that is equivalent of a hundred dollars year after year after year. So if you have inflation if you have inflation and we re gonna say our inflation is is is around five percent.
How much money do i actually have to give you to keep it at a constant hundred dollar value so what that means is if we have where i initially give you the money. Which is a hundred dollars how much do i actually have to give you to give you that constant hundred dollars. So this will be the constant of value that we re doing and we re going to do the actual over here so how much do i actually have to give you if i want to keep it at a constant hundred dollars well i have to give you a hundred dollars then..
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However yeah the next year. We have this we have to account for inflation so again i want to give you any constant hundred dollars. But i want to give you actually how much do i actually want to give you well inflation says. I have to give you five percent.
More because now well it s not worth as much as it originally wants this hundred dollars is losing value so in our scenario. It s losing five percent of its value so we have to up it by five percent. So this will actually be so what we ll do is we have the hundred dollars. We multiply it by one plus.
The inflation rate. Which is zero point zero five to the power r. One so again that will give us a hundred and five dollars..
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So now let s go to year two again i want to keep it with a constant hundred dollars. And what was that give us what we have to take the constant. We want which is a hundred dollars and we have to multiply it by 1 plus 005. Squared so that will give us a new value so i m not sure what that one is quite so calculator real quick.
So we have one hundred and we are going to multiply that by one plus point zero five bracket and then we re going to take that to the power of two parmi. So then we need to give an actual hundred and ten dollars and 25 cents. So one hundred and ten dollars and 25 cents. So that at the end of year two you re actually getting that constant hundred dollars.
This what we want to think of as cost is just the value of it so we want to have just a constant value of 100 money changes in value a dollar is not worth the same as it is a year later. But if we want to say hey i wanna give you a constant hundred dollars. We re saying i want to give you a value of 100 at this time for the rest of the century or whatever so that will change the amount of actual dollar bills..
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You have to give so that s the difference between inflation when you re dealing with costin and actual dollars again the equation to find out how many actual dollars have to do for some constant value at some time is the actual dollars is equal to the constant dollars times. One plus. The inflation rate. The number of years where n.
Is the number of years so we wanted to see the actual dollars. We needed to give at year two so n is equal to 2 f is equal. ” ..
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