If a stereo costs 1200 last year and only cost 1050 what is the price difference?

Answer 1

This question has a more complex answer than you would think. The simple answer is that the stereo now costs $150 less than it did last year. Great. For most people, we can stop there. For those of you looking for precision, read on...

The price of anything over time, is affected by the inflationary or deflationary rate of currency over the given time period. The simplest way to comprehend this is to think of $100 ten years ago. Ten years ago, a dinner out at a nice restaurant may have cost $50. So, your $100 ten years ago would have bought you 2 dinners. Suppose that today, that same dinner costs $100. If you had that $100 today, you could only get 1 dinner for it. The conclusion is that the $100 today is worth only 1/2 of what it was 10 years ago.

This example assumes that the dinners are an accurate reflection of the increase in all costs over that 10 year period. For economics, there is an indicator, a standard measurement, that is used to measure the loss (or increase) of currency over time. It is called the rate of inflation. If the inflation rate is 5%, then the value of that stereo is not only $120 less, but the original value of the money is less, too. So, you would have to add that 5% back in and that would reduce the amount of savings, making that price difference only about $108.