Correct. Real prices are adjusted for inflation. When comparing values across time, it is necessary to adjust for inflation.
There are some additional factors, though, that this chart will never capture.
First, our vehicles are more fuel efficient than Dear Ole Grandad's Pontiac. So we can drive farther on that same gallon of gasoline.
Second, due to economic development, there are more "things to do" and more jobs within driving distance than there used to be. So a gallon of gas provides us much more utility than grandpa got out of it.
Third, the percentage of our income spent on gasoline has been falling even though the share of expenditures on transportation has been rising; we're spending more on non-gasoline expenses.
Fourth, our fuels are cleaner so we get fewer environmental costs from the same gallon of gas. If we were to remove environmental regulations, gasoline prices would plummet.
Finally, bear in mind that granddad didn't have OPEC hiking up his gas prices. If we could outlaw OPEC (the same way we outlaw cartels in the US), our gas prices would be phenominally low.
Federal and state gas taxes were about 25% of fuel costs from 2000-2007. I don't have historical data on taxes to compare what we pay to grandpa. I suspect gas taxes were quite high (as a percentage the gas price) during some wars. Rationing also had an impact on gas prices.
So with all those factors in play, it is actually quite remarkable that we pay the same as granddad. Technology and competition have, over the long run, lowered prices despite OPEC, taxes, and regulation.
2 comments:
Ok, so nominal price in the chart was what the price was at the time, and real price is adjusted for inflation?
Correct. Real prices are adjusted for inflation. When comparing values across time, it is necessary to adjust for inflation.
There are some additional factors, though, that this chart will never capture.
First, our vehicles are more fuel efficient than Dear Ole Grandad's Pontiac. So we can drive farther on that same gallon of gasoline.
Second, due to economic development, there are more "things to do" and more jobs within driving distance than there used to be. So a gallon of gas provides us much more utility than grandpa got out of it.
Third, the percentage of our income spent on gasoline has been falling even though the share of expenditures on transportation has been rising; we're spending more on non-gasoline expenses.
Fourth, our fuels are cleaner so we get fewer environmental costs from the same gallon of gas. If we were to remove environmental regulations, gasoline prices would plummet.
Finally, bear in mind that granddad didn't have OPEC hiking up his gas prices. If we could outlaw OPEC (the same way we outlaw cartels in the US), our gas prices would be phenominally low.
Federal and state gas taxes were about 25% of fuel costs from 2000-2007. I don't have historical data on taxes to compare what we pay to grandpa. I suspect gas taxes were quite high (as a percentage the gas price) during some wars. Rationing also had an impact on gas prices.
So with all those factors in play, it is actually quite remarkable that we pay the same as granddad. Technology and competition have, over the long run, lowered prices despite OPEC, taxes, and regulation.
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