Prices
Prices of valued items undergo questionable fluctuations. For example, even though housing provides the same utility to the individual over time, and supply and demand are relatively constant and stable, the relative price of housing fluctuates. Even more so with Stocks, Oil and Gold. This price volatility appears to occur in cycles and is caused by a myriad of factors.
The chart to the right is an attempt to overlay the prices of Housing, Stocks, Oil and Gold by normalizing the price streams. Normalizing is achieved by applying a discounting formula which converts a price to the price it would be at a certain date, given a certain discount rate. This would normally be used to cancel the effects of inflation, in which case the inflation rate would be used.
In this case the rate is derived as follows: A trend was calculated for the resulting discounted price curve using the method of "least squares". The discount rate was then derived by seeking the goal of a trend of 1, i.e. flat. For housing this normalization rate was 6.06% considering the data from 1940 to 2010 relative to the year 1990. Using this as a baseline rate, the normalized price curves were calculated for the other commodities. Oil and Gold had similar normalization rates, but Stocks tended to beat this trend, while rents tended to loose against this trend in the period observed. Gold was the most volatile along with Oil in close second. Stocks were highly volatile. Housing and Rents were the least volatile of the commodities studied.
Read more about this topic: Relative Value (economics)
Famous quotes containing the word prices:
“United Fruit... United Thieves Company... it’s a monopoly ... if you won’t take their prices they let your limes rot on the wharf; it’s a monopoly. You boys are working for a bunch of thieves, but I know it ain’t your fault.”
—John Dos Passos (1896–1970)
“The earth only has so much bounty to offer and inventing ever larger and more notional prices for that bounty does not change its real value.”
—Ben Elton (b. 1959)
“On the breasts of a barmaid in Sale
Were tattooed the prices of ale;
And on her behind
For the sake of the blind
Was the same information in Braille.”
—Anonymous.