. Economics At the Movies: Real v. Nominal Movie Box Office Sales Inflation affects the purchasing power of the income that we earn by decreasing the amount of goods and services that a dollar will buy. Inflation also distorts the value or worth of different items over time making it difficult to compare peoples’ incomes, companies’ sales, or economic statistics over a long time period. In this activity we will be comparing the top grossing movies of all time and then adjusting their nominal sales into their real (inflation adjusted) sales. Nominal values do not take into account changes in price while Real values do. Real more accurately reflects the growth of GDP, changes in people's wages, or when measuring the value of anything over a period of time.

. What you will need: 1. A calculator 2. Internet Access or the equivalent handouts 3. This handout

. Part A: Open your web browser to this web site (or look at the handouts provided): s/boxoffice/alltime.php

1. What are the top 5 grossing movies of all time (in nominal terms)? Write the Name, Rank, $ amount, and year released. Please round to whole numbers Please round to whole numbers. Worldwide Box Office for Titanic: $1,835 Million Avatar $601Titanic $533The Dark Knight $461Star Wars IV: A New Hope $437Shrek

Movies that may not do well in the U.S. often do well internationally

2. How much have Gone with the Wind, Jaws and Snow White and the Seven Dwarfs grossed (in nominal terms)? Write the Name, Rank, $ amount grossed, and year released. Please round to whole numbers $199 Gone With the Wind $260 Jaws $185 Snow White and the Seven Dwarfs 1938

You are now going to adjust the films in #1 and 2 above into real (2011) dollar terms. As you do this you are making one assumption/simplification that you need to be aware of. You are going to assume that all of the sales for a particular movie took place in the year it was released which is not the case. For example, Star Wars, Episode 1: A New Hope was released in 1977 but has been re-released in the theaters twice, including for its 20th anniversary in 1997 when several additional computer generated scenes were added. This assumption will tend to overstate the real dollar amount for movies that have been re-released, i.e. Star Wars Trilogy, ET, Gone With the Wind, Snow White and the Seven Dwarfs, and others.

Open your web browser to this web site (or look at the handouts provided): acher/calc/hist1913.cfm It contains the CPI data from 1913 to the present. The CPI value for a given year is a measure of that year's cost-of- living compared to that of a 'reference date'; for the data here, that base cost is the average for the time span The 1993 U.S. urban "All Items" CPI of means that in 1993, things cost 44.5 percent more than they did in To calculate this, use the following formula: (Start Year Box Office $ ÷ Start Year CPI) x Target Year CPI = Target Year Box Office $

Example: Mrs. Doubtfire grossed $219,000,000 (Start Year Box Office $) in 1993 and the CPI for 1993 was (Start Year CPI). Then use the CPI for the most recent FULL year (224.9 in 2011). ($219 ÷ 144.5) x = $340.9 million So the $219 million that Mrs. Doubtfire made in 1993 would be the equivalent worth of a film that made $340.9 million in 2011.

3. Now adjust the 8 films from questions #1 and 2 into real (2011) dollar terms (Show your work!). Avatar: 760 ÷ x = $796.8 million Titanic: 601 ÷ x = $842.1 million The Dark Knight: $533 ÷ x = $557.0 million Star Wars: 461 ÷ 60.6 x = $1.71 billion Shrek 2: 437 ÷ 184 x = $ million

3. Now adjust the 8 films from questions #1 and 2 into real (2010) dollar terms (Show your work!). Gone With the Wind: 199 ÷ 13.9 x = $3.22 billion Jaws: 260 ÷ 53.8 x = $1.09 billion Snow White and the Seven Dwarfs: 185 ÷ 14.4 x = $2.89 billion

4. What is the top film in real terms? Gone With the Wind! $3.22 billion in real terms compared to only $796.8 for Avatar and $842.1 million for Titanic. Box Office Mojo Box Office Mojo list of all record holders

Which are the most successful films at the box-office? AVATAR, James Cameron’s epic 3D sci-fi movie went into general release around the world on Friday, December 18, The film reportedly cost over $300m to produce, making it one of the most expensive films ever. Such spending, however, is no guarantee of box-office success. A list of the highest-grossing films in America (adjusted for ticket-price inflation) reveals that “Gone with the Wind”, which cost just $61m to make (in today’s prices), made the most money. Avatar is expected to collect over $150m in its opening weekend alone. Mr Cameron seems to have a magic touch; “Titanic”, the most recent blockbuster on this list, is another of his films.

Source: The Economist

5. Why would the movie studios (Universal, Disney, Sony, Paramount, etc.) of today want to focus on nominal sales figures? Hint: Think about the marketing of the newer films. It makes their films appear to be bigger hits than they really are when compared to past films. It gives the appearance of Blockbuster status.

Part B For the following questions use the equation below (Show your work!): Nominal (present) interest rate - inflation rate = Real interest rate 1. When you place your money into a savings account the bank pays you interest stated in nominal terms. Assume the bank is paying you 2% interest and the inflation rate is currently 1%. What are you making in real terms? 2% - 1% = 1% real interest rate

2. Now assume inflation increases to 3%. Now what are you making in real terms? What is the problem? How can you correct the problem (where else might you save/ invest your money)? 2% - 3% = -1% real interest rate. You have a negative rate of return. You are, in effect, losing money. You might place your money in an account with a higher rate of return, i.e. Certificate of Deposit, Money Market Account, Bond or Stock Mutual Funds.

Part C For the following questions use the equation below (Show your work!): Nominal (present) wage increase - inflation rate = Real wage increase When you earn money working your employer pays you a wage or salary stated in nominal terms. Your employer announces that everyone is receiving a 3% raise. The inflation rate is currently 1%. What kind of raise have you received in real terms? Why might employers want their employees to focus on nominal wage increases rather than real increases? 3% - 1% = 2% real wage increase. If employees focus solely on their nominal wage raise they will think they have gotten a raise when in fact the purchasing power of their paycheck will have declined. This will allow employers to save money and pass the cost of inflation on to their workers.

2. Now assume that you receive the same raise but inflation increases to 3%. Now how much has your income increased in real terms? What is the problem? How can you correct the problem? 3% - 3% = 0% Real wages have not increased! Always try to ask for a raise that is greater than the current or expected inflation rate. Are gas prices really high? Gasoline: Real v. Nominal Chart Gasoline: Real v. Nominal Chart from Dept of Energy

Were retail gas prices in the summer of 2008 really near record highs? Yes. In the Summer of 2008 they were, in both nominal and real terms. No, currently (April, 2011) they are not, in nominal or real terms.

June, 2008 had the highest real gas prices at $4.18/gallon in 2011 dollars. Chart shows monthly average prices,

Even though in nominal terms gasoline prices have trended up, gasoline’s long term real trend has been downward, but with dramatic short term increases. Chart shows annual average prices, $1.60-$2.50 is the approximate range that real gas prices have been in.

The late 1970’s-early 1980’s as well as 1999-Present are the 2 periods where gas prices have made big increases. Chart shows annual average prices, (forecast).