Exercise 6.1:
Why were gasoline prices so high in 2000? Were they really?

Retail gasoline prices in the U.S. reached record levels in the summer of 2000, rising over 40% in one year. The dramatic price increase angered consumers, who suspected that oil companies were unfairly "gouging" customers, and led to a Congressional inquiry to determine the causes underlying the run-up in gasoline prices. Does this sound familiar? A similar story is repeated in 2005. Whenever gas prices rise substantially and quickly (in the eyes of consumers) the same questions arise: "Why did gasoline prices rise so far and so fast and is it 'fair'?" Economists are likely to ask the question "Are Gasoline prices really that high?"

In 2000, the major reason for the gasoline price increase, economists concluded, was a worldwide imbalance between crude oil demand and supply, which led to a dramatic increase in world crude oil prices in late 1999 and the first half of 2000. Oil-producing countries cut production (to raise crude oil prices) and refineries followed suit (due to low profitability), limiting world supplies of crude oil and reducing inventories of gasoline. At the same time, economic recovery in Japan increased worldwide demand for oil. The combination of demand and supply forces led to a rapid escalation in U.S. gasoline prices.

However, despite the high prices at the gasoline pump in 2000, consumers were actually paying about 60% less for gasoline than they did in 1981 when adjusted for inflation [the previous record for summertime gas prices was recorded in 1981, nearly $1.38 per gallon]. How can that be? The table below lists average (nominal) unleaded gasoline prices in the U.S. for various years during the period 1981-2000, along with CPI values and inflation-adjusted (real) gasoline prices.

Notice that gasoline prices rose nearly 9% over the 1981-2000 period, while the average level of prices for U.S. consumers rose about 88%. The prices of most goods and services that consumers buy, including cars, electricity, insurance, medical expenses, postage, and restaurant meals, increased much more than gasoline over the last 20 years. In real terms, the price of gasoline has been steadily falling during this time. While the increase in gasoline prices during 1999-2000 was certainly dramatic, gasoline was a relative bargain for U.S. consumers. Similar concerns about rising gasoline prices were raised in 2003 as concerns about the War in Iraq raised nominal crude oil and gasoline prices again. However, the real cost of gasoline remains low, despite periodic spikes in the price of oil.

References:

General: Short-Term Energy Outlook, July, 2000
U.S. Energy Information Administration, Department of Energy
http://www.eia.doe.gov/emeu/steo/pub/contents.html

American Petroleum Institute
How Much We Pay for Gasoline 1999–April 2000 Review

CPI Data:
Bureau of Labor Statistics
Most Requested Series
http://www.bls.gov/data/top20.htm

Gasoline Prices:
U.S. Energy Information Administration, Department of Energy
http://www.eia.doe.gov/oil_gas/petroleum/info_glance/gasoline.html

Exercise 6.2:
What are the all-time highest grossing movies in U.S. history?

The web site movieweb.com (http://movieweb.com/movie/alltime.html) publishes an up-to-date ranking of movies with the all-time highest U.S. cumulative gross ticket receipts (in millions of U.S. dollars). Table 1 below lists the top ten movies included in the movieweb.com listing as of June 20, 2003. Note, however, that these movies were released in different years, and over time, the price of seeing a movie has changed along with other prices. How, then, can you compare, the gross ticket receipts of Titanic, which was released in 1997, with the original Star Wars, which was released twenty years earlier? Clearly, ticket prices were higher in 1997 than they were in 1977, so we can't directly compare gross dollar receipts and get an accurate picture of the impact of these movies; stated differently, a dollar earned in 1977 was not worth the same, in terms of buying power, as a dollar earned in 1997. So, how does the $461 million taken in by Star Wars since 1977 really stack up against the $601 million earned by Titanic since 1997?

Table 1: Gross Ticket Receipts (Nominal Value)

To directly compare the ticket receipts from the two movies (and any others on the list), we need to first deflate the nominal gross ticket receipts by the consumer price index for the year that the movie was released to obtain the real value of the gross ticket receipts, after adjusting for price level changes. Table 2 lists the top ten movies, ranked in terms of real cumulative box office receipts (1982-84 dollars). Note that after adjusting for inflation, Star Wars brought in more than double the value of box office receipts of Titanic and that neither movie earned as much in real box office receipts as Gone with the Wind, which was released in 1939 and ranked 49^th on the nominal-valued box office receipt list, or Snow White and the Seven Dwarfs, which was released in 1939 and ranked 57^th on the nominal-valued list. In fact, only three of the top ten movies from Table 1 make it into the real-valued top-ten ranking listed in Table 2—most of the movies in Table 2 were released in the 1970s and 1980s, while the majority of movies listed in Table 1 were released in the 1990s or early 2000s!

Table 2: Real Ticket Receipts [100 x (Nominal Ticket Receipts/CPI)]

A caveat is in order. The tables list cumulative box office receipts and many of the films have been re-released over the years. To accurately adjust gross box office receipts for inflation, we need to adjust the nominal box office revenues by the CPI for each year that the movie was released. However, this box office receipt information is not available. Adjusting for price changes in this way might affect the rankings in Table 2, but does not take away from the fact that simply looking at nominal values may distort the real impact of economic activities such as movie-going.