Today farmdoc Daily posted an interesting piece on "A New Era in Real Agricultural Prices? ." Read below.
"In posts on March 29, April 5, and April 12 we examined crop and livestock price behavior in the new era that began to emerge in Fall 2006. Each of these posts was based on the behavior of nominal prices, so that the effects of changes in the general price level over time were not considered. Focusing on nominal prices made sense in the previous posts because farmers make marketing decisions using nominal prices. From a broader economic perspective, it is actually real, or inflation-adjusted, prices that matter. A simple example will help to explain why. If someone has $100 of income and purchases a basket of goods for an average price of $10, they can purchase 10 ‘baskets’ of the goods. Now let the person’s income and all prices double, so they have $200 of income and the average price of the basket of goods is $20. Is the person better off? Of course not— since they can still only purchase 10 baskets of the goods."
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