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):

http://www.boxofficemojo.com/alltime/domestic.htm

1. What are the top 5 grossing movies of all time? Write the Rank, Name, $ amount grossed (box office sales), and year released. Please round to the nearest million. This is the amount of money they made in nominal terms.

2. How much have Star Wars IV: A New Hope (Originally called just Star Wars), Jaws, Gone with the Wind, 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.

You are now going to adjust the films in #1 and 2 above into real (2014) 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 rereleased 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 rereleased, i.e. Star Wars Trilogy, ET, Gone with the Wind, Snow White and the Seven Dwarfs, and others.

Open your web browser to this website that has historical CPI data (or look at the handouts provided):

https://bit.ly/2HjKVn8

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 1982-1984. The 1993 U.S. urban "All Items" CPI rating of 144.5 means that in 1993 products cost 44.5 percent more than they did in 1982-1984.

To calculate this, use the following formula:

(Box office sales (Nominal sales) for a movie ÷ CPI the year the movie was released) x CPI for the most recent full year = Real Box Office Sales

Now look at the website with the historical CPI data to help you understand the following example:

Example: Mrs. Doubtfire came out in 1993 and made $219,000,000. The historical CPI number for 1993 was 144.5. Then use the historical CPI number for the most recent FULL year (236.7 in 2014). ($219 ÷ 144.5) x 236.7 = $358.7 million

So the $219 million that Mrs. Doubtfire made in 1993 would be the equivalent worth of a film that made $358.7 million in 2014.

3. Now adjust the 9 films from questions #1 and 2 into real, current year (2014) dollar terms (Show your work!). Round to 1 decimal.

#1 Movie in nominal terms (from question #1!): ____________________

(Box Office/Nominal sales for that movie__________ ÷ CPI the year it was released ____________) x 236.7 = _____________

4. What is the top film in real terms?

5. Think about the marketing of the newer films and how the studios “sell” them when they are released in the theater and on DVD. Why would the movie studios (Universal, Disney, Sony, Paramount, etc.) of today want to focus on nominal sales figures?

Part B: Nominal vs. Real Interest Rates

For the following questions use this equation (Show your work!):

Present (nominal) 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% (nominal) interest and the inflation rate is currently 1%. What are you making in real terms?

2. Now assume inflation increases to 3%. Now what are you making in real terms? What is the problem? Where else might you invest this money to help correct the problem?

Part C: Nominal vs. Real Wages

For the following questions use the equation below (Show your work!):

Present (Nominal) wage increase - inflation rate = Real wage increase

1. 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% (nominal) 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 wage increases?

2. Now assume that you receive the same nominal raise but inflation increases to 3%. Now how much has your income increased in real terms? What is the problem? To help solve this problem what might you ask your boss for the next time you were up for a raise?