Reference no: EM132271793

Inflation, interest rates, expectations and prices affect every aspect of the economy including international trade and these variable have unintended consequences. Both inflation and unemployment are very important topics in macroeconomics. Often unemployment hits us at a more personal level and suddenly than inflation. Economics research sometimes reveal fascinating facts. Price of first class postage stamp is one such example. Economists always keep track of changes in prices particularly the general price level but the prices of individual products/items do not receive such prominence in the literature or media.

The figure shows the cost of a first-class letter since 1902. The green line is the nominal price--the actual price of a stamp in the dollars (cents) of the year in question. The red line is the real price--the price in terms of the 2002 dollar You can see that the nominal price has gradually increased, but the real price has fluctuated, sometimes rising and sometimes falling. The highest real price 44 cents, occurred in 1975, and the lowest real price 18 cents, occurred in 1920. It is clear that real rate of a stamp was much higher in the past than it is now.

Why do you think that posting a letter in the past was lot more expensive than today?