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On January 26, 2010, the film Avatar officially topped Titanic as the top-grossing film of all-time at the box office. However, the following day, Forbes.com published an article entitled Is Avatar Really King of the Box Office? The article explains how using calculations such as the Consumer Price Index (CPI), one can show how the film Gone With the Wind has grossed more when the value of the box office receipts are adjusted for inflation.

KEY CONCEPTS

Causes of Inflation, Consumer Price Index (CPI), Deflation, Gross Domestic Product (GDP), Inflation, Real vs. Nominal

STUDENTS WILL

In this lesson students will examine the causes behind and the consequences of inflation. Students will learn (1) how to distinguish between real and nominal or adjusted and unadjusted data; (2) how adjusted and unadjusted prices, such as those for tickets to movies can change our interpretation of data; and (3) to use the Consumer Price Index and the GDP Deflator in order to calculate how changes in the supply of money and credit affect prices. 

 

INTRODUCTION

On JMoviesanuary 26, 2010, Avatar officially topped Titanic as the top-grossing film of all-time at the box office. Is Avatar Really King of the Box Office?  (site may take extra time to load). While it is true that in current dollars Avatar has grossed more than the any other film, when those figures are adjusted for inflation another film, Gone With the Wind, remains number one. Inflation is defined as a sustained rise in the general price level of all goods and services. One underlying cause of inflation is an increase in the money supply, as more money enters into the economy, all other things constant, the purchasing power of each individual (marginal) dollar falls and subsequently buys less if output remains the same.

RESOURCES

  • All-time Domestic Box Office Receipts (Adjusted): Contains the top 100 movies, which studio produced them, the year of their release, as well as the unadjusted gross.
    boxofficemojo.com/alltime/adjusted.htm
     
  • GDP Tutorial: Students can use the following interactive activity to learn about GDP; real vs. nominal, and the GDP deflator.
    GDP Deflator Tutorial

PROCESS

Students will start by watching a short trailer to the film Avatar. After using the film trailer to introduce or re-introduce the film to students, they should then read the Forbes article, Is Avatar Really King of the Box Office ? (Either print off copies of the article for students or summarize the article for students). The point of the article is to introduce students to the discrepancy that exists between the purchasing power of the dollar between one year and another.

Avatar’s total box office receipts according to BoxOfficeMojo is $760,507,625 domestically. However, when this figure is adjusted for inflation by adjusting the 2011 ticket price to the 1939 ticket price, the year which Gone With the Wind was released, Avatar drops to number 14 on the list with an adjusted gross of $22,368,700. Gone With the Wind was released multiple times over the years and has totaled almost 200 million in total box office. When the total for Gone With the Wind is adjusted for inflation by calculating the number of tickets sold against the cost of a ticket to a movie today, the total gross is a $1,588,070,800. The average cost of a ticket to see Gone With the Wind in 1939, was just $0.23. Today, the average ticket cost $7.86. BoxOfficeMojo estimates that the number of tickets sold for Gone With the Wind was over 200 million and that Avatar sold just under 100 million.

Why is there such a difference in the prices for goods and services in the 1930s as opposed to the prices that we see today? The short answer to this question is inflation. Inflation is defined today as a rise in the general price level of all the goods and services produced in an economy. The rise in prices can be attributed to an increase in the amount of money and credit relative to the available goods and services. There are other causes of inflation, which are attributed to changes in supply and demand for goods and services. Cost-push inflation is inflation caused by rising costs of production. Demand-pull inflation is inflation caused by increasing demand for output or “too much money chasing too few goods.”

Student will better understand the general idea of inflation after watching a quick 1-minute video from investopedia.com . Now that we have covered the basics of inflation, ask students the next question, how do we measure the rate of inflation? When new money and credit is created and circulates in the economy it does not affect the prices of all goods and services equally. That is to say that if the amount of money is doubled, that does not necessarily mean that everything will cost twice as much. This fact makes it necessary for us to have some measure of how the prices are changing as new money and credit enters in the economy. The most common measure of price inflation used today is known as the consumer price index or CPI. The consumer price index is a measure is used to calculate the changes in the price level of everyday goods and services which are purchased by households. The CPI consists of a basket of market goods and services, which the prices of which are weighted and averaged and then compared against different time periods. For further explanation, please visit the Minneapolis Federal Reserve website.

A second commonly used measure of the rate of inflation is the GDP Deflator. The deflator is based of a Gross Domestic Product or GDP, which is the market value of all final goods and services produced in a country in a calendar year. GDP attempts to represent the total amount of output of a country in a given year. The original figure or the nominal GDP is in simplified terms a multiplication of the all the goods and services sold that year multiplied by the prices in which they are sold. Prices fluctuate in a market economy, in order to calculate the actual growth in output known as real GDP, it becomes necessary to adjust the nominal figure into real terms. Real GDP is calculated by multiplying the quantity of goods sold by a constant price level, usually a given base year. The GDP deflator is used then to calculate the rate of inflation between one year and another. Learn how to calculate Nominal GDP, Real GDP and the GDP Deflator here.

The website Box Office Mojo uses a different method than to calculate their adjusted box office gross. Instead of being concerned with a basket of goods or a measure of the overall price level, they look specifically at the average ticket price and adjust their box office gross figures according to an estimated amount of tickets sold. Because there is no way to perfectly calculate the effects of inflation on the price level, even adjustments made by CPI and the GDP deflator are imperfect as there are at all times a number of different factors that could lead a discrepancy in prices.

ASSESSMENT ACTIVITY

reel and ticketHave student complete the following two worksheets.

1. Using information found at boxofficemojo.com , have students complete the following questions. (Answers listed below) 

Process Questions for Avatar Lesson (All data is based on statistics taken on March 15, 2011, data is subject to change. Teachers are encouraged to re-check answers.)


Process Questions for Avatar Lesson (Worksheet or Open-Ended)- [All data is based on statistics taken on March 15, 2011, data is subject to change. Teachers are encouraged to re-check answers]

1.     Gone With the Wind is #1 in Domestic Grosses (Adjusted for Ticket Price Inflation) all-time, but where does it fall on the Unadjusted list? [110th]

2.     What is the difference between Gone with the Wind’s Unadjusted and Adjusted Domestic Grosses?[1,588,070,800-198,676,459=1,389,394,341]

3.     Avatar is #1 all-time for Unadjusted Domestic Grosses, where does it fall on the Adjusted list? [14th]

4.     What is the difference between Avatar’s Unadjusted and Adjusted Domestic Grosses? [$779,014,700-$760,507,625= $18,507,075]

5.     How many of the Top 100 Domestic Grosses (Adjusted for Ticket Price Inflation) movies were produced after 2000? [19]

6.     How many of the Top 100 Domestic Grosses (Unadjusted for Ticket Price Inflation) movies were produced after 2000? [72]

7.     What might be a demand-pull inflation for the having such a large number of films in the Top 100 all time list having been produced since 2000? [Answer will vary response should be similar to: New technologies such as digital 3-D and computer animated family pictures have changed consumer's subjective evaluations about the value of seeing a movie upward causing a rise in the price level of seeing a movie. Or a substantial rise in people's nominal incomes has driven a rise in nominal ticket prices, however when the new prices are adjusted for inflation it turns out that the number of tickets sold has not risen substantially just ticket prices have increased.]

8.     Star Wars, E.T. and Titanic are only three movies that appear in the Top 10 on both lists, what is a possible explanation for this? [Response should be similar or close to: These three movies are in both categories because they sold enough tickets at a high enough unadjusted ticket price to keep them in both top 10 lists. However, as ticket prices continue to rise one should expect that these films would gradually fall out of the all time unadjusted Top 10 just as Gone With the Wind and other older films with higher ticket sales have done. ]


Test students knowledge of GDP calculation by having them complete the following worksheet. The worksheet creates a four good economy of a movie theater and asks students to calculate a nominal and real GDP, and a GDP deflator for the movie theater. On a separate sheet of paper have students answer the following questions. 

1. Nominal Revenues:
[Year One: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5 x 2000) + (3x1200) + (2x1500) + (2x1000) = $18,600
Year Two: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5.50 x 1800) + (3.25x1200) + (2.50x1400) + (2.50x900) = $19,550
Year Three: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(6.50 x 1600) + (4x1000) + (2.75x1300) + (2.5x1000) = $20,475
Year Four: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(7 x 1500) + (4.25x1000) + (3x1300) + (2.5x1000) = $21,150]


2. Real Revenues:
[Year One: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5 x 2000) + (3x1200) + (2x1500) + (2x1000) = $18,600
Year Two: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5 x 1800) + (3x1200) + (2x1400) + (2x900) = $17,200
Year Three: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5 x 1600) + (3x1000) + (2x1300) + (2x1000) = $15,600
Year Four: Tickets (PxQ) + Popcorn (PxQ) + Medium Soda (PxQ) + Candy (PxQ)
(5 x 1500) + (3x1000) + (2x1300) + (2x1000) = $15,100]


3. Deflator:
[Year One: (18,600/18,600)x100= 100
Year Two: (19,550/17,200)x100= 113
Year Three: (20,475/15,600)x100= 131
Year Four: (21,150/15,100)x100= 140]


4. Inflation:
[Year One to Year Two: {(113/100)- 1} x 100% = 13% rise in prices
Year One to Year Two: {(131/113)- 1} x 100% = 16% rise in prices
Year One to Year Two: {(140/131)-1} x 100% = 6.9% rise in prices
Overall increase from Year One to Year Four : {(140/100)-1} x 100% = 40%]


5. Summary:
[Answer will vary. A correct summary should say something about how the increased
revenues were due to increased prices and not increased output. The price inflation could
mislead the theater owner into thinking the business is doing better year to year when
actually the number of customers he has is decreasing. Further price increases may result in
a drop in revenue as customers rebel against the ever-rising prices.]

CONCLUSION

Students should always be alert to the reasoning behind changes in prices for different goods and services. Under a system of flexible prices, the price of any product is always changing based on changes in supply and demand (think of day-to-day changes in the prices of stocks and commodities). Money is a medium exchange used in a market economy operating under a price system. Changes in prices communicate information to buyers and sellers about the relative scarcity or abundance of goods. Low prices are a sign of relative abundance and high prices signal relative scarcity, each tells consumers and producers how they should model their behavior as they go about employing resources to meet their desired ends. Just as the value of goods and services respond to changes in supply and demand, money is also subject to similar changes. The underlying cause of a sustained increase in the prices for all goods and services in the economy is often an indicator of excessive money creation. Inflation measures such as CPI and the GDP Deflator are helpful in gathering information in order to give one a general idea of price level from one year to the next. However, any measure of inflation is imperfect in one way or another.

EXTENSION ACTIVITY

For other lessons related to inflation please check out these other Econedlink lessons.

1. Was Babe Ruth Underpaid?

2. What Causes Inflation?

3. When Gas Was A Quarter!

4. Philips Curve

EDUCATOR REVIEWS