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### Consumer Price Index

Review Question

At a clothing stand in Korea, I was bargaining with a girl for a shirt. She said it was 33,000 wons. Then she told me she would cut 10% and give it to me for 30,000 wons. I corrected her. What was the actual discount?

(33,000 – 30,000)/33,000 = .0909 = 9.09%

Week 7

CPI

- The value of money changes.
- Our parents talk about things were so cheap back in the day. Things like:
- A can of coke
- A hershey bar
- A bag of chips

- But were they really cheaper?

CPI

- Bureau of Labor Statistics started publishing the CPI in 1917.
- Workers were insisting on higher wages to offset the higher cost of living that resulted from World War I.

- Bureau of Labor Statistics constructs an imaginary "market basket" of goods that an average family needs to lead an average life.

CPI

- Currently, there are approximately 80,000 items in the "basket."
- Price data collected monthly from 22,500 specific outlets and 7,300 specific housing units in 44 urban areas.

CPI

- The CPI is the index number created from the "price" of the entire market basket.
- Currently, the base "year" for the CPI is 1982-84. This means that the average of the CPI over the three years 1982, 1983, and 1984 is set equal to 100.
- The market basket undergoes a major revision roughly every ten years.

- The inflation rate is defined to be the percentage increase in the CPI for a given year.

CPI

- The CPI cannot be used as a cost of living index because it does not take into account changes in:
- Taxes
- health care
- water and air quality
- crime levels
- consumer safety
- educational quality

Using CPI to compare (CPI.xls)

- In 1950 the median family income was $3,319, while in 1998 the median household income was $38,885.
- Were Americans paid more in 1950 or in 1998?
- CPI: 1950 was 24.1, 1998 was 163.0
- In order to compare the two, we need constant dollar value. Two options.
- Compare in 1950’s constant dollar value
- Compare in 1998’s constant dollar value

Using CPI to compare (CPI.xls)

- Let’s see what 1950’s wage is like in 1998.
CPI of 1950 = Dollar Value in 1950

CPI of 1998 Dollar Value in 1998

24.1 = $3319

163 x

x = $22,448

Since the median household income in 1998 was $38,885, we can accurately say that families in 1998 was getting paid more than the families in 1950.

Using CPI to compare (CPI.xls)

- In 1950 the average Major League baseball player salary was $13,228, while in 1998 the average Major League baseball player was $1.4 million.
- Were MLB players paid more in 1950 or in 1998?
24.1 = $13,228

163 x

x = $89,467.39

- Were MLB players paid more in 1950 or in 1998?

Using CPI to compare (CPI.xls)

- Whose wage rose faster? The average family or baseball players?
- Family: $22,448 to $38,885
- Baseball Players: $89,467.39 to $1.4 million

How to calculate Inflation

The CPI in 1997 was 160.5.

In 1998 it was 163.0.

Definition: The inflation rate is defined to be the percentage increase in the CPI for a given year.

Therefore, inflation in 1997 was:

163-160.5 = 1.6%

160.5

A Real Raise?

- You’re getting paid $50,000 in 2005. He tells you that he will give you a $1,000 raise for the next year. Is this really a raise?
So you’ll be getting $51,000. But $50,000 in 2006 constant dollars was:

50,000 = 195.3

x 201.6

x = $51,612.9

So getting a $1,000 raise is not a raise at all.

Walk Through Problems

1. In 1930, Babe Ruth received the then staggering annual salary of $80,000. In 1998, Michael Jordan received the still staggering annual salary of $33 million. Compare their salaries. Who really made more?

Walk Through Problems

2. Open NEA_funding.XLS. Create a column showing 2007 constant dollar value for each year. Then determine whether the funding was greater in 2007 or in 1966.

Walk Through Problems

3. Open CPI.xls. Create a third column that contains the inflation rate for each year. Which 3 years had the greatest inflation rate?

- In Class Activity 10 (about 20 min),11 (about 50 min)
- Please work through both together. Consider it prep for the final exam.

- Homework: Assignment 5
- Revise Part 1 of Final Project

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