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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%.

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Review Question

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Review question

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%


Consumer price index

Consumer Price Index

Week 7


Review question

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?


Review question

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.


Review question

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.


Review question

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.


Review question

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

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 xls1

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 xls2

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


Using cpi to compare cpi xls3

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

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

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

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 problems1

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 problems2

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?


Review question

  • 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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