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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

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

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


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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