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# Review Question - PowerPoint PPT Presentation

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?