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