Poverty: Good News or Bad News? According to Census Bureau figures, in 1990 13.1% of the U.S. population lived in poverty, while only 12.4% of the population lived in poverty in 2000. Assume populations of 249 million and 281 million in 1990 and 2000, respectively. a. Did the actual number of people living in poverty increase or decrease between 1990 and 2000? Show your work. b. Is the news about poverty good or bad? Justify your answer.
32.6 million people in 1990 • 34.8 million people in 2000
Consumer Price Index • Prices typically go up – inflation • Guess the price of a Hershey’s Bar in 1962… • Right…$0.05 • Now? • Right … $1.00
Some things regarding inflation • Compare other prices of the time • Prices don’t go up consistently • Consider better products Most important… wage increases!
Index Numbers!!! • Ratio of a quantity to its value at a base period. • Base period = 100, easy % increases
White Bread Index • Choose a base year and set the index to 100
Bread Index What is the percentage change from 1980 to 1996?
Buying power • How do you arrive at this? • “Bundle” of goods
Average Dollar Price So if goods and services cost on average $130.70 in 1990 then goods and services cost $148.20 dollars in 1994
Ratio from year to year • If we wanted to find the ratio of the cost of goods in 2003 to those in 1991:
Constant Dollar Let’s say in you’re Aunt tells you that in 1990 she was making $50,000. Let’s see what that translates to for 2006 dollars… $130.70 in 1990 is equivalent to $201.60 in 2006.
Constant Dollar If prices were 1.54 times as large in 2006 then multiply the initial wage by this value.
“Expensive” • You can check to see if some good increased in price at the same rate as the bundle or at a slower or faster rate. • For example, the price of gasoline in 1981 was $1.38 per gallon on average. In 2005, it averaged $2.30. Was gasoline more expensive or less expensive in 2005?
“Expensive” • Need to take inflation into consideration. • Let’s convert one of the prices to the other year's constant dollars. • Let’s convert the 1981 price of $1.38 to its equivalent in 2005 constant dollars.
“Expensive” • What this tells us is that $1.38 in 1981 was equivalent to $2.96 in 2005. $2.96 is the 1981 price in constant 2005 dollars.
“Expensive” • Since $2.96 is more than the $2.30 that people were actually paying in 2005, gasoline was more expensive in 1981 than it was in 2005 after we account for inflation using constant dollars.
“Expensive” • Compare the price of gas in 1990 which was $1.16 to the price of gas in 2000 which was $1.51. Again, nominally, the price in 2000 is larger than the price in 1990, but that is to be expected. When did it "feel" more expensive to buy gas? Convert the 1990 price to its 2000 constant dollar equivalent by multiplying the 1990 price by the ratio of the CPI values in 2000 and 1990:
Inflation Rate • The inflation rate is defined as the percentage change in the CPIs from the previous year to the next. For example, the inflation rate in 1996 was