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MCO 463 Chapter 13 by we9mj6AB


									Reading the
Economic News
Stats lecture 6
Goals for Lecture 6
  Learn to construct a price index
  Learn to use the Consumer Price Index
  to compare prices at various time
  Understand other economic indices.
Price Index Numbers
  Measure of price of something at one
  time relative to the price of the same
  thing at another time:

               Price Index =
  (current cost / base period cost) * 100
Creating a Price Index
  (current cost / base period cost) * 100

  Gasoline in Portugal 2010: €1,39
  Gasoline in Portugal 2005: €1,70
         (1,39/1,70) * 100 = 81,8
  Gasoline price index (2005 base) = 81,8
Consumer Price Index (CPI)
  Measures changes in a “market basket”
  of goods and services
  Current cost is compared with a base
  period (2008) cost
  Best available measure of changes in
  cost of living in Portugal
  But doesn’t account for changes that
  can’t be purchased directly
Consumer Price Index
  The CPI is how inflation is measured
  and how its effects are corrected for
  Sample “market basket” collected
  monthly across Portugal, including
  Madeira and Azores
  CPI base (2008): 100
  CPI today: 101,3
Gathering CPI data
  Data is collected each month
  Sampling occurs at about 16.400 retail
  and service establishments in 41 towns
  Prices measured on about 902 products
  About 139.000 prices gathered
  12 categories of goods and services
12 categories
  Food and non-alcoholic beverages
  Alcoholic beverages, tobacco and narcotics
  Clothing and footwear
  Housing, water, electricity, gas and other fuels
  Furnishings, household equipment and routine maintenance of
  the house
  Recreation and culture
  Restaurants and Hotels
  Miscellaneous goods and services
Different rates by category
Uses of the CPI
  Evaluate and determine economic policy
  Compare prices in different years
  Adjust other economic data for inflation.
  Determine salary, pensions, poverty
  assistance and price adjustments.
Criticisms of the CPI
  Market basket may not reflect current
  spending priorities
  If price of an item rises, consumers will
  substitute another
  Doesn’t adjust for change in quality
  Doesn’t take advantage of sale prices
Using the CPI
How to compare costs between Time A
 and Time B:

    Index A       Cost A
    Index B
              =   Cost B
Using the CPI
     Index A       Cost A
     Index B       Cost B

Today’s tuition of $4.972 in 1992 dollars:
             140,2          X
             208,5       4972
Using the CPI
     Index A =      Cost A
     Index B        Cost B
Today’s tuition of $4,972 in 1992 dollars:
   $ 4.972 * 140,2
             ( 208,5 )=X
       $4.972 * 0,67 = $3.331
CPI Problem
 If $20,000 was a fair starting salary in
 1992, what would be fair today?
     218,2         Today
     140,2         20000

    1,56 * 20000 = $31.200
My mom and inflation
  Mom gives me a birthday check equal
  to my age.
  In April 2009, with the U.S. CPI at
  213,2, I got $61.
  This April, with the CPI at 218,0, she
  sent me $62.
  Did my $1 raise keep up with inflation?
My mom and inflation
  My “raise” was 62/61, or 1,6% increase
  Inflation was 218,0 / 213,2, or 2,3%
  Need $62,40 to keep up with inflation.
Economic Indicators
  Leading: Changes up or down tend to
  happen before ups or downs in the
  general economy
  Coincident: Changes coincide...
  Lagging: Changes follow...
  Composite indexes: Several indicators
  combined into one index

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