# cpispring12 by AJOuKu

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```									Your mom says she made \$25,000 in 1981.
You say, “Big deal.”
She says that was a lot of money back then.
Do you believe her?
CPI
Consumer Price Index
Consumer Price Index
The Consumer Price Index (CPI) is a measure of
the general change in prices over a given amount
of time.
Components of the CPI
Housing                             41.4%
Transportation                      17.8%
Food                                16.2%
Energy                               8.2%
Medical Care                         6.4%

Apparel and Upkeep                   6.1%

Other                                3.9%
Inflation
Calculate inflation from 2005 to 2006

New - Old
 % inflation
Old

You calculate inflation from 1929 to 1930
We found that the inflation rate from 2005 to 2006
was 3%. If your boss in 2005 said that over the
next year you were going to get a 2% raise
would that make you smile? Why or why not?
Ratio of Prices
Ratio of two indices 2006 to 2005

CPI 2006 201.6
       1.03
CPI 2005 195.3

On average consumer goods of 2006 cost 1.03
times that of 2005.
Ratio of Prices
Ratio of two indices 2010 to 1981
CPI 2010 218.1
      2.4
CPI1981 90.9
On average consumer goods of 2010 cost 2.4
times that of 1981.
So if your mom was making \$25,000 in 1981, she
would equivalently need to be making:
2.4*25,000 = \$60,000
in 2010 to account for inflation
Converting to Constant Dollars

NewCPI new constant dollar price or salary

OldCPI        old price or salary

NewCPI
*(old price or salary)  new constant dollar price or salary
OldCPI
CPI
We can use the CPI to adjust prices (constant
dollars) so that we can accurately compare them.
Actual Dollars = an absolute dollar value
Constant Dollars = dollars that have been
Converting to
Constant Dollars

In 1930 Babe Ruth made \$80,000 per year. Alex
Rodriguez currently makes \$32 million. In
terms of actual dollars Rodriguez is making a lot
more. But in terms of constant dollars did Ruth
make more or less than Rodriguez?
Converting to Constant
Dollars
Find the CPI values for your two years (2010 and
1930) and convert Babe’s salary to 2010 constant
dollars
NewCPI
*old salary  new constant dollar salary
OldCPI
2010CPI
*1930Salary  2010 Constant Dollar Salary
1930CPI

218.1
*\$80, 000  \$1, 044, 790
16.7
But in terms of constant dollars did Ruth make
more or less than Rodriguez?

\$1,044,790  \$32,000,000
“Expensive”
You can check to see if some good increased in
price at the same rate as the CPI 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.
Convert the 1981 price to 2005 constant dollars.
2005CPI
*1981Price  2005 Constant Dollar Price
1981CPI

195.3
* \$1.38  \$2.96            \$2.96  \$2.30
90.9
“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.
Put another way, the \$1.38 you were spending in
1981 was affecting you more than the \$2.30 you
are spending in 2005.

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