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
 adjusted to reflect inflation
                       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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