Consumer Price Index CPI is the government’s “most important” statistic Announced monthly by Bureau of Labor Statistics Measures changes in prices of goods and services over time Affects elections, economy, government policies, Social Security, pensions According to the Bureau of Labor Statistics: “The CPI directly affects incomes of over 80 million people.”
Consumer Price Index. CPI is the government’s “most important” statistic Announced monthly by Bureau of Labor Statistics Measures changes in prices of goods and services over time Affects elections, economy, government policies, Social Security, pensions - PowerPoint PPT Presentation
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Consumer Price Index
CPI is the government’s “most important” statistic Announced monthly by Bureau of Labor Statistics Measures changes in prices of goods and services
over time Affects elections, economy, government policies,
Social Security, pensions According to the Bureau of Labor Statistics: “The
CPI directly affects incomes of over 80 million people.”
CPI
http://www.bls.gov/news.release/pdf/cpi.pdf How to compare prices from year to year?
“Constant dollars,” “real income” means dollars represent same buying power even though they may describe different years
Basic Conversion Formula: To convert an amount in dollars at time A to the amount with the same buying power at time B:
CPI at time Bdollars at time B = dollars at time A
CPI at time A
Examples – Carleton’s tuition2001: $25,371 vs. 2011: $42,690
Tuition rose nominally from $25,371 to $42,690 Nominal tuition rose (42690-25371)/25371 = 68.26% But the comparison should be made in constant dollars 2011 dollars
$25,371 2001 dollars = $32,224 2011 dollars In constant (2011) dollars, tuition rose from $32,224 to $42,690 Tuition rose in real terms by (42690-32224)/32224 = 32.5%
Examples – Carleton’s tuition2001: $25, 371 vs. 2011: $42,690
We could have done the calculation in constant 2001 dollars instead of 2011 dollars
So $42,690 2011 dollars is equal to $33,611 2001 dollars In constant (2001) dollars, tuition rose from $25,371 to $33,611 Tuition rose in real terms by (33,611-25,371)/25,371 = 32.5% We get the same percentage increase as before because we’re
working in constant dollars
Example – Pizza
1962: The price of a slice of pizza in Boston’s Park Street subway station was 25¢
In today’s prices that’s (25¢) * (224.939 / 30.2) = 186.21¢ = $1.86 A pizza slice that’s $2.50 today rose (2.50-.25)/.25 =
9 = 900% (10 fold) in nominal terms. The price has increased (2.50-1.86)/1.86 = 0.34 =
34% in real dollars
Notes on the CPI
The CPI represents the purchases of people living in urban areas (covers about 80% of U.S. population)
The market basket (goods and services) is determined by the Consumer Expenditure Survey of 29,000 households (they use random sampling)
Prices are also determined by surveys (80,000 prices in 85 cities at a representative sample of stores)
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Exercise: The Minimum Wage• Restate the minimum wage
in 1970 dollars• Make two line graphs on
the same axes, showing the actual wage and the real wage in constant 1970 $$
• Explain what your graph shows about the history of the minimum wage
• How much has the minimum wage increased since 1970, both nominally and in real terms?