Transcript Chapter 16
Chapter 16
The Consumer Price Index and
Government Statistics
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Thought Question 1
Bob drives a Honda Accord LX. When he
bought it in 1986, it cost about $11,500. A
comparable new Honda Accord LX today costs
about $19,905. How has the price of a Honda
Accord LX changed from 1986 to today?
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Thought Question 2
When Jane arrived at college in 1995, she
hoped to get a job paying $35,000 when she
graduated. If she graduated in 1999, what will
she need to earn in order to buy what $35,000
would have bought in 1995?
What information do we need to know?
Consumer Price Index
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Index Number
An
index number measures the value of
a variable relative to its value during a
base period (the percent change from a
base period)
Index Number = (Value / Base Value) x 100
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Thought Question 1: Answer
Bob drives a Honda Accord LX. When he bought it in
1986, it cost about $11,500. A comparable new Honda
Accord LX today costs about $19,905. How has the
price of a Honda Accord LX changed from 1986 to
today?
Honda Index = (19,905 / 11,500) x 100 = 173.087
This means that the price of a Honda Accord has risen
about 73.087% since 1986, but this does not take
inflation into account.
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Fixed Market Basket Price Index
An
index number for the total cost of a
fixed (constant) collection of goods and
services.
The
Consumer Price Index (CPI) is a
fixed market basket price index used to
judge inflation
– has several hundred items that represent
all consumer purchases
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Using the CPI
To
convert an amount in dollars at time A to
the amount with the same buying power at
time B, use the following formula:
Dollars
at time B =
(Dollars at time A) x (CPI at Time B / CPI at Time A)
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Consumer Price Index
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Thought Question 2: Answer
When Jane arrived at college in 1995, she hoped to get
a job paying $35,000 when she graduated. If she
graduated in 1999, what will she need to earn in order to
buy what $35,000 would have bought in 1995?
1999 Dollars = (1995 Dollars) x (1999 CPI / 1995 CPI)
= ($35,000) x (166.6 / 152.4)
= $38,261.15
So, Jane needs to adjust her desired salary if she wants
the same buying power as what she originally wanted.
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Notes on the CPI
Represents
the purchases of people living in urban
areas (covers about 80% of U.S. population)
Market basket (goods and services) determined by
Consumer Expenditure Survey (29,000 households)
(updated regularly to adjust for buying habits, so is
not actually a “fixed” market basket)
Prices determined by surveys (80,000 prices in 85
cities at a representative sample of stores)
Does NOT measure changes in the cost of living
(measures the “cost of living the same” over time)
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Government Statistics
Policy
is based on statistics
Should be free from political influence
U.S. agencies that create/use statistics:
– U.S. Census Bureau
– U.S. Bureau of Labor Statistics
http://www.bls.gov/cpi/ (CPI Web Page)
– National Center for Health Statistics
– Bureau of Justice Statistics
– Bureau of Economic Analysis
– etc.
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Key Concepts
Index
Number
Fixed
Market Basket Price Index
Consumer
Adjusting
Price Index (CPI)
for buying habits
Government
Statistics
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