LSP 120Prices Have Changed!Index NumbersSlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Consumer Price IndexSlide 11Slide 12Slide 13How Do We Use the CPI?Slide 15Slide 16Let’s Try Another OneSlide 18More Uses of CPISlide 20Slide 21Slide 22InflationSlide 24What is Your Salary History?Salary in Constant DollarsLSP 120LSP 120CPICPI(Consumer Price Index)(Consumer Price Index)Prices Have Changed!Prices Have Changed!What do you remember?What do you remember?Try the simple example on Try the simple example on http://facweb.cs.depaul.edu/LSP 120/cpi.htmhttp://facweb.cs.depaul.edu/LSP 120/cpi.htmSo is a $ today the same as a $ yesterday?So is a $ today the same as a $ yesterday?Why do we care? What do you do when Why do we care? What do you do when someone tells you something cost $X twenty someone tells you something cost $X twenty years ago? What about your salary?years ago? What about your salary?Index NumbersIndex NumbersHow is the buying power of $1.00 How is the buying power of $1.00 measured?measured?How can we compare prices of items in How can we compare prices of items in different years?different years?Use a price index or simply an Use a price index or simply an index index numbernumberIndex NumbersIndex NumbersHow do you create an index number?How do you create an index number?Working with a series of years and prices, Working with a series of years and prices, choose a base period and set it to 100.choose a base period and set it to 100.Percentage increases (or decreases) from Percentage increases (or decreases) from this base period are then calculated.this base period are then calculated.For example, consider the average price For example, consider the average price of bread from 1980-1999:of bread from 1980-1999:YearYearAverage Price of Average Price of White Bread per White Bread per pound (US City pound (US City Average)Average)19801980$0.51$0.5119811981$0.53$0.5319821982$0.53$0.5319831983$0.54$0.5419841984$0.54$0.5419851985$0.55$0.5519861986$0.56$0.5619871987$0.55$0.5519881988$0.61$0.6119891989$0.67$0.6719901990$0.69$0.6919911991$0.71$0.7119921992$0.75$0.7519931993$0.75$0.7519941994$0.76$0.7619951995$0.79$0.7919961996$0.88$0.8819971997$0.87$0.8719981998$0.86$0.8619991999$0.89$0.89YearYearAverage Average Price of Price of BreadBreadWhite White Bread Bread Index Index (1980=100)(1980=100)19801980$0.51$0.5110010019811981$0.53$0.5319821982$0.53$0.5319831983$0.54$0.54Let’s make 1980 the base year.We want the index to reflect the ratio of bread prices from a given yearto the price in 1980. ThusPrice in 1981 Index for 1981Price in 1980 = 100or0.53 = Index for 19810.51 100Index for 1981 = (0.53 / 0.51) * 100 = 103.9 (What is this?? “Times more” changed to a percentage!)Similarly, for 1982 we use the ratio back to 1980:Price in 1982 Index for 1982Price in 1980 = 100The complete index number table will look like:YearYearAverage Price of Average Price of White Bread per White Bread per pound (US City pound (US City Average)Average)White Bread White Bread Index Index (1980=100)(1980=100)19801980$0.51$0.51100.0100.019811981$0.53$0.53103.2103.219821982$0.53$0.53104.6104.619831983$0.54$0.54106.5106.519841984$0.54$0.54106.4106.419851985$0.55$0.55108.7108.719861986$0.56$0.56111.0111.019871987$0.55$0.55107.6107.619881988$0.61$0.61120.5120.519891989$0.67$0.67130.8130.819901990$0.69$0.69136.5136.519911991$0.71$0.71139.5139.519921992$0.75$0.75147.4147.419931993$0.75$0.75147.8147.819941994$0.76$0.76149.5149.519951995$0.79$0.79155.5155.519961996$0.88$0.88172.1172.119971997$0.87$0.87171.4171.419981998$0.86$0.86169.1169.119991999$0.89$0.89174.2174.2Index NumbersIndex NumbersThe neat thing about the index is how The neat thing about the index is how easy it is to see the percentage of easy it is to see the percentage of increase of a price from the base yearincrease of a price from the base yearHow much more did bread cost in 1992 How much more did bread cost in 1992 than it did in 1980?than it did in 1980?What is the percentage change from 1989 What is the percentage change from 1989 to 1999? (174.2-130.8)/130.8 = 33.1%to 1999? (174.2-130.8)/130.8 = 33.1%Consumer Price IndexConsumer Price IndexAn index is great for a particular item, but An index is great for a particular item, but what about inflation in general?what about inflation in general?This is where the Consumer Price Index This is where the Consumer Price Index comes into play.comes into play.The Bureau of Labor Statistics created an The Bureau of Labor Statistics created an imaginary “market basket” of goods that imaginary “market basket” of goods that an average family needsan average family needsCategoryCategoryWeightingWeightingHousingHousing39.6%39.6%TransportationTransportation17.6%17.6%FoodFood16.3%16.3%EntertainmentEntertainment6.1%6.1%Medical CareMedical Care5.6%5.6%Education and Communication Education and Communication 5.5%5.5%Apparel and UpkeepApparel and Upkeep4.9%4.9%OtherOther4.3%4.3%Consumer Price IndexConsumer Price IndexThe table on the next slide shows the The table on the next slide shows the official CPI since 1982 (it actually goes official CPI since 1982 (it actually goes back to 1912).back to 1912).Note that the base price was not taken Note that the base price was not taken from one year but taken from the average from one year but taken from the average of three years: 1982 – 1984.of three years: 1982 – 1984.Year CPI (1982-1984 = 100)1982 96.51983 99.61984 103.91985 107.61986 109.61987 113.61988 118.31989 124.01990 130.71991 136.21992 140.31993 144.51994 148.21995 152.41996 156.91997 160.51998 163.0Think of the CPI as the amount the average consumer would have to spend in a given year to buy the same basic goods and services thatone would have to pay $100 for in the base period.How Do We Use the CPI?How Do We Use the CPI?In 1990, gasoline cost $1.16 per gallon (on In 1990, gasoline cost $1.16 per gallon (on average). In 1997, the average price was average). In 1997, the average price was $1.23. Did the cost of gasoline go up or go $1.23. Did the cost of gasoline go up or go down?down?$1.16 and $1.23 are called $1.16 and $1.23 are called current current prices. prices. According to these current prices, it looks According to these current prices, it looks like gas got more expensive. Is this like gas got more expensive. Is this accurate?accurate?Let’s compare the prices taking into Let’s