Chapter 16 1

Chapter 16

The Consumer Price Index and Government Statistics

Chapter 16 2

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?

Chapter 16 3

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

Chapter 16 4

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

Chapter 16 5

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.

Chapter 16 6

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

Chapter 16 7

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)

Chapter 16 8

Consumer Price Index

Chapter 16 9

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.

Chapter 16 10

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)

Chapter 16 11

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.

Chapter 16 12

Key Concepts

Index Number Fixed Market Basket Price Index Consumer Price Index (CPI) Adjusting for buying habits Government Statistics