Consumer Price Index

Something that you can buy today for $1 would have cost (on average) 7 cents in The decline in the value of money is called inflation.

How is the “buying power of $1” measured? Consumer Price Index= cost of a standard bundle of goods that cost (on average) $100 in the years

What is a “standard bundle of goods?” The CPI is calculated every year by by determining how much the same standard bundle of goods that cost $100 in costs in that year.

Using the CPI you can determine (on average) what something that costs a certain amount of Dollars in one year would cost in another year. This allows you to compare prices over time. For example, if the CPI in year X is 1.5 times larger than the CPI in year Y, than things will cost, on average, 1.5 times more in year X than they did in year Y. Salaries will also be, on average, 1.5 times higher in year X. If something cost $100 in year Y and $150 in year X, than it is equally affordable in both years.

Average Movie Ticket Prices YearCPI : $ : $6.88 CPI in 1990: CPI in 2007: Convert price in 1990 to “Constant 2007 Dollars”: Step 1: divide 2007 CPI by 1990 CPI: 207.3/130.7=1.59 A movie ticket in 1990 cost $6.71 in Constant 2007 Dollars Step 2: multiply the 1990 price by the result of the division: $4.23*1.59=$6.71 Movie Tickets were slightly more affordable in 1990 than they were in 2007 CPI in 2007CPI in 1990

Superbowl Ads (30 seconds) YearCPI …… : $78, : $2,600,000 CPI in 1970: 38.8 CPI in 2007: Convert the price in 1970 to “Constant 2007 Dollars”: Step 1: divide 2007 CPI by 1970 CPI: 207.3/38.8=5.34 A Superbowl ad in 1970 cost $417,806 in Constant 2007 Dollars Step 2: multiply the 1970 price by the result of the division: $78,200*5.34=$417, Superbowl ads were much more affordable in 1970 than they were in 2007 CPI in 2007CPI in 1970

One Gallon of Gasoline (Regular) 1970: $ : $3.27 CPI in 1970: 38.8 CPI in 2008: Your turn!

Converting an entire table with prices for a range of years to constant Dollars Example: Cost of a standard first class letter from 1980 to 2006

CPI Table Make sure to paste the values into the correct rows, so that the cost of a letter and the CPI for a given year are listed next to each other. Copy the CPI values … … and paste them here

CPIs for the appropriate years 1993 Postage in 1993 CPI for 1993

=B2*$C$28/C2 B2=cost in “real” Dollars C28 = CPI for 2006 C2 = CPI for 1980 Calculating the cost in constant 2006 Dollars Dollar symbols are needed before the C and the 28 so that when you fill in the Constant Dollars column Excel will use C28 in each row (instead of C29, C30, …). This is called an “absolute cell reference.” You can turn a normal “relative” cell reference into an absolute cell reference by pressing F4 (command-t on a Mac) after you enter C28 in the equation.

Because we are converting to Constant 2006 Dollars, Real Dollars and Constant Dollars are the same in 2006