1. Inflation continued practice

2. Weightings are adjusted by region, for example Food is 15% in Boston and 16% in Cinncinatii

3. 1. Fix the basket (basket = 4 hot dogs and 2 hamburgers) 2. Find the price of each good in each year YearPrice of Hot DogsPrice of Burgers 2005$1$2 200623 200734 3. Compute the cost of the Basket of Goods in Each Year 2005 ($1 per hot dog x 4 hot dogs) + ($2 per burger x 2 burgers) = $8 per basket 2006 ($2 per hot dog x 4 hot dogs) + ($3 per burger x 2 burgers) = $14 per basket 2007 ($3 per hot dog x 4 hot dogs) + ($4 per burger x 2 burgers) = $20 per basket

4. 4. Choose One Year as a Base Year (2005) and Compute the Consumer Price Index in Each Year 2005 ($8/$8) X 100 = 100 2006 ($14/$8) X 100 = 175 2007 ($20/$8) X 100 = 250 5. Use the Consumer Price Index to Compute the Inflation Rate From Previous Year 2006 (175 - 100)/100 x 100 = 75% 2007 (250 - 175)/175 x 100 = 43%

5. CPI in year 2 – CPI in year 1 CPI in year 1 X 100 Inflation rate in year 2 = X 100 Price of basket of goods and services Price of basket in base year CPI = Equations for steps 4 and 5

6. CauliflowerBroccoliCarrots 2006$200$75$50 2006 quantity10050500 2007 price$225$120$100 2007 quantity7580500 1. Calculate the price of each veggie in each year 2. Using 2006 as the base year, calculate the CPI for each year 3. What is the inflation rate in 2007?

7. Product # of Units Year 1 price per unit Year 1 total $ Year 2 price per unit Year 2 total $ Year 3 price per unit Year 3 total $ Coleman sleeping bag220 25 27 2 GB Flash drive115 13 12 Adidas Slide sandals118 20 22 Total Basket per year 1. Calculate the price of each product in each year 2. Using Year 1 as the base year, calculate the CPI for each year 3. What is the inflation rate in 2 and year 3? 4. Using Year 2 as the base year, calculate the CPI for each year 3. What is the inflation rate in 2 and year 3?

8. Product # of Units Year 1 price per unit Year 1 total $ Year 2 price per unit Year 2 total $ Year 3 price per unit Year 3 total $ Avocados41 1.25 1.50 E Book110 12 15 Gallon of Gas103 3.75 3.25 Total Basket per year 1. Calculate the price of each product in each year 2. Using Year 1 as the base year, calculate the CPI for each year 3. What is the inflation rate in 2 and year 3? 4. Using Year 2 as the base year, calculate the CPI for each year. What is the inflation rate in 2 and year 3?

9. Dollar figures from Different times Amount in today’s dollars = Amount in year T dollars x Price level today / price level in year T Salary in 2005 dollars = salary in 1931 dollars x price level in 2005 / price level in 1931 $80,000 x (195 / 15.2) = $1,026,316 This is Babe Ruth’s salary in 2005 – Current index is 228, what is his salary worth now?