1. Chapter 161 The Consumer Price Index and Government Statistics

2. Chapter 162 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?

3. Chapter 163 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

4. Chapter 164 Index Number u 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

5. Chapter 165 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.

6. Chapter 166 Fixed Market Basket Price Index u An index number for the total cost of a fixed (constant) collection of goods and services. u 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

7. Chapter 167 Using the CPI u To convert an amount in dollars at time A to the amount with the same buying power at time B, use the following formula: u Dollars at time B = (Dollars at time A) x (CPI at Time B / CPI at Time A)

8. Chapter 168 Consumer Price Index

9. Chapter 169 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.

10. Chapter 1610 Notes on the CPI u Represents the purchases of people living in urban areas (covers about 80% of U.S. population) u 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) u Prices determined by surveys (80,000 prices in 85 cities at a representative sample of stores) u Does NOT measure changes in the cost of living (measures the “cost of living the same” over time)

11. Chapter 1611 Government Statistics u Policy is based on statistics u Should be free from political influence u U.S. agencies that create/use statistics: –U.S. Census Bureau –U.S. Bureau of Labor Statistics http://www.bls.gov/cpi/http://www.bls.gov/cpi/ (CPI Web Page) –National Center for Health Statistics –Bureau of Justice Statistics –Bureau of Economic Analysis –etc.

12. Chapter 1612 Key Concepts u Index Number u Fixed Market Basket Price Index u Consumer Price Index (CPI) u Adjusting for buying habits u Government Statistics