1. Indexation (Correcting For Inflation) compare dollar figures from different points in time. Need Price Levels (CPI) for two different points in time Inflate Babe Ruth’s 1931 salary into 1999 dollars. Value in Year 1 x P level in Year 2 (CPI) P level in Year 1 (CPI)

2. Value in Year 1 x P level in Year 2 (CPI) P level in Year 1 (CPI) $ value start x CPI going to CPI start

3. Ch 23 CPI Practice 1 #3 Mr. G. made $50,000 in 1999 1999 CPI = 173 Inflate his salary to 2012 2012 CPI = 230 50,000 x 230/173 = $66,474

4. Mr. G. made $50,000 in 1999 1999 CPI = 173 Inflate his salary to 2012 2012 CPI = 230 50,000 x 230/173 = $66,474 What if you knew that in 2012, Mr. G’s salary was actually $62,000 So what do we do with this information? Compare increase in price level to increase in salary. From 1999-2012 : Price levels increased 230-173/173 x100 = 32.94 % From 1999-2012: Actual salary increased 62,000-50,000/50,000 x 100 = 24%

5. “Keep Pace With Inflation” … or not… If Mr. G’s salary kept pace with inflation… He should have earned $66,474…. But he was only earning $62,000 What happened to his purchasing power and standard of living?

6. Can go backwards as well…. Compare prices and salaries today to what they might have been in the past.