1. Copyright © 2008 Pearson Education, Inc. Slide 3-1 Index Numbers An index number provides a simple way to compare measurements made at different times or in different places. The value at one particular time (or place) must be chosen as the reference value. 3-D *Tells you what percent the value is of the reference value

2. Copyright © 2008 Pearson Education, Inc. Slide 3-2 Index Numbers Example: Suppose the current price of gasoline is $3.20 per gallon. Using the 1975 price of 56.7¢ as the reference value, find the price index number for gasoline today. 3-D The current price is 564.4% of the 1975 price.

3. Copyright © 2008 Pearson Education, Inc. Slide 3-3 The Consumer Price Index The Consumer Price Index (CPI) is based on an average of prices for a sample of more than 60,000 goods, services, and housing costs. ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt 3-D

4. Copyright © 2008 Pearson Education, Inc. Slide 3-4 Consumer Price Index (pg. 190) 3-D

5. Inflation The rate of inflation from one year to the next is usually defined as the relative change in the Consumer Price Index. “If I had to populate an asylum with people certified insane, I’d just pick’em from all those who claim to understand inflation.” -Will Rogers Copyright © 2008 Pearson Education, Inc. Slide 3-5

6. Copyright © 2008 Pearson Education, Inc. Slide 3-6 Adjusting Prices for Inflation Given a price in dollars for year X ($ X ), the equivalent price in dollars for year Y ($ Y ) is 3-D where X and Y represent years.