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# chapt16.ppt

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### chapt16.ppt

1. 1. Chapter 16 The Consumer Price Index and Government Statistics
2. 2. 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. 3. 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. 4. Index Number <ul><li>An index number measures the value of a variable relative to its value during a base period (the percent change from a base period) </li></ul><ul><li>Index Number = (Value / Base Value) x 100 </li></ul>
5. 5. 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 doesn’t take inflation into account.
6. 6. Fixed Market Basket Price Index <ul><li>An index number for the total cost of a fixed (constant) collection of goods and services. </li></ul><ul><li>The Consumer Price Index (CPI) is a fixed market basket price index used to judge inflation </li></ul><ul><ul><li>has several hundred items that represent all consumer purchases </li></ul></ul>
7. 7. Using the CPI <ul><li>To convert an amount in dollars at time A to the amount with the same buying power at time B, use the following formula: </li></ul><ul><li>Dollars at time B = </li></ul><ul><li>( Dollars at time A ) x ( CPI at Time B / CPI at Time A ) </li></ul>
8. 8. Consumer Price Index
9. 9. 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. 10. Notes on the CPI <ul><li>Represents the purchases of people living in urban areas (covers about 80% of U.S. population) </li></ul><ul><li>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) </li></ul><ul><li>Prices determined by surveys (80,000 prices in 85 cities at a representative sample of stores) </li></ul><ul><li>Does NOT measure changes in the cost of living (measures the “cost of living the same” over time) </li></ul>
11. 11. Government Statistics <ul><li>Policy is based on statistics </li></ul><ul><li>Should be free from political influence </li></ul><ul><li>U.S. agencies that create/use statistics: </li></ul><ul><ul><li>U.S. Census Bureau </li></ul></ul><ul><ul><li>U.S. Bureau of Labor Statistics </li></ul></ul><ul><ul><li>http://www. bls . gov / cpi / (CPI Web Page) </li></ul></ul><ul><ul><li>National Center for Health Statistics </li></ul></ul><ul><ul><li>Bureau of Justice Statistics </li></ul></ul><ul><ul><li>Bureau of Economic Analysis </li></ul></ul><ul><ul><li>etc. </li></ul></ul>
12. 12. Key Concepts <ul><li>Index Number </li></ul><ul><li>Fixed Market Basket Price Index </li></ul><ul><li>Consumer Price Index (CPI) </li></ul><ul><li>Adjusting for buying habits </li></ul><ul><li>Government Statistics </li></ul>