1. Consumer Price Index

2. Nominal vs. Real Prices (or wages)

3. Nominal price: list or actual cost given current value of money

4. Nominal price: Useful for comparisons within same time period and in same location

5. Problem with nominal prices: Cannot make meaningful comparisons of prices across time periods or locations.

6. Prices of products in 1962: $0.05 for a Hershey bar
$0.05 for a copy of New York Times
$0.04 for first class postage stamp
$0.31 for gallon of regular gas
$0.28 for McDonalds double hamburger
$2, for full-size Chevrolet

7. Why can’t one compare 1962 prices with prices for same or similar products today? More precisely, why are such comparisons meaningless?

8. Real price: Cost relative to general economic conditions in a place and time.

9. A B C
DePaul tuition
20,000
Vacation
5,000
2,000
Corvette
50,000
95,000
25,000
Concert tickets
200
2000 50
Apartment
18,000
900

10. DePaul tuition is more in column C than in column A or B and is less in column B than in column A

11. Why?

12. Why? Because the price of an item only has meaning in terms of what one passes up to buy it.

13. Similarly with wages: Income only can be evaluated in terms of what can be purchased with it.

14. Inflation: A general rise in prices in an economy.

15. Deflation: A general decrease in prices in an economy.

16. Inflation and deflation create disparities between real and nominal prices.

17. Suppose a young person gets an allowance of $10 per week
Suppose a young person gets an allowance of $10 per week. Her allowance allows her a certain level of consumption.

18. Suppose that the prices of goods she normally buys increase by 20% and her father increases her allowance to $11.

19. Has her allowance increased?

20. Answer: Her nominal allowance has increased but her real allowance has decreased.