Consumer Price Index.

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Presentation transcript:

Consumer Price Index

Nominal vs. Real Prices (or wages)

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

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

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

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 $2,529.00 for full-size Chevrolet

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

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

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

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

Why?

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

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

Inflation: A general rise in prices in an economy.

Deflation: A general decrease in prices in an economy.

Inflation and deflation create disparities between real and nominal prices.

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.

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

Has her allowance increased?

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