Reading the Economic News Stats lecture 6

Goals for Lecture 6 Learn to construct a price index number. Learn to use the Consumer Price Index to compare prices at various time periods. Understand other economic indices.

Price Index Numbers Measure of price of something at one time relative to the price of the same thing at another time: Price Index = (current cost / base period cost) * 100

Creating a Price Index (current cost / base period cost) * 100 Gasoline in Portugal 2010: €1,39 Gasoline in Portugal 2005: €1,70 (1,39/1,70) * 100 = 81,8 Gasoline price index (2005 base) = 81,8

Consumer Price Index (CPI) Measures changes in a “market basket” of goods and services Current cost is compared with a base period (2008) cost Best available measure of changes in cost of living in Portugal But doesn’t account for changes that can’t be purchased directly

Consumer Price Index The CPI is how inflation is measured and how its effects are corrected for Sample “market basket” collected monthly across Portugal, including Madeira and Azores CPI base (2008): 100 CPI today: 101,3

Gathering CPI data Data is collected each month Sampling occurs at about retail and service establishments in 41 towns Prices measured on about 902 products About prices gathered 12 categories of goods and services

12 categories Food and non-alcoholic beverages Alcoholic beverages, tobacco and narcotics Clothing and footwear Housing, water, electricity, gas and other fuels Furnishings, household equipment and routine maintenance of the house Health Transport Communications Recreation and culture Education Restaurants and Hotels Miscellaneous goods and services

Different rates by category

Uses of the CPI Evaluate and determine economic policy Compare prices in different years Adjust other economic data for inflation. Determine salary, pensions, poverty assistance and price adjustments.

Criticisms of the CPI Market basket may not reflect current spending priorities If price of an item rises, consumers will substitute another Doesn’t adjust for change in quality Doesn’t take advantage of sale prices

Using the CPI How to compare costs between Time A and Time B: Index A Cost A Index B Cost B =

Using the CPI Index A Cost A Index B Cost B Today’s tuition of $4.972 in 1992 dollars: 140,2 X 208, = =

Using the CPI Index A Cost A Index B Cost B Today’s tuition of $4,972 in 1992 dollars: $ * 140,2 208,5 $4.972 * 0,67 = $3.331 = () = X

CPI Problem If $20,000 was a fair starting salary in 1992, what would be fair today? 218,2 Today 140, ,56 * = $ =

My mom and inflation Mom gives me a birthday check equal to my age. In April 2009, with the U.S. CPI at 213,2, I got $61. This April, with the CPI at 218,0, she sent me $62. Did my $1 raise keep up with inflation?

My mom and inflation My “raise” was 62/61, or 1,6% increase Inflation was 218,0 / 213,2, or 2,3% Need $62,40 to keep up with inflation. MOM CHEATED ME!!

Economic Indicators Leading: Changes up or down tend to happen before ups or downs in the general economy Coincident: Changes coincide... Lagging: Changes follow... Composite indexes: Several indicators combined into one index