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1 CHAPTER 16 CHAPTER 16 CONSUMER PRICE INDEX CONSUMER PRICE INDEX Index number: Describes the percent change from a base (comparison) period. Use index points to be able to compare ‘apples and oranges’. Anything can be put into an index number. Most frequently, it is the cost of a service/good. Formula for index number: value x 100 base value Index number for base value is always 100.

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2 Example: Price of gasoline Tuesday is base value: $.70 Thursday is value: $.77 index number:.77 x 100 = 110.70 Gasoline’s index number for Thursday is 110% of the base value (of 100). index points Therefore, there has been an increase of 10% in index points since Tuesday.

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3 Usually, an index number does not reflect the price change of one item; most often it reflects the change in a ‘basket of services/goods’ over a period of time. fixed These baskets are fixed; once you determine the items and quantities in the basket for the base year they cannot change for the comparison years.

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4 Example of a fixed market basket price index. Gerry’s fixed market basket: 2001 quantity 2001 price 2001 cost Good/service 2001 quantity 2001 price 2001 cost Poutine100$1.75$175.00 Gas1000 liters $.73$730.00 Cell1$40.00 mth $480.00 Total cost: $1385.00 Gerry’s expenses for 2001 were $1385.00.

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5 2003 quantity 2003 price2003 cost Good/service 2003 quantity 2003 price2003 cost Poutine100$1.85 $185.00 Gas1000 liters $.75$750.00 Cell1$45.00 mth $540.00 Total cost $1475.00 Gerry’s expenses for 2003 are $1475.00. Notice: The quantity stayed the same for both years; this is the fixed market basket - it cannot change. Index number for 2003: 1475 x 100 = 106.5 1385

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6 Gerry’s index points rose 6.5% in two years. Consumer Price Index The most famous index number for a fixed market basket of goods is the Consumer Price Index. It is also called inflation, or the percent increase for living expenses given a fixed basket. Important that pensions be indexed to the CPI; go up as much as the CPI to not lose purchasing power. CPI is used to establish the relative value of money (the purchasing power) for two different time periods.

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7 2001 Canadian CPI Weights

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8 If inflation (CPI) goes up from year to year and salary does not, then we don’t have the as much purchasing power. If inflation goes down and salary stays stable, then we have more purchasing power. We will use the Canadian CPI. Base year is 1992 = 100 index points. Formula: $ time B = $ time A x CPI time B CPI time A We are changing the money value of time A into its value at time B.

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10 Example: A person makes $120 per week in 1998. What salary would it take to have the same purchasing power in 2003. $ time 2003 = $120.00 x 122.7 = $135.58 108.6 If salary did not increase during those years: $120 x 52 = $6240 (1998) $135,58 x 52 = $7050.17. (2003) Lost $810.16 in purchasing power in the 2003 year. This does not take into account the loss of purchasing power in the previous years.

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11 Example 2: An apartment cost $450 in 2000. Today that apartment costs $650. Calculate what the apartment would cost if inflation was the only rent increase factor. $ time 2003 = $450 x 122.7 = $495.64 111.4 In 2003, the apartment costs $650; given inflation it should cost $495.64. The difference, $154.35, is due to ‘supply and demand’ factors. Bank of Canada: Calculation Web pageCalculation Web page

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12 Exercises 1. Suzy is a woman of habits. Her fixed market basket for an afternoon with friends is: Good/service 2003 quantity 2003 priceTotal cost Expresso 2 2.004.00 Croissant 1 2.752.75 Movie 1 10.00 10.00 16.75 In 2004, all prices increased by 10%. 1a) Calculate Suzy’s fixed market basket price index for 2004.

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13 2. If a person earned $10.00 per hour in 1980, how much would they have to earn in 2002 to keep the same purchasing power?

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14 3. In 2001, the minimum wage in Quebec was $7.00. How much would you have to earn in 2004 to keep the same purchasing power?

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Chapter 6 Measuring the price level

Chapter 6 Measuring the price level

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