Reading the Economic News Stats lecture 6. Goals for Lecture 6 Learn to construct a price index...

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: €1,39Gasoline in Portugal 2005: €1,70

(1,39/1,70) * 100 = 81,8Gasoline price index (2005 base) = 81,8

Consumer Price Index (CPI)

Measures changes in a “market basket” of goods and servicesCurrent cost is compared with a base period (2008) costBest available measure of changes in cost of living in PortugalBut 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 forSample “market basket” collected monthly across Portugal, including Madeira and AzoresCPI base (2008): 100CPI today: 101,3

Gathering CPI data

Data is collected each monthSampling occurs at about 16.400 retail and service establishments in 41 townsPrices measured on about 902 productsAbout 139.000 prices gathered12 categories of goods and services

12 categories

Food and non-alcoholic beveragesAlcoholic beverages, tobacco and narcoticsClothing and footwearHousing, water, electricity, gas and other fuelsFurnishings, household equipment and routine maintenance of the houseHealthTransportCommunicationsRecreation and cultureEducationRestaurants and HotelsMiscellaneous goods and services

Different rates by category

www.ine.pt

Uses of the CPI

Evaluate and determine economic policyCompare prices in different yearsAdjust other economic data for inflation.Determine salary, pensions, poverty assistance and price adjustments.

Criticisms of the CPI

Market basket may not reflect current spending prioritiesIf price of an item rises, consumers will substitute anotherDoesn’t adjust for change in qualityDoesn’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 X208,5 4972

=

=

Using the CPI

Index A Cost A Index B Cost B

Today’s tuition of $4,972 in 1992 dollars:

$ 4.972 * 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 Today140,2 20000

1,56 * 20000 = $31.200

=

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% increaseInflation 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 economyCoincident: Changes coincide...Lagging: Changes follow...Composite indexes: Several indicators combined into one index