Homework Question 8: The Price is Never Right This question is designed to get you to think about doing real, rather than nominal, com- parisons over time. Consider the following. In 1960, tuition at Harvard for a year was $1,520. In 1970, a retiree would earn $1,500 a year in social security benefits. In 1980, the median value of a single-family home sold in the United States was $66,400. In 1990, the price of a gallon of gas was $1.16. In 2000, the price of a first-class stamp was $0.33. In 2010, the minimum wage in Massachusetts was $8/hour a) Using FRED, write down values for the CPI for June in each of the following years: 1960, 1970, 1980, 1990, 2000, 2010 and 2020. Use a general CPI like the one for all urban consumers to make the answers more uniform across students. b) For each of the 6 items mentioned above, calculate the real price of that good for that year in CPI base year dollars. Then calculate the real price for that good for that year in 2020 dollars. c) In fact, in 2020, tuition at Harvard was $52,000; a retiree could expect to claim $18,000 a year in social security benefits; the median value of a single family home sold in the U.S. was $308,000; the price of a gallon of gasoline was $2.15; the price of a first-class stamp was $0.55 and the minimum wage in MA was $12/hour. How do these 2020 prices compare to the real prices (in 2020 dollars) you calculated in c)? d) Calculate the average annual rate of CPI inflation from i) 1960-2020 ii) 1970-2020 iii) 1980-2020 iv) 1990-2020 v) 2000-2020

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Introduction

Consumer Price Index (CPI): The Consumer Price Index (CPI) is a measure of the average change in prices over time in a basket of goods and services that are typically consumed by households. The CPI is used to track inflation, which is the rate at which the general level of prices for goods and services is rising and, consequently, purchasing power is falling.

Real price: Real price refers to the price of a good or service adjusted for inflation, so that the value is expressed in constant dollars. In other words, real prices allow us to compare the price of a good or service across different time periods, taking into account the changes in purchasing power over time.

Average annual inflation rate: The average annual inflation rate is the average rate of change in the general level of prices for goods and services over a specific period of time, usually expressed as a percentage. It measures the average amount by which the general level of prices has risen or fallen over a period of time and is calculated by using the formula: inflation rate = (CPI in the end year / CPI in the start year)^(1 / (end year - start year)) - 1.

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