A.
Read the following selections from the Margin Notes by clicking on each
link.
B.
Watch these presentations. When you click on one of the links below,
a new screen will pop up. Use the scrollbar on the side of the new screen to
navigate.
You need Adobe Reader to view PDF files.
C.
(Optional) Read the following chapters from the textbook.
Chapters 05 - 07
D. The following Optional Links
will help you do better in your course but they are not required.
E.
Activity #1: What Does A Dollar Really Buy? (10 points)
You hear the phrases on the news: "The CPI is up," "inflation
is down." Though your first impulse may be to change the channel, the CPI is
at least as relevant to most consumers' lives as the latest sports scores.
What exactly does a dollar buy? The CPI is what
most people think of as the "inflation rate." It is used by businesses, individuals
and government to make important decisions. What does it mean to you? Let's
use the CPI to see just how much inflation affects our lives.
In this activity you will describe the purpose
of a price index, explain how a price index is calculated, describe the weaknesses
of the CPI, interpret CPI data as a measure of economic health and identify
who is harmed and who is helped by inflation.
We use the CPI, or Consumer Price Index, to
measure price changes in the economy. It is a measure of the average change
in prices paid by urban customers for a "market basket" of goods and services.
These goods and services include food, clothing, shelter, newspapers and CDs.
Items on which the average consumer spends a great deal of money, such as food,
are given more weight, or importance, in computing the index than items such
as toothpaste and movie tickets, on which the average consumer spends comparatively
less. As with any weighted index, the CPI probably won't match your own budget
exactly. The increase in the CPI is what most people think of as the "inflation
rate." It is used by retailers in predicting future price increases, by employers
in calculating salaries and by the government in determining cost-of-living
increases for Social Security.
[A WARNING OF SORTS: This 1st assignment
involves some math and may look a little overwhelming when you begin. No matter
what your specific situation, though, you will do fine if you will take your
time and follow the instructions in the assignment. What you cannot do is to
wait until the last minute and try to rush through the assignment. If you do,
I suspect you will end up confused, frustrated and positive that the material
is beyond you. It's not … but it does require your attention (focus on what
you are doing) and your determination (keep trying until you get it). The material
in this assignment will initially be foreign to most of you since you are unfamiliar
with economic concepts. Once you've completed it, you'll realize that it deals
with fairly low-level math and basic economic ideas. The good news is that it
involves issues we're all interested in given this economy.]
Key Economic Concepts you need to know:
-
Price index: a number used to measure the
price level. The value of the index is set at 100 in the base year or period.
-
Consumer Price Index (CPI): the price index
most commonly used to measure the impact of changes in prices on households.
The index is based on a standard market basket of goods and services purchased
by a typical urban family.
-
Inflation: the rate of upward movement in
the price level for goods and services. By inflation economists mean a sustained
rate of increase in the price level over time. Over the long haul, the fundamental
cause of inflation is the growth rate of the money supply.
A.
Visit the
Consumer Price Indexes
website to learn more about the CPI. As you browse the CPI information, look
for answers to the following questions.
1.
How is the CPI market basket determined?
2.
What goods and services does the
CPI cover?
3.
How are CPI prices collected and
reviewed?
4.
How do you read or interpret an index?
5.
Do the published averages match an
individual's inflation experience?
6.
How is the CPI used?
7.
What are some limitations of the
index?
8.
Will the CPI be revised or updated
in the future?
B.
There is more than one way to construct
a price index. The easiest to understand is probably the weighted average method.
This method compares the total cost of a fixed market basket of goods in different
years. To construct our price index, we will follow the steps below.
1.
To construct any price index, some
previous period is selected as the base year.
The base year always has an index number of 100.
We will use the total cost of our small market basket in 1995 to compare with successive
years. The following table represents the total cost of our market basket
in the base year of 1995.
Market
Basket Food and Beverages |
Base
Year |
Price
|
Quantity
per Year |
Price
X Quantity = Yearly Cost |
Bread, whole
wheat, per lb. |
1995
|
$1.13
|
70
|
$79.10
|
Apples, Red
Delicious, per lb. |
1995
|
$0.77
|
40
|
$30.08
|
Gallon of Milk,
fresh, whole, fortified |
1995
|
$2.47
|
104
|
$256.88
|
Peanut butter,
creamy, all sizes, per lb. |
1995
|
$1.80
|
26
|
$46.80
|
Potato chips,
per 16 oz. |
1995
|
$3.08
|
60
|
$184.80
|
Celery, per
lb. |
1995
|
$0.74
|
40
|
$29.60
|
1995 Total
Dollar Cost of Goods: |
$627.26
|
1995 Index Number: |
100 |
2.
Find the
total dollar cost of the market basket in the current year using
the same approach and the
BLS Average Retail Food and Energy Prices
(Look at US city average, Prices and the latest date.).
Create a table like the one below and enter the year and price for each
item. Note: Quantities will
remain constant, only prices will change for this year.
Market
Basket Food and Beverages |
Current
Year |
Price
|
Quantity
per Year |
Price
X Quantity = Yearly Cost |
Bread, whole
wheat, per lb. |
|
|
70 |
|
Apples, Red
Delicious, per lb. |
|
|
40 |
|
Gallon of Milk,
fresh, whole, fortified |
|
|
104 |
|
Peanut butter,
creamy, all sizes, per lb. |
|
|
26 |
|
Potato chips,
per 16 oz. |
|
|
60 |
|
Celery, per
lb. |
|
|
40 |
|
____ Total
Dollar Cost of Goods: |
|
____ Index Number: |
|
3.
The cost of the basic market basket
in the current year is then expressed as an
index number of the cost of the basic market basket in the base year
(1995), using the following formula.
Index number
=
(Current year cost of market basket
÷
Base year cost of market basket) X
100
You now have the index number of the current year.
4.
Subtract the base year index of 100
from the current year index number you calculated to measure the
percentage change in prices from the base year
(110 – 100 = 10% or 95 – 100 = -5%). For example, a current year index
number of 110 means a 10% increase in price level from the base year. This
is the CPI, the rate of inflation.
[This activity is based on work
from – but no longer maintained by – EconEdLink.]
C.
If you’d like to explore further, visit
any of the following sites.
CSG Network's Consumer Price Index Calculator
Calculator Pro's Consumer Price Index Calculator
Dinkytown's Consumer Prices Calculator
(requires java)
CPI Inflation Calculator
Online CPI Calculator
D.
Feel free to do all or parts of the assignment
as many times as you need in order to feel comfortable with the material. If
you have problems,
don't try to do it all at once. Complete a little here and there as you have
time. Once you have completed the work above to your satisfaction, send me your
answers to the following questions. Your answers should be thorough, specific,
include relevant concepts from the course material and be free of spelling and
grammar errors.
NOTE: You should normally never send your
work as a list … lists encourage brevity rather than depth and don't strengthen
your writing skills. For this assignment, though, I want you to answer
the questions below in numbered order. Your answers should, however,
be thorough, in complete sentences and use correct spelling and grammar. Do
not include the questions when you send your work to me. I know what
they are. Send me only your numbered answers.
-
How is the CPI market basket determined?
-
What goods and services does the CPI
cover?
-
How are CPI prices collected and reviewed?
-
How do you read or interpret an index?
-
Do the published averages match an individual's
inflation experience?
-
How is the CPI used?
-
What are some limitations of the index?
-
Will the CPI be revised or updated in
the future?
-
What is the total dollar cost of the
market basket above for the current year (expressed as a dollar amount)?
-
What is the total cost of the market
basket above for the current year (expressed as an index number of the cost
of the basic market basket in the base year (for example 110))?
-
What is the percentage change in prices
from the base year, the rate of inflation from 1995 to the current
year (expressed
as a percent)?
-
Make specific and detailed connections
to course content. Always include course concepts in your work. If you're
reading your margin notes and watching the presentations, you'll have
plenty of material from which to choose on every activity. This question
is one you will see in every assignment for this course since I expect
you to show me that you are learning the assigned material in the margin
notes and presentations. For this assignment you don't need to answer
this question as a separate question IF you do a thorough job
on the first 11 since those answers will make the connections. If not,
you need to show your mastery of the material as a separate item 12.