How Much Does it Cost Now?

STUDENT'S VERSION

This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student

INTRODUCTION

In 1976, the minimum wage was $2.30. How does the minimum wage in 1976 compare to the minimum wage in 2008? A house cost $83,000 to build in 1980? After adjusting for inflation, what would that house cost today? In this plan, you'll inflate prices from the 70s and 80s into prices today and compare the relative prices.

In this lesson, you will find that the $2.30 minimum wage in 1976 would have to be approximately $12.63 to buy a comparable amount of goods in 2009. At the time this lesson was created, the minimum wage is $7.25.

Are minimum wage workers better off now than they were in 1976 in terms of how much their wage can buy? Are new homes fairly priced relative to 1980?

A house that cost $83,000 to build in 1980, (after adjusting for inflation) would cost $214,550 in 2009.

This lesson provides you the opportunity to make similar comparisons and inferences about prices between two different time periods. [NOTE to student: An annualized version of the January 1999 Consumer Price Index (CPI) was used in the calculations above.]

TASK

In this lesson, you will convert prices from one year to another and explain the limitations of comparing prices from two time periods.

PROCESS

1. Review how to inflate prices between two time periods.

2. Find a computer and navigate to the St. Louis Federal Reserve Bank FRED database .

Click "Browse"; select "Consumer Price Indexes CPI"; select CPIAUCNS for "Consumer Price Index for All Urban Consumers: All Items. Download the data in the graph to an Excel spreadsheet. For future use doing the kind of analysis being preformed in this lesson, save your spreadsheet to your desktop.

3. Complete the worksheet "How Much Does It Cost Now?"

4. Some products like the iPod were not invented in the 1980s. Discuss some of the limitations of making price comparisons between two time periods.

CONCLUSION

Can you calculate how much a $15 Walkman in 1979 would cost in today's prices? How does the price of a Walkman in 1985 compare to a $65 MP3 player in 2009? Suppose that you hear your father say that the minimum wage was $2.35 in 1977 when he was in high school. How does the minimum wage compare to the current $7.25 minimum wage in 2009?

When working with data from two different time periods, data must be compared data in the same terms. By using the formula in this lesson you can compare the prices of goods from two different time frames. This provides you with an historical sense of economic theory and its application and a comparison to the present.

ASSESSMENT ACTIVITY

1. When John F. Kennedy became president in November, 1961, his salary was $100,000. After adjusting for inflation, what would we expect his salary be in 2009 dollars?EGGS

2. The price of a dozen eggs in January, 1981 was $.90. After adjusting for inflation, what can we expect a dozen eggs to cost in 2009 prices? 

3. stampIn April, 1989 the price of a first-class stamp was $.25. After adjusting for inflation, what would the stamp cost in 2009 prices? 

EXTENSION ACTIVITY

1. Changes in the CPI coincide with changes in the inflation rate.  During times of an increasing CPI or inflation, real buying power decreases.  For example, suppose Juan earns $10 per hour and the CPI is 1.  Then Juan's wages really buy $10 worth of goods.  If Juan's wage rate stays at $10 but the CPI doubles, then Juan's real buying power is only $5 worth of goods.  It may come as a surprise that during a deflationary time, Juan's earning power would actually increase!

Your teacher may suggest that you read this article, Measuring Worth , for more information on purchasing power.

2. Convert the CPI to 2009 prices. Use your Excel spreadsheet and use 2009 as the base year. The index in the base year is 1.00 (215.351/215.351 = 1)

3. Your father says, "When I was your age, I worked for peanuts. Now, I see young people starting out making a lot more than I did. I wish I could be starting out now." How would you determine if your father would have been better off or worse at the current price levels?