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Let's Talk Turkey: The Cost of Thanksgiving Dinner

Key Economic Concepts:

• Consumer Price Index (CPI)
• Deflation
• Inflation
• Price
• Price Stability

Description:

How does your family celebrate Thanksgiving? Are you joined by friends and/or family for a special feast? What do you eat? Most American families celebrate Thanksgiving by cooking turkey. According to www.butterball.com, 90 percent of U.S. households eat turkey on Thanksgiving and 50 percent eat turkey on Christmas day.

Lesson Objectives:

Students will:

1. Explain that a price index is used to measure the price level.
2. Explain that a change in a price index represents inflation or deflation.
3. Explain that an increase in the price level indicates inflation while a decrease in the price level is referred to as deflation.
4. Explain that a price index is constructed by comparing current prices of a market basket of items to the prices of the same market basket of items in some base year.
5. Inform students how to create their own price index.
6. Describe some of the events that can cause a change in prices of agricultural

Introduction:

How does your family celebrate Thanksgiving? Are you joined by friends and/or family for a special feast? What do you eat? Most American families celebrate Thanksgiving by cooking turkey. According to www.butterball.com, 90 percent of U.S. households eat turkey on Thanksgiving and 50 percent eat turkey on Christmas day.

Have you ever wondered what it costs to prepare a traditional Thanksgiving meal of turkey, stuffing, sweet potatoes, pumpkin pie, cranberries, and other goodies? The American Farm Bureau Federation (AFBF) has conducted a Thanksgiving dinner price survey for each year since 1986. Surveyed shoppers are asked to report local costs of twelve basic items found on the dinner table on Thanksgiving day. Survey responses are used to determine the average cost of a Thanksgiving dinner prepared for 10 people.

See "Slightly Higher Thanksgiving Dinner Cost This Year ^[1] ."

1. According to AFBF, what was the average cost of Thanksgiving dinner for 10 people in 1998? ($33.09)
2. How does this compare to the 1997 cost? (1997 cost was $31.75. The cost in 1998 was 4.2 percent higher than it was in 1997.)

Resources:

• Slightly Higher Thanksgiving Dinner Cost this Year:  This 2006 American Farm Bureau article discusses rising agriculture prices.
  www.fb.org/index.php?fuseaction=newsroom.newsfocus&year=2006&file=nr1114.html ^[1]
   
• Consumer Price Index, 1913-:  This Federal Reserve Bank of Minneapolis website contains the Consumer Price Index from 1913 to the present day.
  www.minneapolisfed.org/community_education/teacher/calc/hist1913.cfm ^[2]
   
• American Farm Bureau:  News Releases 2007:  This American Farm Bureau page provides an index of the Farm Bureau's press releases for 2007.
  www.fb.org/index.php?fuseaction=newsroom.newsarchives&year=2007 ^[3]

Process:

 A Thanksgiving Market Basket

The twelve components of the survey can be thought of as a Thanksgiving market basket of items. This is similar to the procedure that is used in tabulating the monthly Consumer Price Index (CPI). The CPI measures the monthly change in the cost of a fixed market basket of items that is purchased by the typical urban household. The monthly cost of this market basket is compared to the cost of the same basket during a predetermined base year (this is the year in which the price index is usually set equal to 100 that is used to compare changes in economic variables). By comparing the current CPI to its base-year value, we can see how much the average price level has changed over time. We can also use two consecutive annual CPI measurements to determine the rate of inflation (an increase in the average price level) or deflation (a decrease in the average price level). [Note: The Thanksgiving market basket is an illustrative example of a price index. This index should not be confused with the CPI as the 'basket' is much smaller and thus much less representative.]

See CONSUMER PRICE INDEX, 1913- ^[2] .

The years from 1982-84 are considered the base period in the construction of the CPI. That is, 1982-84 = 100 in calculating the CPI.

1. By what percentage have consumer prices increased since the base period? [66.2 percent. This is simply the percentage increase in the current CPI from its base year value.]
2. What was the annual rate of inflation for 1998? [1.6 percent]
3. How is this calculated? [The percentage increase between the CPI in 1998 and the CPI in 1997.]

Return to "Slightly Higher Thanksgiving Dinner Cost This Year ^[1] ."

Note the market basket of items in the Thanksgiving Day dinner survey. In the following table, you will find the 12 items in the Thanksgiving market basket and their 1998 prices. Ignore the 1999 column for now. Note that, unlike the CPI, the AFBF survey is not intended to be scientific. In addition, while items in the CPI market basket are weighted by their relative importance in household purchases, no such weighting scheme is employed here (although the largest cost item, turkey, does account for over 40 percent of the total cost of the Thanksgiving market basket).

The AFBF has tracked the average cost of the same basket of Thanksgiving dinner items since 1986. This allows us to make meaningful comparisons of the total costs reported in past surveys.

1. What was the cost of the Thanksgiving meal in 1986? [$28.74]
2. How does this compare to the 2006 cost? [The 2006 cost was 24.6 percent higher.]
3. How does the 1998 Thanksgiving dinner cost compare to its value one year earlier? [It was 4.2 percent higher.]

A Thanksgiving Price Index

A price index for a given year is calculated by comparing the cost of the market basket of items in the current year to its cost in the base year. Specifically, a current year price index can be calculated as:

(Current cost of market basket/Base year cost of market basket) x 100

Thus, the price index in the base year equals 100 since the current cost of the market basket must equal the base year cost since they are the same.

This allows us to compile a Thanksgiving price index using past information reported by AFBF. For example, if we use 1986 as the base year, then the Thanksgiving price index equals 100 in 1986 (calculated as {$28.74/$28.74}x100). In 1987, the price index declines to 85.3 (calculated as {$24.51/$28.74}x100).

Activity

Using the information reported in "Slightly Higher Thanksgiving Dinner Cost This Year ^[1] ," compile a Thanksgiving price index. [Note to teachers: You may wish to assign this as homework if you wish. You also may wish to make this a group activity. The correct answers are found in the table below.]

The Thanksgiving price index helps you see that the average cost of Thanksgiving dinner for 10 people has increased by 15.1 percent since 1986. You can also see that there have been many years in which the overall price index has declined (note that this represents "deflation" in the Thanksgiving dinner market). Comparing the Thanksgiving price index to the CPI over the period 1986-1998 leads us to some interesting observations.

Compare CONSUMER PRICE INDEX, 1913- ^[2] to your Thanksgiving price index.

1. Have overall consumer prices increased by more or less than Thanksgiving dinner prices? [More. The increase in the CPI over the 1986-1998 period was 48.8 percent. Calculated as ({[163.1 - 109.6]/109.6}x100). This compares to a 15.1 percent increase in the Thanksgiving price index.]

2. In general, which of the two price indexes has been more variable over the 1986-1998 period? [The Thanksgiving price index. While the CPI has increased every year in a range between 1.6% and 5.4%, the Thanksgiving price index has fluctuated in a range of -10.1% and 16.8%. Teachers: You may wish to ask students to calculate the percentage change in the Thanksgiving price index for each of the years in the sample. The price index declined by 10.1% in 1991 and increased by 16.8% in 1990.]

3. How might you explain that the Thanksgiving price index has been characterized by more variability than the CPI over the 1986-1998 period? [There may be a number of explanations, but one would certainly be that the Thanksgiving price index places a considerably larger weight on agricultural items than the CPI. Food prices are typically much more volatile than non-food prices because changes in local, regional, national, and global events have a relatively large impact on the agricultural sector. Changes in weather, growing conditions, export-import markets, technology, government policies, etc. can have particularly dramatic effects on the agricultural markets. Teachers may ask students to brainstorm about some market events that may cause changes in observed prices in the Thanksgiving price index. Teachers may also note why these changes will not have as large a percentage impact on the CPI.]

Conclusion:

Calculating the Cost of the Thanksgiving
Market in your Home Town

Print out a copy of the table of the Thanksgiving market basket of items in 1998 and 1999 that is found earlier in this EconomicsMinute. Your teacher will split you into groups of four or five people. Your group's project is to go to a local supermarket and collect information on the current market prices of the items in the Thanksgiving market basket. (Teachers: If there are a number of supermarkets in your region, assign a different supermarket to each group.) In collecting prices for the items, select the best in-store price that you can find. Avoid using coupon specials to keep this as simple as possible. Note that the price of miscellaneous items has been calculated for you (it is assumed to have remained unchanged) in order to avoid confusion in replicating the AFBF survey.

When you have collected all of the necessary information to complete the table, calculate the total cost of the market basket. Use this information to calculate the 1999 Thanksgiving price index (assume that 1986 is the base year and the cost of the market basket was $28.74 in that year). You can now determine what the percentage change in the cost of the Thanksgiving dinner for 10 is this year by comparing it to the 1998 Thanksgiving price index! As Thanksgiving day approaches, check the news releases by the American Farm Bureau Federation ^[3] to see how the cost of your local Thanksgiving market basket compares to that reported in the AFBF's annual survey.

Teachers: Possible Extension Activity. Once your students have calculated the cost of the local Thanksgiving market basket, have each group write a news release similar to that of the AFBF release. Choose the best news release and send it to your local paper.

Links Used:

1. ^{^ ^ ^ ^} "www.fb.org/index.php?fuseaction=newsroom.newsfocus&year=2006&file=nr1114.html" - (www.fb.org)
2. ^{^ ^ ^} "The Federal Reserve Bank of Minneapolis: Consumer Price Index, 1913" - (www.minneapolisfed.org) This website contains the Consumer Price Index from 1913 to the present day.
3. ^{^ ^} "www.fb.org/index.php?fuseaction=newsroom.newsarchives&year=2007" - (www.fb.org)

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