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INTRODUCTION

Gas PumpWhy does everything cost so much more now, compared to when your parents were growing up? Have you heard your relatives say that they paid a quarter for a gallon of gas? Or that they paid a dollar to get into the movie? Well, your grandparents or your great-grandparents only paid a dime!
 

TASK

You will be given two problems to figure out. Both problems will have to do with inflation and you will use the Consumer Price Index to come up with your answers.

PROCESS

Read the story, "Bonus Bucks," to introduce inflation.

Penny InflationWhat happened in the story is something we call INFLATION. It means an increase in the average price level in the entire economy. You would think that you could buy more after the teacher doubled everyone's Bonusbucks, but actually you could buy the same amount. That is because EVERYTHING doubled - the Bonusbucks and the price of the coupon. In the first go-around the Blockbuster coupon was going to be priced at around $48. In the next go-around it was going to be priced at around $96.

What do you think would have happened if the teacher had said that a Bonusbuck was worth only $.50? EVERYONE would have had half as much money and the coupon would have sold for $24. That's called DEFLATION. That means that, on average, prices decrease throughout the entire economy.

So how do you know what things were worth back in your parents and grandparents' day? If someone tells you that gas was $.25 a gallon in 1967, that sounds cheap doesn't it? But was it actually cheap for the people who bought it in 1967? There is a way to find out. You can check it out on the Consumer Price Index. The Consumer Price Index provides information that lets you find out about the average prices in a certain year, and also how prices from one year compare to prices from another year.

Go to the What is a Dollar Worth? page and put 1967 in the box for the year. Then put .25 in the box after the words "I bought goods or services for." Now put 2002 in the next box and click on "Calculate." Now you learn that the same goods and services would cost $1.34 in 2002 - which seems just about right! This means that your relative who bought gas for a quarter in 1967 is getting the same good deal in 2002!

INFLATION is the increase of the average price of goods and services. As our story suggests, as long as everyone's wages and salaries go up at the same rate, then INFLATION is hardly noticed by most people. The same people can buy the same amount of stuff!

INFLATION is a real pain, however, if your salary stays the same when the prices increase. Then you cannot buy as much as you did the year before.

Next time your parents want to give you the same allowance they got, remember to tell them about inflation! You can use the Consumer Price Index to figure out what your allowance should be!

CONCLUSION

This lesson introduces the concepts of INFLATION, DEFLATION, and CONSUMER PRICE INDEX. Inflation is the increase in the average price level of the entire economy. Deflation is the decrease in the average price level of the entire economy. The Consumer Price Index (CPI) is used to compare prices in one year with an earlier year.

ASSESSMENT ACTIVITY

Using the Consumer Price Index site, figure these problems out. Bread

If a loaf of bread cost $.35 back in 1962 and a similar loaf costs $1.75 in 2002, would you say that bread prices went up at the same rate as everything else?

TicketsIf a movie ticket cost ten cents in 1930, and a movie ticket costs $7.00 now, would you say that movie prices went up at the same rate as everything else?

EXTENSION ACTIVITY

For another calculator along the same line; go to: Inflation Calculator

Go to "Then and Now: Prices Compare Prices During the Great Depression to Prices Today " and compare the cost of toys and clothes today to the cost of the same items during the Great Depression.

Interview relatives of different ages about prices when they were your age. See if you can see a pattern!