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Assignment 1 Solutions

This document analyzes the real price of butter from 1980 to 2001 using Consumer Price Index data. It calculates the real price in 1980 and 1990 dollars, finding the real price decreased from 1980 to 2001 in both cases. The percentage change is the same regardless of using 1980 or 1990 as the base year.

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20 views

Assignment 1 Solutions

This document analyzes the real price of butter from 1980 to 2001 using Consumer Price Index data. It calculates the real price in 1980 and 1990 dollars, finding the real price decreased from 1980 to 2001 in both cases. The percentage change is the same regardless of using 1980 or 1990 as the base year.

Uploaded by

nausheenalinizami
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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2.

The following table shows the average retail price of butter and the Consumer Price
Index from 1980 to 2001.
ˇ 1980 1985 1990 1995 2000 2001

CPI 100 130.58 158.62 184.95 208.98 214.93


Retail Price of butter $1.88 $2.12 $1.99 $1.61 $2.52 $3.30
(salted, grade AA, per lb.)

a. Calculate the real price of butter in 1980 dollars. Has the real price
increased/decreased/stayed the same since 1980?
CPI1980
Real price of butter in year X = * nominal price in year X .
CPI year X
1980 1985 1990 1995 2000 2001
$1.88 $1.62 $1.25 $0.87 $1.21 $1.54
Since 1980 the real price of butter has decreased.

b. What is the percentage change in the real price (1980 dollars) from 1980 to 2001?
1.54 − 1.88
Percentage change in real price from 1980 to 2001 = = −0.18 = −18%.
1.88
c. Convert the CPI into 1990 = 100 and determine the real price of butter in 1990 dollars.
To convert the CPI into 1990=100, divide the CPI for each year by the CPI for 1990.
Use the formula from part (a) and the new CPI numbers below to find the real price of
milk.

New CPI 1980 63.1 Real price of milk 1980 $2.98


1985 82.3 1985 $2.58
1990 100 1990 $1.99
1995 116.6 1995 $1.38
2000 131.8 2000 $1.91
2001 135.6 2001 $2.43
d. What is the percentage change in the real price (1990 dollars) from 1980 to 2001?
Compare this with your answer in (b). What do you notice? Explain.
2.43 − 2.98
Percentage change in real price from 1980 to 2001 = = −0.18 = −18% . This
2.98
answer is almost identical (except for rounding error) to the answer received for part b.
It does not matter which year is chosen as the base year.
Horizontal summation has been done in class…

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