# CPI - To compare, use CPI to convert 1964 figure into...

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PRINCIPLES OF MACROECONOMICS CPI Foster

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2 Problems with the CPI These problems cause the CPI to overstate inflation by about 0.5 percent per year despite technical adjustments. Social Security payments and many wage contracts have COLAs tied to the CPI. In the 1990s, it was estimated that the CPI’s bias cost taxpayers \$1 trillion every 12 years in unnecessary COLAs in Social Security and government pension payments!!!
3 Correcting Variables for Inflation: Comparing Dollar Figures from Different Times Inflation makes it harder to compare dollar amounts from different times. Example: the minimum wage \$1.15 in Dec 1964 \$5.85 in Dec 2007 Did min wage have more purchasing power in Dec 1964 or Dec 2007?

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Unformatted text preview: To compare, use CPI to convert 1964 figure into “today’s dollars”… 4 In our example, year T = 12/1964, “today” = 12/2007 Min wage = \$1.15 in year T CPI = 31.3 in year , CPI = 211.7 today Correcting Variables for Inflation: Comparing Dollar Figures from Different Times Amount in today’s dollars Amount in year T dollars Price level today Price level in year T = x \$7.78 \$1.15 211.7 31.3 = x The minimum wage in 1964 was \$7.78 in today’s (2007) dollars. The U.S. Minimum Wage in Current Dollars and Today’s Dollars, 1950-2007 \$ per hour \$0 \$1 \$2 \$3 \$4 \$5 \$6 \$7 \$8 \$9 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 current dollars 2007 dollars 5...
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## This note was uploaded on 02/28/2011 for the course ECON 011 taught by Professor Yezer during the Spring '07 term at GWU.

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CPI - To compare, use CPI to convert 1964 figure into...

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