Quick question about CPI for my macro course
I have a problem that talks about an antique chevy Model T costing 500$ in 1918 with the CPI base year 1983. The CPI in 1918 is 15.1, so the price level increased 84.9%. So the price at 1983 CPI is 500x1.849=924.5 and then at current prices (CPI=190) 924.5x1.90=1756.55. Now we all know a new car wouldn't cost $1700 at todays prices so WHAT accounts for the difference?
I know CPI uses fixed weights on goods so is that why the current price of the Model T is different than current prices of todays cars? In this case, the weight issued to Model T's in 1918 hasn't been adjusted so the price of the car isn't actually taking inflation into account...correct?
Thanks for any help you guys might provide
Erm, doesn't "CPI base year 1983" mean CPI in 1983 is assumed to be 100? Wouldn't that imply that the increase between 1918 and 1983 is a wee bit more than 84.9%?
Once you redo your calcs, we can discuss further...
I know the CPI base year is 100. 15.1 to 100 is an 84.9 increase so I concluded that as an 84.9% increase in price level.
Are you trolling?
15.1 ---> 100 is a 662% increase.
Of course its exponential, but I didn't want to introduce that since you're obviously very confused. 3.16% still isn't correct, but I'm glad you're on the right track.
What exactly is your question? IlliniProgrammer explained the actual difference in the vehicles. I pointed out your flaw in thinking the increase in CPI represents the actual percentage increase.
Today's CPI is 233, not sure where you got 190. So 15.1 to 233 is a 1543% increase, bringing your $500 Model T to $7715. When accounting for lack of features like IP said, it pretty much adds up in my book.
I hope I haven't been misunderstanding CPI this whole time...but I'm pretty sure that its correct.
Well, maybe you should have looked on them internets, amico... It's in the very first section in the Wikipedia article on CPI:
http://en.wikipedia.org/wiki/Consumer_price_index#Calculating_the_CPI_f…
A model T from 1918 was missing important things like, oh, power steering, power windows, cruise control, a 5 year warranty (let alone 1 year warranty), AC (let alone a heater), a metal roof, or more than 25 horsepower. They were also missing things like seat belts, air bags, crack-resistant windshields, etc etc. The list is endless.
A new golf cart in 1983 would have cost you about $3000. So yeah, CPI has done a pretty good job of tracking a dollar's purchasing power for a golf-cart like vehicle.
Your professor is an idiot. Either he's never seen a Model T before and decided to ask a question about it or he's an even bigger idiot for not noticing little details like the car being unable to go faster than ~45 mph. Why would you even ask this question in an econ class? (An early 20th century US history class, OK maybe)
Please, do me a favor and tell your professor that IlliniProgrammer thinks he's some combination of an idiot and an asshat.
Edit: looks like he's never ridden in a "Chevy" Model T. Seriously, where do they come up with these people?
And still...after all these posts...no one has really answered it yet. Illini I get what your saying but I don't think thats the answer hes looking for, something more to do directly with the CPI and how its calculated.
Price changes of individual goods don't necessarily correspond to changes in overall CPI.
Today's CPI is 233 ya, my homework problem is hypothetical and thats why they list the CPI as 190. I know the answer for this question has to do with the weights of how CPI calculates items from a century ago, not anything to do with the car having alot new features nowadays (even though this is correct too).
Well, hope you got it then.
I think you need to go New CPI / Old CPI x Old price to get your "new price". Pretty straight forward - if the car was $500 with CPI 15.1, it would be 100/15.1x500 = $3,311.26 for 1983 and 190/15.1x500 = $6,291.39 for current price (190 in your problem)
15.1 to 100 will never be an 84.9% increase...
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