Question

7XX3N X . BOXCX7 -10-21.00 4 TRR 100x58 QR-14804 • Your grandfather: S20,000 per year beginning in 1965 To compare these salaries, you decide to use the CPI, using 1983 as the base year. a. Why is the CPI a good price index to use for this comparison? b. Fill in the missing data point in the following table: Year CPI 1965 30 1983 2015 238 2018 240 c. Convert both your mother's salary and your grandfather's salary to 2018 dollars. Enter your answers in the table below.

Answer 1

A. The CPI is a good price index to use here (when comparing value of salaries across different times) because it consists of a basket of goods typically used by an average consumer. It includes food & beverages, housing, apparel, transportation, medical care, recreation, education and communication and a few other services. Since it compares almost all the products and services a typical consumer uses, when combined with salaries, it gives a good idea as to what portion of salary someone needs to spend now as compared to, let's say, 2 decades back for the same type and amount of goods being used.

B. Since there is no other information in question, I assume that it is asking for the actual CPI. The actual CPI in 1983 was 99.6¹.

C. Mother's salary is not posted in the question.

Grandfather's salary was 20000 USD in 1965. The CPI in 1965 was 30. The CPI in 2018 is 240. To calculate the value of 20000 USD in current terms, we will use the below formula-

Value in current dollars=amount in 1965*(Current CPI/CPI in 1965)

we get

current value=20000*(240/30)=20000*8=160,000 USD.

Same way mother's salary can be converted to 2018 dollars.

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