Gil CPI Review

The Basic CPI (Consumer Price Index) formula is:

(New Price/Old Price)=(CPI New/CPI Old)

That is the simplest form of the equation. Another one is:

New Price=Old Price + (cpi of event A / cpi of event B)
This is useful when trying to find a different part of the equation.

Here is an Example Problem: Let's say that you own a TV, purchased in 2004. You purchase this fine piece of technology for $999.

Lets say that you want to sell it now, and the year is 2011. You want to know how much the tv would be worth now had you bought in 2011. Basically, you want to know how much money you really spent on it, by seeing how much money you spent in constant dollars.

To do this, you do: 999(ww5.922/188.9)= $1,109.87 which is how much you would have spent had you bought that tv this year.

So why not use Compound interest to find this?



The answer is, because compound interest is for constant growth, whereas inflation isn't constant. CPI gives nominal value rather than assuming.







I Choose You, Miranda (next scribe)!!!!