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Use the CPI to compare the relative buying power of wages for consumer goods in distant...

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carsonpearson | Student, Grade 11 | (Level 1) Honors

Posted December 11, 2012 at 5:09 PM via web

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Use the CPI to compare the relative buying power of wages for consumer goods in distant time periods.

Example: Like gas in 1974 vs 2012.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted December 11, 2012 at 5:26 PM (Answer #1)

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In order to do this, you would need to have the consumer price index (CPI) for your starting year and your ending year.  You would need to be sure that these CPIs were using the same base year so that they would be comparable. 

According to this link, the CPI in 1974 (using 1982 as the base year) was 49.3 while the CPI for 2012 is somewhere around 230.  Given this information, we can tell how roughly how much a certain wage in 1974 was worth in today’s dollars. 

One way to do this is to use the following formula:

Salary in 2012 = Salary in 1974 x (CPI in 2012/CPI in 1974)

If we divide 230 by 49.3 we get 4.66.  This means that a given amount of money (whether it was a salary or a price) in 1974 was worth about 4.66 times that number in today’s dollars.  Similarly, we can take an amount of money today and divide it by 4.66 to find out what sum of money in 1974 would have the same value.

You asked about gas prices.  Gas prices right now are somewhere around $3.40 per gallon.  If we divide that by 4.66, we find that the equivalent amount of money in 1974 would have been about $.73.  This means that if gas cost $.73 in 1974 it would have been about as expensive to people then as $3.40 gas is to us now.

You can do the same thing with wages.  If you find that someone made $10,000 per year in 1974, you can multiply that by 4.66 and find that you would have to make $46,600 today to have the same purchasing power.

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