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Without using math, how can the CPI be used to compare the buying power of wages in...

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

Posted December 12, 2012 at 3:44 PM via web

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Without using math, how can the CPI be used to compare the buying power of wages in distant time periods?

Use the CPI to compare the relative buying power of wages of consumer goods in distant time periods. I understand how to use the math and find it, but I need it to be written in a paragraph form so I can write an essay.

Example: like gas in 1974 vs 2012

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted December 12, 2012 at 4:26 PM (Answer #1)

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You cannot use the CPI to compare buying power at different times without using at least some math.  It does not need to be hard math, but you must use a little math.

The basic idea is that the CPI tells you how what the price of a “market basket” of goods is.  It uses a base year for comparison and then gives the general price level for each other year.  As long as you have two years’ CPIs that have the same base year, you can compare the prices in the two years.

So, let us say, for example, that the CPI in 1974 was 50 and the CPI today is 200.  This is not exactly accurate, but this makes the numbers easier.  Since 200 is four times greater than 50 we know that prices today are about four times higher than prices in 1974.  If goods and services, on average, cost 4 times as much today as they did in 1974, we can say that a dollar today has a buying power that is 4 times weaker than the buying power of a dollar in 1974.  A person would have to make 4 times more today to have the same buying power as they did in 1974.

Thus, basic division and multiplication are needed to use the CPI to compare buying power at different times.  However, the idea is relatively simple: the CPI tells us how much things in one year cost compared to another year.  The relative prices tell us the relative buying power of money in those years.

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