Inflation and CPI Practice- Macro 2.4

[00:00:00] Speaker 1: - Hey, how you doing econ students? This is Jacob Clifford, welcome to AC/DC Econ. Now I'm making these videos to help you practice and learn this stuff. Again, they're not a substitute for your teacher, they're a compliment. So you learned it in class, now it's time to practice. But before we jump into it, do me a favor, please subscribe. Even if you're not an econ geek like I am, please subscribe because it tells YouTube that I'm making good videos that people like and that they want. So please subscribe, hit that notification bell, and please get the ultimate review packet and support my channel. Anyways, let's jump into this stuff. Let's talk about inflation. So your teacher or professor already went over this. I'm gonna go really fast. Remember, when we're looking at inflation, we're talking about changes in prices over time and the government tracks market baskets. They look at a specific number of goods and track that change in prices over time. Now there's two ways the government or any of us look at inflation. The first one is the inflation rate, which shows you the percent change in prices over a specific period of time. For example, in 2016, the inflation rate was 1.3%. So that says prices went up 1.3% in 2016 relative to 2015, right? So a percent change is the idea of the inflation rate. There's also indices or index numbers, and that shows you how prices change since a base year. For example, the consumer price index, which I'll go over in more details in a second, for 2016 was 240. Now, 240, this is not percent. This is an index number, right? This is the idea of the consumer price index is 240 based on 1982-84 prices. And that's where students get super confused. They're like, okay, the consumer price index is not a percentage, it's a number. But what does it mean? Well, here's the idea, right? First, it's the most commonly used measure of inflation, the consumer price index. And the base year is always given 100. So it is all about the base. And every year before or after that base year is given an index number. That index number means something relative to the base year. Now, it'll make more sense with an example. These are actual numbers for the United States. Take a look at these years right here. Now, first of all, you have to recognize that 1982-84 is this base year. Now, it's not just one year. It's kind of like this chained base year. We'll just say 1982 is the base year and it's given a number of 100. So 100 means something. 100 means it's the base year or prices haven't changed since the base year. So 100, notice it's not a percent. It's not 100%. It's just an index number of 100. Now, every other year is also given an index number or a CPI. So you can see 1990 is 130. That means prices increased 30% since the base year. So between 1990 and 1982, prices went up 30% in the United States. The 2002's CPI is 180. So prices increased 80% since the base year. You get it? So for 2016, the CPI is 240. So prices increased 140% since the base year. So if something cost you $100 or price was $100 back in 1982, now it would be, you know, $240 in 2016. So prices increased 140%. And it also goes the other way. Take a look. In 1977, the CPI was 60. Now, if the number is less than 100, that means prices were lower than they were in the base year. In this case, 40% lower. So CPI shows you that prices were 40% lower in 1977 than they were in the base year of 1982. A CPI of 30 for 1961 shows you that prices were 70% lower. And then in 1914, if the CPI is 10, that shows you prices were 90% lower than they were in the base year. Again, it's all about the base. Now, if you're confused right now, don't be. Because once you practice it, it's going to make sense. So first, you have to understand and know the equation for CPI, which is right here, right? It's the price of the market basket in the year you're looking for. Divided by the value of that market basket back in the base year times 100. So the year you're looking for, divided by what that value of that basket was back in the base year times 100, pops out a number. That number is the CPI or an index number that tell you how prices change relative to the base year. So I have a list right here. Take a look. This is what you're going to fill out. I want you to figure out the CPI for each one of these. So I've got year 1999 all the way to 2005. And I've given you the value of a market basket of the same goods and services. And again, that's the key. We're looking at the same number of goods and services and the same goods and services over all these different years. Now, the first thing I want you to notice before you jump in and start calculating, what is it going to be for 2000? Notice 2000 is the base year. So what's the CPI going to be? Well, it's going to be a hundred. Why? Well, the value of that market basket, which is $50, divided what it is in the base year. And since 2000, year 2000 is the base year. So that $50 is the value of that market basket. So it's 50 divided by 50 times 100, pops out 100. The base year is always 100. If you remember that, you're going to be fine. So now it's time for you to practice. Go ahead and pause the video and calculate the CPI for every single one of these years, relative to 2000, base year's number, when the market basket was $50, right? Market basket in the base year is 50. Do the calculation CPI for the rest of the years. Okay? Good luck. So here we go. In 2001, the market basket is $55. Now that's obviously up from 50, which was the base year. So this number is going to be greater than 100. So that's the first thing you have to do is keep in mind, is this number going to be greater than 100 or less than 100? What's going to be greater? Prices increase by $5 and $5 is 10% of 50. Or you can just use the equation. So it's 55 divided by 50 times 100 pops out 110. Prices increased 10% since the base year. So it's really easy to see when the price and the market basket goes from 50 up to 55, then prices increased 10%. So the CPI for 2001 is 110, right? The CPI is not a percentage, but you can find the percentage relatively easy. So there you go for 2002. Let's do this. Actually, let's go back and do 1999. So 1999, the market basket is $40, which is less than 50. So this number is going to be less than 100. So you can use the equation. It's 40 divided by 50 times 100 gives you 80, right? There it is. The CPI is 80 or prices were 20% less in 1999 than they are in 2000. Now, and for 2002, notice you're not looking from 55 to 60. You're looking from 50 to 60, always going back to the base year. Remember that you're always going back to the base year. So this case would be 60 divided by 50 times 100 would pop out 120. The CPI for 2002 is 120. Again, these numbers are all made up. They're not real. The inflation rate was not that high between those years. But now you understand how to calculate CPI. And the rest of them, here's all the answers as well. Check yourself to see if you got the right answers. Again, you can either use the equation or you can just use a little bit of logic. For example, look at 2004. In 2004, the market basket is $100, right? But in the base year, it was $50. So price is clearly doubled, right? The basket is now twice as much. So if price is doubled, what's the CPI going to be? Well, it's going to be 200. Prices increase 100%. So the CPI is really easy to calculate. If you understand the idea of percent change, or if you understand the general idea, you can kind of, you know, without using the equation, kind of get an idea of what the number is going to look like. Or you can just use the equation, memorize the equation, use the equation every single time. But there's your right answers. Now, the first time we just did that was designed to see if you're getting it. Now, if you're lost, that's okay. You get one more chance to practice. And if you totally got all the answers right, then prove you completely get it by getting all of these ones correct. We've got brand new years, brand new market baskets. Again, all made up numbers, except this time I want you to do 2010 as the base year. So $80 is the value of the market basket in the base year. Do the CPI calculation for all the rest, okay? Good luck. Now, of course, the easiest one to spot is the CPI for 2010. Why? Because it's the base year. Remember, it's all about the base. In 2010, the value of the market basket is 80. And if you divide that by the same value in the base year, which is the same year, 80, 80 divided by 80, pops out 100 or it pops out 1 times 100 gives you 100. The CPI in the base year is always 100. And all the numbers where the value of the market basket is less than 80 are going to be numbers less than 100. All the values of the market basket that are greater than 80 will give you CPIs that are greater than 100. So again, you have to have an idea of what the number is going to be before you actually just start using the equation because if you mess up somewhere with your numbers and the equation pops in a number that doesn't make any sense, you'll be like, "No, no, no, that doesn't work." You know, if the value of the market basket is 60 and the base year is 80, the value of that basket, and I pop out a number greater than 100, you're like, "Okay, something's wrong. I messed up somewhere." So that'll help you remember it, understand what you're looking at. So let's go ahead and do this. Let's start with, let's go 2011. So 2011, the value of the market basket is $92. 92 divided by 80 times 100 pops out 115. In other words, prices increased 15% since the base year, right? So between 2011, 2010, prices went up 15%. CPI is 115. For 2012, it went from 80 to 100, right? So from the base year is 80 up to 100. That is an increase of 25%. So you can either do the calculation in your brain, or you can do the equation. So the CPI is 125. Or the equation was 100 divided by 80 times 100. Popped out 125. There's your answer. And for 2013, right? Prices went from $80 in the base year up to $120, which again, I can just in my brain think, okay, they went up $40. $40 is what percent of 80? Well, it's 50% of it. So the CPI must be 150. So there's your right answers on that end. Let's go to the other numbers. 2009, the CPI is 90. And 2008, it's 75. And then 2007, look at 2007. If the value of the market basket is 40, and the base year is 80, that's obviously half as much. So the CPI must be 50 because prices were 50% lower compared to the base year, right? So there's your answers. How'd you do? Did you get the right answers? Did you get the calculations correct? Remember, I'm going quick because this video is all about practice. If you're lost right now, go back and watch my other videos where I explain CPI or my unit summary video where I give you a whole lot more details, go a whole lot slower. This was all about practice. If you got the right answers right and you're getting it, awesome. If you're lost, go back, relearn this stuff, then come back and try this stuff again. Now, that being said, I've got three more questions for you. They're right here. So answer each one of these. We'll talk about calculating inflation rate. The first one, it's really easy. It says in year one, if the CPI is 100 and in year two, the CPI is 125, how much is inflation rate? Of course, it's just 25%, right? The CPI tells you how prices changed since the base year. And so it's really easy to calculate the inflation rate in this case, 25%. But take a look at number two. If you haven't done it yet, pause the video, try number two and number three, see how you do. And I'm going to clarify a misconception that students have a lot of time when it comes to calculating inflation rate. The big mistake students make is they go, well, the CPI in year one was 125. In year two, it's 150. So the inflation rate must be just the change between the two is 25%, right? That's just, I just subtract them each time. No, that is incorrect. You can't do that for CPI. The CPI tells you how prices change since the base year. You can't use those numbers just to subtract and say, well, those, the distance between those, you know, given years. In other words, when you're dealing with the base year, you can just subtract the new CPI from the base year and it'll give you inflation rate. But when you're using other years other than the base year, you have to do some other calculations to get the right answer. So from 125 up to 150 is an increase of 20%. That's the right answer, not 25%. So the way I got that was I use the equation. It's the new minus the old. So the, you know, year two minus year one divided by year one times 100 gave me the inflation rate. It's just, it's just a percent change. That's how you calculate it. So let's see if you can get it again. If you're lost, it's okay. Try number three. See if you're getting it. Assume the CPI in year one is 80. The CPI in year two is 100. What's the inflation rate? Okay. Ready to begin. I'll give you a hint. It's not 20%. If you think it has 20%. Nope, not 20%. So hopefully you're going to understand it after we go over the answer to this one. It is not 20%. The answer is 25%. Understand the idea that it all depends on where we're starting from. So if I said, uh, what's the inflation rate, uh, from the CPI, uh, base year of a hundred to another year where the CPI is 80. Well, that'd be 20%, right? Compared to the base year, prices are 20% lower. But if I start with 80 and go to a hundred, right? That means prices went up 25%, right? Between those years. So again, if you're confused, you got to practice it. So let's practice one more time. You're going to get it. All right. So don't give up. Here we go. I want you to take a look at this. These are the same numbers I gave you a few minutes ago, right? With the year 2007 to 2013, we already did the calculation for the CPI. That's already been done. Now let's actually do the inflation rate. Let's calculate the inflation rate for each one of them, not relative to the base year, relative to the previous year. I've given you equation as well. Let's see if you got it. Now, first one, I want you to notice which one of these are really easy to calculate. So before you start using the equation and freaking out, which one's really easy to calculate? Well, the first one, the easiest one to calculate is right here, 2011. Why? Well, the base year's 2010, CPI is 100 and the CPI goes up to 115. That means the inflation rate is just 15. Super easy to calculate because that's what you did earlier, right? If the CPI is 100 and another CPI is 150, then there's a 50% change in prices between those years. There's also one more thing I want you to keep in mind. In 2007, you can't calculate it, right? I put a question mark because we don't know 2006 market basket or CPI. Now, I also want you to notice you can either use the market baskets or you can use the CPI, but it doesn't matter which one you use. If you use from 2007 to 2008, the market basket or the CPI, either one, you can get the right answer to calculate the inflation rate. I put right here the ones that are not whole numbers that are a little trickier to calculate. So you have those ones done. You've got three more. So I want you to try to figure it out. Now, I gave you these answers, so maybe that'll help you out. Try to figure out these three missing inflation rates. Do the calculations, write it down on your paper, pause the video, then I'll go over the answers. Okay? Good luck. Remember in these ones, we're not analyzing the base year at all. It has nothing to do with the base year, has to do with the previous year. So prices went from $40 to $60 or the CPI went from 50 to 75. Either one you want to use, you can use those numbers. So an increase, let's just do the market basket from 40 to 60 is an increase of $20. $20 is what percent of 40? Well, it's 50%. So 50% is the inflation rate, or you can use the equation. It's year two, 60 minus year one, 40. So that gives you 20 on the top divided by 40. That popped out a number times 100 gives you 50%. So prices increased 50% since 2007 and 2008. So from 2008 to 2009, it went from 60 to 72. All right. That may be a little harder to calculate in your brain. Or you can use the CPI from 75 up to 90, right? You use the equation pops out a number. Here it is 20%. 20% change in prices between 2008 and 2009. And the last one, you can just really easily do these calculations from 100 is the basket up to 120. It's just a 20% increase. So from 2012 to 2013, there's an inflation rate of 20%. Now, this puts the whole lesson in full circle. There's two ways of looking at inflation. One is CPI, the index numbers, right? That's right here. That tells you how prices change relative to a base year. And there's inflation rates that tell you how prices change relative to last year or some specific time period. Now, I know I went quick here, but I hope it helped you learn and understand the concept. If you need more help, take a look at my ultimate review packet, or the unit summary videos, or the practice multiple choice questions that I have for unit two of macroeconomics. I have a playlist that covers all this stuff. Thank you so much for watching and please subscribe. Tell your friends about my YouTube channel and do me a favor really quick. Leave a comment. Let me know if these videos are helping you and tell me what's the next concept that you want me to cover for these practice videos. Okay. Thanks for watching. Until next time.